Feb 22 2010

The Economics of Snake Oil

One of the common questions (sometimes framed as a claim or justification) about unscientific and implausible treatments that frequently comes up is – if they don’t work, why are they so popular? The assumption (also made by some who oppose regulation of medical products) is that the consumer will perceive the medical value of products and adjust demand accordingly.

I and others who favor more scientific and effective regulation of health products and claims have argued that there are a host of factors distorting the market in favor of health products with appealing claims, even if they lack substance. I am not an economist, however. So it was heartening to read the very same arguments I have been making expressed from an economist’s point of view.

This paper by Werner Troesken, an economist from the University of Pittsburgh, explores the flourishing of the patent medicine industry from 1810 to 1939 in the US (when FDA regulation essentially shut it down).

Troesken explores many factors leading to this success, but what I found most interesting is that when you strip away all the complexity, Troesken shows how ineffective treatments will still flourish in the marketplace.

Inelastic demand with respect to product failures

The core concept of this paper is that the patent medicine industry demonstrated what Troesken calls “inelastic demand with respect to product failures” – in other words, people still wanted to buy patent medicines, even after their previous experience with such products resulted in failure.

He begins with a few reasonable premises. The first is that the patent medicines of the time did not work. We can say with historical hindsight that the products popular at the time were not effective in curing the diseases they were being used to treat – often serious illnesses that were common at the time, like tuberculosis, but which lacked any mainstream medical treatment. Most patent medicines were variations of the same product, in fact – a bit of alcohol, sugar, and some (essentially random) vegetable matter. Often the same products were marketed over and over again with different labels and claims. We can now say with a high degree of confidence that these elixirs did not cure tuberculosis, or seizures, typhoid, or any other ailment that was claimed. Troesken assumes a 100% failure rate for patent medicines.

Troesken also assumes that customers perceived this failure – they knew they were not cured of TB. For a bit more of background on this premise, however, Troesken explains that at the time the empirical model of assessing medicines was dominant. In other words, treatments were assessed purely on whether or not they worked, not on the plausibility of any putative mechanism. This is largely due to the fact that science had not yet progressed sufficiently to think productively about plausibility.

It is a very interesting side note that empiricism resulted in very slow and uneven progress in medicine. Scientific medicine began to improve dramatically, however, when it became increasingly founded upon basic science. I would add, however, that the technology of empiricism also improved – we got better at doing clinical experiments. I would argue that this debate continues today – that between pure empiricism (which functionally is represented by evidence-based medicine) and a more balanced mixture of basic and clinical science, which I and others advocate as science-based medicine.

In any case, Troesken argues that consumers were following an almost pure empirical approach to patent medicines. They did not know enough science, and not enough science was known, to assess the plausibility of the products, so they judged them entirely on whether or not they perceived a benefit.

This is Troesken’s basic model – medicines do not work, consumers judge them solely on whether or not they work, and consumers correctly perceive that they do not.

Interestingly (and I think this is the core insight of this paper) even with this basic model, Troesken argues that the patent medicine market would still flourish – as it in fact did. This is because (here is where the economics perspective comes in) the perceived value of a potential cure is extremely high, compared to the relatively low cost of experimenting with a new treatment. So consumers felt that they had little to lose and the world to gain, leading to repeated experimentation with, and even high demand for, patent medicines.

Troesken acknowledges that repeated failures would decrease the perceived value of patent medicines, but this perceived value would not go to zero – it would decrease asymptotically, and remain substantially high even after multiple failures.

In other words – the allure of a promised cure is so great, people are willing to risk the investment in the treatment even after repeated failures. We therefore cannot rely upon market forces to weed out ineffective treatments from the marketplace.

False positive and other factors

But of course – this is the most basic model. There are many other factors at work, and Troesken hits upon many of the ones I and my colleagues have discussed in the past, but not all of them. For example, he discusses how marketing was designed to produce “false positives” – this led to the testimonial, a fake patient giving a fake testimony about how the patent medicine worked for them. Consumers then incorporate the false positives of testimonials into their calculations, making the product demand even more resistant to personal failures.

Another potential source of false positives was actual active ingredients present in many patent medicines. Products often contained cathartics, purgatives, or even narcotics (and of course alcohol is an active ingredient). These substances may have caused dependence, and in fact some patent medicines may have been little more than a socially acceptable “back door” method of consuming illicit drugs. Or they may have produced physical effects that convinced consumers something biological was happening, such as removing toxins through purgatives.

What Troesken does not discuss much is the false positive of the placebo effect. This is because he is restricting his analysis to claims for cures of real diseases. In his basic model he ignores spontaneous remissions, but he acknowledges this is another source of false positives – sometimes people get better on their own. But the more serious the disease, the more rare this should be.

When we move into the arena of symptomatically treating chronic ailments that are not life-threatening, the placebo effects takes on a larger role. For example, many illnesses are self-limiting – they will get better with only tincture of time, and so any treatment will seem to work. Also, people with a fluctuating illness will tend to seek treatments when their symptoms are at their worst, and so regression to the mean will result in improvement after any treatment they take while symptoms are at their peak. There are also a host of other psychological factors leading people to perceive improvement in the absence of a real biological effect. (See here for more information on placebo effects.)

One factor I think Troesken gets a bit wrong is his conclusion that patent medicines thrived not only despite their lack of effectiveness, but because of it. He argues that if a patent medicine worked, and cured a client, that consumer would be removed from the pool of demand – they would no longer be seeking medicine. This is true (again within the limited model of patent medicines as cures for serious illnesses, rather than symptomatic treatments for chronic illnesses) but he ignores an important factor. If a person survives one illness, they will survive to get another – and when they do, they will likely return to what cured them the first time. Everyone is relentlessly aging, and with age comes increasing illness. Ironically, Troesken does accurately refer to this effect in a different context below.

The rise of science-based medicine

Troesken also argues that improvements in the knowledge base and effectiveness of scientific medicine did not, and would not be expected to, reduce the patent medicine market. The success of snake oil, in other words, should not be interpreted as a failure of or the absence of effective medicine. In fact, Troesken argues, the success of germ theory and increasingly scientific medicine meant that people were surviving the acute illnesses of their youth to become older adults – older adults with chronic ailments. Modern medicine, therefore, increased the pool of demand for patent medicines.

He also points out, and I would amplify, that increasing medical knowledge did not dampen the demand for implausible treatments. This is because the general public, while they may have increased scientific knowledge as scientific knowledge in general increased, would not rise to the point that they would reject patent medicines on the basis of scientific plausibility. They remained empiricists.

This matches our knowledge of belief in pseudoscience even outside the realm of medicine. Acceptance  of dubious science actually increases with education, until one gets to the post-graduate level of science education. It takes a very high level of scientific knowledge (and/or, I would argue, an understanding of the principles of scientific skepticism) to feel confident in rejecting a claim based upon plausibility alone. This is true even of health care professionals.

Patent Medicines Today

The classic era of patent medicines may have ended in 1939, but it has had a resurgence in the US since 1994, when DSHEA was passed. DSHEA essentially removed supplements and herbs out from under the yoke of FDA regulation, partly (at least on the right) based upon the claim that market forces were sufficient to regulate such products.

What is amazing to me is how the supplement industry of today is so similar to (and in some cases historically continuous with) the patent medicine industry of the 19th century. All of the same factors are in place – testimonials, cutting supplements with active ingredients (caffeine is now common, and of course some Viagra replacement herbal supplements were found to be cut with actual Viagra), the types of claims that are made for products (combining ancient wisdom with cutting edge science), and more.

I think Troesken makes a compelling argument for the inelasticity of demand for such products, which, in my opinion, undercuts some of the libertarian arguments made against regulation of supplements, and even (by some) pharmaceuticals. Some may still argue that the demands of personal liberty outweigh the goal of protecting the public from worthless products, or that regulations, despite good intentions, either do not work or have negative unintended consequences. I disagree (even while I am sympathetic to these arguments in principle, I disagree with how they are often applied in this context), but these arguments are not addressed by this paper.

What this paper convincingly argues is that we cannot expect market forces to result in better and more effective health products, or even to keep entirely worthless or even harmful health products from the marketplace.

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22 responses so far

22 Responses to “The Economics of Snake Oil”

  1. BlindChristianon 22 Feb 2010 at 9:14 am

    Banging on my theme of the desperation of people with incurable disabilities trying snake oil is (if someone would actually do a census of such people) likely disproportionately are attracted to such bogus remedies.

    The economics described in your article is amplified in a population given no hope for a near term cure so they are very willing to spend even large sums of money (I blew through $200K between 1979 and 1984 when I was disgusted and put in touch with CSICOP) as, compared to blindness, deafness, paralysis, you name it, even a glimmer of hope is makes it seem worthwhile placing a bet on a long shot.

    I see this every day in my work on technology and people with disabilities (congratulate me, I just became the Director of Access Technology for Project GNU – http://www.gnu.org) and do my best to advise, push, hint, cajole and do anything from standing on my head to showing off my blind juggling tricks (best viewed by an all blind audience) to try to convince them to send their money to research projects instead of what are always bullshit panaceas.

    I hate being the one to dash even the false hopes of the desperate. With no hope, they may end up in a suicidal state of animistic depression. I find myself crying when someone I know tries some solution ranging from homeopathic potions, chiropractic and Santa ria witch doctors popular here in Florida (yes, we have real voo doo so we can’t really use it as an adjective to express futility) has their hopes dashed once again.

    I’ve started work on a new web site, possibly to be called “Skepcrip” which will address as many bogus cures for blindness at first and other disabilities as I assemble a cadre of helper/advisors – I hope it will be a good addition to the world of skeptical online media.

    cdh

    PS: I posted a related but more personal comment on Skepchick this morning. Anyone who wants to discuss this matter at length should contact me directly and we can have a phone or Skype call.

  2. Karl Withakayon 22 Feb 2010 at 10:50 am

    The hands off, pure market approach assumes absolutely rational consumer behavior in driving market forces, at least over the intermediate to long term. I argue that casinos and lotteries would not be in business if consumers could be counted on to behave in a purely rational manner, and that this blanket assumption can be discarded.

    A large part of marketing is based on the assumption that consumers can be persuaded to not act rationally. Store brand canned vegetables typically roll of the same production lines as name brand goods, and people continue to buy name brand stuff, mostly due to perceived value.

  3. XYZon 22 Feb 2010 at 11:29 am

    I hear you, Christian. As someone living with multiple sclerosis (relapsing-remitting) I can honestly say the feeling of desperation is unlike any that I would have known before my diagnosis.

    I like to think of myself as a rational, well-educated person, but I’ll confess that there have been periods when I have taken leave of my senses and been seduced by the woo-woo. It is that desperation for something, anything. Shoving a plank of wood up your *** will help with the symptoms of MS? Sign me up.

    I’m proud to say that I’m currently back in the world of the rational. Interestingly enough, I might add, even though all the neurologists I’ve seen are, of course, clearly in the pocket of big pharma (ahem) it was these doctors who gave me the most fair and balanced view of my treatment options. “These are the treatment options, these are the side effects etc. etc. Some people choose not to have treatment, we don’t recommend that, but these are your choices…” It was the naturopath/herbalist I saw that resorted to fear mongering.

    I am currently on treatment and out of the woo.

  4. Rob Heberton 22 Feb 2010 at 2:31 pm

    Nothing much to say except “Awesome post.” Keep it up.

  5. mlegoweron 22 Feb 2010 at 4:48 pm

    Excellent post and I’m glad to see a nod to economics. It just so happens I’m a grad student in the Pitt Econ dept. and as such Werner is an acquaintance.

    However, it seems to me that we need more than those assumptions to explain the success of patent medicine. If people are truly aware of a 100% failure rate, they would never purchase the product at a nonzero price. There has to be something behavioral going on here; people tend to overweight low probability events and underweight high probability (near certain) events; see the lottery for an example. As such, people must think there is a low probability of the medicine working and overweight that contingency to justify the cost of the medicine. But clearly this is what’s going on, just like Ray Kurzweil taking an absurd array of supplements to extend his life; the potential value to him of extending his life even a few years (past the singularity) is huge and relative to that huge benefit the cost is relatively small.

    @KarlWithakay – “The hands off, pure market approach assumes absolutely rational consumer behavior in driving market forces, at least over the intermediate to long term.”

    I think what you mean to say is that the hands off approach is only welfare improving if you assume absolutely rational consumer behavior over the long term. And even that makes some assumptions about how the advocates of the hands off approach place welfare weights on the utility of rational vs. irrational consumers. But certainly if as a society we weight everyone equally, then the hands off approach is not welfare maximizing.

  6. saburaion 22 Feb 2010 at 5:13 pm

    This was a good and thought-provoking post today. I have a question about a scenario that Troesken apparently did not treat (I scanned his paper and could not find it, and Steve did not mention it): The corrective power of class-action lawsuits.

    Even without market regulation, if a group of patent-medicine users were free to band together and jointly sue the manufacturer for making false claims, wouldn’t even a small number of such actions be enough to bankrupt the producer and make the market for such fraudulent products highly unfavorable? Is there some legal barrier that prevents this mechanism from hurting the patent medicine/supplement market?

    I wonder about this frequently when I’m driving late at night; I almost always end up listening to an episode of “Your Health Matters” or some such (a front for the woo-masters at Purity Products).

    They always make the most ludicrous 20-minute claims about how their all-natural fruit drop condensate pill powder can cure anything at all… followed, at the very end, by a recorded narrator who says the product “is not designed to treat or cure any disease”. Such a fig leaf of a disclaimer after a tour-de-force of totally fraudulent claims seems like an obvious invitation to sue, but I rarely hear about any litigation.

    As you may have guessed, Steve, I’m one of those who “still argue that the demands of personal liberty outweigh the goal of protecting the public from worthless products, or that regulations, despite good intentions, either do not work or have negative unintended consequences,” but I also believe that there’s more to the market than buyers and sellers. There are also trial lawyers.

  7. CivilUnreston 22 Feb 2010 at 7:50 pm

    “However, it seems to me that we need more than those assumptions to explain the success of patent medicine. If people are truly aware of a 100% failure rate, they would never purchase the product at a nonzero price.”

    That’s not entirely accurate — he’s saying that these customers are aware that all previous purchases have had a 100% failure rate.

    They clearly still believe that a success is possible even though they know it is highly unlikely.

  8. Rob Heberton 22 Feb 2010 at 7:56 pm

    @saburai:
    The short answer is that, unless you can show that the nostrum was actually harmful, not just ineffective, you don’t really have a leg to stand on.

    Being tricked into shelling out $10 for a homeopathic “remedy” isn’t enough of an injury. And the FDA won’t touch the snake-oil companies unless they make certain types of unapproved claims.

  9. Sastraon 22 Feb 2010 at 8:01 pm

    mlegower wrote:

    However, it seems to me that we need more than those assumptions to explain the success of patent medicine. If people are truly aware of a 100% failure rate, they would never purchase the product at a nonzero price.

    I suspect that the assessment of probability/outcome is affected by the general rule of thumb — “what works for one person, may not work for another; and what doesn’t work for one person, may work for someone else.” Everyone is different.

    Because both susceptibility and symptoms often vary a great deal across a population, people may have an over-tendency to emphasize the uniqueness of every individual, vs. the commonalities of the disease. For a lot of everyday problems, personalization’s the working assumption: some people who have trouble falling asleep benefit from warm milk; others don’t. Find what works for you.

    Perhaps this sort of folk-thinking is then extended to areas where it makes little to no sense: some people are cured of cancer by elderberries; some people are not. Find what works for you.

    The odds, are the odds. But if there’s an exceptional exception, it’s quite likely to be them. They already feel like they’re an exception to the rule, because they got sick.

  10. tmac57on 22 Feb 2010 at 9:18 pm

    Maybe ‘magical thinking’ plays a role in why people would make such an irrational decision. I have known many people who faithfully buy lottery tickets, always using their “lucky numbers”. Now this is purely irrational, and they would probably be the 1st ones to admit it, but they just can’t shake that nagging feeling that maybe,somehow, they have stumbled onto the one true “lucky” combination of digits. Maybe next time?

  11. ccbowerson 22 Feb 2010 at 11:09 pm

    There is an inherent irrationality to the “free market” argument. There isnt a free market… this is not the wild West. Trial lawyers are not a correction in a free market, since they operate following existing laws, which are inadequate. Markets are created with laws the dictate the rules.

    This is the bias of libertarianism… pure ideology and belief in “the market.” (This is an area where Penn and Teller fall off their typical skeptical approach to topics)

    The real problem with fixing DSHEA is how. I think a few (big) tweaks are better than an overhaul, because inevitably an overhaul will create unintended and undesirable consequences. Why is this inevitable? Because large pieces of legislation are difficult to create well. Look at the mess that HIPAA created when it was first being introduced.

    Change the burden of proof for safety to the manufacturers. Give the FDA more authority (and money) to oversee the supplement industry when it comes to safety and medical claims. Give the FCC even more power to enforce rules about advertising. These three changes alone could make a big difference.

  12. Rob Heberton 23 Feb 2010 at 9:53 am

    @ccbowers:
    I’m of the opinion that DSHEA was a clusterf*** from the get-go. Just repeal it and regulate supplements as drugs. And that way, you don’t have to involve the FCC as much, since the majority of advertising for the products will count as supplemental labeling.

  13. saburaion 23 Feb 2010 at 4:18 pm

    “The short answer is that, unless you can show that the nostrum was actually harmful, not just ineffective, you don’t really have a leg to stand on.

    “Being tricked into shelling out $10 for a homeopathic “remedy” isn’t enough of an injury. And the FDA won’t touch the snake-oil companies unless they make certain types of unapproved claims.”

    @Rob Hebert:

    Can you be a little more specific about the “unapproved claims” that supplement sellers can’t touch?

    The notion that, unless a product actively harms you, you can’t sue, seems totally inconsistent to my experiences of class action suits.

    In college, I collected something like $10 as part of a massive class action suit against an online retailer (I didn’t have anything to do with bringing the suit; I just got a letter in the mail). Their “harmful” offense consisted of accidentally offering a $500 computer monitor on their site for a few hours for $50. They ended up having to pay everyone who tried to order the monitor at that low, low price a settlement of $10, even though we weren’t harmed AT ALL… unless having your desire for an underpriced computer accessory dashed counts as significant harm.

    Certainly, whatever emotional harm I suffered upon not getting my cheap monitor was consistent (if not far less than) the harm experienced by someone with a serious disease who truly believes that a fruit juice capsule will cure them, only to find it does nothing. Their monetary harm may be small, but assuming they paid anything at all for the pills, they lost more money than my college buddies and I (we weren’t charged anything for the monitors; our orders were just cancelled).

    Making false claims is a form of theft, and, though I’m a free market proponent, I don’t think people have the right to steal. In our litigous society, class actions lawsuits would appear to be the perfect vehicle to curtail the extrodinary claims of the modern patent medicine crowd.

    If there’s some legal technicality protecting them, I think that’s the first thing a reformer should target.

    PS: Any relation to former Saint Bobby Hebert?

  14. Matt Pon 23 Feb 2010 at 6:21 pm

    The one principle of psychology that I am surprised has not been mentioned yet (unless I’m totally wrong, or it has been called something else here and I missed it) is the fear people have of “lost opportunities.” I’ve heard about a lot of studies that show that people are more fearful of losing an opportunity to gain something big than they are of losing something that they already have, even when the chances of actually gaining that big something are very slim. From an economics standpoint, this is not rational thinking, but it apparently is very common thinking (or emotional reaction).

    To use the lottery example others have used, it would go like this: “I’ve been playing the same lottery numbers for years and haven’t won yet, but what if I didn’t buy a ticket today and tonight’s drawing was the one where my numbers came up?” The fear of not getting the big winnings outweighs the risk of losing a few bucks on the ticket.

    People with serious illnesses/disabilities and their families are very afraid that it they don’t try some “alternative remedy,” they may miss out on the opportunity for the big cure. (“I know that the past twelve alternative remedies have failed, but what if this one really is the cure?”)

    It may take a few hundred thousand more years of evolution before humans are more rational, and less emotional, in decision-making. Until then, I fear that snake oil will continue to be popular.

  15. Matt Pon 23 Feb 2010 at 6:37 pm

    @saburai:

    Just off the top of my head, there are a few factors that I think play a role in why class action lawsuits won’t stop CAM. Some of these may even be inconsistent with each other, but I’m just doing a stream-of-consciousness thing here:

    1. People who use CAM believe in it, and wouldn’t be the “representative plaintiffs” that would bring suit.

    2. Even if there were some representative plaintiffs out there, so many class members would likely not file claims or would opt out of the class that the number of people making claims would be small for a class action suit.

    3. It would be almost impossible to identify members of the class. There are no customer lists, warranty registrations, or the like that could be used to reasonably require a manufacturer/seller of a particular product to notify potential class members (with the exception of online sales, perhaps).

    4. Similarly, a system of making claims would be almost unworkable. How would I prove that I bought a bunch of herbal remedies a few years ago? How many people save receipts for that kind of thing?

    5. People who have been taken in by a product or claim might be too embarrassed to make the claim. Most criminologists and law enforcement officials I have read and heard say that most victims of scams won’t come forward out of embarrassment.

    6. The most seriously harmed victims are either too sick to make a claim, or are dead.

    Nevertheless, I have been amazed at the success of some class action lawsuits, so maybe one would work. Maybe some skeptical organization should recruit an ambulance chaser–sorry, I mean personal injury attorney–to find some representative plaintiffs and start a class action suit. I can just hear the TV commercials now: “Have you taken toad wart extract for chronic fatigue syndrome? You might be entitled to damages. Call the Law Offices of John Smith at 1-800-CAM-SCAM now!

  16. sonicon 23 Feb 2010 at 9:01 pm

    I’m not sure that the assumption that the patent medicines don’t work is a good one. Clearly there is no elixir that will cure cancer, but some of them may have brought about pain relief and allowed the person taking it to forget their troubles for a time. While this is not the claim, it might be enough for a person to want to do it again.

    I’m not sure that playing the lotto is irrational (I don’t play it, but that is because I think it is a lousy way to fund a government)
    If I did play- my $1 per week expanse will have no negative impact on my financial situation– but if I won- a very large positive impact.
    (Put another way)–The assumption that the utility of money is linear is probably false.

  17. Rob Heberton 24 Feb 2010 at 12:01 pm

    @Saburai:
    “Unapproved claims” is my own over-simplification, but in general, you can get in trouble for making specific disease claims (like “This product cures stomach cancer!”) or claims that the product alters the structure or function of the body (for instance, “Helps clear phlegm from the esophagus!”). Health claims, like “boosts immunity,” don’t count–that’s why you can sell stuff like “Ariborne” and a whole host of other woo products without any evidence of efficacy.

    The primary effect of DSHEA is to give an exception to vitamins, minerals, amino acids, and a few other types of products by statutorily classifying them as food, not as drugs. Food is really only substantively regulated in regards to safety. That’s why you can go into any GNC or Vitamin Shoppe and see shelves full of stuff that looks like it’s making claims you would expect to see drug companies making. Nitric Oxide, for instance, causes water retention in the muscles in order to increase strength and size (sounds like a structure/function argument to me), but it’s only regulated on safety (the manufacturer never had to bring a New Drug Application, or anything like that, to the FDA).

    Food and drug law is pretty complex, because it involves a bunch of different disciplines, and I haven’t even really touched on advertising law, administrative law, or several other pertinent areas, but this is kind of the main point: if you get classified under DSHEA as a food, then you basically don’t have to show that your junk works.

    Concerning your class action suit, that sounds like a contract issue to me, as opposed to a tort. I forget the term of art for it, but you can’t offer a $500 monitor at $50, and then not honor the offer. The remedy for something like that is usually restitution. Torts are more about physical injury, emotional distress, stuff like that.

    So if you took a homeopathic remedy and it actually harmed your health, you could probably bring a tort claim. But that rarely happens, because most of the woo products are so low-dose.

    You would assume that there would be a false advertising claim, or something like that, when the product doesn’t work, but, again, they get certain statutory exceptions under DSHEA and FDCA concerning their claims. And there’s a general presumption of “caveat emptor” in contract law that prevents people from bringing suit for just your regular scams. Hence, my belief that it’s a cluster****.

    PS: Not related to the NFL quarterback Bobby Hebert, but I am also from New Orleans. There are a lot of us Heberts running around down there ;)

    PPS: I should point out that the FDA does sometimes bring suit against companies selling dangerous products, and that there are RARE instances of people winning class action suits against supplement or woo companies. But the awards are a tiny, tiny, tiny fraction of the billions the industry rakes in.

  18. mlegoweron 24 Feb 2010 at 10:15 pm

    “If I did play- my $1 per week expanse will have no negative impact on my financial situation– but if I won- a very large positive impact. (Put another way)–The assumption that the utility of money is linear is probably false.”

    Very few economists think the utility of money is linear. We generally think it is convex, meaning that the marginal utility of the first dollar is much higher than the marginal utility of the 5 millionth dollar. However, every dollar has utility. A $1 utility loss is still a utility loss. And if you were paying $1 for a 1 in 5 million chance at $5 million it would be okay; it would mean you are risk neutral. But most people are risk averse; consider how much you would pay to play the following game:

    I flip a fair coin until it comes up tails. You get $2^N, where N is the number of heads that came up.

    The expected value of the gamble is infinite: there is a non-zero probability that you get infinite dollars. But you would not pay infinite dollars for that gamble because you are likely risk averse. However the expected value of the average lottery ticket is much much less than the price you pay for it. So in order to rationalize the purchase of a lottery ticket, the person would have to be risk seeking, which is probably not consistent with their other decisions.

    Also, in casual conversation I wouldn’t nitpick, but since this is a post referencing economics, keep in mind that “rational” has a specific meaning when economists assume that someone is rational. To skeptics, rationality means using logic, reason, and evidence based reasoning to answer questions about the world. As economists, rationality means that people have complete and transitive preferences over all available alternatives. So to an economist, you can be “rational” and buy homeopathic products and believe in UFOs; they are not inconsistent. As long as 1) you can always say which of two things you prefer and 2) if you prefer A to B and B to C, you prefer A to C, then you are rational.

  19. ccbowerson 24 Feb 2010 at 11:19 pm

    @Rob Hebert
    The regulation of supplements like medications is just unrealistic and impractical. No one wants that besides skeptics. “No one” includes the general public, politicians, the supplement industry, Big Pharma (who often make alot of the products), nor the FDA, and these are the relevant parties who matter.

    Not to mention there would be alot of unintended consequences. For one, many of the so-called vitamins would be off the market because they could never show efficacy for any disease at each dose avaiable. Very few vitamins treat anything other than a deficiency of that vitamin (which with few exceptions are rare in the US), and in many of those instances those diseases may require physician oversight (which may make them prescription). Entire sections of stores would disappear, and pharmacies/stores would close. There would be a greater black market of supplements and vitamins, which of course would create a whole other set of problems. This would further drive the consipracy theorists,and create an even greater disconnect between people who can think clearly and those who cannot about healthcare. Also there would be an even greater shift to health “foods,” which is already a problem with all these exotic (and expensive) berries, which people believe are more magical because they come from a far away place.

    Not that I wouldnt be pleased with the main effect of getting all the crap off the shelves, and to make it clear which products work and which don’t. Its just not that simple, and its not going to happen. Give the FDA (or create new department within it) enough clout to demand safety data first, and more authority (and funding) to challenge label claims. Make the burden of proof on the supplement manufacturers, and that will go along way to fix the DSHEA mess.

  20. Steven Novellaon 26 Feb 2010 at 7:33 am

    cc – I do not advocate regulating vitamins like drugs. And I don’t know of many skeptics who do (except for a couple on the far far left).

    Herbs is another matter – herbs are drugs.

    Vitamins are actual supplements, and it is reasonable to regulate them more like food.

    However – I would regulate the health claims made for them, and for food, for that matter. But the FTC may be able to handle that.

    What we object to is regulating herbal drugs as if they were food, and allowing for health claims (structure/function claims) without regulation.

  21. Rob Heberton 28 Feb 2010 at 11:00 pm

    @cc –
    I should have been a little clearer. There are several different “tiers” of regulation for different types of drugs. The heftiest regulations are for “new” drugs that make therapeutic claims.

    Other drugs aren’t very heavily regulated at all. For instance, if you start manufacturing aspirin, you don’t need to submit a “new drug application” (NDA), because we know how aspirin works, what it does, its proper dosage, etc. You’d only have to dose it accurately, make sure it wasn’t adulterated with some unsafe additive, and refrain from making fraudulent claims about it on your ads and packaging. Aspirin is just one entry on a long list of generally approved drugs. Vitamins, minerals, amino acids, and certain herbs that we have decent enough information on could be added to that list, no problem. The difference between regulating vitamins that way or as food is very small.

    The only reason I don’t like regulating all vitamins as food is that, from what I understand, you could accidentally poison yourself with certain vitamin pills if the dosage were inaccurate. Regulating vitamins as generally approved drugs would allow the FDA to better monitor those kinds of manufacturing problems.

  22. [...] of “CAM” use and popularity, and begin trying to find out why it is that some people are drawn to implausible treatments, even in the face of compelling, contradictory evidence. Such investigations might begin by looking [...]

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