Why are we giving gifts?

(Featured image credit: Peter Dutton CC BY)

Lifting the veil over a mysterious custom

This is the time of the year when it is obligatory for any piece with even the vaguest reference to Christmas, gifts, or economics to mention economist Joel Waldfogel and his classic paper, The deadweight loss of Christmas. In it, he explains why the habit of giving each other presents at Christmas has an overall negative economic effect (to the tune of $25 billion worldwide per annum in 2009). There, that’s me done.

But is our collective engagement in an activity so detrimental to the economy proof that we are irrational beyond redemption? That is not so sure. Much of our behaviour that looks, superficially, as if it is irrational – in the sense that it appears to be a deliberate action that goes against our own self-interest – is nothing of the kind. Sometimes there is more to economic transactions than a material balance sheet showing a consumer surplus (in human language: we value the goods or services we have bought more than the money we paid for it).

Giving gifts is one of those transactions where this may well be the case. Let’s look at some reasons beyond material gain why it may make sense to buy someone a present.

Multiple beholders

They say value is in the eye of the beholder, and with gifts, there are often multiple beholders. There is not only the lucky recipient, but there is also you, the generous giver, and there are any number of bystanders, people who see or learn about your gift.

The material effect to the beneficiary is pretty clear – with a net gain of a jumper they are economically better off. You, on the other hand, are giving something away, so the material result of the transaction looked at in isolation is negative. But there are of course immaterial aspects to it. Picture the gift is a really nice surprise to the recipient, and they show this with great gusto, through genuine signs of gratitude. That’s the kind of stuff you cannot buy for money – except indirectly by giving such a wonderful gift. Is that alone worth the expense? Quite possibly. You can surely imagine how the elation of a loved one upon receiving such a brilliant gift might give you immeasurable happiness.

The perfect gift? (Note the bonus woolly hat) (photo: Stuart Chalmers CC BY)

But there is more. Perhaps you have ulterior motives. Reciprocity is a social psychology concept that describes how a positive action is often encouraging an equally positive response. So by giving a gift, you “buy” a future favour of some kind (or simply some amount of social credit). A third possibility is that you value the warm glow – the emotional satisfaction of doing something good (like giving someone a jumper).

 

The signalling gift

What about the bystanders? Giving gifts can function as a signal. Nature is full of such signalling messages – from male birds building a spectacular nest to attract a mate, to gorillas thumping their chest to show their dominance. Now it is rare for people at Christmas to, say, build a house as a present for the one of their dreams, or to stand up during dinner and perform a chest-beating drum solo to show who’s boss. But a big, fat, expensive gift does signal to all and sundry that you are well off and generous, and that may be worth advertising (if that is your thing). A quirky, witty gift is a sign that you’re a quirky, witty person, and may be useful to build or maintain a certain reputation. Such messages too can have value.

But perhaps the weightiest signal a gift can send is not to others, but to the person receiving your gift. It is the sacrifice you make that shows how much you care. Part of this is the money you spend, but it may also be the time you’ve spent tracking down that rare David Bowie album, or indeed the amount of effort you put into knitting that unique jumper. It is important to bear in mind that it is the perception of your sacrifice in the eye of the recipient that matters, though. It must look meaningful, and that means not just anything will do. Your gift may be evaluated against the typical Christmas present (whatever that may be), or compared with other gifts (what are you giving to others, what are others giving to the recipient, or even what are others giving to others?).

Maybe what you are aiming to get in return for your present is prominence in the recipient’s mind? It’s all well and good to make a big impression on Christmas day, but if your gift is then promptly forgotten forever more, it’s a bit of a waste. In that case, you may want to consider something that they will use (or at least see) every day, providing a frequent reminder of your generosity and perspicacity. But subtlety is probably advisable: a life-size sculpture of yourself to put in the front garden may be a little too much.

Too complicated?

Behold, an orgy of wealth destruction (photo: Alexander Baxevanis CC BY)

With this multitude of possible reasons to give gifts, it’s not surprising that, for many people, this is a stressful affair. Giving cash – according to Dr Waldfogel the best way to counter the “orgy of wealth destruction” – would avoid all the confusion. The signal it sends, apart from the magnitude of the sum, is simply that you’re not into playing games and that you value economic efficiency. Then again, it may also reveal something about your personality, as economist Rachel Meager confessed in a tweet:

 

Like most economists, I too used to believe that my dislike of Christmas presents and my preference for cash was due to the inefficiency and inherent potential for deadweight economic loss in gift exchange. Later I realised that I was just afraid of intimacy.

— Rachael Meager (@economeager) December 17, 2018

Who knows, the overriding reason why we give gifts at Christmas might not be found in the various potential motives, or in what we believe we get in return. Among the strongest behavioural drivers is social proof, a term coined by Robert Cialdini in his classic book Influence. We tend to copy the actions of others, especially when we have no strong, clear preferences. And there is something to be said for that if you find it all a bit complicated: if you let yourself simply be guided by what others do, you are freed of all these other considerations, and you can enjoy a truly peaceful Christmas.

Merry Christmas and a Happy New Year!

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Don’t be defensive (be surprised)

(featured image credit: Henry Burrows CC BY)

We should be pleased when what we observe contradicts what we believe to be true: wisdom arises when the unexpected happens

We people are simple at heart. We are of course incredibly complex machines – just think about the elements of your anatomy that allow you to read these paragraphs: the muscles, tendons and bones in your hands and fingers, your eyeballs that can turn left, right, up and down, with their diaphragms that can adjust to the light level, the nervous system that connects the lot together, and the brain with its billions of neurons to control it all and make sense of what you see. Yet we like the world to be simple… too simple perhaps.

A possible reason for this desire for simplicity is that we tend to prefer certainty over uncertainty. The dependable straight lines of the exclamation mark in ‘That’s the way it is!’ are so much more comfortable than the circuitous bends of the question mark in ‘What on earth is going on?’ We like our world to be predictable.

It’s the law!

Laws give us that certainty, which is why we are so fond of them. We expect moving objects to always obey Newton’s law, or we expect the economy to always follow the law of supply and demand. And where there are no such laws, we just construct our own. We form beliefs based on what we are taught or what we observe: BMW-drivers never use their indicators, or politicians are all crooks out to line their pockets. Pretty much we treat such beliefs as laws too.

The law of nice Dutch beer: there is no such thing as nice Dutch beer. Or is there?

And what do we do when we are confronted with facts that violate one of these laws? We have plenty of ways to eliminate the cognitive dissonance that we would otherwise experience. We can ignore it, or dismiss it as an anomaly that doesn’t count.  “A nice Dutch beer? Ah, you mean La Trappe? But that’s a Trappist beer, which is a Belgian beer really!” We can question the validity of the facts, or of the person who raised them. (“Who mentioned a nice Dutch beer? Oh, Fred? But he knows nothing about beer!”) We can declare them to be outside our scope. (“Hertog Jan? Yeah, very nice, but they call it a barley wine, and I was talking about lagers!”)

What would happen if we didn’t immediately pull up the defences, but actually engaged with the apparent conflict between new facts and our beliefs? A few weeks ago, I came across a captivating discussion on Twitter, which featured a clip from a nature documentary. In it, a young female leopard that has just killed a baboon discovers that her prey was carrying a new-born young. Remarkably, rather than eating it, she proceeds to protects it from a bunch of hungry hyenas, taking it up into a tree, and keeps looking after it.

Some people may dismiss this film as fantasy, staged by the makers, in defence of the belief that leopards inevitably will kill and eat helpless little baboons. But if you trust it to be truthful and suspend that belief, an interesting question arises: what might be behind the behaviour of the young female? Clearly, she did not lack the instinct to feed herself, having just killed (and not even eaten yet, so she was still hungry) the baby baboon’s mother. Are we witnessing a stand-off between two instincts – one for survival, and one for maternal care?

It’s hard to tell. But what is obvious is that the primary instinct we associate with hungry predators is not the only driver for their behaviour. Even if we don’t suddenly see young leopardesses routinely starting to fostering orphan baboons, this single unusual, unexpected, frankly surprising event tells us something: it can happen. The belief that a hungry leopard will always kill and eat any prey animal, and never safeguard it, has been dented.

Progressive insight

If this can happen with beliefs about animal behaviour, then we can expect the same with human behaviour. In a recent episode of the Freakonomics podcast, one of the guests was Sheena Iyengar, a psychologist renowned for her work on choice. Her research lies at the basis of the so-called paradox of choice. Early in her career, she and Mark Lepper investigated how children react when they can choose from a multitude of toys. They found that, instead of being elated and engaging in play, the children “would look at all these toys and stare outside the window”. This went against the prevailing scientific belief at the time: more choice produces more intrinsic motivation, higher satisfaction and a greater sense of control. Iyengar and Lepper also conducted the now famous jam study, in which shoppers at a prestigious supermarket were shown a choice of 6 types of jam in one condition, and 24 kinds in the other condition. 60% of people stopped to taste with the larger amount of jams on display, while only 40% did so when just 6 jams were presented. But of the people who saw the 24 jams only 3% actually made a purchase, while 30% of those who stopped for the smaller display went on to buy jam. It seems we enjoy choice because we value the multitude of opportunities, but we don’t like the cognitive load of actually having to choose between too many options, like the children or the shoppers confronted with 24 jams.

Jam today, tomorrow, and all year, really. But is it too much? (image: Joanna Poe CC BY)

Iyengar and Lepper’s experiments alone would be a good example of unusual, unexpected behaviour, which challenges a prior belief (“more choice is better”), and which gives rise to new insights. But it is just the beginning of the story: a lot of choice is not always too much choice. As Rory Sutherland once said, “if you’ve driven 27 miles around the North Circular (a notoriously unpleasant London road) to visit a place called World of Jam, you’re probably not going to walk in and go ‘Oh Jesus! There’s just too much jam.’” Context matters.

But does choice overload really exist? A meta-analysis, conducted by Benjamin Scheibehenne at Basel University and colleagues, cast doubt over its very existence, finding a mean effect size of virtually zero (albeit with wide variation). At the very least, the researchers concluded, it is complicated: not just the number of options available but also the structure, and the decision processes matter. And this finding too was not the last word. A further meta-analysis, by Alexander Chernev, a psychologist at Northwestern University, and colleagues, identified four factors (choice set complexity, decision task difficulty, preference uncertainty, and decision goal) that have a reliable and significant impact on choice overload.

Sheena Iyengar’s remarks in the Freakonomics podcast clarify what might be happening here. We don’t necessarily just shop when we go to a store. For instance, even if most of the time we routinely put the same products in our trolley, week in, week out, we still to some extent be on the lookout for new. In addition to replenishing supplies, we are then looking to update our knowledge on the available options, deliberately seeking variety and novelty. If one of our goals is to discover new options, then more options will be benefiting us. In contrast, when we go into your habitual coffee shop in the morning, we are not in updating mode at all: just give us exactly what we’re having every day, and leave out the choices.

Assumptions, better than beliefs?

Assumptions are often reasonable as a first order approximation in most circumstances. Classical music is more likely to feature violins than accordions; most popular Dutch lagers are pretty bland; people prefer more choice over less choice. But if they are turning into beliefs, it is much harder to accept there may be nuances we are missing.

If we are truly concerned with understanding the world better, whether it is in academia, trying to replicate social science experiments, or more generally, in our manifold interactions with our fellow humans, assumptions are more useful than beliefs. When beliefs are contradicted, we feel a strong need to defend them.

Assumptions, on the other hand, allow us to keep our mind open for the unusual, the unexpected, and the surprising. To paraphrase Paul Saffo’s ‘strong opinions, weakly held’ mantra, it is thanks to strong assumptions, weakly held that we learn that not all Dutch beers are bland, not all BMW-drivers are inconsiderate maniacs, and we can be doing more than just replenishing our pantry when we go shopping.

That is how we learn.

Don’t tell me what you don’t want

When rejecting something is not enough

“Tell me what you want, what you really, really want”, the Spice Girls sang in their catchy hit Wannabe, 22 years ago. They were not (to the best of my knowledge) a bunch of economists. But they might as well have been, since economists too are often very interested to know what we really, really want.

Sometimes what people don’t want can be exactly as revealing as what they do want. If you are tossing a coin, and you do not want to choose heads, then the only other option is tails. By not choosing one, you automatically choose the other. If there are two choices for dessert on the menu – say fruit salad or ice cream – then, if you would like a desert but do not want the fruit salad, you will have to have to settle for the ice cream.

Meaningless

But if the number of options is larger, or undefined, then stating what you don’t want is meaningless. This is pretty much what Theresa May told the members of the British Parliament who intend to stop the UK leaving the EU without a deal.

The problem here is the withdrawal agreement (WA) prime minister May negotiated with the EU. This is, to put it mildly, not popular among the MPs who will have to approve it in a vote next week, on December 11^th. Its 580-odd pages inevitably bulge with compromises, so it is easy for anyone to find fault with it. However, it is not clear exactly what the next steps would, or even could be if – as is quite possible – the WA is rejected. The only thing that is certain is that, unless there is an active intervention of some kind to stop it, the UK will leave the EU at 11pm GMT on March 29^th. That is the law. If there is no deal, then that withdrawal will be without a deal – something for which, with less than four months to go, both the government and the businesses in the UK are profoundly unprepared. Some MPs believe that parliament can ‘take back control’ and stop such a no-deal Brexit. On December 4^th, the Commons did indeed approve a motion which gave it the power to vote on what the government should do if and when the WA gets a ‘nay’. But as the prime minister said, it is not enough to say you do not want ‘no deal’, you have to be specific about what you want instead.

Best not to move your house before you know where you actually do want to live (photo: Katherine Jackson CC BY)

Focusing on what you don’t want can be quite compelling, though. Some people resign their job without having an immediate prospect of an alternative one, because they do not want to stay where they are. Others leave their home because they do not want to live with the other members of their household any longer. Walking away from what you don’t want like this, without having a clear idea what you do want, is risky. Still, most people do have a short-term stopgap: they live off their savings or stay with a friend, while they find a more permanent option. The issue here is generally not so much that it is hard to find a new job or a new place to live, but that it takes time.

But most of the time, we are not acting impulsively and without a plan. By coincidence, I have been helping my daughter and her family move house this last week. They have outgrown their current home, and need more space. Yet they didn’t just focus on the disadvantages of their existing place. Instead, right from the start they knew very well which features they wanted to see replicated and which ones they didn’t, and the trade-offs they were prepared to make. How close should the new house be to work? What should be the minimum size? How large a garden? What kind of location? Wisely, it was only when they found and bought a house they wanted more than the current one that they decided to move out – and not before.

What are the realistic alternatives?

If you focus too much on the undesirable features you want to leave behind, without being precise about what alternative you aim for, you risk building up a vague ideal that may bear no resemblance to what is achievable in reality. Choices imply trade-offs, and to make trade-offs, you need to know what is being traded off. But actually making trade-offs can be difficult, and it is tempting to evade them by continuing to dream about the best of all worlds, of having your cake and eating it.

Ironically, it is exactly the intense focus on ‘not being in the EU’, without a thorough consideration of the realistic alternatives and the trade-offs involved that has led to today’s problem. The referendum question itself was inherently asymmetrical: remaining in the EU was the preservation of a known status quo, while leaving the EU was entirely undefined. As Paul Simon sang, there must be fifty ways to leave your lover – and there must also be at least fifty ways in which the UK can leave the EU. Staying in the single market via the EEA, less well-defined concepts like Norway plus, Canada-plus-plus, and even Canada-plus-plus-plus, completely bespoke deals, and indeed no deal at all: all of them are forms of Brexit. But there comes a time when you can no longer fantasize about an existence outside the EU that is all puppy dogs and rainbows. At that point, there are only very few possibilities on the table from which a choice must be made. And that time is now.

Like a person who quit their job without another one to go to, who has been entertaining idealistic views of a new career without taking any concrete steps to find such employment, who has been basking in the satisfaction of having slammed the door behind them and taught the old boss a lesson, but whose savings are now running out, the British MPs are now faced with a stark choice. Nearly wo years ago, they voted overwhelmingly for the European Union (Notification of Withdrawal) Act, which allowed the PM to invoke Article 50 unconditionally. They thus voted for the UK to leave the EU on March 29^th 2019, without any idea how that would happen, or what that would entail. Now their time, too, has run out.

Not too hot, not too cold, but just right in between (photo: Kaboompics.com)

The available options form an intriguing example of the compromise effect, and the prime minister is not letting that opportunity go unused to persuade MPs to support her agreement. You don’t like the agreement? If you’re a Remainer, voting against it means you risk the nightmare scenario of seeing the country crash out of the EU without a deal. If you are a hard Brexiteer who thinks the WA is too soft a Brexit, be aware that rejecting it could mean a new referendum, and possibly  no Brexit at all. This can be a powerful stratagem to increase the attractiveness of the middle option.

There is something delightfully surreal about this configuration. Some MPs would undoubtedly prefer one of the alternatives to Mrs May’s WA, but they’d find the other alternative much worse. And since nobody knows right now which of the other two possibilities would become reality in case the WA is rejected by parliament, that puts them into a quandary. And that is before you take into account the preferences of your constituents as an MP: depending on the choice you make, they may punish you at the next election…

If only they had heeded the advice of the Spice Girls, and been clear about what they really, really want, instead of about what they did not want, when they voted to start the Brexit clock.

More power to the imagination

(featured image credit: Motihada)

In praise of an underrated and underused mental instrument in decision-making

There is more to economics than the economy. Much of human interaction is a form of trading: we give something up, and we get something in return. Every time we do such a thing, a trade-off is being made. When we are making such trade-offs consciously, we can usually justify our choice based on using reason to evaluate the gains and the sacrifices, even if we have to work with limited information, and if we cannot possibly compute all the possible consequences.

We make many choices unconsciously too, of course – out of habit, or applying a simple heuristic, for example. The trade-offs in such choices still exist, but they do not necessarily reflect an expressed preference, whatever economists who adhere to revealed preference theory may say.

Not enough reasoning

A striking example can be found in a study by Shaun Larcom, a Cambridge economist, and colleagues, that looked at the travel patterns of London commuters. They found that a two-day strike on the underground system caused around 5% of travellers to adopt a different route, and to stick with it. One possible explanation for the inefficiency of the original journey the authors give is the fact that the London Tube map often provides an inaccurate picture of distances: the effect was stronger where the distortion is more extreme. Commuters ‘choose’ a route based on the map, and then maintain what they’ve always done; they do not calculate the optimum route. Being forced to try an alternative helped some of them discover a better choice.

But reasoning – or appearing to reason – is not necessarily evidence of a balanced consideration of costs and benefits. The legend of Faust describes the economic transaction between the central figure and the Devil, in which Faust trades his immortal soul for unlimited knowledge and worldly pleasures. He does not do so on a whim, but the story nevertheless paints him as someone driven by the short-term benefits, neglecting the longer term – eternal even – costs of the deal.

Not all decisions require a burning platform (photo: via Wikipedia)

Now, sometimes we don’t have the luxury of patiently deliberating the possibilities that lie ahead of us and weigh up the pluses and minuses. In organizational change, the phrase ‘burning platform’ is often to refer to a highly compelling reason to do something different (or differently). It has its origin in the Piper Alpha explosion in July 1988. When an oil platform is on fire behind you, you don’t worry about how long you might survive in the cold North Sea water 15 stories below. When a decision genuinely involves life and death, your System 1 rightly takes over. You just jump.

Misusing our System 1?

But we are pretty good at mobilizing our System 1 even when the issue facing us is not one of sheer survival. If we want to avoid, or ensure, something at all cost, we are acting as if it is a matter of life and death. We engage the visceral mechanisms that serve us well when we experience an intense threat to our life, or to the lives of our loved ones – when there is in fact no such threat.

Sometimes a single issue can come to dominate our powers of reason to such an extent that it feels as if it must be pursued no matter what. We may think we are still reasoning, but often we are deluding ourselves. On a small scale, cravings can cause this to happen. We know that we should not open and scoff a third bag of crisps, or that we should not have another large glass of pinot noir, because we will regret it tomorrow – when we step on the scale, or experience the painful fireworks of a hangover. And yet, they become the most important thing in the moment, the thing that must happen at all cost, and we reason that the extra crisps or wine won’t make that much difference, really.

On a large scale we find issues like – how can we avoid the subject – Brexit. But let’s not look, for once, to the pros and cons of Leaving or Remaining in the EU, nor even to the content of the draft Withdrawal Agreement (WA) – the binding treaty that will secure the divorce after a 45-year marriage. Let’s cast our eye instead to the politics in the House of Commons, the lower chamber of the UK’s parliament.

When prime minister Theresa May unexpectedly lost her majority in the early elections she had called in May of 2017, she needed support from outside her party to form a minority government. She got it from the Democratic Unionist Party, which seeks to keep Northern Ireland within the UK (against the slow, but persistent trend towards unification of the whole of the island of Eire). As the agreement was struck, the DUP said, “The alternative [to a Conservative government] is intolerable. For as long as Corbyn leads Labour, we will ensure there’s a Tory PM.”

Now, that general confidence-and-supply agreement is in peril. The DUP, with just 10 MPs, was able to gain significant concessions from the government in return for their support. But they are now refusing to back the WA because of the notorious backstop relating to the border between Ireland and Northern Ireland. This will not only jeopardize the disproportionate influence on policy they have, but also increases the chance of new elections, which may well lead to the Corbyn government they called ‘intolerable’ not much more than a year ago.

On the other side, we have Labour which, under Jeremy Corbyn, is in favour of a united Ireland, and hence diametrically opposed to the DUP. Yet Diane Abbott, the shadow Home Secretary, said in a radio interview last week: “At this point we don’t agree with the DUP on the issues at stake, but in this parliamentary turmoil you can’t necessarily rule anything out. People in [Abbott’s constituency] Hackney sent me to parliament to get rid of the Tories, and if it’s all about getting rid of this Tory government, you have to do what it takes.” Maybe not quite a pact with the devil, but it comes close.

But it might be wrong to attribute these two cases of intense focus on a single issue to the dominance of System 1. There is plenty of reasoned justification involved. But what we may be observing here is the failure to imagine the full consequences of all the options.

1, 2 and 3

In order to make good decisions, we need to be able to consider future states of the world. Our System 1 may produce a quick and dirty evaluation of a future state, and our System 2 may give us a more considered assessment – but they both require something to work with. This is what Leigh Caldwell, a cognitive-behavioural economist, has labelled System 3. There is both neurological and psychological evidence of the existence of such a third, distinct mental process.

Maybe System 3, as Leigh argues, can (and does) make decisions autonomously, alongside Systems 2 and 1, depending on the situation. Another possibility is that the three cognitive systems work together and come to some kind of consensus – with sometimes only one or two of the three systems actively engaged. But whichever model you consider (and we need to recognize that these systems are just part of a model, not actual reality), one thing is clear. Unless we have a good detailed idea of the possible outcomes of a decision, we can only work with the present information – and that is not always a good predictor of the future.

Imagining a quicker commute is not that easy

We do not always use that System 3 as much as we could. It takes effort, and it can lead to unpleasant cognitive tension – we may say “I can’t imagine” something, but that often means we don’t want to imagine it, because it makes us feel bad. So our System 1 responds to the immediate situation, and/or our System 2 calculates the costs and benefits of the options as they are presented here and now. With more input from our System 3, we could more thoroughly evaluate not just the end states, but also the path to get there in the different possibilities ahead of us.

Whether it is imagining a quicker journey into work, or the outcome of a momentous political decision, we may well be better off by giving more power to our imagination.

How cold?

(featured image: Ross Dunn CC BY)

 

When we say something leaves us cold, we don’t always mean absolute zero

Last Sunday, the Christmas lights were switched on in my town. This is an annual event, not just here, but up and down the country. The weather was nice and dry, but even when it is less clement, the switch-on seems to excite lots of people, children and grown-ups alike. But me? I am indifferent.

It leaves me about as cold as the Christmas market that takes place in our high street every Sunday from the first weekend of October, and as the Christmas displays in the shops that are ubiquitous this time every year.  Not that I am complaining, even though moaning about premature Christmas decorations is a popular pastime in the UK. it is the country in which the phrase ‘Bah humbug!’ originated after all.

The no man’s land of indifference

Yuletide fans like to wheel out evidence that Christmas decorations signal a friendly nature, of course. (They have little regard for the fact that the research is now nearly 30 years old, and is rather more tentative in its conclusion than is sometimes implied.) The Scrooges, in turn, can point to articles like this, with a headline like “Why playing Christmas songs early is actually bad for your health”. Clearly it is not just Brexit that is dividing the British nation.

But just like I cannot get excited about tinsel and fairy lights, I cannot get agitated by them being applied early either. The whole affair simply leaves me indifferent.

Of course, nobody can possibly get excited about everything, and tastes differ. One person may be passionate about opera while they have a strong dislike of football, while for their neighbour it may be the exact opposite. But for many people, there seems to be a no man’s land in between like and dislike, where we simply don’t give a damn either way.

From an economic perspective, the subject of such feelings (or better, absence of feelings) provides us with neither benefits or costs – this is indeed a way of defining indifference as an economics concept. And there are actually quite a few such things when you start looking for them. For people without small children, for example, the provision of playgrounds in their vicinity is of no consequence. Yes, you may have something of a societal conscience, and feel that it would be good if there were playgrounds for families with young children – or you may have grandchildren, or nieces and nephews who would benefit from them when they visit, or with whom you identify.

It does not leave them cold (image: spilltojill CC BY)

But if everyone in your household is well beyond the age of being excited by a roundabout, a see-saw or a swing, playgrounds probably leave you cold. And if it’s not that, then there may be sports events (that you never attend), parks (that you never visit) or shops (where you never buy anything).

For things that involve public money, you could perhaps argue that their elimination would make you better off as you’d pay less tax. Or you could argue that playgrounds are an investment in public order, helping keep children occupied who might otherwise engage in mischief, causing an even higher cost than the upkeep of a play area. But unless you are so disposed, we are really talking about proper indifference.

Or so it seems, at least.

Not so cold?

Let’s look at other situations where we should be indifferent – say someone else will pay for something for you. They invite you for a meal, for example, or your uncle or grandma will pay for a new suitcase as a Christmas present, but she wants you to buy it.

The normal cost benefit analysis that we tend to use when we are footing the bill doesn’t really apply here.

Or imagine this situation, inspired by a discussion I had with a colleague last week, on what price we’d find acceptable for a hotel room “when the client pays”. You’ve booked a room at £150 per night, which is not out of the ordinary for the location, and you know that this will be entirely acceptable to the client. You then notice that this price includes breakfast – and that the price without breakfast is £25 less. A couple of croissants, a glass of juice and a coffee would cost about £7 in the café next door to the client.

If you had to pay out of our own pocket, you would most likely get breakfast in the café: £25 for breakfast feels rather overpriced. But if the client pays, and you know you can claim the cost, including breakfast, in full without problems, a rational you should really be indifferent to the price: you would not be better or worse off either way.

And yet, would you not feel a bit reluctant to allow the hotel to rip off your client, even if they would reimburse you without blinking, unaware of the overpriced breakfast? And you would probably not go for the most expensive dish on the menu, and still look for a good price for that suitcase, even if someone else is paying. It seems that indifference is not quite so indifferent.

Is this breakfast worth £25… if someone else pays for it? (image: Kathryn Wright CC BY)

Something similar may be happening with playgrounds, parks and the annual Christmas lights switch on. Imagine you had no junior relatives, and you could move into your dream house which would either be built in an area with a playground nearby, or in one without. Your choice. Would you pay more for one option than for the other? Probably not – so you’re indifferent!

The question whether we’d pay for something is a good way to establish whether we’re indifferent. But it may not paint the full picture. Let’s turn things around: what if the local council were to decide to take down all playgrounds, or sell off the park we never visit to a property developer? What if the cute, quirky shops that we never frequent were to close? Would we still feel indifferent, or would we actually experience this as a loss? If, by contributing say just £10, we could prevent the playgrounds disappearing, or the park being turned into a housing estate, or the shops shutting down – would we do so?

I am pretty sure I would, and probably more than £10. I would miss the playgrounds even if I never use them, and the park that I never go to. And I’d miss the quirky high street shops where I never buy anything. Even if all I was prepared to spend to stop their disappearance is a tenner, that is enough for anyone, including myself, to question my claim that all that stuff leaves me cold. That’s the endowment effect for you: once you have something, it’s hard to be indifferent about it.

I would even be prepared to contribute to ensure that each year, there’d be Christmas decorations in the town, and even to have the annual event of switching the lights on.

It could be the Christmas spirit taking hold of me. But really, I think this stuff may not be leaving me as cold as I first thought…

How difficult can it be?

(featured image credit: Torbein Rønning CC BY)

We all need a little faith, once in a while, when we’re faced with a difficult problem and we don’t know what is the best solution. But it’s best not to use it as a substitute for curiosity

Are you curious? I bet you are. The fact itself that you are reading this suggests that you are interested in finding out what this article is about. Maybe you even expect to learn something (I hope you do!). But even if you’re just reading this to while away a few idle moments, there are most likely other areas where what you do is motivated by curiosity.

A good thing on balance

Checking your social media feeds, watching or listening to the news, reading a book, viewing a documentary or even a soap opera or a reality show – if you were not curious what the next page, the next minute or the next episode would bring, you would already have ceased checking, watching, listening etc.

Curiosity doesn’t get the unequivocal thumbs up, though. The English proverb curiosity killed the cat ascribes lethal capacities to it. And in a famous Kipling story a little elephant with “’satiable curtiosity” initially gets beaten up for asking too many questions, but eventually its curiosity is vital in providing all elephants ever since with a most handy appendage.

So it is in practice for us too: curiosity is a valuable trait. Arguably, the success of our species so far, as well as the prospects of its future are closely tied to this trait. Maybe that is symbolized by the most important punctuation sign by far: the question mark. We owe a debt of gratitude to our ancestors for their why, how, when, and what questions which have led to all the good stuff we have today, from agriculture and electric cars to cancer treatment and Netflix.

So, curiosity is a key driver for acquiring knowledge, insight. This can serve us personally – if we are more educated or skilled our work can be more financially and emotionally rewarding. And it can serve others: when we put to use what we learn thanks to being curious, our family and friends, our colleagues, our clients (and indeed our readers, I should add) can also benefit.

Costly curiosity

But responding to curiosity is costly. When it comes to choosing things – whether it’s breakfast cereal, a car, a sofa or even a house or a life partner, most people are by and large satisficers, rather than optimizers. This means that we tend to go for answers, solutions or choices that are “good enough”, rather than figuring out what is the very best one. As long as we avoid a major catastrophe, we seem to be reasonably content.

Is satisfying your curiosity worth this much? (image: reynermedia CC BY)

There are several possible reasons for this. A recent paper by Larbi Alaoui and Antonio Penta, two economists at the university of Barcelona, explores why we stop reasoning before we have found the best answer. Being economists, they hypothesize a trade-off between the (expected) benefit of a better solution, and the (cognitive effort) cost of discovering it. However, such a cost-benefit analysis may not always be the only or the dominant factor in the decision whether or not to continue reasoning.

We often don’t know for certain whether there is a better solution to be discovered, whether we will actually find it, and how much effort it will take. How we deal with this uncertainty may depend on who we are, and on the context. Some people may derive intrinsic joy out of exploring possibilities – thus lowering the cost of satisfying their curiosity. But others may, in contrast, have an aversion to thinking, or fail to systematically pursue all the options because they are under time pressure and the fear of failure is large. (This can sometimes be spotted in TV game shows.)

But even establishing whether ‘a’ solution to a problem or ‘a’ choice is ‘good enough’ may require some measure of cognitive effort. Ultimately, we need confidence that it will indeed be good enough – i.e. it will not be disastrously wrong. Maybe we need to work something out, imagine different futures, or do some calculation and check that the result is above or below a certain threshold. Maybe we need to estimate a number or likelihood. Or perhaps we can rely on previous experience, or on heuristics.

A bad trump card

But there is one thing that can trump all that: faith. Faith can give us confidence, without requiring evidence.

That can be quite helpful. If it is too effortful to work out which of two satisfactory options will be better, and we are uncomfortable with tossing a coin, then a sprinkle of faith can add to the confidence we already had in one of them and seal our choice. But faith is such a powerful element in our decision-making process, that it can overshadow all other aspects.

In an article in the Guardian last week, Rafael Behr described a striking illustration of how this can happen. It featured the then-Brexit Secretary, Dominic Raab (who has since resigned from the British government over the draft EU withdrawal agreement that prime minister Theresa May is – as I write this – still valiantly defending in the House of Commons).

Raab had, to use a phrase that was inadvertently coined by George W Bush, ‘misunderestimated’ the importance of cross-channel trade for the UK economy, notably the Dover-Calais crossing. In doing so, he joined his predecessor David Davis and other leading figures on the Leave side of the Brexit divide, whose assumptions and predictions had likewise often turned out to be at odds with reality (see this Twitter thread for some choice examples).

There is of course nothing wrong with being ignorant, even though it is not always bliss. We are born ignorant, but also with the capacity to ask questions and learn. As Behr points out, however, the key flaw in Mr Raab’s attitude and that of his naïvely optimistic colleagues was that they did not ask. Their faith in the righteousness of the cause, and in the ability of determination to overcome every and any obstacle disengaged their curiosity. And when there is no curiosity, there is no awareness of ignorance.

This would appear to be a peculiar instance of a cognitive phenomenon known as motivated reasoning, peculiar in the sense that there is hardly any reasoning involved. Normally, those who engage in it will emphasize the facts and data that support the conclusion that they prefer (or that they believe is most likely). Like a lawyer for the defence or the prosecution in an adversarial case, they are highly selective to build and strengthen their argument.

Blindfolded by faith – yay ignorance! (image: Kirill Balobanov)

What we see here, however, is the justification of a choice based entirely on faith, which makes facts and data unnecessary. Genuine curiosity tends to generate question upon question in the search for understanding.

But if faith is all there is, there is just one rhetorical question: “How difficult can it be?” The only value of this question is that it is a rather good tell-tale sign for the problem.

Faith, next to curiosity, can play a useful role in decision-making, in particular to combat indecisiveness, and to provide enthusiasm for a satisfactory, rather than an optimum choice. But it can be very dangerous when it is used on its own. Before you know it, it can have fooled you into thinking that there is no need for facts or data, and shut down your curiosity.

Isn’t that curious?

A new life or an old life?

(featured image credits: Jenny Mealing CC BY and Dr KontogianniIVF)

One of the fundamentals of economics is also a fundamental of life. It involves cake and eating.

Most people know pretty well what actions are needed to make babies. But these technicalities are a necessary condition, rather than a sufficient one to actually produce a new life. For some couples with a desire to have children of their own, that first step is not a straightforward process.

About 1 in 7 couples may have difficulty conceiving. 16% of couples will fail to become pregnant naturally within a year if they have regular unprotected sex, and those who have unsuccessfully tried to do so for more than three years have only a ¼ chance of succeeding in the next year. Many such couples turn to in vitro fertilization (IVF).

Science to the rescue

Thankfully, for British women this intervention is available free of charge through the UK’s National Health Service. But IVF is not a done deal. The chance of a successful treatment falls rapidly with the age of the would-be mother, from 29% for women aged under 35, to just 2% for women over 44.

The age of the first pregnancy for women has been steadily rising (e.g. in the UK from about 26 years in 1974 to 30 years in 2015). This means that more women discover relatively late that they may need to resort to IVF, and hence the number of them seeking the treatment when they’re 35 or older is growing. The average age of a woman receiving IVF treatment in 2016 was 35.5, up one year since 2000.

40 years ago – the first of many

But recently the treatment has been refused to women over 34 in twelve areas of the UK (and is no longer offered to anyone in a further seven). Not surprisingly, this has been met with protestations. What is going on?

The NHS, the UK’s flagship (at least in the eyes of a sizeable part of the British population) health service, does not have unlimited resources, and funding has been under pressure for years. In one area’s own words, it has “taken into account the relative cost-effectiveness [of IVF] compared to other treatments that could be funded with the resources we have available.” In the UK, the cost of IVF is around £5,000 ($6,500) for one cycle. Of the 68,000 IVF treatment cycles in 2016, 41% were funded by the NHS – a total cost of about £139 million.

That looks like a sizeable amount, but if you compare it with the bill for cancer diagnosis and treatment, it is relatively small: the NHS spends about £8 billion ($10.5 billion) on this. Look at the individual patient expenditure, though, and the picture changes. A woman under 40 is entitled to up to three IVF cycles funded by the NHS. 29% of those under 35 will be lucky and become pregnant in the first cycle. Yet others won’t, and a woman under 35 will, on average, receive 2.2 IVF treatment cycles, with an overall probability of around 65% of getting pregnant.  The average number of cycles increases, and the probability of a successful pregnancy decreases as the age of the woman at the time of the treatment is higher, as the table shows.

The key number to look at is the he cost of producing an IVF-baby. This increases rapidly from just over £17,000 for women under 35 to £250,000 for women over 44. For women aged 38 or 39, the cost is already a little more than that of diagnosing and treating a cancer patient, which is £30,000.

The healthcare cake

This is the choice the people in the NHS face: should they spend £30,000 of their scarce resources to fund the treatment of a cancer patient or for producing a pregnancy in a woman aged 38 or 39? Should they prioritize the old life, or the new life?

They can only spend every pound once. They can, as the hackneyed phrase has it, either have their cake, or eat it – but not both.

Those stark trade-offs confronting health decision makers are not always apparent to the rest of us. We are only superficially aware of how healthcare is funded. Our tax and social security contributions are deducted automatically from our income, and we don’t really know what they actually buy. On the other hand, we are used to healthcare being available on demand – without ever having to make a trade-off between having a filling in our wisdom tooth, and having physiotherapy for our sprained ankle. We can have both. So it is not entirely surprising that we wonder why we can’t have IVF and cancer treatment.

Trade-offs – like this one – are a core concept in economics, but not just in economics. The economist Robert Frank argues that in the future Charles Darwin (rather than Adam Smith) may well be seen as the father of economics. Evolution itself is indeed characterized by trade-offs, notably between the benefit of a trait for the individual, and the benefit (or cost) of that same trait for a larger population. He gives the example of the antlers of the male elk. To secure a mate, a bull elk must dominate, and if necessary fight off, a bunch of rivals. The bigger his antlers, the bigger his advantage in stand-offs and combats – and the more likely he will be able to pass on his genes.

But keeping pushy suitors away from his is not male elks’ only concern. They must also be able to outrun wolves. And then the construction on their head, weighing nearly 20 kg, is rather inconvenient, making escaping a hungry pack much harder. So a better chance to procreate for the individual comes at the cost of an increased likelihood of being eaten by wolves – for all bull elks.

“Mine is the biggest” (image: Murry Dalton CC BY)

Imagine the elks could agree to reduce the size of their antlers by 50%. The relative advantage of the toughest bulls would persist, but they would all be much better positioned to escape a wolf attack.

Of course, elks don’t have that capacity. Most animals don’t even consider multiple simultaneous options, don’t weigh up immediate advantage with benefits in the longer term and so on. They just follow their instincts, fine-tuned over many generations to favour whatever option is optimum for the continued success of the species. Their very existence today is testament to this.

For us humans it is a bit different. Evolution has endowed us with the ability to evaluate costs and benefits of multiple competing options. We can reason about which is the better of a range of possibilities… and we can ponder the question whether we prefer to have our cake, or to eat it.

Unfortunately, that doesn’t give us a quick and easy shortcut to choosing between spending money on IVF treatment, and spending money on cancer treatment – between favouring a new life and favouring an old life. If we had to make that kind of decision in our personal life, it would be a tough call.

And yet so it is for the NHS (or any health insurer). It is not different from the hypothetical dilemma in which you would have a daughter struggling to conceive, and a spouse who is suspected to have cancer, and you have only £30,000 available. You would be able to help one or the other, but not both.

The call is no less tough for the people who need to allocate the scarce, limited resources available for the health of the nation. There are no easy answers.

It is good to remember this, before we start criticizing them for making the wrong choice.