We all know people that lie. We lie to our parents at one point or another to avoid getting in trouble. Our friends lie to protect us from unpleasant truths that might hurt our feelings. And politicians lie. Whether they are promising to deliver free universal health care or a wall along the US-Mexico border, politicians make promises they know they will never be able to keep. And now, with the 2020 election season well underway, get ready for more prevaricating on a debate stage or at a campaign rally near you.
When real money is on the line, in other words, our actions speak louder than our words.
It turns out that even experts sometimes lie to the public—and it’s not always in a way that’s sinister. Sometimes they lie without realizing it, tricking themselves while they do it.
Economists have long noticed that people’s words and actions often suggest different things. For example, a survey might ask people how much they care about privacy. Respondents might answer that they care a whole lot. But when researchers look at people’s actual behavior, many consumers seem hardly willing to pay anything at all for privacy. When real money is on the line, in other words, our actions speak louder than our words.
Stated vs. Revealed Preferences
Economists refer to this difference between words and actions as the difference between “stated” and “revealed” preferences. When people answer you in words, whether intentionally or not, they might lie to you. For example, when you ask someone how many alcoholic drinks they consume in a week, they might undercount. Some lying is intentional to look good to the surveyor, but some of the fibbing is out of self-deception. We’d rather not know the truth about ourselves.
Either way, looking at people’s actions—their revealed preferences—tells you a lot more about them.
The funny thing about this is that economists are also guilty of saying one thing but doing something completely different in practice. We economists claim to care a lot about efficiency, which is just a measure of wealth—the value of all the stuff we have.Economists like to assume cost-benefit analysis works because it’s mathematically convenient, but it’s not at all realistic or scientific. Economists talk about efficiency because we can measure it, unlike, say, human well-being, which might be a better metric if it weren’t such a fuzzy and hard-to-define concept. Efficiency is more objective.
Strangely, however, when economists analyze public policies, they keep trying to measure well-being, not efficiency.
For example, when economists conduct a cost-benefit analysis for a government policy, they base the analysis on a “social welfare function,” or a mathematical equation that describes … societal well-being. The welfare function they use (which comes from a popular economic growth model) treats society like it has the characteristics and preferences of one person—with human traits like impatience, for example. Economists like to assume this works because it’s mathematically convenient, but it’s not at all realistic or scientific.
The really strange thing is that when economists finish a cost-benefit analysis, they proceed to speak about the results as if they tell us something about what we should have been measuring in the first place: efficiency. But the results tell us no such thing. All we really know about the policy is how it fared when judged by an unrealistic social welfare function.
Just as consumers sometimes say they value privacy but don’t seem to in practice, many economists say they value efficiency but don’t seem to in practice. Lots of people have a mental disconnect between what they say and what they do. They lie, in other words, even to themselves.They seem to care more about well-being. This is understandable—even admirable on some level—but they can’t quite seem to admit it to themselves, likely because it’s a very unscientific way to approach policy analysis.
Lots of people have a mental disconnect between what they say and what they do. They lie, in other words, even to themselves. It turns out that economists, who are well aware of this dynamic, are no exception. Once in a while, we economists should stop and take a long look in the mirror. We might learn a lot from our own revealed preferences.