Ed Glaeser and Cognitive Errors in Utility Maximization

Art isn’t meaningless… It is in itself. It isn’t in that it tries to make life less so.


Currently listening to:
Simple Song by the Shins
Currently reading: The Beautiful and the Damned by F. Scott Fitzgerald

When I was at Harvard, I took a class taught by an economics professor named Ed Glaeser. According to the course guide, it was an intermediate microeconomics class, but in reality, it had a fair share of quantitative rigor that attracted physics majors like myself.

Ed was quite the character. He showed up to class every day in a three piece suit and a gold pocket chain. Apparently, he’d been dressing like this since the age of 12. He spoke as loudly as a football coach, yet as crisply as a news anchor. I remember him scribbling furiously, chalk dust flying everywhere as he solved yet another differential equation in record time. Even the physics and math majors, sitting in the back, were damned intimidated by the man.

These days, I remember very little microeconomics. But some of his lectures will always stick with me. One of them was about the way humans make utility maximization decisions. Ed’s thesis was that humans are actually pretty good at making a discrete, single utility maximization decision under uncertainty.

An example of such a decision could be – you’re in a convenience store and there’s only one brand of ice cream that you’ve never seen before. Should you try the strawberry flavor of this new brand of ice cream or should you try the walnut? On the first try, you probably do some kind of expected value calculation (based on the distribution of possible yumminess of the strawberry vs. distribution of possible yumminess of the walnut) and essentially choose based on whether you have historically preferred strawberry or walnut.

This seems rational and you probably really did maximize utility that day, ending up with a satisfied palette. However, chances are the next time you walk into that convenience store, you’ll make the same calculation (though now knowing exactly how good strawberry is vs. a distribution of walnut yumminess) and the exact same choice. Iterate that decision 100 times and suddenly you have a pattern of always choosing strawberry.

Professor Glaeser’s idea was this – while good at individual utility maximizations, people tend not to consider future implications. They choose one at a time, rather than recognizing the optionality that may be generated by making a choice that is seemingly “irrational” in the moment. What if… what if you bucked your individual calculation and tried walnut, even though strawberry was almost definitely going to be better in that moment. Well, worst case, you had a bad ice cream experience for one night and went back to eating strawberry. But maybe, just maybe, you’d find out that this new brand’s walnut was phenomenal and for your foreseeable future in ice cream consumption, you got a utility bump every time over eating strawberry.

Not so dumb to try walnut right? Professor Glaeser concluded that we should not be afraid to take “little risks” in everyday life. I think this makes a lot of sense. The way I try to think of it is – when making a decision that I’ll probably have to make again (e.g., whether to hang out with someone), I quickly figure out what I want to do… and then take a step back and think “Well, what happens if I decide this way every single time for the next 100 decisions?” It sometimes changes the calculus (usually from “I don’t want to hang out with this person” to “Fine, let’s do it.”).

Initial Thoughts on The Beautiful and the Damned:

Have not finished the book yet, but thus far it’s been reminding me what it’s like to read something that is really, really well-written. It fully transports the reader into the characters’ world and just conveys every single sensation of being there. The diction is both imaginative and precise. Imaginative in the sense that I would never think to use the words that Fitzgerald uses to describe something, and yet precise in that I find myself nodding at the result, “that’s a perfect way of saying it!”

Obviously, the subject matter is really attractive as well. Sort of deals with what it means to be a young, relatively privileged male living in the big city and trying to sort life out.

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