Rational valuation

Recently I have read a couple of economics books that made me think about how humans value things in new ways.  The first is Predictably Irrational and the second is The Logic of Life.  They both addressed the old idea in economics that man is some kind of superbly rational economic machine who makes ideal choices.  In The Logic of Life he is referred to as homo economicus who has the greed of an Enron executive, the intellect of Mr. Spock and the emotional intelligence of an armchair and who would strangle his grandmother for a dollar as long as it cost him less than a dollar's worth of time.  Obviously the old economic ideas of a perfectly rational person are an incredibly poor model of how people actually behave.  That said, these books present some very different ideas about how people think - in particular the way in which people overvalue what they have and undervalue what others have.

In Predictably Irrational the author shows us a study where people stood in line to get tickets to the big game and were awarded the chance to buy them randomly.  After the fact they were asked to place a value on the ticket and those who had one claimed they would need to be offered about 2000 dollars to sell it while those who didn't get one claimed they would pay only 200 dollars to acquire one.  This seems like a case of irrational behaviour since the division of the tickets was random - there is no reason to think those who got one would have valued it more prior to acquiring it.

The counterpoint in The Logic of Life is that this phenomenon is found primarily in areas where people have no expertise.  In these experiments people were found to value what they had too highly when they were novices in the area but when experts were tested similarly they behaved extremely rationally, valuing things as if they placed no additional value on things they already owned.

Both these behaviours seem absolutely bang on if you think about how human minds developed.  Most of our evolution has not occurred in a large, efficient marketplace like in theoretical economic models.  Far more common has been the situation of two people trading things whose value is not well defined.  In that case it is extremely rational to overvalue what you own when you are relatively uninformed because most likely people trying to trade with you are simply hoping to profit from your ignorance.  When the person being tested feels that they have a very good understanding of the values involved in a transaction however they are far more likely to trade away what they have because they have some confidence that they are the ones benefiting from experience - they think the other guy is the rube.

Normally I find the author of Predictably Irrational very accurate but in this case I side against him - overvaluing what you own is a very rational response to an unpredictable world full of smiling salespeople and sly con men.  You can only begin to trade in a 'rational' fashion once you are sure who the sucker is and that it isn't you.