The Limits of Free Choice

Cultural values shape our attitudes and worldviews. The way we perceive wealth and success is largely shaped by the societal context in which we grew up. These values not only shape our life choices but also influence economic policies and practices at a larger scale.

In collectivist societies like China, decisions are often made with the welfare of the group in mind because cultural norms place a high value on group harmony and collective wellbeing. Thus, economic decisions focus on ensuring the welfare of the entire group – sometimes to the detriment of individuals. This can be seen in the way resources are distributed and economic policies are formulated. There is far less of a taboo in China about the government breaking its citizens’ right to property than in Western cultures.

In contrast, individualistic societies like the USA often prioritize personal gain when making decisions because individual freedom and personal achievement are a higher priority. As such, economic decisions in these societies are often about maximizing personal gains, sometimes even at the expense of the welfare of the group.

Besides cultural values, our decision making is also often influenced by everyday unwritten rules or social norms. These norms can be so ingrained in us that we are not even aware that they shape our actions by setting expectations for what is considered acceptable or unacceptable in a given context.

Culture is an important variable when it comes to economic decision making, as suggested by Levinson and Peng in their 2006 article. Their study found cultural differences between Chinese and American participants in terms of how they placed financial value on different objects. This suggests that economic decisions are not just about rational calculations of costs and benefits but also about cultural values and norms.

Other studies have found that some cognitive biases, like the fundamental attribution error and framing effect, are more cultural than universal. These biases, it appears, are not just inherent to human cognition but are also shaped by cultural values and norms.

Tipping is considered irrational from the perspective of traditional economics, but most people conform to this practice where it is considered a norm, as in the United States. It is in one’s best economic interest not to leave a tip, but in these countries, tipping is not just about compensating for service. Rather, many people tip service workers to adhere to a social norm that is deeply ingrained in their culture.

Likewise, one does not gain anything monetary when donating to charity. Instead, one receives social approval, a good reputation, and a sense of satisfaction from having done a good deed.

Both tipping and charity work challenge the traditional economic assumption that people act in their own self-interest. These practices suggest that economic decisions can also be about adhering to cultural norms and values, contributing to the welfare of others, and maintaining a positive social image.

Gender norms can also impact on a person’s major life choices. For example, whether one continues to work outside or becomes a stay-at-home parent to young kids depends on the support networks and assistance available to them. Furthermore, mothers usually take the role of default parent in most cultures, though stay-at-home dads are slowly becoming more common.

In addition, women tend to accept lower salaries than their male counterparts. This phenomenon is known as the gender wage gap, and it is more prevalent in some cultures than in others, especially where there is a stronger expectation for men to be their family’s primary breadwinners.

Experts used to believe that men and women tend to approach decision making differently – men are more likely to take risks, and women are more altruistic. But as society gains awareness of gender equality issues, such gender differences may cease to exist, as suggested by a 2022 study conducted in University of Exeter.

In Werner Guth's Ultimatum Game, one player is given a sum of money to split with another player. The first player can state whatever amount they want to offer the second player. If the second player accepts the offer, both can keep their respective shares. If the second player rejects the offer, neither receives anything. Despite the rational choice being to accept any non-zero offer, many second players reject offers they perceive as unfair.

Ernst Fehr and Simon Gächter suggest that there is an element of reciprocity at play in the Ultimatum Game. Players are concerned not just with their own gains but also with the fairness of the offer. If they perceive the offer as unfair, they may reject it in order to ‘punish’ the other player for their unfairness. This suggests that economic decisions are not just about maximizing personal gains but can also be about maintaining fairness.

What counts as fair depends on many factors, one of which is perceived relative status. People adjust their expectations depending on where they think they stand in the transaction. If a person perceives themselves as having a lower status than the other player, they are more likely to accept an unfair offer.

Time discounting refers to our tendency to prefer immediate rewards over future ones, especially when the time horizon is too long. For instance, people may choose to spend money now rather than save it for the future, even if saving would lead to greater long-term benefits.

Impulsive economic decisions due to time discounting may lead to negative outcomes like financial instability or poor health. For instance, people might engage in risky behaviors like smoking or excessive spending, which harms them in the long term.

Time discounting can be explained by our desire to secure a gain immediately rather than risk losing it in the future, regardless of whether the risk is present or not. This tendency can also be attributed to our lack of self-control.

Time discounting is evident in real-life scenarios such as smoking, where individuals trade off long-term health for short-term gratification. Despite the well-known health risks associated with smoking, many people continue to smoke due to the immediate pleasure it provides.

Our perception of benefits and tradeoffs across time is not always linear. Hyperbolic discounting suggests that we are more willing to wait for smaller, more immediate rewards rather than larger but later rewards. We might be willing to wait an extra day for a better outcome, but a full year might be asking too much.

Companies leverage time discounting by offering delayed payments, providing free shipping past a minimum threshold, or giving free gifts with purchases to encourage immediate buying decisions. By offering immediate rewards, companies can nudge customers to spend more.

As we make more decisions, our cognitive resources get depleted, leading to poorer decision-making. This can result in impulsive decisions, reduced self-control, and a tendency to avoid making further decisions. This phenomenon is called decision fatigue.

Steve Jobs' habit of wearing the same outfit every day is a well-known example of a strategy to combat decision fatigue. By reducing the number of decisions he had to make each day, Jobs was able to conserve his cognitive resources for more important decisions.

Similarly, Apple keeps its suite of products at a manageable range to avoid overwhelming consumers with too much choice, a phenomenon known as choice overload. By limiting the number of options available to consumers, companies avoid subjecting their customers to decision fatigue. This is in the best interests of the business, as an overwhelmed customer may end up purchasing nothing at all.

The paradox of choice suggests that having too many options can lead to dissatisfaction and regret. In the world of dating apps, users are presented with an endless array of potential matches. The illusion of limitless choice can make it difficult for users to commit to a relationship, as they may feel they can always find a better option.

With more choice comes the fear of making the wrong decision. This fear can be exacerbated by the belief that others might have made a better choice, triggering a fear of missing out. This can lead to dissatisfaction and regret, even if the chosen option is objectively good.

Too much choice can also lead to paralysis, especially for those who are indecisive. When faced with too many options, individuals may struggle to make a decision, leading to inaction. This can have unfortunate consequences when the decision is an important one, such as choosing a medical treatment.