Economics in our thoughts
By: Koen Smets
Tags: Cognitive Science, Psychology, Behavioral Economics, Decision Making

Economics in our thoughts

We are economic beings, and much of our own economics happens between our ears

Picture your favourite artist or band, performing your favourite song, live on stage. Now, how much more would you be prepared to pay for actually being there, rather than watching a video of the concert? If you are like most people, market prices will tell us the answer. Almost everyone will pay a lot more for a ticket to see a live performance, than to buy (let alone see) a recording — often ten or even twentyfold. Nothing unusual about this. But would you also be prepared to pay more to see the live concert, projected onto a cinema screen than for a movie of the concert?

That is a different affair. Livestreaming of performances is a now a thing. Concerts and shows are beamed to cinemas all over the world, so tens of thousands more can join in with the fun. And while tickets for such events tend to sell for a small fraction of what you’d pay on average for the real thing, they are typically 50% to 100% more expensive than an ordinary film screening.

Live is better

Now, as veteran DJ Annie Nightingale (she has been a presenter on Radio 1, the BBC’s pop and rock station, for more than 49 years) said on the subject earlier this week, you cannot replicate the experience of your clothes vibrating to the bass at a live Chemical Brothers performance in a cinema; you also lack the sense that you are breathing the same air as your heroes. That explains why people are willing to pay a good deal more for the genuine item. But if you are in a plush cinema seat, with the same sound waves reaching your ears, the same pixels lighting up on the screen, the only difference between a live stream and a recorded film is in your head — and in your wallet.

Worth so much more when seen live (photo: seriouslysilly CC BY)

And this is not just the case for music or theatre. If you are a football fan (substitute another sport as needed), imagine there is a very important game live on TV tonight. You were looking forward to it, but it turns out you have an inescapable moral obligation to join your spouse for a posh, utterly boring dinner with his or her parents. Your only option is to set your recorder and watch it tomorrow. Wouldn’t you be willing to pay good money to be able to watch the game live? (Live broadcasts of sports events are on pay TV, too.)

When Adam Smith, the founder of modern economics, observed that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest,” he was solely concerned with material exchanges, not with their timing. Sure, timing can be important in a material way. When trading stocks, for example, having early knowledge can be profitable, and economics recognizes that getting £10 next week is more valuable than getting £10 next month. But this is not what we see with live or recorded concerts or sports. Something else is happening here.

Thoughts have economic relevance. They can clearly affect the perceived value of an experience. The thought that we are enjoying an event in the very moment, even if we are not personally there, for example, has value for us that we are prepared to pay for. Thoughts can enhance (or detract from) the value of objects too. If a random painting is credibly attributed to a master, its value suddenly skyrockets, without anything materially changing to the item. Likewise, a painting originally claimed to be a masterpiece, but revealed to be a fake will see its value drop through the floor. It’s the same with items that used to belong to celebrities or historical characters, and so on. The difference is only in our thoughts.

Trading thoughts

And there is more: thoughts themselves can have economic relevance. When we spend time looking at old photos, it is rarely the brilliant composition or the colour balance that enamour us. Old photos activate thoughts of a particular kind: memories. That is what we value, and what makes spending the time worthwhile (just imagine looking, all that time, at someone else’s photos instead.)

Thinking about the future can gives us pleasure (or dread) — imagine anticipating a family Christmas (it might give you both). Does this really represent economic value, though? Perhaps you would not pay to have nice thoughts about a holiday in a few weeks’ time. But you might well happily spend time daydreaming about it, while you could be doing something more productive. And you may well be prepared to pay to stop thinking about a difficult meeting with your boss next Monday, about a project that has gone badly wrong. Even simply fantasizing (fill in your own favourite vision here) can provide enjoyment.

In fact, why are you reading this (and why indeed am I writing this)? In both cases, at least part of the explanation is, again, thoughts. Even though writing is mostly a matter of blood, sweat and tears (and this piece is no different), I also enjoy the intellectual stimulation of thinking about the subject matter, and I enjoy the thought that some people (including you?) will be reading these words. And even if nobody actually reads them, I can still enjoy the thought someone might while I am writing. And you, reader, presumably find pleasure in the thoughts these written words evoke in your brain, otherwise you would be washing your hair or performing some other important activity.

But the economics of thought is about more than simply recognizing cognitive enjoyment, either of material objects (like an original work of art) or experiences (like watching a football match live). Our very capability of imagining that which does not (yet) exist — possible futures — may be instrumental in our ability to plan for, and pursue long-term goals, when short-term goals appear more rewarding.

Better start saving for when I look like that

A good example is saving for our retirement. We know we need to set money aside to live our later life in comfort, but today’s temptations compete for the same resources. We can resort to stratagems like automatic enrolment, or Save More Tomorrow to overcome our tendencies to Spend Today. But we can also try to imagine more vividly what life will look like — indeed what we will look like — when we come to retire. Prudential Financial, an insurance company, used an app to show people a version of their older self to motivate them into making financial plans.

A new discipline

The intriguing thing is that our imagination can play both the role of an instrument to simulate possible futures, and of the reward of using this instrument. This makes the economics of thought, or Cognitive Economics, a domain of study in its own right.

Leigh Caldwell, one of the pioneers in this area, uses the process of eating chocolate to illustrate how this might work. We see the wrapper of a chocolate bar on the table, and we anticipate the pleasure of eating the contents. We can imagine what the chocolate will taste like, and that will motivate us to open the package to access the delicacy. But why would we actually think about the taste of chocolate? Cognitive Economics proposes that this thought itself is a reward we get upon seeing the wrapper: we experience it as pleasurable to think about the taste of chocolate. We can even extend the process. We recognize the logo of our favourite chocolate brand, which can provide the reward of thinking about a physical chocolate bar, and motivate us to actually buy one. Once we then see and hold the wrapper, the thought of the chocolate inside takes over as before.

One way to map this process of imagining what might happen in the future is to see it as a complement to the well-known System 1 (fast impulsive thinking) and System 2 (slower conscious and reasoned thinking) ** Daniel Kahneman describes in Thinking, Fast and Slow. A complementary System 3 would focus on imaginative thinking, through a process where the thoughts it produces themselves provide the rewards (or punishment, when we think of negative outcomes). This then encourages us to (or discourages us from) continuing the sequence of thought and eventual action.

This is a fascinating and potentially very promising field of study to improve our understanding of decision-making. At least that is what I am imagining.

(This weekend your correspondent will be joining a bunch of experts in the new science of Cognitive Economics at a two-day workshop. You may already start anticipating future articles on the subject.)