More compensation!

(featured image credit: Gerd Altmann)

Would the world be a better place if we found (and made) it easier to compensate others?

It’s a beautiful Saturday and you’re invited to a barbecue. The hosts have a reputation for ensuring memorable occasions, with superb food and eye-catching decorations in the garden. In short, they will, as always, have put in a lot of effort. It’s the kind of event for which you’d actually pay good money. Yet you don’t: you will not arrive at the garden party, informing your friends that you and your spouse have just transferred £70 to their account. You will instead take three nice bottles of wine and a bunch of flowers.

We seem to make a strong distinction between our interactions in the market domain and those in the social domain. In one we pay money in return for goods and services, while in the other we either do stuff for free – like refereeing a football game at our children’s school or helping out a colleague fixing her car – or we reciprocate in kind, rather than at market rates. And never the twain shall meet. Or should they?

Compensation in international politics

I was reminded of this when I read an intriguing blogpost by economist Bryan Caplan, in which he wonders why not a single politician has yet proposed the simplest possible solution to Brexit: let the UK buy its way out of the EU. After all, there is already the financial settlement, colloquially referred to as the divorce bill – the money the UK owes to settle its obligations as an EU member. Estimated at around £36 billion (€42 billion, $47 billion), it covers things like commitments to expenditure beyond the exit date and liabilities like pensions for the British fonctionnaires. Now the key reason why the current UK-EU withdrawal agreement has been rejected by the British MPs three times is the so-called backstop – the protocol that ensures an open border between the republic of Ireland and Northern Ireland, in accordance with the Good Friday agreement. So why could the UK not, for example, ask the EU, “how much to remove the backstop  from the withdrawal agreement?”

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A bag of money for your backstop (image: Marco Verch CC BY)

Does the backstop have a price – for either side? That is, would the EU be willing to abandon the backstop go in return for suitable compensation from the UK, or would the UK be willing to accept it if the EU put money on the table? In a sense, the backstop is in the ‘social’ domain, but between countries instead of between people. Direct cash transfers (the ‘market’ domain) between countries to settle a disagreement outside the purely financial domain are very uncommon, if not non-existent. But that in itself is not enough reason to dismiss it.

 

As Prof. Caplan says: “If this were any normal business deal, this straightforward path would be on the tip of every Brexiteer’s tongue.” For example, if you need a certain shipment delivered tomorrow rather than on the normal 3-day schedule, offering to pay more can usually get it rushed through. But of course, Prof. Caplan also knows that politics is not like business. Whoever is the next British prime minister, he is not even remotely likely to consider the suggested approach. Caplan ascribes this unwillingness to foolish pride (“we’re not selling out!”) and wishful thinking (“of course, they will agree to our demands”).

Legal basis

Compensation which crosses the boundary between the social and the market domains is not that uncommon, though. Alongside obvious compensation for material harm, some countries have legal provisions for the compensation of immaterial losses, i.e. that do not directly affect the victim’s economic situation. In Belgium these are known as moral losses (e.g. loss of enjoyment, as when the victim is unable to perform certain pleasurable activities, or affective damage, the sorrow and pain over the death or serious injury of a loved one).

But this is still post hoc compensation, offering amends for a loss already incurred. What of truly negotiated transactions? At the end of last week, The Times reported on the use of non-disclosure agreements (NDAs) in a case of alleged sexual assault and sexual harassment. Two women received substantial financial sums in an out-of-court settlement in which they also withdrew their claims and signed an NDA. Arguably, part of the compensation could well relate to the moral loss the women would have suffered at the hands of the alleged attacker. But another part is certainly related to not taking matters to an employment tribunal: it shows what it was worth for the accused not to be taken to court, and what it was worth for the women to abandon the case and not talk to the media. (One can wonder whether NDAs are appropriate in cases like this, or even whether there is a fundamental difference between this kind of situation and blackmail, but that is a different discussion. Here, we are talking about voluntary transactions in which one party compensates another party for (not) acting in a certain way.)

Compensation at home

Could negotiated compensation along these lines be useful in a different context, say in households? These are interesting collaborative entities, with lots of apparently uncompensated, voluntary effort, in particular in the shape of chores. They’re not something one does for pleasure, and yet they get done. The mechanism is often one based on an agreed, more or less equitable division of labour (you fill the dishwasher, I put out the trash). All household members put in effort that, in aggregate, serves the common good, so this makes specific compensation unnecessary. (Pocket money for children is mostly unconditional, so it is not really compensation either.)

But there are many other situations in a household where one person gains, with the burden falling on another one. Imagine, for example, one spouse accompanying the other to a work event, while they’d much rather stay home and read a book, instead of making small talk with strangers all evening. Or a parent taxiing, week after week, one of the children to karate while they’d much rather be watching live football, only because Junior cannot be bothered to fix the leaky tire on her bike.

Maybe we assume too readily that such action form part of the implicit social contract in a household: it’s the kind of thing we just do for each other, fuelled by intrinsic motivation. But what can we truly, unconditionally expect from others in our household? This is a question that rarely gets asked, or even considered.

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Would you happily accompany your spouse to this office party? (image: Split The Kipper CC BY)

Perhaps we believe that overall reciprocity should take care of it (“you accompany me to my work do, I will come with you next time you visit your parents”). The trouble is that, even if that were the case (which is by no means necessarily so), in the moment itself the future reward may seem too vague and too distant to outweigh the sacrifice that is being made. Sometimes it can feel as if that sacrifice is not valued by the beneficiary, and as if one party is taken for granted by the other.

Of course, in a household, financial compensation is unlikely to be the right approach. Paying your spouse to join you at your employer’s Christmas gala seems, well, weird. But there is an implicit market in households where favours, chores and more generally time and effort can be traded. It is perfectly possible to agree on a suitable compensation for the person making the sacrifice.

And the beauty, at least in some situations, is that it can clearly work both ways. What would it take for one spouse to accompany the other? Or alternatively, what would it take for the other spouse to go to the work do on their own? Even in the case of the lazy teenager, it is reasonable that the parent would be prepared to offer something in return for not feeling morally obliged to play taxi.

If you feel that bargaining and offering compensation in the household still feel a bit improper, consider the remarkable intangible benefit it could produce. In a conventional setup, using the work do one last time, there will always be one miserable, maybe even resentful spouse: either the one forced to make a solo appearance and cook up some story why they are on their own, or the one that is there under moral duress. With agreed compensation, no such aggro: it’d be a pleasure to fabricate a reason why the other half could not make it, or it’d be a joy to spend time chitchatting to your spouse’s colleagues all evening. No long faces and regrets the days after.

It may not work in international politics, but a bit of diplomatically arranged compensation can certainly contribute to a more efficient and more pleasant household.

 

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Too much perseverance

(credit: Martin Deutsch CC BY)

Does our tendency to keep going work in our favour?

“I’ve started so I’ll finish” is one of the first catchphrases that stuck in my mind when we moved to the UK many years ago. At the time, it was uttered pretty much weekly by Magnus Magnusson, the host of the Mastermind quiz programme, in which candidates need to answer general and specialist knowledge questions in quick succession during 2 minutes. Whenever he had begun reading out the last question at the moment the expiration signal is sounded, he continued doing so, and the candidate was then entitled to answer the question.

To me, it sounded not just fair but also entirely reasonable. Nice catchphrase, that also carries an exhortation to persevere: don’t give up. That, however, can lead to a cognitive error known as the sunk cost fallacy, observed particularly in business, where investment decisions regarding large, multi-year projects sometimes need to be revisited.

Avoiding waste

Whether it concerns the development of a potential new oil field by an energy company, or governments funding a supersonic passenger aircraft, the rational way to approach the decision whether or not to continue a project is to totally ignore all the investment to date. The only question that matters is how much it would cost from today onward to complete the project, and whether the benefit at the end justifies that future investment. But sometimes the amount of money and effort that has already been spent does weigh on the decision, and is used to warrant continuation. Some might argue that Brexit is a fine example of the same phenomenon in politics: the British government has been devoting inordinate amounts of time and resources on it so far, and it is far from clear-cut that continuing will deliver the anticipated benefits.

This curious persistence intrigues many behaviouralists, as the economics of such decisions are generally pretty clear-cut. What might explain hard-nosed business people’s and politicians’ dogged, inappropriate perseverance?

One possible factor may well be the urge to complete what we started, as voiced by Mr Magnusson, acting as a kind of default: unless you have a really good reason to stop, keep going. Another explanation may be our tendency to avoid losses. When you abandon a project, the resources spent so far are, to all intent and purpose, wasted. Even though, on balance and from a purely economic viewpoint, that might be the right choice, the emotion we experience with this loss is hard to ignore.

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“I’m bored stiff in Michigan, but I am wasting less money, so yay!” (photo: nonanet CC BY)

This is compellingly illustrated in a 1985 experiment by psychologists Hal Arkes and Catherine Blumer. Participants were presented with a hypothetical situation in which they purchase a ticket for a skiing weekend in Michigan for $100. Later they buy a $50 ticket for a skiing trip to Wisconsin (and the Wisconsin weekend is believed to be more enjoyable than the Michigan one). They then discover that both trips are on the same date, and they can neither obtain a refund, nor sell the tickets on: having spent a total of $150, they now have to choose one, and forego the other. The rational decision is to go to Wisconsin, as it is the more pleasant of the two. Yet the researchers found that less than half of their participants made that choice: by going to Michigan it was as if only $50, the price of the Wisconsin ticket, was ‘wasted’.

Material investment and loss is actually only part of the story: business and political leaders sometimes stake their reputation on a project.  So, cancelling such a project may look, rightly or wrongly, like a loss of reputation, and that can be a major obstacle to doing what is economically right.

Also at home (and in the dovecote)

The sunk cost fallacy is not just found professionally and in psychological experiments. Last week, when most of France was melting in temperatures that in some places exceeded 40°C, I was talking to a colleague in Paris. It was impossible not to mention the weather (I learned the French have a splendid word for heatwave: ‘canicule’), and she spoke of a similarly sweltering summer when she was a girl, living in Brittany. Her parents had rented a holiday house in the South of the country, where the heat meant you could not really go outside for more than 10 minutes between mid-morning and well into the evening. Ironically, the coolest place in France at the time was their home in Brittany. If they had stayed put they’d undoubtedly have had a pleasant time – but since they had paid for the holiday, they packed their bags and drove to the Midi, only to sit indoors for most of the day. The only positive thing she could say about that vacation is that it was memorable – for being the worst ever holiday.

Have you ever, at the end of a meal in a restaurant when you’re ready to settle the bill, found there to be some wine left in the bottle – and felt strangely unable to leave it there? Did you fill up the glasses one last time, and quickly quaff the leftover? That is the sunk cost effect: if the waiter would offer you a free glass of wine with the bill (rather than the more customary mints), very few people would take it – yet because you paid for the wine, you feel the need to finish it.

And so it is for example for a book or a film that, halfway through, turn out to be a waste of time. But we paid good money for the book or the cinema ticket, and we’ve already invested an hour or more of our time. Quitting now means that time and that money is wasted – at least if we do not value the remaining reading or watching time that we could be doing something more pleasant. So it is too with eating what is on our plate, or even what is left in the pan: we bought the beans and potatoes, we cooked them, so we will bloody well eat them – even if we’re not really hungry anymore. (Bye bye, waistline.)

pigeon

“Plenty of food here, no need for red or green keys for me!” (photo: if winter ends CC BY)

Even animals exhibit similar behaviour. Thomas Zentall, a psychologist at the university of Kentucky, describes three experiments with pigeons trained to peck keys with a coloured light a certain number of times in order to obtain food (e.g. 30 times red, or 15 times green). After training, they presented the pigeons with a setup with three keys. In the first phase, the central key lit up red, and so the pigeons started pecking away to get their food. However, the experimenters switched off this key after 5, 10, 15, 20 or 25 pecks, and in the second phase lit up the keys on either side: one red, the other green. What would be the best choice for the pigeon? If it had already pecked on the central red key 20 or 25 times, it should choose the red key and complete the sequence with 10 or 5 pecks to get the reward. If it had only pecked the central red key 5 or 10 times, it should choose the green key and peck it 15 times to minimize the total number of pecks.

 

Yet they found the pigeons had a significant bias towards continuing with a red key and complete the sequence of 30, even if they could have obtained the food more quickly by choosing the green key. The birds exhibited a similar bias in the other two experiments.

Measured persistence

Perhaps we, and other animals, do have an innate tendency to complete things we have begun: perseverance may well be an adaptive trait that protects us against distraction, boredom or fatigue when carrying out important activities for survival and procreation. But as is so often the case with mental shortcuts, what served us well in the savannas of hundreds of thousands of years ago may not always so unconditionally useful in the 21st century CE.

Is persisting an irrational tendency? Easy to ask, not so easy to answer. Who knows, the regret of leaving the wine in the bottle undrunk might outweigh the slight discomfort of drinking more wine than we wanted, and after the coffee. Maybe the feeling that we’re wasting more money going for the cheaper ski trip spoils the fact that it would be more pleasant, and so we’re ultimately better off reasoning that taking the expensive, less enjoyable weekend is the better option.

But perseverance does not always pay. So perhaps it is worth learning to spot when it is our autopilot making us continue something, and move the decision to a conscious level. Yours truly had an opportunity to practise this just a few days ago. On my plate was a succulent fillet steak, cooked and seasoned just right. But my appetite for meat has diminished over the years, and it was just too big for me. So, I figured I would not enjoy eating more steak than I really wanted, and I chose to leave about 20% of it on my plate. No regrets, and goodness me, did it feel liberating!

“I’ve started so I’ll finish” can be a pretty good rule of life, but it is not always so. The trick is to know when stopping pays more than persevering. The least we can do is ask ourselves the question.

Posted in Behavioural economics, Cognitive biases and fallacies, Psychology | Tagged | Leave a comment

Green nudges, clever and not so clever

(featured image credit: Colin Brown Photography)

Behavioural science can do its bit in averting severe climate change, but it has to be done well

 

How will climate change affect you personally? This can be hard to tell. There is broad scientific consensus that it is happening (and will continue to happen). Sophisticated models project numerous consequences, from increasingly extreme weather patterns to dramatic rises in sea level. But it is not easy to imagine, let alone determine, how precisely all this will affect your own life.

Perhaps the migration of certain species might pay a role for you. If, like the author, you are keen on brown shrimp, you might be alarmed by the findings of a recent report (in Dutch) on the Seawatch-b initiative by the Flemish  Institute for the Sea. It suggests that, as a result of the rising temperature of the North Sea water (+1.7 degree C, twice as fast as the global average), the prevalence of these delicious creatures has fallen by 80% since the beginning of this century.

It’s hard to see how forest fires and the advancing sea would have much effect of us when we live in a large city nowhere near large woodlands, way inland. For many people climate change will be a matter of many small effects (like rarer and more expensive shrimp).

Likewise, it is hard to see how a few, massive interventions (like spraying minuscule reflective particles into the stratosphere to block sunlight) could counteract climate change. Just like an investment across a broad portfolio of assets is a better bet for a comfortable retirement than putting all your savings in Apple, Alphabet or Amazon stock, many more modest interventions are going to be needed to slow down climate change. We will all need to make small changes to our behaviour, especially regarding the numerous ways in which we consume energy. How can we do that?

In the air and on the ground

One study from a few years back, conducted by three economists, Greer Gosnell, John List and Robert Metcalfe, showed how airline pilots could be encouraged to reduce fuel consumption. Pilots make numerous decisions, and some of those significantly affect kerosene consumption. Before the flight they need to establish how much fuel should be pumped into the aeroplane: taking more fuel than necessary will increase consumption (as the plane needs to carry the weight of the excess fuel). When they’ve landed and taxi to the stand, they can choose to do so on just one engine and switch off the others, which will save fuel. And of course, during the flight, they can adjust their speed and altitude, both of which influence momentaneous consumption.

The researchers divided 335 Virgin Atlantic captains across 40,000 flights in four groups. One group received monthly performance feedback, including the percentage of their flights during which they exhibited the three types of fuel-saving behaviour (before, during and after the flight). The second group got the same report, plus a personalized performance target 25 percentage points above their baseline performance prior to the experiment. Captains in the third group received the same feedback and targets as their colleagues in the second group, but as an extra incentive, for each target they achieved, the company would donate £10 to a charity of the pilot’s choice. The final group was a control, in which the participants received no information, targets or incentives. Pilots of the other three groups received the information by post to their home address every month for eight months, the duration of the experiment.

Captains in all groups (including the control!) significantly changed their behaviour, but the best result was found in the groups that received performance targets. (The incentive of a charitable donation made no difference to the behaviour, but these pilots reported higher job satisfaction.) Overall, throughout the experiment, an estimated reduction in CO2 emissions of 21,500 tonnes, and a cost saving of $5.4 million, representing just over 0.5% of total consumption.  (If you think this does not sound all that spectacular, remember two things: this was easily achieved at negligible cost, and combating climate change is a matter of numerous small interventions, not a few huge ones.)

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Little box, big effect (source)

Consumers too can be nudged to reduce their energy consumption, and there have been many trials and studies exploring the opportunities over the last ten years. One of the first ones (started in 2009) introduced the Home Energy Report. This was developed in conjunction with Robert Cialdini, a veteran behavioural scientist, and provides households with two key types of information: the actual consumption, with tips on how to reduce it, and a comparison of their consumption pattern with their neighbours’. 3 years on, this low-tech intervention helped participants typically save between 2 and 4% on their previous energy bills.

Another, more recent, example is a field experiment involving about 150 households on the Dutch island of Texel, conducted in 2014 by Erdal Aydin, and economist at the Turkish university of Sabanci and colleagues. It used an in-home display to provide much more immediate feedback to the consumers, and quickly achieved (and sustained) a reduction in consumption of around 20%.

Reasons for success

Why were these interventions, both with the airline captains and with the households as consumers of energy, successful? One factor was a clear behavioural starting point. To change people’s behaviour, you need three things: an understanding of what they do right now, a clear definition of what they ought to be doing, and a clear-cut mechanism by which they are more likely to choose the desired behaviour over the old one. For example, refuelling, taxiing and adjusting speed and altitude were identified as crucial decision points where old and new behaviour were positioned. Likewise, there are discrete, well-defined things consumers can do to cut down their energy usage, from replacing incandescent bulbs with low-power ones, to showering for the duration of The Ramones’ Blitzkrieg Bop (2:12) rather than prog rockers Genesis’ Supper’s Ready (22:54). Reminding people of such actions, and providing encouragement (by showing them similar consumers that actually do better) gently nudges people towards greener behaviour.

But not all interventions are so well-thought through.

The environmental footprint of the Flemish (the Dutch-speaking Belgians) is considerably higher than that of citizens in the neighbouring countries, and a study (in Dutch) commissioned by the Flemish regional government identified two main reasons. One is the elevated energy consumption, the other is the high mileage people drive – because key amenities like shops, schools, public transport links, leisure, healthcare and so on are too difficult to reach by bike or on foot. This is reflected in a single number, the so-called Mobiscore, rating all dwellings in cells of 1 ha (about 2.5 acres) from 0 (terrible) to 9.99 (all amenities right next door). Users can specify what their most frequent journey is, and this the can personalise their score by at most one point up or down.

The idea is that by raising awareness of the environmental impact of a dwelling, the ‘mobiscore’ will encourage people to move and live closer to the amenities. A laudable initiative? Maybe, but it got a rather lukewarm reception. So what is wrong with it?

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What would make you move from a red house to a blue house? (source)

One problem is inevitably the broad brush approach to quantifying the environmental impact of a home. It relies on assumptions and averages, which fail to capture the varied circumstances of individual households. The actual footprints of two similar neighbouring houses, one occupied by a newly retired couple in good health, the other by a young family with three kids who need shuttling not just to school, but to ballet, football, guitar lessons and what not will be rather different.

This is not the main issue, though. The real question is how this will change the behaviour of a household. People don’t move house all that often, least of all the firmly rooted Flemish. In 2009, just 4.1% of them moved to a different town – once every 25 years on average. The chance that a settled household will move house just because they have a bad mobiscore is low.

Maybe it would work for new households? How would they behave? Picture a young couple. They have found a pretty house with a garden (great for the kids later). And it is affordable too! Now they discover that it has a low mobiscore, because it is in a small village. They check out similar houses in a larger town, but these cost a lot more. For the same price as their dream house, all they can find is a smaller house without a garden, or a flat. Imagine them opting for such an urban home: “Sure, the kids won’t have a garden to play in, but hey, look at our mobiscore!” Can you? Neither can I.

Living in cities is more energy-efficient, but energy-efficiency is not the only criterion people use to choose where to live. People choose their home primarily with their heart, not with their mind. Of course those who choose to live in the countryside are generally well aware of the sacrifices this brings with it, like longer commutes and more money for petrol. But they weigh this up against the upsides, like a more pleasant environment and more space. For many, that makes it all worth it.

To think that an instrument like the mobiscore will have any material influence on this decision verges on delusion. Encouraging people to reduce their environmental footprint will be a matter of changing many everyday behaviours, not of trying to affect an infrequent decision of great emotional importance, especially if that involves a questionable number with little emotional (or for that matter, any) significance.

Developing effective nudges takes thought and insight, and the only criterion for success is whether they affect people’s behaviour. On that criterion, the mobiscore is likely to be a big fail.

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When in doubt… do something, or do nothing?

(credit: Esa L CC BY)

When we’re not sure, our biases guide our choices… but which ones?

Imagine you’re the goal keeper of a great football team in a championship final. The game is nearly over and your side is winning 2-1, but an unfortunate foul by one of your team mates in final minute of injury time means you’re facing a penalty kick. Stop it, and you will be the hero of the match, let it in, and thanks to you it’s extra time, and possibly defeat. What is your plan – dive left, dive right… or stay put?

Penalty kicks take place at the boundary of human reaction time. The player needs to decide where to place the ball before the goalkeeper moves, and the keeper needs to choose what to do before the ball is actually kicked. If you did like most goalkeepers do, you’d go for one of the two sides. Unfortunately about 1/3 of penalty kicks are placed in the centre of the goal, as a study by Michael Bar Eli, a psychologist at Ben Gurion University, and colleagues found. They analysed 286 penalty kicks from top league and championships by watching footage of the matches (research can be really hard!), and worked out that 29% of them were kicked in the centre, 32% to the left, and 39% to the right. However, the goalie jumped left 49% of the time, right 45% of the time, and stayed in the centre just 6% of the time.

“Something must be done”… or must it?

Why this tendency to jump, rather than stay put if that would increase their chance of stopping the ball? It is called action bias. People sometimes tend to “do something”, perhaps because if they didn’t, and the outcome was bad, they’d be blamed or they’d regret it. When they take action, at least they can say they tried. This is a phenomenon we can see not just in sports, but also in policy-making and organization management. “Something must be done, this is something, so let’s do it”, with little regard to the actual effectiveness of our action.

Sometimes, that is.  At other times, people seem to prefer to do nothing. An example that springs to mind is the controversy around vaccination. A rather alarming finding of a survey by the Wellcome Trust published last Wednesday is that, in all of Western Europe, 22% of respondents disagree or strongly disagree that vaccines are safe. In France, in particular, 1 in 3 people disagree that vaccines are safe. Not surprisingly, France is experiencing a significant rise in the incidence of measles, as parents decide not to have their children vaccinated.

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Lack of trust, lack of action (source: Wellcome Global Monitor 2018)

Just like with the penalty kick, a decision needs to be made regarding an uncertain future, but here some people seem chose inaction, rather than action. Perhaps this is because the result of ‘doing something’ can be – at least in the perception of the decision-maker – be much more severe than losing the championship. Or is there more to it?

This brings to mind the classic philosophical thought experiment of the Trolley Problem. Faced with a runaway trolley heading for a section of track where there are five workers about to be killed, would you flick a switch to divert it to a siding where only one worker will be killed? About 9 in 10 people would do so. However, if the method for saving five lives by sacrificing one is not flicking a switch, but throwing a fat person on the track, far fewer people would take this course of action. We treat situations in which people suffer because we didn’t do anything different from situations where they do as a direct result of something we did – even though both involved a deliberate decision.

But what the Trolley Problem (in its canonical form at least – there are numerous variants out there) does not reflect is the uncertainty of decisions like the goalkeeper’s or the parent’s: they don’t know exactly the outcome of if they do, or don’t, take action. It is not knowing for sure what the consequence of our action will be that makes the decision so much harder.

We can see this also in the reluctance of some women to opt for Hormone Replacement Therapy (HRT) to counteract the effects of the menopause. For many women, these can seriously reduce the quality of life: loss of libido, painful intercourse, bone loss and increased likelihood of fractures, weight gain, joint pain and more. HRT can be very effective at reducing these symptoms, but in 2002 it was found to be associated with an increase in the risk of breast cancer. A woman undergoing HRT for 5-9 years between the ages of 50 and 59 is about 4 times more likely to develop breast cancer than a woman who doesn’t. That is, however, from a low baseline: the risk goes from about 2% to about 8%. On the other hand, a higher weight (one of the effects of the menopause) is also associated with an elevated risk of breast cancer.

Two cognitive biases

Since the revelation, 17 years ago, that HRT could lead to breast cancer, many women have stopped using it (or decide not to start using it), despite the significant improvements in life quality and health benefits it can offer. This is difficult trade-off to make, and two cognitive biases interfere with our ability to serenely reason about it: loss aversion and ambiguity aversion.

Loss aversion describes how we experience a loss as more intense than we experience a gain of similar magnitude. Ambiguity aversion is our tendency to avoid situations where the probabilities are unknown. As an example, consider the following choice: you can draw a ball from one of two urns in front of you, and if it is white, you win. One urn contains 50 black and 50 white balls, the other contains 100 balls, black or white, but you don’t know how many of each. If you prefer to draw from the first urn, you exhibit ambiguity aversion.

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Uncertainty either way… get the jab, or don’t get the jab? (image: Victoria Borodinova)

It is of course not easy to compare the experienced ‘loss’ of developing breast cancer with the ‘gain’ of reducing or eliminating the detrimental menopause symptoms, but the prospect of the former can loom large in our perception of the choice. Together with an aversion to ambiguity, this can tilt the uncertainty balance: we don’t really now how bad the menopause symptoms would be, and perhaps we can learn to live with them. On the other hand, we may not know that we will develop cancer, but we know (“for certain”) that it is possible. And suddenly, the choice becomes clearer.

A similar thought process could explain the choice of a parent not have their children vaccinated: measles is still a relatively rare disease, and if one is convinced that vaccines can cause autism in children, that settles the decision too. In both situations, a prior belief that HRT and vaccines are “unnatural”, and that Big Pharma and governments are in cahoots, may reinforce the chosen course of (in)action – such unambiguous beliefs are powerful arguments when one is ambiguity averse.

Of course, our decision in situations like these depend crucially on our perception and indeed our prior beliefs. We could construct similar arguments in favour of vaccination and HRT. There may as yet be unknown detrimental side effects to vaccines (high ambiguity), but we know they are effective against a serious disease (low ambiguity). We don’t know whether we will develop breast cancer as a result of HRT (high ambiguity), but we do know it will vastly improve the quality of our post-menopausal life (low ambiguity). And if we trust scientists and the robustness of their scientific methods that produce the insights we use, that too will reinforce our choice.

When we cannot (or will not) use reasoned deliberation to evaluate the options before us, we rely on more simplistic shortcuts. Unfortunately, we are a bundle of contradictions, and depending on how we look at the world, we may opt for action, or for inaction. Neither guarantees us the correct solution.

Thankfully, alongside our contradictory tendencies, we possess another powerful capacity: hindsight bias, or the conviction after the event that we chose to do the right thing – even if it was to do nothing.

Posted in Behavioural economics, Cognitive biases and fallacies, Philosophy, Society | Tagged , | Leave a comment

Behavioural economics’ bone of contention

(credit: Michael Warmby CC BY)

Should we avoid using heuristics, or instead prefer them over ‘rational’ methods?

 

Behavioural economics is the branch of the dismal science that is concerned with how real people behave in a way that deviates from the neoclassical assumptions of the so-called homo economicus. Not surprisingly, over the years it has on occasion run into conflicts with its neoclassical relative, although more recently the antagonism seems to have been turning into a rapprochement between the two sides. But that is not the only area of tension in which behavioural economics is involved.

In another argument we find, in the opponent’s corner, Gerd Gigerenzer, a German psychologist (as well as an accomplished banjo player). Throughout most of his career, he has been studying decision-making under uncertainty, and he is a long-standing critic of behavioural economics, or at least of some of it.

Gigerenzer is a vocal advocate of the use of heuristics in preference to conventional analytical and probabilistic calculations. He argues that simple rules of thumb are often (and demonstrably) a more parsimonious way of making ‘good enough’ decisions, and it is this that set (and kept) him on a collision course with, in particular, Daniel Kahneman and Amos Tversky (two pioneers in behavioural economics). But what are heuristics really, and why are they so controversial?

Less is more

The Encyclopaedia Britannica defines a problem-solving heuristic as “an informal, intuitive, speculative procedure that leads to a solution in some cases but not in others.” They are “cognitive shortcuts”, simple mechanisms that transform a given input to an output, without the baggage of a raft of additional data, or complicated calculations. They enable us quickly, and with modest effort, to find an answer or a solution that is most likely good enough. Heuristics are a key instrument in what Nobel laureate and polymath Herbert Simon called satisficing.

A powerful example Gigerenzer often refers to is the gaze heuristic for catching a ball. Most people are perfectly capable of performing this feat, despite the fact that it would, in principle, require simultaneously solving a quadratic equation and a linear equation – the trajectory of the ball, and that of the catcher (assuming a constant speed). This is obviously not what we do in practice. Instead, we look at the ball in the air, and try to keep the angle at which we see it constant. If it reduces, we must speed up, and if it increases, we have to slow down. Just picture it (and if that doesn’t convince you, dogs do the same, and they definitely do not solve quadratic equations).

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Simple heuristics outperform more complex, fine-tuned models (source: BE Guide 2016)

Gigerenzer cites numerous other examples of heuristics with more economic relevance. In his introduction to the 2016 Behavioral Economics Guide, he refers to the hiatus rule, used in the airline industry to distinguish active from inactive customers: If a customer has not made a purchase for nine months or longer, classify him/her as inactive, otherwise as active. Can this rule of thumb, using a single variable, outperform sophisticated probabilistic calculations, which use lots of salient user data (the total value purchased, the number of items bought, the number of orders placed, their gender and age, their postcode and so on)?

 

Yes, it seems: a 2008 study by Markus Wübben and Florian von Wangenheim at the Munich Business School compared the performance of a complex prediction model and that of the hiatus rule in three contexts: airlines, fashion, and CDs (back then more common than now). They found that, for CDs, both methods performed equally well (at 77% accuracy), but for the airline and fashion businesses, the heuristic outperformed the mode; (77% vs 74%, and 83% vs 75% respectively. Less (effort) is indeed more (accuracy), it seems.

Two kinds of logic

I doubt many behavioural economists would dispute this, though, and this is not really where the main bone of contention lies. For that, we need to turn to a classic Tversky and Kahneman paper from 1983, featuring a hypothetical young woman named Linda. The participants were given some facts about her (“She is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.”) They then had to rank particular statements about Linda according to the degree she fit the profile, including the following:

  • Linda is active in the feminist movement.
  • Linda is a bank teller.
  • Linda is a bank teller and is active in the feminist movement.

The purpose of the experiment was to see how people use initial information as a heuristic to predict other facts. 85% of participants thought Linda fit the feminist profile the best, followed by the more specific category of feminist bank tellers. But they also judged that she was more likely to be a feminist bank teller than just a bank teller.

This is illogical (the cognitive error is known as the conjunction fallacy). It is like saying that it is more likely that I drive a red Ferrari, than that I drive a Ferrari.

Linda

But is it more likely she is also a feminist?

Not so fast, say Gerd Gigerenzer and his then student Ralph Hertwig, in a paper from 1999. It all depends on the context. When people think about probability, they do not necessarily do so in a mathematical sense. Everyday communication uses different standards, including something called the relevance maxim: the person speaking is giving clear and relevant information, and avoids obscurity and ambiguity. In this case: if a person specifically asks about the conjunction, it is not illogical to assume there is a good reason – namely that it is more likely that Linda is a feminist bank teller.

Does Gigerenzer have a point? I am inclined to say so, but then so have Tversky and Kahneman. Presented with the three statements in isolation, few people would fall for the conjunction fallacy and think it is more likely that Linda is a feminist bank teller than just a bank teller. It is the information given upfront, used as a heuristic, which can mislead.

My impression is that the ongoing debate between the Gigerenzer and the Kahneman camps (Tversky died in 1996) is kept alive by purist positions and straw men. Heuristics can backfire, if we use them where or when they don’t apply, and they can be a very useful instrument to quickly find a good enough (or even a superior) solution to a problem.

Keeping our heuristics to ourselves

We should certainly disabuse ourselves of the idea that heuristics are inherently bad. We use them all the time, from making sure we wear decent clothes on days we go into the office, to predicting that drivers of certain German cars will not use their indicators.

It is even tempting to outsource heuristic problem solving to automated tools, especially if the execution is effortful or difficult. Satellite navigation is a good example. It does exactly what we used to do ourselves when we ask it for the quickest route from A to B: it anticipates that we will, on average, make faster progress on main roads than on back streets, and even more so on motorways. It only does it much faster and more comprehensive than we can. But is the motorway always the best route?

Rory Sutherland makes a splendid counterargument. On the way home from the airport, he is happy to follow the satnav’s advice and take the motorway. On the way out however, when there is a plane to catch, the expected travel time may well be shorter via the fastest route, but if there is a major incident on the motorway you end up stuck, with no escape. So, on the way to the airport, Rory ignores the satnav’s recommendation and takes the A-road. His average speed may be lower, but the variance is smaller when taking the scenic route, because in case of congestion he can use the backroads to avoid the hold-up. Such sophisticated heuristics come naturally to us humans, but are beyond simplistic heuristic automation.

Amy Webb, a professor at NYU Stern School of Business and a quantitative futurist, was recently a guest on the Econtalk podcast, and she raised another, altogether more sinister risk of outsourcing heuristics to devices and systems. Amazon, in its relentless drive to automate the shit out of our homes, has introduced a $60 microwave oven, equipped with its Alexa voice recognition software. Sounds crazy – who needs a microwave you can speak to? Lazy Americans can’t even push the buttons to pop their popcorn, right?

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“I’m sorry, I’m afraid I can’t pop that” (source: Amazon)

But she points at Amazon’s true intent: selling us stuff, including popcorn. Our own heuristic for purchasing this delicacy is to look at the shelf in the pantry, and if the space devoted to it is (nearly) empty, we put popcorn on the shopping list – unless we forget. No longer, though: thanks to this amazing microwave oven, Amazon can know exactly when we are about to run out of popcorn, and make sure we have enough popcorn at all times.

 

But wait: Amazon can know much more about us. It can check our smartwatch to see how much exercise we’ve been doing, and it can work out how much popcorn we’ve been eating lately. And our fancy microwave may well judge that now is not the time to have more popcorn, and refuse to do the popping, in true I’m sorry, Dave, I’m afraid I can’t do that fashion.

The heuristics we use are imperfect. We cannot possibly work out ourselves what the expected travel time is to the airport, and we overlook the fact that we binged on popcorn the day before yesterday, and we forget to buy some. But they are also sophisticated. We are not only interested in the estimated travel time, but we also want to catch our plane. And when we remain in control and can override, if we wish.

Let’s keep on using heuristics, and refine them as we go along. Let’s understand better how they work, and more importantly when and where they work. But let us not outsource our own heuristic decision-making completely to supposedly intelligent systems that fail to recognize the complexity of what we really need, or that purport to know better than we do what is good for us.

Yes, sometimes we make the wrong call with our heuristics, but it is our call.

 

 

 

 

 

 

 

 

 

 

 

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An (accidental) behavioural economist takes a break

A collection of vignettes illustrating the quirky (but not necessarily irrational) behaviour and decision-making of us human beings (primarily the author’s)

Taking some time off work changes one’s focus and perspective, but some thought processes just keep on running. If observing and seeking to understand human behaviour is your stock in trade, a holiday can be a rich seam of interesting and intriguing sightings. Here this spring’s collection.

Our destination was Cornwall this time, a stone’s throw from the southwestern extremity of mainland UK, Land’s End. That is a long drive from the Midlands where we live, and we were hoping to leave quite early so we would get there in good time to unload the car and get our provisions without needing to hurry.

But there was an unexpected fly in the ointment. The day before our departure, my phone battery had died (it had been walking on its last legs for a good while, but you know how it goes – there is never a good time to have it replaced). Among the worst possible times, though, is surely the morning you want to leave on time for a six-hour drive. Overnight on the charger, the battery appeared to have come to life again, but could it be trusted? I had a choice to make: leave later so I could get it changed, or leave on schedule but risk a week with a phone that didn’t hold its charge and that might actually die. Hmm…

Two utilities

Many people, including yours truly, can get a bit stressed about leaving later than planned. Understandable when you risk missing a train or a plane, but is it really that big an issue when it is just a drive to one’s final destination? Delaying our departure certainly felt very immediate and salient, while the potential problem of a failing phone felt remote and uncertain.

It reminded me of a paper by Adam Oliver, a behavioural economist at the London School of Economics, in which he contrasts remembered utility (how we recall it after the event) with decision utility (how we anticipate it at the point of decision). How did the utility of leaving on time (and arriving on time) compare with that of having a new battery in my phone? The decision utility didn’t help much: how on earth do you choose between arriving on schedule with possibly an unreliable phone, and arriving late but having your phone fixed? Remembered utility, however, was much more promising: what would leave me with the best memory – being without a phone for a week, or arriving a couple of hours late? This was a no brainer – thanks, Adam! So that morning, all relaxed, I popped over to the phone repair shop and got the battery fixed. We left a good hour later than foreseen, and because we got stuck in the rush hour late in the afternoon, got to our destination nearly two hours later than scheduled, but by the time we’d finished our dinner, our tardy arrival was completely forgotten.

The social domain and the commercial domain

As we entered the cottage, we found a bottle of wine waiting for us on the table – a nice touch, and just what we needed after a long journey. This is a typical example of the distinction between transactions in the commercial domain and in the social domain: renting the cottage was a commercial transaction, but the gift of the wine was a social one.

wine on table

Who paid for this wine? (image: Jo Zimny)

The accidental economist in me, however, wasn’t quite on vacation yet, and couldn’t help thinking about the utility equation once again. Did this arrangement maximize the utility for us and for the owners? Let’s look at the alternative. Say it was a £10 bottle: if the landlords had charged us £10 less and not left us the wine, we would both economically be no worse or better off. But we would have missed out on the social utility of receiving an unexpected gift (and the landlords potentially also on the corresponding warm glow). Moreover, by leaving us the wine, the owners had bought themselves a tiny bit of goodwill – it increased, by some small amount, the chance we would return to the same cottage in the future. So: thumbs up for the ‘free’ wine.

But wait: who actually paid for it? Was it not bought with our money and therefore part of the commercial transaction? Not really. Once we had paid the rent, it had become the owners’ money, and it was their choice what to do with it. The wine was well and truly their gift to us.

Too much choice

The paradox of choice, a phrase first coined by psychologist Barry Schwartz, describes the phenomenon which makes us decide not to make a purchase if the number of options gets too large. The classic example is that of the promotional jam stand in a supermarket where less jam was sold when there were 24 on offer than when there were just six (I wrote about it here).

I experienced a rather more extreme version on our holiday. We had been contemplating taking advantage of a big, county-wide event where hundreds of Cornwall-based artists opened their studio in the week we were there, and buy a painting of a seascape. After visiting a few studios, and browsing through the illustrated booklet with dozens more, however, I noticed I was no longer interested in seascapes at all. It was not just that I felt unable to choose among so many paintings. Seeing such multitudes (and imagining hundreds more) made me realize there was nothing special about boring seascapes. (Thankfully I have not yet been put off jam for life, simply because of the choice in the supermarket…)

The inexpensive experience

Experimental evidence suggests that wine tastes better if we are told it is more expensive, and the research of experimental psychologist and gastrophysicist Charles Spence at Oxford University suggests that the ‘theatricals’ around a meal – the surroundings, the noise, and the quality of cutlery and crockery are rather significant in our perception of value. So I was interested to see what kind of experience the ‘cosy, casual’, moderately priced  Mackerel Sky seafood bar in Newlyn would be like.

mackerel sky

Cosy and casual (image: Mackerel Sky)

To say that it is not a posh place would be an understatement. It is tiny (seating just 18 indoors), guests sit on old chairs and share tables, the kitchen area is barely separated from the dining area, and the toilet is in a building next door. Yet it was bustling, with three cooks and five servers keeping up with the guests’ orders, when we got there just after six on a Wednesday evening.

Did the decidedly downmarket surroundings detract from our experience? Au contraire. Clearly, it’s not the place to go when you want lengthy breaks between the courses to engage in meandering conversation with your companion. But the food was great, and I could not imagine my smoked mackerel pâté with apple jelly tasting any better served on a genuine Royal Doulton plate, eaten with a silver fork and with wine from a crystal goblet. Clearly context matters, and in this case at least, the basic surroundings added to the experience, rather than diminishing it. Not surprising, really, that it is in the top echelon (#34) of Tripadvisors’ ranking of more than 1,200 Cornish restaurants.

Given the high demand, they don’t want people to linger for too long, of course. The menu revealed an interesting little nudge to ensure people leave when they are done eating: there is no tea or coffee available. Clever.

Anchored weather

If you hope to spend your days walking, the weather is an important factor in how enjoyable a break turns out to be. In our case, the forecast for the week had been less than encouraging: with the exception of the first day, temperatures would barely exceed 15C, and we would get rain at least half of the time. So, we had come prepared: physically by bringing appropriate clothing and footwear, and mentally by adjusting our expectations – if the weather turned out as bad as predicted, at least it would be no worse than we had anticipated.

But as the days came and went, the weather remained mostly dry and sunny, save for the odd short shower and half a day’s rain. Had we been expecting normal late May weather, we would have been disappointed, but now it turned out altogether a more positive experience.

This can be seen as an example of anchoring **. Often this concept refers to prices – a jacket costing £80 seems a lot less expensive if you are told its original price was £150, or if you see that the most expensive jacket in the store costs £200. But as we see it can also apply to things that are not so easy to quantify. Had the forecast been more optimistic, the exact same weather might have left us with a much more miserable adventure.

But as we drove home, the realization that anchoring our expectations to a pessimistic forecast had turned our break into a very pleasant one was a worthy end to a week with many peaks. When you have eyes for it, behavioural economics is everywhere – even on holiday.

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Political tradeoffs

Traditional political parties depend on compromise. That is bad news for them in uncompromising times

Imagine an election in which a party that did not even exist less than two months before gains one-third of the vote, pushing not only the governing party into fifth place but also the main opposition party into third. Actually, don’t – there is no need, because this is exactly what happened in the elections for the European Parliament in the UK. These elections were not even supposed to take place, since the country should have left the EU on 29th March. Yet they did happen, and they may well have changed the British political landscape for years to come.

The European elections in the UK have traditionally been a very low-key affair. Neither the voters nor the media used to pay all that much attention to it. Turnout has always been much lower (never more than about 38%) than that of general parliamentary elections (typically 60% -70% in recent times). Even the main political parties were at best lukewarm about it. For the British, politics was a matter for Westminster, not Brussels or Strasbourg.

Not so this time. Weeks before election day, the polls spelled disaster for the governing Conservatives and, remarkably, also for the Labour opposition, and predicted victory for Nigel Farage’s Brexit party. And the forecasts were right this time. The Brexit party picked up nearly all the votes UKIP, Mr Farage’s former home, got in 2014 and took a good chunk out of the score of the two main parties. Labour and the Conservative Tories, which collectively received nearly half of the votes in 2014 now did not even get close to 25%. All because of Brexit.

But why has Brexit hacked so relentlessly into the support of the two traditional parties?

Voters (not) trading off

One possible explanation can be found by looking at the trade-offs that politicians and voters face. For politics, and particularly party politics, is inherently a mechanism for facilitating and enforcing trade-offs between conflicting policy options. Few voters concur fully with every single point in a party manifesto. They may agree strongly with some of them, and more weakly with others. They are probably indifferent about others still, and quite likely there is yet another subset of the manifesto components with which they disagree. Voters would weigh them all up, and give their support to the party where the overall net balance of agreement and disagreement with its various policy choices is the highest.

Or at least, that is what voters who properly reason about how to vote would do. In reality, our behaviour does not necessarily mean we have thoroughly considered all the trade-offs, and that applies to voting too. Many voters are barely aware of a small fraction of a party’s manifesto, let alone the whole shooting match.

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Every vote is a trade-off… or is it? (photo: Element5 Digital)

Perhaps more even than a party’s policies, it is its general philosophy that appeals to (or repels) voters. Traditional parties tend to be shaped around a more or less coherent set of values, from which their policies follow. Voters whose own values resonate with those of a party will be inclined towards it – even if there are some policy points with which they disagree. There are inherent and inevitable compromises across a party’s policies, but its values act as a softener, a reassurance, and indeed as a glue to keep the community of supporters together, and behind the party.

Developing workable compromises is not an easy task for large parties, of course. Pledging more money for child care may please parents with young families. But that could dismay older voters with a more traditional view of the family, who believe young mothers should stay at home and more money should go to pensioners. The larger a party, the more such trade-offs must be navigated, but as long as the overarching values it projects chime with its grassroots, the circle can be squared.

Just one issue: easy-peasy!

Smaller parties, in contrast, do not face this challenge to the same degree. Their base is more homogenous, and the policy options based on their professed value set are less likely to conflict with each other. That applies even more strongly to single-issue parties like the Brexit party. Their simple and uncompromising message (some might even say it is simplistic) appeals to voters who, for whatever reason, are not interested in making tough, complex trade-offs.

Such single-issue parties often play to voters’ discontent with the traditional parties, emphasizing how their policies misalign with the people’s wishes. Ordinarily, this may not gain much traction, but when there is a big, hairy, polarizing issue that does easily sit with the other political parties’ values, things change. Brexit is just such an issue.

Sure, the rhetoric of Prime Minister Theresa May (“Brexit means Brexit”, and “No deal is better than a bad deal”) suggests an unequivocal approach to Brexit. But for all that, quite a few Tory MPs do not support an uncompromising no-deal approach. Even now, some Brexit-supporting candidates to succeed Mrs May are talking about the “political suicideno deal would mean. Labour has a different, but altogether similar problem of internal tension: the strongly Leave voting, but traditionally Labour supporting, constituencies in the old industrial North of the country make it hard for them to support a soft Brexit or a second referendum.

Both traditional parties have, for the last few years, been trying to triangulate where the electorate is going – effectively, they have been following, rather than leading. But trying to follow a deeply divided electorate ends, as we see now, in tears. Moreover, the lack of clear, persuasive leadership leaves the stage wide open for demagogues who are not concerned with seeking the compromises that governing a country requires. Because these now set the agenda, the large parties find themselves ever more internally conflicted – tragically so.

Trade-offs and compromise, no more

The demagoguery also fuels the changing attitude among the voters. Most people used to align with a broad political family based on values, as long as its policies were broadly in line with their wishes. They inherently bought into the trade-offs and compromises that a large party embodies. Now, a growing section of the electorate is no longer content to accept these trade-offs and compromises. Instead of thinking “I don’t particularly like it, but I can live with it”, they now see policy points in a binary fashion: they are either unacceptable or unacceptable. They seek a purity that is unrealistic, but that appears to be on offer from single-issue parties. Shades of grey do not have a place in this discourse: dissenters are traitors and saboteurs.

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The end of ‘strong and stable leadership’, when it all started falling apart (image via youtube)

The leaders of the traditional parties are reduced to trying to stop the haemorrhaging of voters to the upstarts. David Cameron’s main motivation for calling the Brexit referendum was the poor performance of the Conservatives in the 2014 European elections (they dropped from first to third position, with UKIP gaining 10 points giving them 27% of the vote, which made it the largest party). Now Labour too is trying to hang on to their pro-Brexit supporters in North England.

Unfortunately, the time for compromising was after the referendum, not three years later. There is no majority in parliament for any of the three available options: the deal Theresa May agreed with the EU, a no deal Brexit, and the revocation of Article 50 (which would mean remain in the EU). Most opinion polls show the same applies to the country as a whole. And it is hard to see how a compromise can be found between these options.

Weak or uncompromising leadership is not the way out of this. Theresa May started out uncompromising (talking tough about the three red lines) and ended weak (with three successive, spectacular defeats), and we know where that got us. The ongoing equivocation of Labour leader Jeremy Corbyn is just as problematic. In a few weeks we will know who will succeed Mrs May, and we will see whether this new leader is both strong and willing to compromise. And perhaps changes are afoot in the Labour party too.

That will be needed to repair British politics, and save it from those who pretend that compromising and trade-offs are no longer required. Politics is the art of the possible, Otto von Bismarck said. That requires politicians and citizens alike to be able to recognize, confront and make the trade-offs that are inevitable.

 

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