“SOVEREIGN in Tastes, Steely-Eyed and Point-on in Perception of Risk, and Relentless in Maximisation of Happiness.”

Reading Passage Question

“SOVEREIGN in tastes, steely-eyed and point-on in perception of risk, and relentless in maximisation of happiness.” This was Daniel McFadden’s memorable summation, in 2006, of the idea of Everyman held by economists. That this description is unlike any real person was Mr McFadden’s point. The Nobel prize winning economist at the University of California, Berkeley, wryly termed homo economicus “a rare species”. In his latest paper* he outlines a “new science of pleasure”, in which he argues that economics should draw much more heavily on fields such as psychology, neuroscience and anthropology. He wants economists to accept that evidence from other disciplines does not just explain those bits of behaviour that do not fit the standard models. Rather, what economists consider anomalous is the norm. Homo economicus, not his fallible counterpart, is the oddity.

To take one example, the “people” in economic models have fixed preferences, which are taken as given. Yet a large body of research from cognitive psychology shows that preferences are in fact rather fluid. People value mundane things much more highly when they think of them as somehow “their own”: they insist on a much higher price for a coffee cup they think of as theirs, for instance, than for an identical one that isn’t. This “endowment effect” means that people hold on to shares well past the point where it makes sense to sell them. Cognitive scientists have also found that people dislike losing something much more than they like gaining the same amount. Such “loss aversion” can explain why people often pick insurance policies with lower deductible charges even when they are more expensive. At the moment of an accident a deductible feels like a loss, whereas all those premium payments are part of the status quo.

Another area where orthodox economics finds itself at sea is the role of memory and experience in determining choices. Recollection of a painful or pleasurable experience is dominated by how people felt at the peak and the end of the episode. In a 1996 experiment Donald Redelmeier and Daniel Kahneman, two psychologists, showed that deliberately adding a burst of pain at the end of a colonoscopy that was of lower intensity than the peak made patients think back on the experience more favourably. Unlike homo economicus, real people are strongly influenced by such things as the order in which they see options and what happened right before they made a choice. Incorporating these findings into models of consumer behaviour should improve their power to predict everything from which loans people choose to which colleges they apply for.

Trust is something economists already incorporate into their models. But trust turns out to be not just a function of history and interactions, as dismal scientists tend to think, but also a product of brain chemistry. Pumping people with oxytocin, the so-called “love hormone”, has been found to make them much more generous in games where they have to decide how much of their money to entrust to another person who has no real incentive to return any of it. Sovereign, indeed.

Much of this may be alien to modern-day economists, but it is in line with the conception that other disciplines have of human decision-making. Psychologists have long known that people’s choices and preferences are influenced by others. Biologists have a much clearer understanding of altruism and kindness, whether to kin or strangers, than economists, who typically emphasise the dogged pursuit of self-interest. This way of thinking would also have been recognisable to their intellectual forefathers. Adam Smith wrote extensively about the central role of altruism and regard for others as motivators of human behaviour. The idea of loss aversion would have made sense to Jeremy Bentham, the founder of utilitarianism: he spoke of increased pleasure and reduced pain as two distinct sources of happiness.

Mr McFadden believes that economists need to do things differently if they are truly to understand how people make decisions. Manipulating brain activity is one way of delving into where economic choices really come from. Analysing the information people get through social networks would help them understand the role of influence and identity in decision-making.

Such tools have implications for policy. Plenty of poor people in America are wary of programmes like the Earned Income Tax Credit (EITC) because the idea of getting a handout from the government reinforces a sense of helplessness. Dignity is not something mainstream economics has much truck with. But creating a sense of dignity turns out to be a powerful way of affecting decisions. One study by Crystal Hall, Jiaying Zhao and Eldar Shafir, a trio of psychologists, found that getting poor people in a soup kitchen to recall a time when they felt “successful and proud” made them almost twice as likely to accept leaflets that told them how to get an EITC refund than members of another group who were merely asked about the last meal they had eaten.

A nudge and a think

Taking the path Mr McFadden urges might also lead economists to reassess some articles of faith. Economists tend to think that more choice is good. Yet people with many options sometimes fail to make any choice at all: think of workers who prefer their employers to put them by “default” into pension plans at preset contribution rates. Explicitly modelling the process of making a choice might prompt economists to take a more ambiguous view of an abundance of choices. It might also make them more sceptical of “revealed preference”, the idea that a person’s valuation of different options can be deduced from his actions. This is undoubtedly messier than standard economics. So is real life.

“SOVEREIGN in tastes, steely-eyed and point-on in perception of risk, and relentless in maximisation of happiness.”- is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 5 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

Question 1
In the experiment mentioned in the third paragraph it can be reasonably inferred that orthodox economics would have expected:

1. a pleasurable experience to create longer lasting and more vibrant memories
2. a more exaggerated response to painful experiences
3. the sequence of events to have less influence on the memory of the experience
4. most people to have preferred a longer but less painful procedure
5. most people to have preferred a shorter but more painful procedure

Question 2
According to the passage it could be reasonably inferred that some economists:

1. believe that a majority of people behave in ways that can be predicted by standard models
2. believe that some exceptions to the standard models of economics can be explained by theories developed in fields outside of economics
3. use only real people as the basis for their economic models
4. incorrectly apply the standard economic models to predict the behavior of real people
5. would benefit by drawing information from various competing fields of economics

Question 3
According the passage, which of following is an example of the endowment effect?

1. Buying a new car for more money than you had expected to spend because you felt emotionally attached to the brand name.
2. Cancelling a vacation which has been planned for six months so that you can avoid missing a potentially lucrative business deal.
3. Selling an old coffee mug that you no longer use for more than the market value only because you consider it yours.
4. Putting a high value on your parents furniture because you associate it with childhood memories.
5. Placing a lower value on a baseball card that you plan to buy because you already own a card of comparable value.

Question 4
Which of the following best expresses the main idea of the passage?

1. To describe some flaws in traditional economic thinking and to recommend a course of action to improve economic models and the accuracy of their predictions.
2. To provide a history of a certain type of economics along with a prediction for its future.
3. To describe a flaw in standard economic theory and provide several examples of how the flaw manifests itself in practical applications.
4. To describe several ways in which economists can benefit from the decision making theories of other fields and provide experimental evidence of these benefits.
5. To propose an adjustment to standard economic theory incorporating new ideas from other scientific fields.

Question 5
The author would most likely agree with which of the following statements?

1. Other sciences outside of economics have developed decision making models which incorporate altruism, kindness, and loss aversion that can accurately predict human behavior.
2. Decision making models created by some biologists are superior to models created by economists who adhere to the standard economic models .
3. Some of the principles that are being incorporated into modern economics contradict the beliefs of some famous classic economists.
4. Self-interest should not be considered as a major contributor to rational decision making.
5. Traditional economics has not considered increased pleasure and reduced pain as two distinct sources of happiness.

Suggested GMAT Reading Comprehension Questions

• A One-Child Policy was Implemented in China in 1979
• Seeking a Competitive Advantage, Some Professional Service Firms
• On the surface, the Conquest of the Aztec Empire by Herman Cortes
• But Man is Not Destined to Vanish. He can be Killed, but he cannot be Destroyed, Because his Soul is Deathless and his Spirit is Irrepressible.
• When Literary Periods are Defined on the Basis of Men’s Writing, Women’s Writing Must be Forcibly Assimilated
• Behind Every Book Review There are Two Key Figures: A Book Review Editor and A Reviewer.
• Barbara Strozzi was a Singer and Composer of Madrigals, Aria
• During the Victorian Period, Women Writers were Measured Against A Social
• It Is Perhaps Not Surprising that Debate has Arisen Over Bioluminescence-Based Biotechnologies
• The Fact that Superior Service can Generate a Competitive Advantage
• The Origin of the Attempt to Distinguish Early from Modern Music
• The Phenomenon of College Basketball's Surging Popularity Remains a Challenge to Classify
• The United States Government has a Long-Standing Policy of Using Federal Funds to Keep Small Business Viable.
• A Recent Study has Provided Clues to Predator-Prey Dynamics in the Late Pleistocene Era.
• Even More Than Mountainside Slides of Mud or Snow, Naturally Occurring Forest Fires Promote the Survival of Aspen Trees.
• The Black Death, a Severe Epidemic that Ravaged Fourteenth Century Europe
• The System of Patent-Granting, Which Confers Temporary Monopolies for the Exploitation of New Technologies
• Ethnohistoric Documents from Sixteenth-Century Mexico Suggesting that Weaving and Cooking were the Most Common Productive Activities for Aztec Women
• Solar Ponds are Bodies of Water in Which Circulation is Incomplete and There is a Very High Salt Concentration that Increases with Depth
• Traditional Social Science Models of Class Groups in the United States are Based on Economic Status