This test comes from the excellent book, Misbehaving: The making of behavioral economics, by Richard Thaler. He’s an economist who observed that human beings are much messier than the rational, optimizing agents in economics textbooks. As an example of this, he surveyed subscribers to a newsletter on wine auction pricing, called Liquid Assets, and asked them this question:
Suppose you bought a case of good Bordeaux in the futures market for $20 a bottle. The wine now sells at auction for about $75. You have decided to drink a bottle. Which of the following best captures your feeling of the cost to you of drinking the bottle?
a) $0. I already paid for it.
b) $20, what I paid for it.
c) $20 plus interest.
d) $75, what I could get if I sold the bottle.
e) -$55. I get to drink a bottle that is worth $75 that I only paid $20 for so I save money by drinking this bottle.
Take a moment now and choose what you feel the cost would be. (There’s no one correct answer, and I’ll provide how people in the survey responded below.)
You may have already come across behavioral economics in some other excellent books such as Thinking, Fast & Slow by Daniel Kahneman, Predictably Irrational by Dan Ariely, and Nudge co-authored by Thaler. They all show how people make decisions that can be decidedly against their best interests.
The Wine Test is more than a party trick. Though the correct answer according to economists would be “d) $75, what I could get if I sold the bottle,” only 20% of respondents made that choice. More than half of the people considered drinking the bottle to be free (30%) or even result in a profit (25%). The rest just considered the original price (18%) or included interest (7%).
Why are our choices so different from what economists would predict? And why are we so different from each other?
$100 bills on the sidewalk
The problem is that we’re not purely rational agents who optimize outcomes. Included in a long list of deviations is that we tend to over-react to losses, to overweight near-term versus long-term benefits, and to base decisions based on how they’re worded or “framed.”
A striking example of this is how we save for retirement. In a paper titled, “$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans,” researchers showed how people didn’t take advantage of employer-matched funds (literally free money) and consistently paid little attention to contribution rates and how their retirement money would be invested.
Providing education about investments didn’t change much, but something else did: intelligent defaults. Employers automatically enrolled employees in the program and selected contribution rates and investments based on their profile. Employees still had full control to change things, but it was opt-out instead of opt-in.
“Under the opt-in approach, participation rates were 20% after 3 months of employment, and gradually increased to 65% after 36 months. But when automatic enrollment was adopted, enrollment of new employees jumped to 90% immediately and increased to more than 98% within 36 months.”
With a simple change, and without diminishing employee autonomy, behavioral economists were able to improve the retirement prospects of thousands of people.
Changes in your work and life
Whether it’s investing in wine, retirement, or in your own career and personal development, it’s clear we don’t always do what’s best for us. But as Thaler noted,
“Once you understand a behavioral problem, you can sometimes invent a behavioral solution to it…My mantra is if you want to help people accomplish some goal, make it easy.”
How did you do on The Wine Test? How will you do on making other, more important, decisions?
The more we know about why people do what they do, the better we can design things to make work and life better.