Business Behavior
Economist delves into what people are thinking as they make financial decisions
By Francie King | Photo by Jackie Ricciardi/BU Photography
When the Red Sox welcomed the Tampa Bay Rays to Fenway Park on the afternoon of April 21, 2016, fans clamoring for a seat in the right field roof box were asked to hand over $38. The same seat for a July evening against the Texas Rangers would cost $51; a few nights later with the San Francisco Giants in town, $58.
This is real-time pricing in action. When teams and entertainment venues first got into the business of prices informed by demand, there was an outcry. “Initially, people were outraged that they were charged more for a game against the Yankees, versus against another team,” says economist Ray Fisman. “This, surely, would alienate the fans, right? In fact, the fans got used to it pretty quickly, and that’s how much sports pricing is done today.”
What interests Fisman is the extent to which people will trade off non-pecuniary considerations—such as justice and equality—for the sake of their own consumption. Will we soon accept that everything—whether Red Sox tickets or human organs—is a matter of market transaction? Or will we maintain that something beyond economic cost-benefit tradeoffs could govern our decisions?
Today’s economists are looking more closely at what consumers and investors are thinking as they make financial decisions and Fisman, the inaugural Slater Family Professor in Behavioral Economics in the College of Arts & Sciences, is one of them. BU Overseer Kenneth Slater and his family created the endowed chair in 2011 after recognizing the growing importance of this relatively new field.
According to Fisman, economists like Adam Smith in the 18th century and John Maynard Keynes, some 150 years later, made assumptions about behavioral impacts. But now there is a “much greater concern with how observations play out in the data,” he says. “Smith was a keen observer of economic phenomena, but he really wasn’t a data guy.”
The growing focus on behavioral economics has been a natural progression, says Fisman. “We’ve gone from making sweeping generalizations about markets in general, to accepting that the health insurance market is different from the market for what’s in your mom’s attic, and that’s different from the market for used cars,” he says. “So you start adapting your modeling approach to the salient, critical specifics of a particular market.”
“I was surprised to learn that individual behavior was not really considered in classical economics,” says Slater, a principal in Tremont Partners LLC, a financial advisory firm in Palm Beach, Florida. “I knew instinctively that behavior played a role in decision-making, and I was certainly very interested in that, in how human behavior affects business decisions. But I wanted to know much more, and BU was the right place to study it.”
Before arriving at BU, Fisman was a professor at Columbia University and codirector of its business school’s Social Enterprise Program. He’s the coauthor of several books, including Economic Gangsters: Corruption, Violence, and the Poverty of Nations (Princeton University Press, 2008) and The Org: The Underlying Logic of the Office (Twelve, 2013). The Inner Lives of Markets is due to publish in June 2016. A highly regarded scholar, Fisman “brings a remarkable range of expertise to economics at BU,” says Provost Jean Morrison. “His dynamic work in managerial economics and international development has applicability to so many areas.”
Today’s economists are looking more closely at what consumers and investors are thinking as they make financial decisions and Ray Fisman, the inaugural Slater Family Professor in Behavioral Economics in the College of Arts & Sciences, is one of them.
Among the questions he’s tackling in his research: Can we develop more realistic assumptions, often through the lens of social psychology, to build more credible models of human and market behavior? How do these behaviors inform economic policy and practice? His recent studies have explored the worth of political connections to corporations, and how much politicians may benefit from these. He’s also been looking into the social costs of bribery, corruption, and influence peddling. In the classroom, he’s teaching such issues as government redistributive policies and global corruption.
One thing that troubles Fisman is that many have come to see market efficiency as an end in itself. “All else equal, I love efficiency,” he says, “How can I not? I’m a card-carrying member of the American Economic Association. But all is not necessarily equal: what’s given up in the pursuit of efficiency?
“The people who are creating and curating these markets may not have a clear sense of the consequences of this increased marketization. Further, the rest of us may not share their vision. I would love to see more of a public conversation about these issues.”
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