The one thing President Bush undoubtedly delivered was his vision of an ownership society: We are all about to become the owners of a bunch of ailing banks and a few hundred billion worth of toxic assets. A bit “off” perhaps from our original vision of “ownership” but hey..
Now, before I go any further, understand that you’re dealing with someone who spends hours of brunchtime defending free markets; who vows in the name of “small government”; and who’d bow to kiss Adam Smith’s invisible hand if I could actually see it. You might well think, then, that mine is a world where “ownership” (as in taking control of your life, savings, health, education and bedroom wallpaper) is a revered ideal—the most obvious of human prerogatives.
Well no, actually. And the reason is simple: The idea of an ownership society is premised on a set of, let’s say, “ambitious” assumptions about the state of the real world.
– First, that choice is good;
– Second, that we are fully aware of all the choices available to us, when faced with a decision;
– Third, that we are capable of evaluating these choices and assess which one is best for us;
– And fourth, that we are rational—that is, given our preferences (and what we can afford), we will go for the choice that is best for us.
Allow me to assume for the moment that choice is indeed good; and that we are the rational human beings economic models often assume us to be (psychologists, behavioral economists and compulsive shoppers feel free to protest). So I can focus then on assumptions (2) and (3). How realistic are they? Let’s see…
Think first my Sunday night visits to my local greek diner. A menu I know all too well… offering a wide range of culinary choices, perfectly ranked in my head according to their Mediterranean authenticity and the pleasure they are expected to give to my salivary glands. Put simply, I know the full set of my alternatives and I know what’s best for me—an example where ownership is unquestionably desirable.
Now let’s go up a notch: Shampoo shopping! Once again, thanks to my well-stocked neighborhood CVS, I am fully aware of pretty much the entire menu of shampoo brands. But here’s where things get harder: How do I know what’s best for me? L’Oreal’s color-truer hydragloss? Or Neutrogena’s triple-moisture? “Cucumber and green-tea” or “shea butter”? And how about that cyclopentasilokane?
Arguably, the management of one’s savings comes (at least) one notch above shampoo. Here I’m lucky… that’s what I do for living. But how about healthcare? Not only is it difficult to work out the fine-printed intricacies of each health-plan; it’s also unrealistic to expect that I’ll be spending my precious free time conducting a comparative study of health plans across the U.S. of A. [In fact, I’m willing to bet that not even John McCain—an ardent fan of choice, at least when it comes to healthcare—can tell me why I might want to diss my New York-based health plan for one in Arizona.]
So, faced with the endless daunting choices that life imposes upon me, what do I do? Turns out that I (and dare I speak for the average American here?) tend to adopt the shampoo-shopping approach to decision-making:
1. Simplify: True, there are countless shampoo brands but life can be made easier if I limit ny search to, say, the left CVS shelf; or to pink-only bottles; or to moisturizing shampoos in pink bottles. Similarly, if it came to choosing a mortgage, this method would boil down to “one broker, fixed-rates-only please, and don’t ask why.”
2. Rationalize: Admittedly, frequent application of the “simplify” approach runs the risk of making me look kind of dumb. That why at times I go for something more elaborate: Rationalize. I mean, it looks a bit more intelligent if I can offer a reason why I ended up with L’Oreal instead of Organix—be it “offers the truest of shines” to “sister raved about it” to “matches my shower curtain.”
3. Succumb to “framing”: Another frequently adopted approach to decision-making is to succumb to what-is-called “framing.” This is what happens for example when charming advertisers “package” of our decision problem so artfully as to make our eventual choice seem utterly self-evident. For example, aided by “framing” I can be impelled to believe that L’Oreal’s shine is unparalleled; or that an adjustable-rate mortgage is “truly best for me, as I’ll be paying minimal interest for the first three years, after which I can always sell my house if I can’t afford it because, hey, prices can only go up!”
Are these optimal decision-making methods? Not really. Are we then irrational, irresponsible, lazy or just dumb? Not necessarily.
It’s just unrealistic to demand from my grandmother to make sound asset allocation decisions; from an economist to choose the best shampoo; or from Joe the Plumber to have an informed, five-year outlook of the US housing market.
What to do? Throw ownership society out of the window? Regulatory overkill? Ban mortgage brokers from offering exotic mortgages to anyone but economics majors? Hmmm.. Thankfully, for all the soul-searching this crisis has been stirring, nostalgia for the former Soviet Union has not (yet) taken hold.
Still, I confess that there are (many) instances where I find the lack of choice …liberating! No, I’m not advocating the absence of choice. Rather, the freedom to choose between “no choice” and “choice.”
Think pension plans for example: Employers could (and some already do) offer their employees the choice between (a) a default option, with a two-pager on why research has found it’s a desirable option, given one’s age, income, etc; and (b) a full menu of alternatives. If you’re busy, lazy, frightened by numbers or otherwise “impaired,” you can go for the former. If you’re curious or a “maverick”, you might opt for one of the latter. Similarly for mortgages.. might even work for shampoo!
Ultimately “ownership” is pointless, and at times dangerous (as we have painfully come to know), if we don’t understand what we own. So unless you’re prepared to vow that every American is a genius, a polymath and with time to spare on assessing the benefits of cetearyl alcohol for hair fiber, you might want to deflate somewhat your vision of the American dream.
Free markets can remain free… but they ain’t perfect!
Originally published at Models & Agents on Oct 21, 2008 and reproduced here with the author’s permission.