Everyone who works is an economist. Rational economic theory says we will work where we can maximize our individual economic return.
If we can earn more doing something else, we will. If we can upgrade skills and raise lifetime wages by 17 percent, we will spend the money and time required to get there (up to the amount of the expected gain). Also, the unemployed would always seek a job as markets improve to net more income from wages than unemployment compensation.
One problem: we are not rational beings.
In his new book, “Misbehaving: The Making of Behavioral Economics,” Richard Thaler, makes a convincing case that rational economic theory is incomplete at best. People make all kinds of choices that reduce economic returns.
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His most compelling theory is the “endowment effect.” If it is even partially correct, it helps explain important things I have observed about all of us and our jobs.
The endowment effect includes two basic principles: 1) people are generally more likely to keep what they have than to trade it (called inertia), and 2) losses are perceived about twice as painful as gains are pleasurable (called loss aversion).
Thaler illustrates his theory with many experiments in human behavior, money and the potential for gain or loss. Over and over again, people make choices that are mathematically incorrect and reduce economic returns. When choices were described as a potential for losing something you now have (“endowed”) rather than a potential for gain, people chose the gain version despite its having a worse economic result. People also tend to choose to keep what they have, perceiving a trade as a “loss.”
To me, endowment theory helps explain how we view our jobs and why many/most of us are not pure economic maximizers.
Take the example of a reasonably well-employed person, working for a decent employer and making a market income meeting their basic needs. Will they seek out a new job making 15 percent more for which they are qualified?
Rational economic theory says “yes.” People are coin-operated. Behavioral economic theory says not so fast.
The employee considering a job change has both a trade to consider (inertia) and a potential risk (loss aversion). Giving up fair pay with a good manager will be very hard to do just to get a raise. You might also get a bad manager!
Thaler’s book suggests to me that if job change is perceived as relieving significant pain (bad manager), then change is much more likely even if the dollars are similar. Every day at work with a bad boss is another day of loss! We see this regularly in workplaces we serve.
Labor markets are not perfect and none of us are perfect players. Economic graphs often ignore real human behaviors.
The next time you rationalize a job change as purely an economic decision, stop to consider you may be wrong. Given the power of loss aversion on decision-making, the perceived economic gain would likely need to be clear and significant by itself.
Bruce Clarke, J.D., is CEO of CAI, helping more than 1,000 North Carolina employers maximize employee engagement and minimize employer liability. For more information, visit www.capital.org.