By: Mike Ransdell

Deciding whether something is worth buying should be a simple, rational decision. Yet, too often, all of us make a purchase that not long afterwards has us asking, "What in the world was I thinking?" George Loewenstein has asked that question, and what his research uncovered may change century-old economic theory.

George Loewenstein's heart quickened when he saw the envelope. "I can't open it here," he thought to himself while standing in the mailroom in the University of Chicago's Graduate School of Business. "It's bad luck." He walked to his office, closed the door behind him, and sat down at his desk.

He was understandably anxious. The contents would either lift a huge weight off his shoulders or pile more on, darkening the shadow he felt creeping across his young career in economics. Loewenstein realized he was just being superstitious by heading to his office, but he had stood in the mailroom when he read the first two letters, so maybe ... well, it couldn't hurt. Besides, if it was to be the third rejection of his research, he didn't like the thought of having to lug that disappointment through the busy hallways trying to avoid his colleagues as he made his way back to his office to collect his thoughts. It was best to be alone.

Loewenstein had been in his position as assistant professor of behavioral science for about two years. But in that time, he hadn't yet grabbed the first brass ring needed not only for rising up the academic ranks toward tenure, but for keeping his job. He hadn't published a paper. And he was starting to feel the pressure.

That's why the letter was so important. It was from the editor of a British publication called Economic Journal. About six months prior, Loewenstein had submitted a research paper on an unconventional topic: Anticipation and the Valuation of Delayed Consumption. It was the first paper he had written as a professor. It had already been rejected twice by two of the most prominent economic journals–first by The Quarterly Journal of Economics, the oldest professional economics journal in the English language, and then by its slightly younger counterpart, American Economic Review. Their brief, dismissive replies basically said, "Sorry, this is not economics." Both times, the news landed like a blow to the stomach and chipped away at his confidence that he would ever be published. To make matters worse, because of the exclusive submit-and-wait process, two years had passed.

The unpublished paper was born from his dissertation on intertemporal choice–the tradeoffs between costs and benefits that occur at different points in time. In other words, how purchasing decisions we make today affect the purchases we can and cannot make tomorrow. For example, if we buy a new laptop today, that's money we won't have to spend on other goods in the future. On the other hand, if we save or invest our money today, the opposite will be true–we'll have more spending options in the future.

Most economists, at the time, relied on the theory of discounted utility (DU) to explain intertemporal choice. ("Utility" is defined by economists as happiness or enjoyment.)

According to the DU model, people are impatient. We want rewards now, and we want to delay unpleasant experiences as long as possible. But Loewenstein's research proved differently. He reintroduced an argument that dated back to 1789 that states that anticipation plays as much of a role in our utility as the actual consumption of a product. In other words, anticipating an outcome–whether positively or negatively–affects our happiness and guides our behavior. That's why, for example, we schedule an appointment for a root canal (an unpleasant experience) sooner rather than later. Or why, instead of taking a vacation right away (a pleasurable experience), we plan several months in advance. The anticipation of such events affects our utility.

Loewenstein fundamentally believed that there was much more going on in consumers' brains than logical, cognitive decision making when choosing what to buy. His thinking went against the grain of conventional economic thought, which espouses that people make decisions based on rationality–logically weighing the expected pros and cons of purchases and then deciding based on what will bring them the greatest utility. But Loewenstein disagreed with that logic. He had noticed too many exceptions to the rational-choice rule in his own behavior, which made him question some of the core beliefs of conventional economic theory.

(Continued …)

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