Planet Money - Big Little Ideas

Episode Date: August 14, 2021

There are a lot of fancy terms for the things we experience — but are they really useful? Yes! We explain four social-science terms that can help us understand our world. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Kenny, let's start the show with some words. Availability heuristic. Hyperbolic discounting. Stated versus revealed preference. These words are all economic terms, social science terms. And I hear words, phrases like these. And sometimes I think, come on, do we really need phrases for these things? Take availability heuristic, for example.

You know, that is obviously a set of overly complicated words, sure. But the question is, do we even need that phrase? Because availability heuristic is just what economists call that thing where we overestimate the odds of a plane crash and underestimate the odds of a car wreck. Because when a plane crashes, it's huge news. We hear all about it. And car wrecks happen all the time. And we never hear about those. That's what availability heuristic means.

It would certainly be easier to understand. And you wouldn't sound like a schmuck going around saying heuristic all the time. But it did just take you kind of a while to say that thing where we overestimate the odds of a plane crash and underestimate the odds of a car wreck, because when a plane crashes, it's huge news, and we all hear about it, and car wrecks happen all the time, and we never hear about it. It is true. And if I had just said availability heuristic, it would have been much faster than that. So we agree on faster, but I'm going to make the case that it's more than that, right? I feel like even inside my own mind, just as I am moving through the world, it's useful to have these

little kind of obscure phrases tucked away. Take another one. Take stated versus revealed preference. So for example, if I read a poll that says 44% of high-income New Yorkers are considering leaving the city, and I start to think, wait, why does this poll seem kind of meaningless? I can open the mental drawers and find in there this phrase, stated versus revealed preference. And that tells me, oh, right, we shouldn't pay attention to what people say to their stated preference. We should pay attention to whether they actually leave New York, to their revealed preference.

It is nice to have a drawer full of these ideas. It's like that drawer in the kitchen with the masking tape and the rubber bands and the pushpins. These ideas, these phrases, they are useful little tools that help us understand our world. Hello and welcome to Planet Money. I'm Kenny Malone. And I'm Jacob Goldstein. Today on the show, we got a drawer full of helpful little idea tools. They will make you better at parsing COVID numbers. And maybe help you the next time you go in to ask for a raise. And also,

we got one that will explain why you should feel fine if you're the kind of person, like me, who will spend hours and hours and hours to save, you know, 10 bucks. Okay, so today we have a handful of useful tools, useful ways to think about the world. Bringing us our first tool, Amanda Aronchik. Hello, Jakob Okkeni. Oh, I'm so sorry. Was I speaking Icelandic? I just spent two weeks there.

I sometimes can't even tell. Am I speaking English? Am I speaking Icelandic? I just spent two weeks there. I like sometimes can't even tell. Am I speaking English? Am I speaking Icelandic? Are you like the exchange student in high school who comes back from London and like calls everything brilliant and signs her emails this year? Is that you now, but for Iceland? Yes. So the reason that I went to Iceland was the same reason that lots of people have been going to Iceland. It is because they have very low COVID rates and very high vaccination rates. So basically, Iceland said, bring us your tourists who will pay the big bucks to ride their little horses. But as I was packing to go, there was this COVID spike there. And the very scary thing that was getting thrown around was that most of the people getting infected were fully vaccinated.

We've been hearing about this kind of thing a lot this summer. You know, heard it from Israel, from that outbreak in Massachusetts and Provincetown. Right. And lots of people hear these stories and they are scared. But I bring you an expert bearing good news. It is just people committing the base rate fallacy. They're not considering the whole context of the data. So this is Katrine Wallace. She's an epidemiologist at University of Illinois at Chicago. And you might know her as TikTok's Dr. Kat. And the base rate fallacy is

the super helpful idea that she is bringing to us today. And let's talk about the base rate fallacy in the context of Iceland. So 67% of COVID infections in Iceland over the past month have been in people who are fully vaccinated. 67% does sound bad. When you look at Iceland and you kind of graph that data out by who's vaccinated and who's unvaccinated and who the cases are. You can see there are more cases in the vaccinated group than the unvaccinated groups. But what does that actually mean? Does it mean that the vaccine doesn't work? That 67% stat does not answer that.

Because we are missing a very critical piece of information. We are missing the base rate. The base rate is basically how common some characteristic is in a group. So in this case, the base rate that we care about is how common is it for people in Iceland to be vaccinated? Specifically, what percentage of the country's population has been vaccinated already? what percentage of the country's population has been vaccinated already? As of data from this week, 86% of the population in Iceland is vaccinated per their health department website. So that is a lot of people. Basically, everyone in Iceland who could get a vaccine got a vaccine.

So it is not surprising then that when COVID cases do happen, most of them happen to vaccinated people because there are very few unvaccinated people left. Yeah. I mean, if you want to just do like a thought experiment, take it to the extreme, right? Imagine a world where everybody has the vaccine, where 100 percent of people are vaccinated. Well, in that world, if there's any COVID left, every single case, 100% of cases would be in vaccinated people. Right. So the more useful question to ask is how big was the risk of catching COVID if you were vaccinated? And how big was the risk if you were unvaccinated? Dr. Katz says six of every thousand vaccinated people caught COVID in that month. But for the unvaccinated, the rate of infection was more than double that. Fifteen But for the unvaccinated, the rate of infection was more than

double that. 15 of every 1,000 unvaccinated people caught COVID that month. So clearly, it was better to be vaccinated. And of course, in general, there's an even bigger difference between vaccinated and unvaccinated people when you look at hospitalizations and deaths. That makes total sense. Once you consider the base rate, you get a very different and frankly more useful story than that misleading number that we started this with. And it is not just COVID. Dr. Katz says the base rate fallacy is useful to keep in mind whenever you hear people throwing numbers around to make a point. What I would advise is just anytime you see like X percent of this or, you know,

five out of 10 that I would just say, what's the broader context here? What are we talking about? Because you could be looking at something that's not enough data to make a conclusion. So there you go. Hopefully that is useful. Kenny Og Jakob, tak och bless. Get out of here. Tak, Amanda. Tak you very much. Okay, for this next segment, our producer Darius Rathion has ventured out to see one of our economic tools in action in the actual world. Welcome to the world famous Rose Bowl flea market, the shopping place of the star. Darius, when I first heard this recording, I did not believe

it was real. It is all too real. And it plays on a loop out in front of one of the country's largest flea markets at the Rose Bowl Stadium in Pasadena, California. A treasure hunter's paradise, a bargain hunter's dream, a shopper's heaven. When I went there last week, there were thousands of people selling everything. Surfboards, old couches, vintage movie posters, lots of animal skulls for some reason. And also, there were tens of thousands of people looking for deals. Hi, what brings you to the flea market today? Thank you. Oh, we drove here from Oklahoma. We came in Tuesday. Wow, you drove here all the way from Oklahoma? Yeah. Why? This

has been like, I don't know, 20 years I've wanted to do this. This is like Disneyland for us. And are you like, are you looking for a particular piece today? We're looking for mid-century rugs. We found a lot of rugs. They'd spent hours digging through dusty crates in the hot sun, not to mention dozens of hours driving from Oklahoma to California, which, you know, seems like a lot of work to save a few dollars on a rug. But there is the money you save,

and then there is the joy of the deal itself. The Rose Bowl is, like, a really good place to find, like, stuff for, like, fairly priced items. For instance, I ran into this guy named Gio Raduta. He had driven eight hours to get to the flea market, and he had scored a good bargain on some vintage clothes. Is there something about kind of, like, getting the deal that gives you kind of a thrill? Yeah, I'd say so.

Is that like adrenaline rush when you find like a good deal? That adrenaline rush when you find a good deal, there is a name for that. It's called transaction utility. Darius, I just want to say that transaction utility is my absolute favorite of the ideas on the show. And my basic understanding is that it is like the like the joy that you get when you pay less for something than you thought you were going to pay for it. Is that is that about right? Yeah. I mean, so let's say you spend three hours digging through old crates and you find a denim jacket that costs twenty dollars less than what you would pay online. Now, that doesn't really seem like a great deal, three hours of work for $20. But when you save that money, you have the money,

yes, but you also have the satisfaction that you get from getting the deal. And that satisfaction is part of what economists would call utility. Utility, of course, is this really basic thing in economics. There's this fundamental idea that people maximize utility. Andility, of course, is this really basic thing in economics. There's this fundamental idea that people maximize utility. And I think sometimes people think, like economists just think people are greedy, that utility maximization just means everybody just wants more money. But that's not right. That's not a complete picture of utility. Like, sure, yes, we do get utility from money, but we also get utility from lots of other things, including, in this case, the joy of getting a deal. So if you want to drive across five states to get a good deal on a mid-century rug, go for it.

The transaction utility may be well worth the trip. Thank you, Darius. You got it. Enjoy your stay here at the world's most unusual shopping place. The second Sunday of every month. After the break, a smarter way to ask for a raise. Also, donuts. Also donuts. So, Kenny, this next one is this idea I've been wanting to get on the show for a couple years now.

I learned about it when I was working on my book on the history of money. And I've thought about it maybe like every week since then. It's just a really useful, tidy little idea. And it boils down to one phrase. And that phrase is the money illusion. The money illusion. The money illusion. The money illusion. The money illusion. Okay. So the money illusion is a phrase coined- No. You're welcome, by an economist named Irving Fisher. He's largely forgotten now. He was a huge deal in the first

few decades of the 20th century. And in addition to being a big-time economist, he ran this company that sold some kind of index card system, like a little proto-Rolodex that Fisher invented. And what happens is this. You know, he realizes that you have sometimes inflation, right, where prices go up. In this era when he's running this company, you actually also had deflation sometimes. We don't really have that anymore. But you used to have moments when prices of everything will go down for a period of time. And he realizes like my employees' pay should rise and fall with inflation and deflation, right? They should be able to buy

the same amount of stuff next year as they can this year. I mean, if they're going to get a raise, that's a separate thing. But as a general matter, if prices go up, their pay should go up. And if prices go down, their pay should go down because they're getting the same amount of stuff, the same amount of purchasing power, right? Right. There are cost of living adjustments, which presumably are like tied to inflation. Your money buys less. Therefore, you need to make more as an employee. It's not the most foreign concept. Exactly. So he actually tries this at his company. You know, he says to all his employees, look, we're going to give you sort of cost of living adjustments. And when he starts this, there's inflation, prices are going up, and he starts raising people's paychecks. And he's

like, look, this is not a raise. You're getting- It's a cost of living. It's a cost of living adjustment. You can buy the same amount of stuff. And he was like, sure, great. OK, got it. And then there is this moment when there is deflation, when prices fall. And so he cuts everybody's paycheck. And he's like, look, you're not getting a pay cut. You can still buy the same amount of stuff.

And he's like, what the hell are you doing? Why are you cutting my pay? Of course, right? Obviously, sure. And it's like, what the hell are you doing? Why are you cutting my pay? Yeah. Of course, right? Of course. Obviously, sure. But from this, you know, Fisher realizes this really important thing that like clearly what matters is not the number of dollars but how much you can buy with it. But we human beings just cannot get that, right? We are just so fixated on the number of dollars that we lose sight of the

amount of stuff. And this problem, this inability to see the whole picture, Fisher calls the money illusion. This is the money illusion that you've been talking about for months, Jacob. Okay, got it. So that's the econ, but here is the hack that we can present you, the listener, today. One of my favorite websites on the entire internet is the Bureau of Labor Statistics CPI calculator. Jacob, you know this, yes? Love it. Yeah. If you just Google BLS CPI calculator, CPI stands for Consumer Price Index.

It's a measure of inflation. Yeah. Let's do an example here. So, okay, let's say that in the year 2008, you were hired at a job and you were making $50,000 a year. Okay, I'm going to enter this into the calculator now. Punch it into the calculator. $50,000. Yeah, so it actually says $50,000 in January 2008 has the same buying power as, I'm going to click calculate, $64,000 in June of 2021. If you're making less than $64,000, say you've gone from $50,000 to $60,000, in real terms, you have gotten a pay cut.

In meaningful terms, you are making less now than you were when you got hired. a pay cut in meaningful terms, you are making less now than you were when you got hired. And before you go into your salary negotiations, your raise negotiations, this is like a pretty good tool to remember to use just so that you're aware what is actually a raise and what is just your employer- And what is just the money illusion. And what is just the Money Illusion. All right, Emily, can you tell us the donut story? Is it a particular donut story? Do you have a list of donut stories that you could rattle off?

This is Emily Clark. She's a friend of mine. She used to commute into Manhattan from New Jersey. And every day, she would get off the train in New York City, go to Dunkin', and buy two donuts. The particular kind was chocolate with sprinkles. Like a cake donut, a little colorful pop on top.

Exactly. It just made every day feel like my birthday, which is kind of like the threshold I need to operate at. But this was not just an indulgence. It was part of a bigger eating system that Emily had. I'd made this negotiation in advance with myself that having that morning indulgence sets me up for eating really healthy the rest of the day. like eating really healthy the rest of the day. And then one day I walked up to the window and I saw some really shocking numbers next to the donuts. New York City had passed this local law that required chain restaurants to post calorie counts on their menus. And Emily, she obviously knew that she was not eating a healthy breakfast. But now she was confronted with the very specifics of how unhealthy her breakfast was.

Each donut was around 300 calories apiece. So what did you do that day? Did you buy the donuts? You know, I don't know if this is a memory or not, but it seems real that I did buy them and didn't enjoy them. I think I've seen me like turn to ashes in my mouth, but I felt like they I had them and then it was just different. Her old system, enjoy the donuts, then eat healthy all day, didn't work anymore. So she stopped getting donuts and tried to do what this scoldy new calorie count law was nudging her to do. I would have like a hard-boiled egg and spinach and then feel rotten the rest of the day and eventually spin out and eat way more calories than fat overall.

Emily wanted to go back to the old way to keep eating her donuts, but she didn't want to be reminded every time of how many calories they had. But then she realized that this calorie count rule, it only applied to New York City. It did not apply in New Jersey, where she lived. Jersey City did not have menus annotated with calories. They were just very simple. Here's a donut. It's, you know, 79 cents. Have a great day. The two-donut morning was back, scold free. There is a formal econ-y term for Emily's behavior here, information aversion. She is going out of her way to avoid information. And in a sort of naive universe, this doesn't make any sense because generally more information is better for decision making.

But in the non-naive universe where we all live, there are in fact many settings where we want less information. Like think of investing. I have my retirement account invested mostly in the stock market. When the stock market crashes, I do not want information. I don't want to know what the stock market is doing. I don't want to know how much money I'm losing because if I know, I'm going to panic and I might sell at the bottom, which is, you know, classic retail investing mistake. So with respect to my retirement account, I am an information-averse investor. I just want to take money out of my paycheck every

two weeks, automatically invest it, and ignore every piece of stock market news until I retire. And Emily was also better off before the calorie counts showed up on the Dunkin' menu. She had her system, donuts in the morning, healthy food the rest of the day, and that worked for her. Getting more information in this case made her worse off. You are an information-averse donut eater. Okay. It's good to finally have a diagnosis, so thank you. Is there anything else? Any other details? I'm off donuts.

What happened? Actually, I think age caught up with me. My doctor actually said I had to stop living like Don Draper. My cholesterol was terrible. If you've got your own useful little tool ideas, like, let us know. We'd love to hear about them. You can reach us. We are planetmoneyatnpr.org. We're also on all of the social media. We're at Planet Money.

Today's show was produced by Darius Raffion and engineered by Andy Huther. Our supervising producer is Alex Goldmark. And the show was edited by Bryant Erstad, who just reminded me that we never explained hyperbolic discounting. Hyperbolic discounting is when you take a mediocre thing right now rather than take something great in the future. I'm Kenny Malone. I'm Jacob Goldstein. This is NPR.

Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.