A Behavioral Econ Lab Is Not a Restaurant

July 16, 2018
Posted by Jay Livingston

Great title for an article

We should totally open a restaurant:
How optimism and overconfidence affect beliefs

It will be in the August issue of the Journal of Economic Psychology. The link popped up in my Twitter feed this morning.

No, the failure rate for restaurants is not 90% in the first year as a 2003 American Express ad claimed. But most restaurants don’t make it to three years. So it’s only natural to ask about the people who think that their new restaurant will be among those that beat the odds. This was an article I wanted to read.

Imagine my surprise when I discovered that the article was not at all about people who started up a restaurant. True, the word restaurant appears 13 times in the article, plus another seven if you include restauranteur [sic – the preferred term is still restaurateur, no n]. But the data in the article is a from a laboratory experiment where subjects try to guess whether a ball drawn from an urn will be white or black. No chefs brilliant but overweaning, no surly waitstaff, no price-gouging suppliers, no unpredictable customers, no food, and no location, location, location. Just opaque jars with white balls and black balls.

The procedure is too complicated to summarize here – I’m still not sure I understand it – but the authors (Stephanie A. Hegera and Nicholas W. Papageorge) want to distinguish, as the title of the article says, between optimism and overconfidence. Both are rosy perceptions that can make risky ventures seem less risky. Optimism looks outward; it overestimates the chances of success that are inherent in the external situation. Optimism would be the misperception that most restaurants survive for years and bring their owners wealth and happiness. Overconfidence, by contrast, looks inward; it is an inflated belief in one’s own abilities.

Both in the lab and probably in real life, there’s a strong correlation between optimism and overconfidence. People who were optimistic also overestimated their own abilities. (Not their ability to run a restaurant, remember, but their ability to predict white balls.) So it’s hard to know which process is really influencing decisions.

The big trouble is that the leap from lab to restaurant is a long one. It’s the same long leap that Cass Sunstein takes in using his experiment about “blaps” to conclude that New York Times readers would not choose a doctor who was a Republican. (See this earlier post.)

The Hegera-Papageorge article left me hungry for an ethnography about real people starting a real restaurant. How did they estimate their chances of success, how did they size up the external conditions (the “market”), and how did they estimate their own abilities. How did those perceptions change over time from the germ of the idea (“You know, I’ve always thought I could . . .”) to the actual restaurant and everything in between — and what caused those perceptions to change? On these questions, the lab experiment has nothing to say.

But you’ve got to admit, it’s a great title. Totally.