Behavioral economics arose as a challenge to standard economic theory in the 1970s, offering a counterpoint to the buttoned-up, classical view that portrayed economic activity as the logical outcome of dry, unvarying economic forces.
The rebel economists espousing the new perspective became adept at discovering common economic exchanges that were psychologically coherent but financially illogical.
As it turns out, this renegade activity occurs all around us and in our own homes.
Take the case of my 1984 Martin Shenandoah guitar, which I was about to put on the market until behavioral economics waved its magic wand.
When I bought the guitar in 1985 at Mandolin Brothers on Staten Island, I paid $600 for it. What I really wanted, I could not afford—a Martin D-28, which was a perennial favorite among folk musicians. But I gambled on the possibility that owning any guitar made by Martin would motivate me to practice more, and help me move off the plateau I had been occupying for years.
I lost the bet, eventually stopped playing the guitar, and decided to give the violin a try.
I was encouraged enough during my five years of violin lessons to buy an instrument that I believed was a hundred years old and crafted by an obscure Italian violin maker (very obscure, as it turned out).
My years with the violin had mixed results; my brain absorbed a lot of information about playing the violin, but my muscles did not. The violin wound up back in its case until three years ago, when a new teacher and a more committed attitude had the desired effect: my playing began to improve as I practiced with more focus, and I actually began to enjoy the experience.
Buoyed by all this, I took my violin to the Baker Violin Shop in Vermont, where I got good news and bad news.
The bad news was that my instrument was not made by a skilled violin maker, but by an amateur craftsman. The good news was that it was probably about a hundred years old, and likely made in Italy.
More good news: these violins are known as “rustic” and right now are selling pretty well. When David Baker finished his repairs, my rustic violin had a very sweet sound. So I had a violin in active employment and a guitar in deep retirement.
A few months ago, when my wife and I began to talk about downsizing, it made me wonder if it really made sense to keep a guitar I wasn’t playing. I figured that the guitar might be worth $300. I decided I would take $200.
When I went to the internet to get the bad news, I discovered that a Martin Shenandoah D-2832 from the 1980s in good condition sells for $900 or more—three times what I expected. Repeat, three times what I expected.
Time to move it out the door, right?
No way! Are you kidding? A priceless instrument full of hope and dreams that I have treasured for 34 years? I do not think so. My heart has been recaptured.
This is an overstatement, of course, but not by a whole lot.
Standard economic theory understands economic exchanges as subject to the laws of the market—dry, predictable, rational.
Behavioral economic theory focuses on those exchanges that do not conform to the standard model. Instead, there is an emotional element to the exchange that exerts an unmistakable effect on the outcome.
Nobel Prize–winning economist Daniel Kahnemann (author of Thinking, Fast and Slow) asks us to imagine that we hold a ticket to a sold-out concert. The face value of the ticket is $200, which is what we paid. We believe we would have gone as high as $500 to buy the ticket, but not more than that. On the other hand, we don’t think we’d sell the ticket for $500. We might want as much as $3,000.
According to standard economic theory, the “value” of the ticket should be roughly the same whether we are buying it or selling it; but sometimes it is not. Sometimes behavioral economics holds sway and there is an “endowment effect” bestowed by ownership that is based on what the object means to the owner.
When I thought I might get only $200 for my guitar, it was a mildly disappointing prospect that rekindled some negative associations I had to the instrument, mostly having to do with the fact that I never reached the point I had hoped to in my playing—nothing I’d want to dwell on.
By contrast, the realization that the guitar had actually appreciated over time brought only positive associations: My introduction to playing the guitar in the late 1960s by fellow grad student Rick Merwin at the University of Massachusetts; my virgin exposure to hearing acoustic instruments played well in the confines of someone’s living room (Rick, and his friends from Yellow Springs); and the opportunity to hear live folk music up and down the Connecticut River Valley.
My economic machinations with regard to the Martin were topsy-turvy. Rather than an emotional attachment to the guitar compelling me to demand a higher selling price, it was the unforeseen prospect of a high selling price that stimulated a renewed attachment to the guitar. I’d give it up for $200 but not for $900.
By way of contrast, my relationship to my violin couldn’t be more straightforward or less influenced by behavioral economics. If someone offered me $1,500 for my rustic violin, my response would be based entirely on how much I’d have to add to that amount to get a decisively better sounding instrument.
David Baker tells me that when you are looking to buy a better violin, plan on doubling the value of the one you have. That applies all up and down the price scale, and I would be prepared to make my decision based on these parameters.
Finally, there is this: several times each year, my friend Dan and I go to flea markets, where I keep my eye out for old violins.
I enjoy inspecting these battle-scarred survivors of the dog-eat-dog violin world, but because they are usually poorly strung, I am not able to listen to their sound.
Still, I am enthralled, and I wonder about their provenance and how they would respond to life support.
Violins are tough and (unless they have been eaten by bugs) most can be restored. A $100 price tag could be an inducement to take a gamble rather than walk on by.
If I could have one or two restored at a reasonable price, it might be fun to see what leads to what. But I know that if it adds up to anything it will only be because I will make my decisions based on standard market economics.