Editor's note: This story first appeared on the Division of the Social Sciences website.
Inequality has many causes, but sometimes it stems from a lack of incentives that foster fair outcomes.
That’s a key finding of a new book by two economists who used a series of imaginative field experiments to show how incentives shape behavior in real-world settings. Prof. John List, chair of economics at the University of Chicago, and Uri Gneezy, professor at the University of California, San Diego, applied experimental tools to everything from workplace inequality to the pricing of wine. In their recently released book, The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life, the authors discovered that handicapped people face hidden surcharges in the marketplace, that encouraging women to negotiate for salaries can reduce gender inequality, and that bias can derail even the simple act of giving directions.
“To us, economics is a discipline fully engaged with the entire spectrum of human emotions, with a laboratory as big as the whole world,” said List, the Homer J. Livingston Professor of Economics.
Gneezy, the Epstein/Atkinson Endowed Chair in Behavioral Economics at the Rady School of Management, added that the book provides “new understanding of the hidden motives that drive people to behave the way they do and of how we can achieve better outcomes for ourselves, our companies, our customers and society in general.”
The two economists have conducted experiments around the world that seek to draw out the causes for behavior, to give more meaning to findings in fields where mere correlations are usually used to provide answers. Correlations frequently mislead people, they found.
Retailers can be confused about the impact of advertising, they point out. One company, for example, believed that when it advertised, sales went up accordingly. The scholars showed that increased sales came during the holiday season and were not influenced primarily by advertising.
Teasing out the causes of people’s reactions requires a little more work. In addition to testing an incentive to behave in a certain way, the economists also included people in the experiment who were not given the same incentive, a control group that provided a reference point to the impact of the intervention. Here are some examples:
- Business people discriminate against the handicapped because they don’t expect them to shop around for better deals. In a test in Chicago, the scholars showed that when a wheelchair-bound person showed up for an auto repair, the bill was higher than it was for a non-handicapped person. When the handicapped person announced he was going to obtain three estimates, the repair costs were the same as for the non-handicapped. The discrimination takes place because of a desire to maximize profits, not because of a particular dislike for the group being discriminated against, the researchers said.
- People also discriminate when asked for directions, depending on how the person asking for help is dressed. In an experiment that echoes the recent Trayvon Martin case, researchers found that people will send a young black man in a hooded sweatshirt the wrong direction when he asked for help, while they are more willing to help a black man dressed in business attire.
- Women receive lower wages because they are less willing to negotiate a salary, since society discourages women from competing. When told that negotiating salary was welcomed, women negotiated. To test the cultural basis of women’s taste for competition, the two visited an Indian culture where women are dominant and found that they were just as competitive as men elsewhere.
- When people are given an opportunity to get dropped from a charity mailing, they frequently give more. To test effective fundraising, List advised a charity to let people give once and choose not to be contacted again. Giving doubled when people were given a “one-and-done” option, and the size of giving also increased.
- Setting a higher price for a particular bottle of wine can boost sales. In an experiment that Gneezy and his wife Ayelet conducted, the two helped a wine grower determine the value of cabernet sauvignon originally priced at $10 by charging $10, $20 and $40 for each bottle to different groups of visitors. They found that the bottle sold best when it was priced at $20 instead of $10. “People treat the price of the wine as a signal of quality, and when the price is higher, they think that the wine is better,” Gneezy said.
Experimental economics is important at a time when large data sets, or “big data,” has come to attract scholars, as field experiments look at why people act, the scholars contend.
Because the experiments touch so many aspects of everyday life, the book helps a broad audience understand the role economics plays in understanding human behavior, List said. For that reason, the book is written for a larger audience, in addition to scholars. “We wanted to write it in a way our neighbors could understand the role economics plays in their lives,” List said.