Tuesday, 30 June 2009

Interview with Kevin Murphy

From The Federal Reserve Bank of Minneapolis's magazine, The Region, June 2009.

Kevin Murphy on rational addiction:
ADDICTION

Region: With Gary Becker, you developed a theory of “rational addiction.” Could you give us a description of what seems, on its surface, a very counterintuitive concept?

Murphy: OK. Let’s take that rational addiction framework. I guess I’ll tie together—and I think this is what’s important really—the predictions of the theory along with the mechanics of the theory.

We laid out in our analysis how someone would behave who was a perfectly rational individual faced with the notion that if he starts, say, smoking cigarettes, that that will have an effect on his desire to smoke cigarettes in the future—that is, our perfectly rational individual realizes that smoking today raises his demand for smoking in the future. And he takes that into account in his decision-making.

He also takes account of the impact of smoking today on other things in the future, like his future health—smoking today means he’s more likely to get lung cancer or cardiovascular disease.

That theory has some pretty simple implications. One is, if I learn today that smoking is going to harm me in the future, then I will smoke less—that is, people will respond to information about the future.

People will also respond to future prices. If they think cigarettes are going to be more expensive in the future, developing a taste for cigarettes is a more expensive habit, and they will have an incentive to avoid building up a smoking habit.

A major implication that we tried to test in the data was, do anticipated increases in the future price of cigarettes impact smoking today? And what we found when we went to the data was yes, there’s a pretty strong pattern saying that anticipated future changes in the price of cigarettes actually show up as less smoking today.

Now, what’s interesting is you can compare that with what we call a na├»ve or myopic model. In a myopic model, people don’t look forward and, therefore, they only decide whether to smoke based on the current price of cigarettes. They don’t care about the future price. And the data actually reject that simple myopic model in favor of the rational addiction framework.

So I think the empirical evidence that we found was consistent with the rational addiction model. It was that evidence that convinced us, more than anything, that we were on to something. We wrote down the theory because we wanted to understand, what does the theory have to say? We then took it to the data to say, well, do the data bear out this theory or do they bear out a more traditional theory, that addicts are somehow completely irrational? And we found that the data say, well, people seem to respond at least somewhat in the direction of being rational.

You don’t want to overstate it though. Our data don’t say people are completely rational. It looks like they’re mostly rational is the way I would interpret our data.

Region: Bounded?

Murphy: Well, I don’t know if it’s the same as bounded rationality, but they take account of future prices but not quite as much as the theory would say they should. The myopic theory says there should be a zero. Let’s say as a normalization, the rational addiction framework says you’d get a one; you actually kind of get a number like 0.7 or 0.75. So it’s closer to the rational model than the myopic model, but it’s not a 100 percent victory. It’s a 75 percent victory for the rational model. So it comes out to be a useful model for understanding behavior, but not a perfect model.

Subsequently, others have gone out and modified the model and tried to make it consistent with bounded rationality and hyperbolic discounting and all kinds of other things, so I think there’s been a lot of work that’s built on our model, that tries to help explain that last 25 percent that we missed. But I take it as saying that, look, the model is a very useful model for thinking about the world.

And I don’t think it’s that surprising to people. One of the things that comes into people’s minds when they smoke is, they think about the future, they think about should I really be smoking, it’s bad for me. Most people who quit smoking don’t quit smoking because they don’t enjoy it. Right? There’s nobody out there who said, you know, I quit smoking because I didn’t enjoy smoking. You ever meet anybody who said, I quit because I didn’t enjoy it?

No, people say, I quit because I worried about my health, worried about my children, it costs too much. But very few people stop smoking because they don’t enjoy it. And that tells you immediately that there’s an element of rationality to their decision-making. Maybe not as much as there should be, in some people’s minds, but there’s certainly an element of rationality in the smoker’s mind.

If you ask people who don’t smoke why they don’t smoke, there’s an element of rationality too. They say, well, I don’t want to smoke because I don’t want to get addicted and I don’t want the bad health consequences. So I don’t find it surprising that a model that says that people look forward has some predictive power. I think a lot more people would smoke if they didn’t worry about the future.
This bit is interesting,
Most people who quit smoking don’t quit smoking because they don’t enjoy it. Right? There’s nobody out there who said, you know, I quit smoking because I didn’t enjoy smoking. You ever meet anybody who said, I quit because I didn’t enjoy it?
So people get benefits from smoking, they actually enjoy doing it. But what about alcohol? Any benefits from drinking alcohol? May be we should commission a report to find out.

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