Sunday, January 30, 2011

The Hurtful Helicopter

I’ve been doing a lot of reading about prospect theory lately. This theory is likely become taught in most microeconomics courses over the next 10 to 20 years (things move slowly in the academy). There are a lot of important details in the theory, but one that sticks out in my mind is the idea of reference points.

The idea is that when considering options (prospects) people compare the possibilities to what they have now. What you have now is a reference point and what you might get is a prospect. It doesn’t take much of a stretch to see that what you expect about something or someone can be a reference point. This is one of the reasons why expectations are so important.

Having established a reference point, the next interesting piece of the theory is that gains are treated very differently from losses. While gains improve your happiness, the effect is moderate. Losses, on the other hand, cause dramatic reductions in happiness. Estimates show a loss as having almost twice the impact of a gain. So gaining $5 bucks, keeping it for a while, and then losing it is worse than never having it at all.

What does this have to do with helicopter parents and happiness? Think about what your average overbearing parent does to a child’s expectations in life. The child has never experienced failure, has been told they are super, special, and just the bestest at everything. These expectations are going to be impossible to meet once you grow up and get out into the world. This means that something that would be a forgone gain (a minor discomfort) for most of us, becomes a crushing loss for the pampered kid. The impact on the happiness of the child will be dramatic. I haven't met a sheltered kid that seemed happy to me, and this might be part of the explanation.

Trying to make your child happy all the time, might just be making them unhappy in the long run.


Anonymous said...

That's why we need more tiger moms and dads?!

IMHO, two important pieces in economics you taught me a while ago was about expectations and incentives. These are the two most powerful economic forces around. Get them right more or less, you're fine; however, miss it and you're doomed a long time.

Prospect theory in relation to the current financial crisis would probably predict that after a brief relapse we might end up in a bigger mess if you can imagine one than today, why, because of the problems of moral hazard and still poor risk management (aka greed).

economistatlarge said...

I'm with you on the Tiger parents (we need at least some of that approach).

As to the financial crisis - it seems like we're coming out the other end, but you might be right. I'm still chewing on some of the stuff going on right now. I'm working on a post about reference points and how we've generally got it wrong when we compare where we are to where we were. But more on that later!

Anonymous said...

aren't real incomes fallen back to levels where they were in the early 80s?

although one of the goals of the state is to maximize consumption, how is enough?

consumption is getting to be a dirty word and concept for me. since the 80s, it seems that consumption is done for the hell of it - to feel good, to look good , to keep up with the Jones', well if that's the case, and with falling real incomes...the only way to keep this going was to incur more debt and it's still happening. changing people's behaviour won't occur overnight but nothing is being done to help motivate that change.

debt isn't necessarily a "bad" thing, it depends where and how you spend it.

i still can't believe that in north america, infrastructure spending did not occur as much as i would have liked it and i don't mean only the fill in the potholes infrastructure spending.

another good debate is PPPs - public/private partnerships. mark my words, that is a disaster in the making. Obama mentioned that this would be one way to reinvigorate the economy in the early months of his presidency; however, if this is done full-scale, mark my words, that would be the final nail in the coffin. i don't buy it. public/private is like oil/water, you can try and try and try but in the end it is a mess. the road to hell was always done with good intentions.

let's face it, serious problems, and these problems are structural too, require serious and tough solutions...political votes or not and maybe i'am a bit naive about this, but you can't have the status quo anymore, but then again you'd be amazed how far stupidity can take us.