Have you ever walked to a particular location, say a friend’s house, and found that the walk actually was a lot farther than you had expected, making it quite the unpleasant walk? But, you found that on the way back the walk seemed to go by much more quickly? There’s a scientific name term for this. It’s called the “return trip effect” (RTE).

Now that I live the pedestrian life in a new city, I get to experience this roller coaster of utility, or happiness level, all the time. My first time around the National Mall in Washington D.C. was ridiculously tiring. But, after giving family members, friends, and even myself the tour of all the monuments and museums several times, I now find the walk to actually be not that bad.mall walk

There are three possible explanations for this:

  1. We tend to walk faster the second time or on the way back
  2. We seem to become familiar with the route, thus making us either walk faster or the familiarity makes it feel faster
  3. Our expectations have changed so it makes the trip easier to deal with if we seemingly lower our expectations to fit the trip and make it bearable

A study on the RTE tested for familiarity by changing up the routes on the way back, using individuals and groups, and concluded that the initial trip still seemed to be 17 to 22 percent longer than the return trip. What the authors find is that it isn’t that we become familiar or walk faster (pedal faster as in the study), but that we adjust our expectations. We expected the initial trip to be shorter than it was, so on the way back we subconsciously lengthen the time we expect the trip to take.

In any case, the parameters have changed; not physically but in our minds.

RTE and Economics

When I noticed the RTE the other day, I thought how it could be applied to other things in the world, particularly markets. In economics, we create models that help us understand how humans interact with each other in markets. Many of these models are used by policymakers as a way to look after our well-being. They implement taxes and regulations to make sure that we are not being taken advantage of or to curb our behavior; to essentially make us happier.

But, like the RTE, our happiness parameters are constantly in flux. Studies on happiness show this as well. Remember the first time you got behind the driver seat of the car? Or, better yet, the first time you got to drive on the highway by yourself? Happiness was through the roof. Feelings of independence, like you’re on top of the world, were arguably the highest they had ever been in your young life. You also remember that that feeling fades away pretty quickly. Driving becomes routine and at some point it becomes kind of a drag.

This also goes the other way. Paying the monthly student loan payment, power bill, and rent feels easier after several months, even without getting a pay raise. (There may be studies done on this topic, but I haven’t looked…yet. This is more of a personal anecdote that should hold true across most humans. The cool thing about economics is that we have personal insight into what we’re studying, unlike chemistry where we have no idea what is going on in the mind of a Nitrogen atom.)

On to the point:

Markets are conventionally looked at by starting off with an “equilibrium point.” This point, if you recall, is where the supply curve meets the demand curve. Practically, we take a screenshot of a market at a particular moment and the equilibrium, or market clearing point, or socially optimal point, or supply=demand point, (whatever you want to call it), becomes our starting point. From there, economists can look at screenshots taken at other times and compare the difference in prices and quantities both demanded and supplied, and start to make inferences about what’s going on or why it changed. Of course, the practice of doing this becomes more complex in order to capture more of what the market looks like in real life, but at its core, this is what is being done.

This conventional way of looking at markets also assumes that there is only one price that can exist in equilibrium. It also gives the notion that we actually have the knowledge to determine what the equilibrium price is or should be. However, the crux of this method of looking at markets is that we are able to determine when consumers [or producers] are being hurt, economically. By simply modeling this out through complex screenshots of markets, we are then able to find ways to “correct” them and push them into equilibrium.

The Market Process

However, if we view markets as a process as opposed to a static (or even dynamic) state of trade, we incorporate more realistic notions to how people interact. First, it assumes that we don’t know everything. We all know little bits of information, but not all the information in the world. It also incorporates that with our little bits of information, we are subjective, therefore we all look at things, particularly market transactions, differently. What’s more, we all have different costs. Going to the movie theater in the middle of the day on a Wednesday may be less costly for me with no set work hours than for someone who works full-time, Monday thru Friday from 8 am to 5 pm.

Importantly, it allows for preferences to change given new information.

The market, viewed as a process, is then always in some form of disequilibrium. In this process, the role of the entrepreneur becomes pretty important. It is the alert entrepreneur that is able to seek out where and how to improve on the disequilibrium by not only having newly acquired knowledge, but by employing it in a way that is profitable and helpful to both consumers and producers.

To bring it full circle, the reason markets are a process instead of a “state of trade,” is because of our RTE; our changing parameters. People are constantly adjusting and the parameters of what is, say, “socially optimal” are constantly in flux. Transaction costs, in particular, are susceptible to fluctuations.

whyFor example, imagine the scenario of doing business overseas where the two parties speak in different languages. At first, doing business in a different language can be costly in that mistakes happen due to misunderstandings or being unfamiliar with certain business practices. Worse, the language barrier might keep a great business relationship from ever happening. However, by acquiring new knowledge, whether that’s by speaking in a common language or hiring translators, now this business transaction can happen. The parameters have changed.

To conclude

The importance of looking at markets in this manner and thus incorporating the RTE to better clarify how markets actually work is to emphasize what the Nobel laureate Hayek says in The Constitution of Liberty:

“Every change in conditions will make necessary some change in the use of resources, in the direction and kind of human activities, in habits and practices. And each change in the actions of those affected in the first instance will require further adjustments that will gradually extend throughout the whole of society. Thus every change in a sense creates a “problem” for society, even though no single individual perceives it as much; and it is gradually “solved” by the establishment of a new over-all adjustment.”

That being said, whenever there is a perceived problem a market, we, and policymakers should consider that humans, without even knowing, are adjusting in a way that often solves the problem. The return trip effect is hard at work.

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