Though I agree that the price of the dinner at McDonald’s increases if your friends are all going to a higher-end restaurant. There are some interesting social incentives at play.

It is more common for individuals to complain about wages if they are lower in comparison to their peer group. If I was earning $50k in a group of individuals earning $100k, I’d feel relatively deprived. However, if there was an individual earning $30k outside my peer group, I would not feel grateful for earning more than them.

Everyone lives in a state of mild deprivation, however depressing that is. Few people stop and appreciate that most Americans are better off than those living in third-world countries. Instead, they compare themselves to Americans within their own social strata, or at their workplace, or academic institution. This emphasizes the importance of peer groups..

The old labour – leisure tradeoff. I run into a bit of a problem as an economist – both my labour and my leisure is doing economics, and as my wage is not based on hours worked, my optimal hours spent performing labour are undefined!

I know, I’m a geek 😛

Australia has a movement of “sea changers” and “tree changers” as well-off people semi-retire to live on the coast or in small communities inland. They’ll either telecommute or start a small business that they can run part-time. Selling a million dollar home in Sydney (there are lots of them) and buying something for $200k is quite practical and becoming more common (and house prices in popular areas are rising as a result). To me that’s a clear case of people choosing lower pay and more leisure.

I’ve chosen a variant of that – for quite a while was working as a contract programmer and earning $50k each year before stopping and doing other things. So I worked 4-8 months and had 4-8 months off. Then I got sucked into a salaried job for lots more money. Some days I’m not sure it was a change for the better…

“Surely the original survey, if well designed, would have asked follow up questions to the students about why they chose a).”

I agree. Experimential economics is a new field, and as a result is often fraught with methodological inconsistencies. Given time I’m sure that survey design will improve.

In one striking example, students at Harvard University were asked whether they would prefer (a) $50,000 a year while others got half that or (b) $100,000 a year while others got twice as much. A majority chose (a)….

Although people value their income in relation to that of others, this does not seem to be true of their leisure time. The same Harvard students were also asked to choose between (c) two weeks’ holiday, while others have only one week and (d) four weeks’ holiday while others get eight. This time a clear majority preferred (d). In other words, people’s rivalry over income does not extend to leisure. The result of this, suggests Lord Layard, is that developed societies may tend to work too hard in order to consume more material goods, and so consume too little leisure.

I think the leisure result would also be consistent with confusion about the price level explaining the income result. Surely the original survey, if well designed, would have asked follow up questions to the students about why they chose a).

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Tracking down the survey would be a good idea, I’ll think about it when I’ve got some time.

“When I first heard this experiment described, I think the survey group was MBA students and the income parameters related solely to their classmates’

That is very different to having the world on a certain income – as prices will not adjust. Very interesting. Then again, I would guess that these people don’t like their class mates (as they are MBA students), so the person is willing to spending 50K to mess up all these other guys.

If anything that sounds like a consumption decision to me 😉

Has anyone actually tracked down the study being referenced?

Indeed, that was the point of the strategic complementarity discussion thingy 😉

“Researchers have the same problem with the one-shot prisoners’ dilemma — it’s really hard to stop subjects from playing it as though it’s embedded in a larger repeated game.”

Indeed, and it makes sense that people act that way. We have limited cognitive capacity and follow rules of thumb – rules of thumb aren’t always going to be optimal, but they are better than re-analysing every decision. I think thats what researchers are finding when making these specific examples.

I had the opposite problem when I was doing 3rd year Industrial economics. We would play a repeated prisoners dilemma game and I would always defect straight away :). The reason I did that is because when I was in first year, someone defected on me in a practice prisoners dilemma game, and I had internalised this rule of thumb without even thinking about it 😉