Teaching the Use of Cost-Benefit Reasoning in Everyday Life

Our research shows that people can apply the cost- benefit rules of microeconomic theory to their everyday deci- sions. Two populations were examined: (a) people who had previously received extensive formal training in the rules and (b) naive subjects who were randomly assigned to receive brief training in the rules. Training affected reasoning and reported behavior in both populations. The results indicate that ex- tremely general rules govern choices across a wide range of domains and that use of the cost-benefit rules can be improved through training. Do people think about leaving bad movies, taking losses on investments, and demolishing outdated buildings in the same way, relying on the same inferential rules? Are there general rules of choice that guide people's decisions across a broad range of domains? If so, can the nature of these rules be altered by instruction? Economists have long assumed that a set of abstract rules of choice exists, and that people make choices according to those rules across the economic spectrum from consumer choices to decisions about time use (Becker, 1976). On the other hand, many psychologists share Thorndike's (1906) view that people's behavior is governed by domain-dependent rules that do not generalize across situations that are very different from one another. Even among psychologists who believe that people have domain-independent rules, a pervasive opinion originating with Piaget is that such rules can only be learned by self- discovery methods and cannot really be taught in a formal way (Brainerd, 1978; Newell, 1980). In this paper, we examine whether people use abstract rules in making choices and whether these principles can be taught so that people will use them across a wide range of situations. We first sketch the cost-benefit model of choice and show that there is ample evidence that people depart from it in their everyday choices. We next present original evidence about differential rule usage, comparing people trained in the use of the normative rules with those who are less trained. Finally, we present evi- dence about the trainability of people by relatively brief inter- ventions, about the degree of domain specificity of training, and about the durability of training. overall welfare. The model assumes people are confronted by a set of actions, each of which is associated with outcomes that will occur with some probability. Each of these outcomes has a value to the person that can be compared with the values of the other outcomes by converting the values to a single scale (for example, dollars). Three principles follow from this model, (a) The greatest net benefit principle, which states that the action with the greatest positive difference between the total benefit and total cost of its outcome should be chosen from the set of possible actions, (b) The sunk cost principle, which states that only future benefits and costs should be considered when mak- ing a choice, (c) The opportunity cost principle, which states that a cost of undertaking a given course of action is foregoing the expected net benefits associated with other courses of ac- tion. These principles may seem incomplete to readers familiar with standard textbook cost-benefit analysis (Mishan, 1976; Morgan & Duncan, 1982). We eliminated certain principles from the list of inferential rules of choice because they were either derivable from the principles listed above, or because they were not sufficiently general to apply to all choice situa- tions. Also, these cost-benefit rules certainly are not exhaustive of the principles that guide choice. Moral, esthetic, and social principles may compete with the cost-benefit rules, and human- istic values may be included as costs and benefits in the eco- nomic calculus. Thus, departures from economic reasoning could be due to people's favoring humanistic values or princi- ples rather than ignorance of the normative rules. We will re- turn to the question of whether noneconomically trained people know cost-benefit reasoning but are more likely to favor hu- manistic values, or whether they are actually less likely to know and use cost-benefit reasoning.