I’m reading Predictably Irrational a really fascinating book, especially for those who have any interest in economics. One of the chapters that I’ve just finished discusses the ‘two worlds’ of valuation and exchange: one which is ruled by ‘social norms’ and the other by cold rational market analysis.

The interesting psychological element to these two ‘worlds’ is that once you cross the threshold into the world of market analysis, you can’t go back. The author cites an example of a day care center which created a new rule which attached a monetary file to arriving late to pick up your child. Once the fine was implemented, more parents arrived later to pick up their children. The social cost of picking up their child late was not easily quantified and thus, most likely, it was greater than the fine attached. The most interesting part of the experiment is that they removed the fine, but parent’s behavior did not positively improve – late pickups did not return to the previous levels. Since parents knew what the cost was, even if it wasn’t charged anymore, it didn’t have a social cost associated with the action.

I’d be interested to see the average tip percentage in restaurants who include a base gratuity on the bill and those who do not. My guess would be those who include a gratuity lose out. Additionally, I wonder if the world of social costs exists in online commerce. Since we never really encounter any people-in-the-flesh online, it is easier to ignore social norms because there really isn’t any community to which establish them (although there are ‘ruled’ written and unwritten in many online communities, I’m not sure if these could be categorized as social norms or costs). For instance I’ve talked to many friends who use NoiseTrade who uncomfortably admit (in a face-to-face conversation) that they have never ‘tipped’ an artist on NoiseTrade.

Great book so far – excited to read the remainder of it.