An unruly pair

(featured image: OGL/Wikimedia)

Rules, can’t live with them, can’t live without them. But if it’s rules for thee but not for me, then trouble awaits

Here is an easy riddle: what do Novak Djokovic and Boris Johnson have in common? They are both experiencing some trouble with rules. The world no. 1 male tennis player, intent on defending his Australian Open title, has been experiencing a few problems trying to enter the country, related to its COVID-19 immigration rules. The British premier has been attending a gathering in the garden of his official residence at 10, Downing Street in May 2020, when the country was in lockdown and such an event was in breach of the government’s own COVID rules.

Rules are a peculiar phenomenon. We may not be aware of them all the time, but they lurk in vast numbers just below the surface of our day-to-day business. Some rules are descriptive, capturing an equivalence or a correlation between observations (e.g., the doorbell sounds) and their significance (there is someone at the door). This helps us simplify the world around us, and make decisions without much cogitation. For example, when we hear the bell, we may want to go and open the door (or at least check whether it is a visitor we want to welcome). Likewise, the rule that, If the milk smells bad, then it is unfit for consumption can help us decide whether we should pour it in our coffee or tea, or instead in the sink.

What is, and what ought to be

Rules can also be normative: instead of describing what is, they assert what ought to be, and tell us what we must, or must not do. We can (and do) make many of such rules up for ourselves. We may have a rule that we go for a run four times a week, do the weekly shop on Saturday morning at 8am, or squeeze the toothpaste tube from the end (rather than the middle). We may also make rules that apply to ourselves and to others: if you enter this house, you must wipe your feet; if an item of clothing needs washing, you must place it in the laundry basket (and not leave it on the floor); if you put the cutlery in the drawer, the forks go on the left, and the spoons on the right, and so on.

[Dirty washing in the basket (and not on the floor) – a normative rule (photo: Annie Spratt/Unsplash)

Beyond our house – in our town, country or even on our planet – there are plenty of normative rules too. It is hard to see how a social, cooperative species could exist and persist without them. We need norms telling us that we must drive on the agreed side of the road and stop for red traffic lights; we need norms telling us that we cannot enter other people’s property without their consent; and we need norms telling us that we must not smoke our talk loudly in the cinema.

Like descriptive rules, normative rules help us decide more easily: both relieve us from some of the burdens involved. But there are important, fundamental even, distinctions. Descriptive rules inform us so that we do not need to collect lots of evidence, while still leaving the eventual trade-offs to us.  Normative rules, in contrast, instruct us. They tell us what to do, or what to refrain from, so that we do not have to weigh up options and make trade-offs. Any trade-offs are built in to the normative rule. In addition, they are intended to avoid arbitrariness. Are they therefore always a good thing? (You guessed it.)

When good rules go bad

Sometimes, normative rules have solid, logical roots. An example is the allocation of landing slots at airports. If airlines want to keep their landing rights at an airport, they must use 80% of their slots on a yearly basis, otherwise they need to give them up. That makes sense, especially because landing slots are scarce (and hence very valuable: American Airlines paid $60 million for two slots from SAS in 2015). With the drop in demand for air travel resulting from the COVID-19 pandemic, fewer flights are needed, but if airlines simply cancelled unnecessary flights, they would lose the corresponding landing rights. So, Lufthansa intends to operate no less than 18,000 “ghost flights” without passengers, in order to retain their slots. So, one problem with normative rules is that, once they are established, they impose a rigidity which may lead to less-than-ideal outcomes.

Infections in ample supply (image: ourworldindata.org)]

In a way, Mr Djokovic’s adventure down under occupies a similar context. As the highly contagious omicron COVID-19 variant emerged, Australia had imposed stringent immigration rules in order to keep it out. Since then, however, Australia is among the countries with the highest number of new infections per day (nearly 4,000 per million), and we also know that even people who have received three doses of vaccine are still susceptible to become infected. The risk that Mr. Djokovic – or anyone who has in the past tested positive, vaccinated or not – poses is, well, negligible in present-day Oz. Nonetheless, the Australian Border Force decided he did not meet the rules for a visa (a decision which has since been overturned by a judge, though the Australian minister of immigration, Alex Hawke has since retracted the visa again, ironically by using his discretionary power to overrule the judgement). Did they apply the rules incorrectly, and if so, why? The transcript of Djokovic’s interrogation is inconclusive. In any case, the shenanigans in Australia suggest a second problem with normative rules: they can be invoked for motives that have nothing to do with their original purpose.

They can facilitate decision making, but perhaps the biggest issue with normative rules is that this is neither the only purpose, nor the only effect they have. And this is where we find Mr. Johnson’s predicament. He not only conceded that a “socially distanced drinks” party took place in the gardens on 10 Downing Street when the country was in a severe lockdown, but also that he actually spent time mingling with around 40 others. In doing so, he (and the others) unequivocally violated the rules his government itself had set. (It turns out this was not the only party in the grounds of the residence during lockdown.)

Power can backfire

Normative rules can be, in part, a power game: whoever sets the rules dictates what others must, and must not do. (In a limited sense, we have that power at work and at home, but a prime minister is of course in a superb position to enjoy this particular privilege at scale.) If such rules do not conflict with our preferences, we might not mind them very much, but in the opposite case, we might well resist, and seek to circumvent, them. Naturally, the creator of a rule is exceptionally well placed to exploit such opportunities: he or she can authoritatively interpret it to their specific advantage. Even for the rules we set ourselves (snack less, exercise every day, watch less TV and read more) we can be quite resourceful in justifying violations. In that respect, the attempts of Mr Johnson to claim that he thought the drinks party was a work event are at least understandable.

A garden party that is still the talk of the town two years later! (photo: Marvin Meyer/Unsplash)

But when a PM violates rules while ordinary citizens get penalized for doing so (more than 800 fines were handed out to people accused of breaking coronavirus rules in the week of the garden party), there is inevitable damage. A normative rule may be supported by sanctions, but it almost always relies on a willingness to comply with it voluntarily, even from those who disagree with it. If that willingness is lost, the rule is dead. Worse still, the authority of the rule creator risks being destroyed – the calls for Mr Johnson to resign from within his own party are a clear demonstration.

Might we be better off without normative rules, and instead adopt a radical consequentialism: for every decision, systematically consider the options, their costs and benefits, and the second-order consequences? As someone who leans heavily towards consequentialism, who tends to take a dim view of too many rules, it pains me to say that I fear this won’t work.  Rules are at the core of the way we make decisions.

But what we can do is to confront rules and ask the tough questions. Do they have a clear purpose? What is the evidence that they will deliver it? What are the costs and the unintended consequences? Have the trade-offs been properly considered? Arguably it is our moral duty to challenge rule makers if the answers to these questions are unsatisfactory – and our moral right to choose to ignore rules that fail these tests.

Posted in Behavioural economics, Ethics, Morality, Psychology, Society | Tagged | Leave a comment

Viral decisions

Featured image: Laura Billings/Flickr CC BY-NC 2.0

The extreme conditions a pandemic puts us in shines a stark light on the fundamental challenges of decision making – both at a personal level, and in policy making

Imagine being asked not to call an ambulance, but to make your own way to the hospital, except in life-threatening situations. That is precisely the advice that Britain’s North East Ambulance Service has been giving people in the area it serves. Wait a moment, you might think, am I not entitled to an ambulance when I have broken my arm, or have a suspected concussion? Is that not why I am paying my taxes, for goodness’ sake?

Scarce resources force trade-offs

The ambulance service is under pressure because the highly contagious omicron variant of the SARS-CoV-2 virus has made many paramedics ill with COVID-19 (and forced many more into self-isolation because they were a close contact of someone who was ill). The result is that ambulances have become a scarce resource: there are not enough to go round.

Ideally, the available ones should first of all be going to patients whose life is on the line, but that decision is the patient’s to make. An emergency call operator can ask questions, but the caller can choose to exaggerate the condition in order to secure a ride with blues and twos. Doing so, however, might very well deprive someone who is in greater need of a life-saving service.

Situations like these embody a conflict between our own self-interest, and that of our fellow citizens – arguably even between self-interest and moral values: is it morally right to place our comfort and the avoidance of a financial loss (the cost of a taxi to the hospital) above the idea that those with the greatest, most acute need should have priority access to scarce healthcare resources?

Only for life-threatening situations, you know! (photo: Bert Knottenbeld/Flickr CC BY-SA 2.0)

Many hospitals – in the UK and elsewhere – have also decided to halt “non-urgent” interventions because of staff shortages and an increase in COVID-19 patients. This might engender a level of indignation similar to the outrage of someone who is asked not to call an ambulance: the feeling of being denied an entitlement. Such perceptions of entitlement are misleading, though. They create an illusion of unconditionally and unlimited availability of resources, and conceal the fundamental trade-offs from us.

But the trade-offs are real. That is why the decision to pause non-urgent hospital interventions when the availability of vital resources is restricted (whether because of a virus or for any reason) is, in fact, objectively a good one. Considering such situations in advance makes it possible to evaluate the available options, and establish appropriate priorities. In this case, defining what is, and is not an “urgent” intervention allows decision makers to plan how supply constraints will be handled in the best possible way. It enables for a proactive change of working procedures, rather than a reactive, ad-hoc one.

The complex trade-offs of policy decision making

Hospitals are well equipped to make such decisions, because most of the parameters and the trade-offs involved are within the core competence and the experience of the decision-makers. This is much less the case for governments who decide on policy. They may be competent at weighing up the costs and benefits, the gains and losses, the pros and cons, the pluses and minuses of the various policy options, but cabinet members cannot possibly be competent and experienced in every domain that is involved in a policy. They need advice from people who are competent and have relevant experience. So, for extraordinary challenges like a pandemic, they gather specialists in panels like SAGE in the UK, or GEMS in my native country, Belgium. Here, decision making runs into several issues.

Unlike most other policy making, pandemic policy making happens largely in the public eye, with daily PowerPoint slide presentations and so on. But not everyone necessarily understands how an evidence-based policy making process works, in which policy makers request scientific evidence to inform their policy decisions. A case in point is the criticism of the modellers, who invariably come up with worst case scenarios, with hospitals that cannot cope and with innumerable deaths. Since the very beginning of the pandemic, reality has – thankfully – remained far from those doom scenarios, and that makes many doubt the competence and even the motives of the advisers.

But, as professor Graham Medley, an expert in infectious disease modelling at the London School of Hygiene and Tropical Medicine, and the member of SAGE presiding over the modelling subcommittee, says: “These scenarios are not predictions.” They describe what would happen under certain circumstances, based on the questions the policy makers ask them. Because they are not predictions, they should not be judged on whether they turn out true. If they do not, that may be because the conditions on which they are based were not true, or because mitigating actions to avoid them were successful. Yet that does not stop some people misinterpreting this process, and not just continuing to treat these modelled scenarios as predictions, but also using them as a touchstone to evaluate the policy measures.

No, scenarios are not predictions (photo: nvodicka/Pixabay)

Still, while the models are not at fault, the same cannot necessarily be said about how they are being used. It is important to realize that these models do not carry a probability. They simply provide ‘what if’ scenarios – much like “what if a plane crashed onto a nuclear power plant?”. For a policy maker, this evidence is just one piece of a jigsaw puzzle, in which other pieces are the likelihood of the scenario, the actual magnitude of the consequence, the possible mitigating actions and their effectiveness and their costs and so on – and this for every relevant scenario. To what extent are policy makers completing this puzzle? We do not really know. We hear them claim that they “follow the science”, but that is no more than a slogan that lacks in substance, used as a fig leaf to cover up a decision process that lacks in rigour and transparency – it’s easy to deflect blame and escape responsibility when one can hide behind scientific advice.

A third issue we may see is that some members of the advisory panels go beyond the boundaries of their role. That role is to provide advice in their domain of competence – to advocate, even. It is not to recommend decisions that transcend their expertise and that involve making trade-offs that are the responsibility of the policy makers. However, when these appear to have a less than robust process to do so, it can of course be tempting for advisers to fill the gap and exceed their remit. What happens then is not evidence-based, but advocacy-led policy making, in which one facet dominates the decision.

The COVID-19 pandemic lays bare the weaknesses in how people make decisions. We should take this as an invitation to do to better. We should expect the policy makers to ‘show their workings’, and be transparent about the evidence on the basis of which they decide on the measures they take. Imagine a government implementing a policy of closing all cultural venues (not even inspired by scientific advice!), that is subsequently suspended by the Council of State (the country’s highest administrative court). They might be seen as a bunch of bumbling amateurs, making it up as they go along.

But it’s not only policy makers who can do better. We can choose to judge their decisions not on the basis of whether we like them, but on whether they are the result of a sound process. And we can challenge our own tendency to cling on to perceived entitlements, and recognize the trade-offs in others’ and in our own choices.

It may be small comfort, but perhaps one good thing about this pandemic is that it may help us get a little better at an important skill.

Posted in Behavioural economics, Emotions, Ethics, Morality, politics, Psychology, Society | Tagged | Leave a comment

Our internal drivers

Featured image: <drivers.jpg> (image: HeungSoon/Pixabay)

In the face of multiple, conflicting motives, how can we make the best decisions?

The very first humans were already economists. At least, that is what we would conclude if we were to believe the Old Testament. Why? Well, while they inhabited the Garden of Eden, whatever Adam and Eve needed was available in plentiful supply. But the moment they left paradise, boom! All of a sudden, resources were scarce resources and they had to learn to make trade-offsbetween them.

Evolution, however, is generally considered a more plausible explanation than creationism for the emergence of life on our planet, and so it is for the emergence of economic behaviour. The very first unicellular organisms already had to make choices. Initially, it was just a case of getting it right – between moving towards or away from an environment, depending on whether it was nutritious or toxic, for example. But sometimes they also had to decide between preserving energy and staying put in an environment with depleting sources of food, and expending scarce energy packing up and swim off in the primordial soup, in search of a more nutritious environment. As a single-celled organism, even without have a single brain cell, they passed down their ability along the evolutionary tree through their DNA (or rather, the ones that made the right choices passed on their DNA, so that the next generation would do so too).

[Portrait of an early economic being (image: National Museum of Wales/Flickr CC BY-NC 2.0)

Making the ‘right’ choice was rewarded (those who did so survived and prospered), the ‘wrong’ choice was punished (it meant getting killed or starving). Alongside surviving and prospering, successfully procreating was rewarded with the preservation of the genetic material of individual organisms with limited life spans. Those who failed died out.

The successful ones were those that made the right choices and avoided the wrong ones. In economic terms, there was an incentive for them to do so. Managing scarce resources, making trade-offs, responding to incentives: the very first organisms were making economic decisions. The very first humans were indeed economists – because their ancestors had been all along too.

Three competing drivers

But as more complex animals, even though surviving, prospering and successfully passing on our genes remain central to the choices we make, we face many decisions in which these considerations do not, or only very peripherally, figure. But behind our complex and multifarious decisions we find just three types of drivers.

First, we are concerned with our own economic gain and loss. These are most directly linked with our basic aspirations of successfully surviving, prospering and procreating, because to do so we need material resources – food, shelter, tools and so on. Acquiring them, and avoiding losing them is important. And because we compete for scarce resources with others, our aspirations can be relative concepts – surviving longer, prospering more, and procreating more abundantly than a competitor makes us more successful than them. If we can capture more resources, there is less left for them – which in turn is also good for us.

But we are also social beings, dependent in many ways on the support of and collaboration with others. So, a second concern is our status in the eyes of our peers – are we trustworthy, helpful, generous and so on. When we have a choice between different options, we may judge that it is better to pick the one that preserves, or enhances, our reputation. Volunteering, or paying for a round at the pub, for example, can boost your position in others’ esteem.

And we are also moral beings: people typically possess an innate sense of what is right and wrong, and influences our choices – even when there is no instrumental motive of either realizing an economic gain, or safeguarding our reputation. It prevents us, for example, stealing stuff even when nobody is looking and we would be safe from suspicion, or encourages us to stop and help someone who dropped a shopping bag to collect their groceries.

These motives can be, and often are, in conflict with each other. Volunteering means a loss of time, paying a round a loss of money. Not stealing mean foregoing an economic gain, helping someone collect their belongings costs us time. Many choices we make inherently involve making a trade-off between economic, social and moral motives.

Is hoarding loo roll doing the right thing? (image: Carlos ZGZ/Flickr CC BY 2.0)

Imagine for instance that there is a shortage of toilet paper (as you well know, it has happened, and it could happen again!). You have about 10 days’ supply left at home, and you had hoped to get in some more because it might become even harder to obtain. In the supermarket, as expected, the shelf is bare. But by coincidence, you see a member of staff arriving with six packs of nine toilet rolls to put on the shelf. Others have spotted it too, but you’re the closest. You could solve your own loo roll supply problem for many weeks to come: quickly load the lot in your shopping trolley and dash to the checkout. That would be an economic gain, which may, however, come at a social cost and saddle you with reputation damage: the other shoppers (at least one of whom is an acquaintance) might see you as a vile hoarder. Perhaps it’d better to buy just the one pack – less, but still some, economic gain, and reputation intact. However, you remember that your elderly neighbours, who have difficulty walking and hence shopping, had mentioned they were nearly out of toilet paper. It would only be doing the right thing to pick up a pack for them too – but then you risk your reputation again! Or would you give up on a pack for yourself in order to safeguard it?

Which of the three drivers should get the upper hand – in this hypothetical situation, and in general?

To complicate matters further, others who wish to influence our behaviour may offer us incentives. They may be economic incentives, like our employer offering a bonus payment for working overtime or for making a big sale. They may be social incentives, such as a social media platform promising us a higher status through likes and followers if we post engaging material more frequently or, at work, the prospect of a promotion to a job with ‘senior’ in the job title if we perform well. They can even be moral incentives, like a religion’s promise of a blissful eternal life if we eschew bad behaviour and pursue a virtuous life (in accordance with its own definition). Such incentives are intended to make us alter the choice we would have made had they been absent. What are we willing to give up for an incentive?

It is up to us to weigh up the possibilities in front of us – nobody but we ourselves make the choice. But it is worth, in doing so, bearing in mind the words of the Roman emperor and great Stoic philosopher Marcus Aurelius, from Book 6 of his Meditations: “Just that you do the right thing. The rest doesn’t matter.” Whether we are pursuing economic gain, social recognition, or any combination of the two, as long as we know we are also doing the right thing, it doesn’t matter what we choose.

May all your decisions in 2022 be the right decisions. Happy New Year!

Posted in Behavioural economics, Economics, Morality, Psychology, Society | Tagged , | Leave a comment

Smiling at a deadweight loss

featured image: Matt Stratton/Flickr CC BY NC ND 2.0)

Should we be simply be giving each other cash, or are presents better after all?

28 years ago, then young-ish economist Joel Waldfogel wrote a paper, The Deadweight Loss of Christmas, in which he argued that giving gifts at Christmas (and similar holidays with gift-giving rituals) is a colossal waste of money. Recipients value the gifts they received as less than the amount the giver has spent on it, and he calculates this deadweight loss at between one-tenth and one-third of the amount spent. In the US in 1992, that corresponded with $4-$13 billion. Big if true. But is it?

Every year in December, journalists and bloggers around the world cite this paper (I actually did so myself), often to point out, and poke fun at, the crazy excesses of the holiday season. But not all economists agree with Mr. Waldfogel. In 1996, Sara Solnick and David Hemenway challenged his findings in a comment reporting on their own research, which suggests that recipients commonly value a gift higher than its price (in their case, recipients valued the gifts at 214% what the giver paid). John List and Jason Shogren looked at both studies in 1998, and did their own, more robust analysis, finding that gifts do indeed produce a welfare gain, but a somewhat more modest one, at 121-135% of the spend. A little later, economist Bradley Ruffle and behavioural scientist Orit Tykocinski explored why Waldfogel’s study finds a deadweight loss, and Solnick and Hemenway a welfare gain. They find one reason may be that the results depend considerably on how the questions are asked – subtle changes in the wording can drastically affect responses. (The debate goes on, with other economists and Waldfogel himself (re)joining the controversy, but I guess you get the picture.)

The giver’s perspective

However, all this research looks at the matter from the point of view of the recipient – the ‘demand side’ of the transaction. 25 years after Waldfogel’s original paper, economists Laura Birg and Simon Pommeranz turned the tables, and investigated how things are perceived from the giver’s perspective – the ‘supply side’. Might there be a surplus on that side, i.e., might givers themselves derive welfare from the act of giving a gift of a particular value (rather than giving the money)?

You must pay me to give cash as a gift! (image: 401(K) 2012/Flickr CC BY SA 2.0)

Their participants (all students at the university of Göttingen) were asked details about the three most important (to them) presents they were giving at Christmas 2015. This included many aspects, including who was the recipient; the type of the gift: in-kind (with quantifiable value), idealistic (without quantifiable value), gift card or cash; the price paid; how time-consuming and stressful selecting and purchasing the gift was; how suitable the gift would be; the motive for choosing the gift; and, for in-kind gifts only, how much they would have spent if they had given money instead, and how much they would need to be paid to, instead of the in-kind gift, give its value in cash.

Their survey covered 716 presents, 87% of which were in-kind gifts, 9% gift cards and 4% idealistic gifts, with just one gift of cash. The average price of the in-kind gift was €36, and givers would require an average compensation of €10 for themselves, if they had to give that amount in cash instead of the gift. In other words, giving a present worth €36 provided them with a “giver’s surplus” of €10, compared to giving the cash – an uplift of 43%. Interestingly, this welfare gain is higher for parents, siblings, and grandparents and aunts and uncles (140-161%) than for friends (134%) and partners (131%).

Even if there is a deadweight loss on the receiver’s side, this giver’s surplus may compensate it, the authors concluded.

Another study by Adelle Yang and Oleg Urminsky sheds some light onto what might contribute to this giver’s surplus – and to the receiver’s deadweight loss at the same time. Their point of departure is the observation that many recipients of gifts either return the gift, or keep it but find it unsatisfactory. Could this simply be a – potentially profound – lack of understanding of the receiver’s preference?

Affective reaction beats satisfaction

The researchers hypothesize that the giver’s motive may not, in fact, be the maximization of the recipient’s satisfaction, but of their own. The immediate affective reaction of the recipient upon receiving a gift (facial, vocal or gestural expressions of emotion) – provided it is positive! – is a source of enjoyment for the giver. But of course, what elicits the recipient’s most intense affective reaction is not necessarily what will ultimately provide them with the greatest satisfaction. So, what would a giver select as a present, faced with one option that produces a stronger affective reaction, and another one that gives the recipient more satisfaction?

The authors suggest that while a houseplant might provide more long-term satisfaction, a bouquet of flowers might prompt a smile or a squeal of delight – and provide the giver with immediate gratification. Even the anticipation of the reaction may hold enjoyment for the giver, and further stimulate the preference for the gift that generates it. So, Yang and Urminsky postulate the smile-seeking hypothesis: when a giver’s beliefs differ about what would give the recipient more overall satisfaction, and what would produce a stronger affective reaction, they’d go for the latter.

In a series of studies, they put this to the test. For example, participants were randomly assigned to the role of giver or recipient, and asked to judge gifts like (a) a pair of ordinary mugs, personalized with a couple’s wedding date and (b) a pair of award-winning ergonomic mugs, especially pleasant to hold. Both givers and receivers rated them as providing equal satisfaction, and predicted that the personalized set would elicit a stronger affective reaction. However, while recipients would prefer to receive the designer mugs, the givers would prefer to give the personalized ones.

Agreement on satisfaction and emotion, disagreement on preference (image: Yang & Urminsky)

They found similar discrepancies with Valentine gifts (e.g. a dozen roses in full bloom vs a dozen budding roses about to bloom). Interestingly, they also found that the giver’s preference for reaction-inducing gifts disappears if they expect not to be present to observe the recipient’s reaction. The final study asked participants what the most and least favourite gifts were that they had either given or received. Givers’ favourite gifts were those with the highest reaction-inducing scores and a lower satisfaction-generating score. Receiver’s favourite gifts were those with a higher satisfaction-generating score and a lower reaction-inducing score – precisely the givers’ least favourite gifts. All in all, the difference in preference between giver and recipient really matters.

So, dear reader, it appears that giving gifts is not a simple affair. If you had hoped to find in this article some clear, unambiguous guidance regarding gift-giving, I am sorry to have disappointed, and perhaps even thoroughly confused you. My gift to you, this holiday period, is the awareness that we people are complex beings, with complex motives inspiring complex decisions and behaviour. Will that give you satisfaction? Who knows – as long as it makes you smile (even a wry smile is OK!).

Happy holidays!

Posted in Behavioural economics, Economics, Emotions, Psychology | Tagged , | 6 Comments

The favourable dictator

(featured image: Jeanne darq/Flickr CC BY NC ND 2.0)

Social beings that we are, we regularly rely on favours from others, but bluntly asking is rather awkward. Are there better ways? Yes, there are!

It is hard to imagine our life without the small favours we grant to, or receive from other people. They oil the wheels of social interaction, from holding the door open for someone rushing to seek shelter from a sudden downpour, to bringing back the groceries your poorly neighbour needs when you do your weekly shop. But asking someone for a favour can feel uncomfortable. If we didn’t care what they think about us, we might come up with some Machiavellian approach that uses every behavioural trick in the book and all but eliminates their option to decline, but usually we want to maintain the relationship and not damage it with an ill-formulated request – and yet still get them to say yes.

This challenge is the subject of a paper, “Getting a Yes. An Experiment on the Power of Asking” by Lisa Bruttel, an economist at the university of Potsdam, and two colleagues. It describes a laboratory experiment in which they investigate which arguments (in a written message) are most persuasive, and what other aspects of the communication increase or decrease the chance of success. As a basis for their experiment, they chose an old favourite in economics and social science: the dictator game.

Good old benevolent dictator

In the standard version of this instrument, the first player (the dictator) receives a sum of money. The dictator can share this with the second player (the recipient, who is entirely passive throughout), in whichever way she or he wants: pass on none of the initial sum, all of it, or any fraction. At first sight, the dictator would be best off keeping all the money, yet in practice this is rarely the case.

We are a pretty generous bunch, but asking a favour is still tough (photo: Magnus Karlsson/Flickr CC BY SA 2.0)

In 2010, a meta-analysis over 616 instances of the game by Christoph Engel at the Max Planck institute found that, while 36% of the dictators gave nothing, nearly 30% gave away more than half (with more than 5% giving everything away). Overall, the mean size of the pie given up by the dictators was just over 28%. This observed generosity is quite remarkable to anyone who believes people are deep down self-interested, utility-maximizing materialists. There are several possible underlying reasons for this behaviour, from an aversion to inequality and a sense of empathy towards a fellow human being, to conformity with social norms regarding fairness, and self-image concern (we are a good, charitable person in our own eyes, and seek to act in accordance). This apparent bias towards generosity forms a kind of baseline against which the persuasiveness of the messages is evaluated.

Bruttel and her colleagues modified the game in a few ways. The recipients were instructed to write a free form message to the dictators asking them for a share of their endowment. (This was passed on to them after the first round without communication, which provided a baseline.) Furthermore, the dictators only had a binary choice: either don’t give at all, or give a fixed part of their endowment. And finally, in the latter case, the recipient would receive double the amount the dictator gave up. This reflects the welfare-improving nature of a real-life favour: the beneficiary is typically better off by more than the cost to the benefactor. The amounts were chosen such that dictator and recipient would then receive the same payoff.

Messages that count

At the end of the experiment, the messages the recipients produced were evaluated by independent judges, and given one or more labels from eight categories. Two reflected the tone: Friendly Greeting, and Humour; the others referred to the argument(s) in the message: Larger Sum (giving increases total welfare), Equity (giving makes the payoff for both players the same), Decency (appeal to fairness), Power/Responsibility (the dictator has the power and should act responsibly), Need (the recipient needs money), and Random Role (the roles had been randomly allocated). The two most frequent message categories were Equity and Decency, the two least frequent ones were Need and Random Role.

Across all the first rounds (i.e., without a message), 31% dictators shared their endowment, while on average, across the other rounds (with the messages), the percentage sharing was nearly 48%. This suggests that, on the whole, the messages did influence the dictators (it represents more than 50% increase in giving). But what makes a message more effective?

A message using humour had the largest effect on the dictator’s generosity (boosting the chance of a gift by 12 percentage points), and a smiley was also a persuasive addition (8pp). Longer messages tended to be better too (about 1pp per 10 words extra), but a spelling mistake cut the chance of a gift by 3pp. An expression of need for money also increased the chance of success by about 11pp, but dictators reported in the post-experiment survey that they tended to take a dim view of begging or attempts to induce pity.

Asking for a favour? Don’t bother saying please (photo: Haut Risque/Unsplash)

Messages that alluded to a dictator’s power (and hence their responsibility) were effective to persuade female dictators (25 pp extra), but left male dictators cold. Conversely, messages pointing out that giving increased overall welfare had no effect on female dictators, but boosted male dictators’ generosity by nearly 10 percentage points.

The remaining characteristics left all of the dictators unmoved. In contrast to what your mother used to tell you, neither a friendly greeting, or the word ‘please’ in the message had any effect on the likelihood of persuading the dictator. The same applied to appeals to equity or decency.

How (not) to ask for a favour

We can certainly draw some interesting insights from this experiment. First, the intuitions of the recipients were rather missing the mark: the two most frequent arguments (Equity and Decency) had no effect at all, while one of the least frequent ones (Need) turns out to be among the most persuasive. That is an insight worth bearing in mind in case we ever need to ask for a favour.

What the dictators do seem to appreciate is effort (longer messages, no spelling mistakes), and humour (even if it’s just a smiley). This fits well with the concept of reciprocity: someone who puts in the work and makes you smile is deserving of a good turn. Most people (including the dictators) are also responsive to people who need help (at least as long as they don’t lay it on). These findings would seem to be good hints when requesting a favour (especially in writing).

The lack of impact of a friendly greeting or the use of ‘please’ seem puzzling at first, but while they are natural in spoken context, they could come across as laboured in writing, so perhaps we should be careful with these elements. Reminders that granting a favour would reduce inequity, or be an act of fairness were quite possibly interpreted by the dictators as inappropriately demanding and laying on social pressure. We would be well advised to leave that stuff out when we need a favour from someone!

Now, might I ask you for a small favour? If you enjoyed this 1200+ word article, would you recommend it to a friend? Thanks! 🙂

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The non-non-conformity bias

(featured image: illustration from the Emperor’s New Clothes via Wikimedia)

How what we believe other people think leads to a peculiar kind of inaction

Picture the scene. A bunch of young adolescents, all dressed up, awkwardly sitting on the chairs surrounding an empty dance floor. The music – a popular song that some are silently singing along to – is loud (not too loud, of course), but nobody moves. The young people keep on eyeing each other until, eventually, a group of girls sitting together gets in a huddle and suddenly, they all jump up in sync, and start dancing. Within seconds, everyone else has joined in, and the school disco has officially started. What took them so long?

You may recognize this scene – perhaps even first hand. It is as if self-consciousness peaks around the age of 13. A teenager’s social status is a precious good that they are loth to jeopardize. Yet somehow, they do not realize that all of their friends feel exactly the same as they do. Once there is safety in numbers – as in the group of girls from the vignette – the process of populating the dance floor is primed, and soon there is no trace of the earlier paralysing hesitancy.

Talking to strangers

This kind of reluctance is not limited to teens, though. Juliana Schroeder, a psychologist at Berkeley University and her colleagues investigated a topic that, for adults – certainly for British adults (the research took place in London) – rivals the awkwardness of being the first one to get up on the dance floor at the school disco. It concerns conversations with strangers. In the paper Hello Stranger? Pleasant conversations are preceded by concerns about starting one, the researchers explore why people on the commute to or from work usually completely ignore each other. One possible reason (established in earlier research) is that people misjudge how pleasant it would be to chat to a stranger.

My mum always told me not to talk to strangers (image: Guvluck/Pexels)

This was confirmed in their first field experiment with nearly 400 participants on London commuter trains. Those in the treatment group (assigned to talk with a stranger) reported having a much more pleasant journey than those who had to sit in solitude, or (the control group) those who could do whatever they normally do during their commute.

The second field experiment explored the reason behind the general reluctance to engage in conversation with a stranger. The hypothesis was that this was because people underestimate how interested strangers would be in talking with them, rather than because they expected to have an unpleasant conversation. And indeed, the researchers found that people imagined trying to start a conversation with a stranger to be less pleasant than how they imagined actually having a conversation (for example because they thought a stranger would be less interested in talking than they themselves, that starting a conversation would be difficult, or that most strangers would simply not feel like chatting). The similarity with the school disco is striking. We do not realize that others think the same as we do – worse, we think they all think something else, and so we choose not to stand out from the norm.

Misperception at scale

This happens on a larger scale too, as two studies illustrate. A discussion paper by Peter Andre, an economist at the university of Bonn, and his colleagues, examined survey data from 8,000 US citizens around their willingness to combat climate change, and the determinants of that attitude, such as the perceived social norms, their economic preferences, and their moral values. The researchers found a high degree of misperception of the prevailing descriptive (how things are) and injunctive (how people think things should be) social norms. 67% of participants underestimated the prevalence of climate-friendly behaviour: on average, they believed that just 51% of Americans actively try to combat climate change (the actual figure was 62%). Similarly, no less than 76% underestimated how many Americans think the people of America should try to fight climate change: on average they thought that was 61%, while the true proportion was 79%.

I am doing my bit for the climate, but I am but one of the few… (image: Nicolás Boullosa/Flickr CC BY 2.0)]

But the most striking finding was that participants’ willingness to change their behaviour increased when they were given the correct figures. The underestimation of others’ willingness and engagement actually depresses the willingness take action – much like at the school disco and on commuter trains.

A second study, by Leonardo Bursztyn, an economist at the university of Chicago, and colleagues, is set in the Kingdom of Saudi Arabia, where the female labour participation is very low compared to most other countries (around 18% in 2017). Social norms largely explain this low percentage: not only are women expected to work in spaces that are segregated from those used by men, they also need the explicit approval of their ‘guardian’ (usually their husband or their father). As relatively modest but significant societal changes are slowly being introduced (e.g. the lifting of ban on women’s right to drive), the researchers explored to what extent the male guardians of the Saudi women had a correct view of their peers’ opinions regarding their wives’ participation in the job market.

Surveying 500 Saudi married men aged 18-35, the researchers found that 87% agreed that women should be allowed to work outside the home. When asked what proportion the participants themselves thought would share that belief, 70% of them underestimated it: the average estimate was just 63%. Similar to the climate change study, participants in the treatment group were then told the correct share. They could then choose between an online gift card, or a free sign-up for their wife to a job matching site. Compared to the control group, the number of men choosing the job matching service was 36% higher, driven by those who had first underestimated the support for women working (in that group, the choice for the job matching service was 57% higher). In a follow-up six months after the experiment, the wives of the men in the treatment group were also found to be more likely to have applied for a job (16% compared to 6%) and to have interviewed for a job (6% compared to 1%).

Overcoming (the consequences) of misperception

So here too, the lack of awareness of others’ attitudes depressed people’s own willingness to change their behaviour. This phenomenon is known as pluralistic ignorance: people privately hold a certain belief (getting up and dancing is nice, talking to a stranger is pleasant, combating climate change is a good thing, women should be going out to work) but incorrectly believe other people do not share that belief. It leads to a peculiar kind of status quo bias: we are reluctant to stand out, to be the non-conformist – we prefer to be a non-non-conformist. As with so much in behavioural science, this is not new – you may recognize it from the Andersen fairy tale of the Emperor’s New Clothes.

Pluralistic ignorance can be a major barrier to behaviour and norm change. However, the little boy in the folk tale who eventually pointed out what everyone believed but nobody was willing to admit hints at one way to overcome it. If the true state of affairs is communicated, people’s reluctance to adopt the new norm and act accordingly will shrink. But the girls at the school disco, too, provide a way out: a small group of brave, likeminded people may be all that is needed to kickstart a wave.

There is no reason to let pluralistic ignorance be an excuse for inaction.

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Real repugnance

Should some transactions – even between two willing parties – be forbidden?

The other day, I came across a picture from the US, showing a small sign attached to a tree announcing that someone was willing to buy diabetic test strips for cash. The sign suggests there is unmet demand for such products, and invites people who can meet that demand to do so, thus facilitating a market. But some people think this is wrong. Do they have a point?

Diabetic test strips are disposable pieces of plastic used by people with type 1 diabetes to test their blood glucose level, typically four or five times a day. Individuals with health insurance receive these free of charge, but uninsured people will need to buy them at a cost of around $0.50 each (prices in the UK and Europe are equivalent at around 40p and 45 eurocents).

This may sound like a relatively small amount, but the daily cost of $2-$2.50 is considerable for someone on a small budget without insurance. At the same time, for someone on a small budget, but with health insurance (perhaps through their employer), the opportunity to gain extra income by selling some of their strips might be appealing.

Repugnant markets and transactions

Hey presto: we have supply and we have demand, so we have a market. But it is what is called a repugnant market.

Some people think it is objectionable that individuals buy and sell this kind of medical supplies, just like they think trading in organs is objectionable, or indeed trading in horse meat for human consumption.

Repugnant markets, or more widely, repugnant transactions (they do not have to take place in an actual market) are a fascinating, complex phenomenon that Nobel laureate and economist Alvin Roth has been studying for many years.

What is so repugnant about a nice piece of horse meat? (Image via Wikimedia CC BY 2.0)

He is perhaps best known for his work around designing matching ‘markets’ for kidneys. Many people who need a kidney transplant have a spouse or a close relative who would be more than willing to give up one of theirs, but who cannot because they have incompatible blood types. Roth was instrumental in the creation of a kidney exchange, in which one non-compatible donor-recipient could be matched with another non-compatible pair, so that the donor of the one pair could donate their kidney to the recipient of the other pair, and vice versa (with chains of multiple pairs as necessary). Such an exchange was necessary because it was impossible to create an ordinary market: trading kidneys is repugnant and indeed illegal just about everywhere (except in Iran).

The very existence of such a thing as a repugnant transaction is intriguing. Why should anyone object to a free exchange between two willing parties of sound mind, if this does not inflict harm on anyone not involved – let alone find it so repugnant that it ought to be forbidden? If I have something to sell that you want to buy, and nobody outside the two of us is affected, why should this be anyone else’s business?

The complexity of repugnance regarding transactions has at least two major components. One is that it is not an invariable characteristic, but one that can vary along space and time. Slavery was once commonplace, but repugnant (and illegal now). Lending money for interest used to be repugnant (and still is under Islamic law), but is now widely practised.

The other one is that repugnance has multiple facets: it can be rooted in taste, morality, utilitarian concerns, public health, animal welfare, religion, ideology and more – often in combination. Eating horse meat is taboo in many countries, and its sale is banned in several US states, and elsewhere the consumption of pork and beef is against the tenets of some religions. Many countries prohibit, or at least regulate, prostitution, and the same applies to the sale of drugs or alcohol and to gambling, typically for reasons of morality, public safety or public health.

A reasonable trade-off?

Repugnance, in all cases, can constrain what people may buy or sell. And, like trading, that in itself implies a trade-off: prohibiting a transaction because it is deemed repugnant is welfare-reducing for both prospective parties. It is, as economists would call it, inefficient. Is that always a reasonable trade-off? Is the world a better place without these transactions?

While there is no clear-cut answer to this question, we may try to apply some broad principles when evaluating a repugnant transaction, and establish perhaps a spectrum on which they can be placed.

At one end, we may put the trade in horsemeat for human consumption. Perhaps it is objectionable for reasons of animal welfare, but that would hold little water if at the same time selling beef, pork, and lamb is fine, or it is OK to slaughter horses to produce dog food. Sure, horse lovers may find the idea of eating horsemeat distasteful, but is it really any of their business that someone else enjoys a juicy horse steak or a few slices of paardenrookvlees? It seems, in general, hard to argue that the yuck factor for a certain subset of a population outweighs the economic benefit to the participants in the supply chain for a certain good (or service), and the enjoyment of its buyers, if such transactions are not causing harm (or at least no more harm than equivalent transactions).

At the other end, we would find… well what would we find? If we exclude any transactions that are not between willing participants, or that would cause harm to third parties, criminal activities like human trafficking or contract killing are immediately out of scope. Drugs? Arguably, there is a public health concern, but that same concern does not seem to hinder the market in alcohol, so the case would be weak. Antisocial behaviour in most guises generally harms others, so that is out of consideration too.

A violation of human dignity, but is it worse than restrictions on the freedom to sell one’s possessions? (image via YouTube)

One interesting candidate is mentioned in a paper by Al Roth: dwarf tossing. Attempts to ban it in France reached the supreme court, which in October 1995 declared it to “violate human dignity”. This verdict was supported by the United Nations’ Human Rights committee, which “essentially concluded that dwarf tossing was so repugnant that it imposed a negative externality by diminishing human dignity, a public good,” Roth writes. The repugnance is in the immaterial harm to an immaterial public good.

Where does that leave people buying and selling diabetic blood test strips? It’s hard to see how it would fall in the same category as dwarf tossing. Perhaps the reason why some object to these transactions is that it is an affront that people are so poor that they need to sell their own essential medical supplies, or that they cannot afford to buy them. But banning the practice would not rectify that problem, while it would harm both the seller (who has better use for the money they get in return) and the buyer of the items (who cannot afford them at the full price).

And the dwarf tossing verdict of the French Conseil d’État and the UNHR committee regarding human dignity might provide a further insight. A recent small-scale study by a local London charitable organization supporting families in need with food parcels found that people prefer the cash equivalent (£36, €42, $48) over a weekly food parcel: it provides more choice, less waste, and better opportunities for budgeting. More importantly, it eliminates the undignified process of visiting a food bank with its queues and penetrating questions to make sure you are entitled. Instead, it treats the recipients as mature, emancipated individuals capable of making their own decisions. Is the freedom of people to buy and sell what they want, whether it is diabetic test strips, kidneys, or whatever, not just as much a matter of human dignity?

Perhaps a hidden category of really repugnant situations worthy of scrutiny lies in the paternalistic rules and policies that constrain and restrict people’s liberty to act in their own interest as they see fit.

Posted in Behavioural economics, Economics, Emotions, Ethics, Morality, Psychology | Tagged | Leave a comment

Disruptive benefits

Featured image: Dave Schumaker/Flickr BY-CC-ND 2.0

How a change of plans and expectations can act as shock therapy to help us properly consider our choices… or not

Imagine you’re going on a city break with your spouse to celebrate a special occasion. You’ve decided to push the boat out and book a suite in a swanky hotel for four nights, but as you arrive, the receptionist tells you that there has been a plumbing problem in the bathroom of your suite, making it unusable. All other suites were in use, but you are offered an ordinary room (at the ordinary price) until the bathroom is fixed plus £200 ($270, €240) in compensation. You are a little annoyed (who wouldn’t be), but it is a fair offer, so you accept.

As it happens, the ordinary room – while lacking the opulence of a suite – is perfectly good, and after a good night’s rest and a hearty breakfast, you cheerfully embark on an exploratory walk around the city. When you return in the afternoon, the receptionist informs you that the bathroom in the suite you had booked has been fixed. You can move into it straight away (and a hotel worker will move your luggage), but if you wish, you can also opt to stay in your current, lower-priced room. What do you do?

A change of perspective

Well, it might depend on the price, but this kind of situation gives you a perspective that you rarely have. When you face two purchase options, your baseline is that you have neither at present, and either spend the smaller amount for one option, or the larger amount for the other one. You compared what you’d get in each room (the benefit) with what it will cost you, and decide accordingly.

But now, you start from a different baseline: you already have the cheaper option, and have the opportunity the pay extra for the more expensive option: you consider the increment in cost with the increment in benefits of the more expensive suite. Chances are that the trade-off works out differently now, and you might no longer prefer the more expensive choice. How come?

Not how much for this, but how much more for this? (image: Club Med/Flickr CC BY-NC 2.0)

Perhaps your mindset at the time of the original booking was so focused on the special occasion that you did not even perform a real cost-benefit analysis: the situation merited an extraordinary choice. But even if you did explicitly compare the different options’ costs and benefits, your focus is now different. The experience of the perfectly adequate cheaper room reframes the perceived value of the posh suite: your choice is now between sticking with the room you have for no extra cost, or paying extra – an amount that you could spend on something else. The larger the difference in price between the two rooms, the more likely you will find better ways to spend the money, and stay put.

And while costs are neatly cumulative (the price of the suite equals the price of the ordinary room plus the difference between the two), that is not necessarily true for the benefit. Seen from your kitchen table at home, the suite may well look better value for money than the ordinary room, but seen from the cheaper room, its additional benefit is not worth the extra cost. There is nothing irrational about this. And so, ending up elsewhere than you planned may turn out to be a rather beneficial disruption, helping you reconsider and perhaps make a better decision than your initial one.

Disruption at work

An unexpected pipe burst in a hotel room is one thing, a pandemic that shocks the global economy in pretty unprecedented ways is quite another one. It certainly imposed two big changes on organizations: the sudden switch to remote working, and the suspension of international business travel.

Remote working did, of course, exist before COVID-19 threw a spanner in the global economy’s works, but in the last 18 months both workers and employers have had an unplanned opportunity to experience what it is like to abandon the old status quo. For many employees that experience has been quite beneficial: no more commuting to work, and much more flexibility to deal with domestic matters without having to take time off. If the employees had their say, more than 50% of them would work remotely at least three days a week, according to one survey in the US (one of very many, most of which tell a very similar story). That would be a major change from the pre-pandemic status quo, though employers may not quite go that far. The same survey found that more than 2/3 of bosses believe that, to retain a strong company culture, their staff would need to be in the office at least three days per week. Yet it is very likely that a new status quo will emerge, quite different from the pre-pandemic situation (according to an American survey, in 2019 only 6% of the workforce worked primarily (at least 3 days a week from home, and 75% had never worked from home).

Business travel too is unlikely to return to pre-pandemic patterns. A survey found that only 1% of companies would maintain or increase their travel budget, while 45% expects to reduce it by 25-50%, and 24% to even more than half.

Why, if boosting flexible working and spending less on business travel is now considered the right thing to do as the economy returns to normal (fourth COVID-19 wave notwithstanding), were those choices not made before the pandemic? The answer is the similar to that in the hotel anecdote: the difference in perspective brought about by a disruption enabled a deliberate evaluation of costs and benefit that was not carried out before.

Scaling up

[Out with the lockdown… and out with the clean air? (image: State Library of Victoria/Flickr CC BY-NC 2.0)

Might it also apply at a larger scale than individuals and organizations? Governments imposed a wide range of measures to stem the spread of the virus, but these had often additional consequences, from a drop in air pollution to a reduction in traffic casualties (not to forget a reduction in cases of other diseases like the ful). Lockdowns led to cleaner air in many cities around the world, with reductions in NO2 directly attributable to the measures ranging from 8% in London to more than 50% in Delhi. While there is considerable diversity across countries, road deaths declined during the pandemic in most of them, with reductions between 2019 and 2020 as high as 26% in Bulgaria (22% in Belgium, 14% in the UK). The flu, usually a considerable killer during the winter months, all but disappeared in 2020 (in the US, 700 people died of it, compared to 22,000 in 2019), mostly thanks to social distancing and mask wearing.

We could look at the relaxation of the specific pandemic measures as a policy change, with benefits (the enablement of economic and social life) and costs (a deterioration of air quality and more deaths on the road). What would the cost-benefit analysis look like? The natural experiment of the pandemic offered policymakers a rare opportunity to actually perform it. But was it actually done, and did the benefits of dropping the restrictions so great that they outweighed the consequences – more air pollutions, and more dead from traffic and disease? Or did nobody bother, because the pull of the old status quo, the old normal is so strong? We may never know.

Still, even though policy makers may ignore the opportunities of a new perspective brought about by a sudden shock, at other levels we can still happily make use of it. Of course, we don’t have to change our mind. The benefit of the disruption is that we are encouraged to think about it – something we probably didn’t do before – and make a conscious choice.

Moreover, the beauty is that we don’t even need to wait until the unexpected happens: with a little bit of imagination, we can pretend we have left the status quo behind already, and overcome our inertia (and maybe our status quo bias) without the downsides of the disruption. Imagine that!

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

The meaning of things

The value of an object to us is closely tied with its meaning, and that is tied up in the emotions we experience

The art market can be peculiar, but by and large there are some principles that generally seem to hold. One such principle is that an original by a sought-after artist will almost always fetch a sales price that is a large multiple of what a perfect copy would sell for. Simple enough. But what is the value if the authenticity of a work is uncertain? And what else might influence an artwork’s value?

The provenance of a work of art is not always entirely certain. Some experts might believe it really was produced by a famous artist, while others think it is by a pupil, or perhaps even a forgery. This uncertainty will then be reflected in the price at auction of what is, in comparison with an undisputedly authentic work, a speculative purchase. That price is an indication of how certain the buyer is that they are acquiring something with real market value.

But what if that chance was known exactly?

A valuable bargain (image: MSCHF/moforgeries.com)

Well, now we know a bit more about that. A New York based artist collective by the name of MSCHF (derived from the term ‘mischief’) acquired an original print, Fairies, by Andy Warhol from 1954, and made 999 copies of it. They used a robot arm to ensure they looked identical to the original, and then subjected the copies to a degradation process (check out the video here) to make it impossible to distinguish the copies chemically. And for good measure, they destroyed any internal information that could identify the original print, valued at $20,000.

Art(ificial) value

All 1,000 items – the original and the 999 copies – were offered for sale for $250 each, and sold out in no time. That gives us an interesting perspective on the authenticity of an object.

What did the buyers actually buy? One part of it was definitely the chance that the item they purchased was authentic (though we need to bear in mind there is no way that could ever be established). We can work out how that one particular aspect was represented in the price: the total revenue was $250,000, for one original worth $20,000, and 999 copies. This makes each copy worth approximately $230.23 ($230,000/999). In practice, this means that the difference in price between a simple copy (with no chance of its being the original) and one of this peculiar set is just under $20.

To some buyers, this characteristic may well have been worth much more than that, but to most of them the possibility that they now possess a genuine Warhol would not have been the only reason to buy it. The value of a work of art (and indeed of any object) is in the eye of the beholder, and hence artificial. It is also a composite of many different aspects.

Perhaps the most obvious one is the aesthetics. We may value the craftsmanship of the artist, or simply the way the object looks. This is of course entirely subjective: what one person likes, another may find abhorrent. If it concerns a reproduction, we may also care about the nature of the work – we might be willing to pay $345 for a copy of Van Gogh’s Starry Night with real oil colour on real canvas, but not for a fine art print of the same work. (Part of this may be our perception of the production cost and our willingness to compensate that.)

We may also perceive specific value in the subject itself (a view of the village where we were born), or in the context of the work (maybe it is connected to a special occasion, like the Warhol prints). An older work may, all else being equal, also represent more value than a more recent one. Age can be seen as a specific case of scarcity: we see older works as rarer. Numbered prints are also scarcer than unnumbered ones (and sometimes those with a lower number fetch a higher price, despite being otherwise entirely identical). Related to scarcity, yet different from it, is the aspect of exclusivity: we don’t just value what is scarce, we also value what others cannot have, according to research by economists Alex Imas and Kristóf Madarász.

And of course, bringing us back to the real/fake Warhol pieces, authenticity can definitely have value (even if it is only probabilistic), as can market value: we may prize an inherited work of art depicting a subject we don’t care about and that we find repulsive, but that experts have estimated to be worth £20,000.

Object(ive) emotion

Why do any (or indeed all) of these aspects contribute to the value of a work of art? Because of the meaning they have to us, and because of the emotions this evokes. We can see this by means of a simple thought experiment.

In our spare room, we have had an old painting standing on the floor for years. It comes from my wife’s late parents’ house, where it hung above the dresser since she was born until her father died. It is not a particularly nice painting, depicting a rural scene by someone who clearly did not understand perspective, and with a damaged frame. Last year, my wife wanted to get rid of this piece of old tat. So, I asked her whether she would take a hammer to it so we could put it out with the trash. She was horrified at the thought – and the painting is still in our spare room.

Even the market price is a matter of emotion (photo: M C Morgan/Flickr CC BY-SA 2.0)

One aspect I missed out earlier was sentimental value, perhaps the most personal and subjective of all reasons why we may value an object – of art or otherwise. We all recognize this feeling – I suspect you too have plenty of objects in your house that nobody else would be remotely interested in, but that you wouldn’t give up for the world – from early drawings of your children and old crockery or saucepans from your mother’s kitchen, to perhaps a tatty painting that you inherited. We would not dream of deliberately destroying them, and would definitely mourn if we lost them.

Yet sentimental value is no more tied to our emotions than all the other aspects. If a buyer of one of the mostly fake Warhols were to lose his newly acquired possession, she or he too would mourn. Even if the only loss they felt would be that of the market value, that sense of mourning is a manifestation of the emotional ties to the object.

The meaning of an object is in our heart.

Posted in Behavioural economics, Economics, Emotions, Psychology | Leave a comment

Why slowing down climate change is hard (and how it might be done anyway)

(featured image: <flooding,jpg> Sue Thompson/Flickr CC BY-ND 2.0)

Countries get together to discuss how to address climate change, but it’s people’s behaviour that needs to change

If, one evening, you were to discover that your house is on fire, I would guess that your response would be as swift as it would be robust: without hesitation or procrastination you would make sure that every member of your household is safely outside, and contact the emergency services. But when was the last time you checked the batteries in the smoke alarms? (You do have smoke alarms, don’t you?)

We are better at addressing what demands our immediate attention than on what is distant and not so urgent – however important it is. Urgent situations that we neglect tend to get more urgent very quickly, so we promptly get the lesson that we had better get our socks on. What is merely important, though, usually doesn’t get more important, or even noticeably more urgent, if we ignore it – and we can continue doing so with impunity for quite a while. When it eventually does become urgent, responding is much harder or more costly – and what’s worse, we rarely learn the lesson.

Nice graph, but I don’t see much change right here, right now (image: Met Office)

In behavioural science, this is phenomenon is sometimes called present bias. Retirement saving is often cited as an example: it is more fun to spend money now than to save it for the dim and distant future. In many ways, climate change – the theme of the COP26 mega conference currently taking place in Glasgow – is similar. We hear that the seven hottest years since 1850 occurred in the last ten years. But for most of us, the consequences are far away or decades into the future. We hear UK prime minister Boris Johnson saying, in his opening speech to the conference, that the world is at “one minute to midnight”. But most of us don’t feel that urgency at all. And so taking action (which would involve giving up things we enjoy) is not a priority.

Climate change may be similar to retirement saving, but the comparison only goes so far. Steering the policy making of nearly 200 countries, the activities of millions of companies, and the behaviour of billions of people away from a potentially rather unpleasant future, that is a challenge of a different scale.

Countries are not people

One important difference is that addressing climate change involves collective action. We can save for our pension and don’t need anyone else to do so, but no single country can slow down climate change just for itself – not Liechtenstein, not China. This is only going to work if countries representing the vast majority of the world population take action together. It’s like a small town, threatened by a wildfire. If every household sends one person to join the volunteer fire brigade, the fire can be put out, but if there are too many who don’t participate, those who do will risk their lives for nothing. The risk is real that everyone waits to see what the others do, and nothing happens until it is too late.

Now in a small town, and with real people, social conformity might well influence behaviour. Provided the town is saved in the end, anyone who failed to join the efforts may well find themselves shunned and ostracized. That prospect might be enough to encourage most people to sign up.  But countries are not people, and the fear of being rejected later on, what would that even mean for a country – being kicked out of the UN? So what?

Political leaders are people, though, and they face the same tension in their policy making that we all experience in our decisions, the tension between the present and the immediate future on the one hand, and the future decades away on the other. In particular, politicians’ time horizon rarely reaches much beyond the next general election. Committing to significant sacrifices in the short term (even if they will – hopefully – deliver benefits in tens of years’ time) is not the kind of choice they believe wins many votes. Just ask Australian premier, Scott Morrison, who “plans to keep coal mines open for as long as possible.

Governments do have leverage

Yet ultimately, it is not countries that must change their behaviour. It’s policy makers, business leaders and ordinary citizens. And this is where governments do have some indirect, but very powerful, levers that can bring about change of the magnitude that will be required.

One such measure is as drastic as they come: mandates. The UK brought forward by 10 years its anticipated ban on the sale of fossil fuel powered cars by 2040, and joins Germany, the Netherlands and Ireland (only Norway is more radical, with a ban from 2025). This is reminiscent of a similar challenge in the 1990s, when emissions of ozone-depleting substances (like the CFCs then widely used in refrigeration) needed to be halted to close the hole in the ozone layer. Germany mandated that new refrigerators should be CFC-free, and the German white-goods manufacturers took op the gauntlet, leading the world in the development of more efficient, ozone-friendly products. We see a similar response now, with Ford committing to selling only electric cars in Europe from 2030 and Jaguar becoming electric-only by 2025. When business gets a clear, realistic steer from governments, such wisely formulated mandates can – and do – provide the necessary focus for profound behaviour change.

In a sense, this way of announcing a decision well ahead of when it will be implemented echoes a classic behavioural intervention in retirement saving: the Save More Tomorrow approach, developed by Nobel laureate and nudger extraordinaire Richard Thaler and Shlomo Benartzi. Its core idea is that workers commit now that they will allocate a portion of a future pay rise to their retirement fund. This time delay lowers the threshold of making the decision itself – including for political leaders! – and reduces the chance they get cold feet and postpone the decision when the time has come.

But electric cars (and heat pumps instead of gas boilers etc) alone won’t fix the problem. Ultimately, it is every individual’s fossil fuel usage that needs to be cut. Some of that we control directly (the energy we use in our households), but there is a big chunk that is encapsulated in the production and supply processes of the products we buy. How can we, the citizens, be encouraged to reduce our carbon footprint? Social proof – copying what other, similar people do to fit in – might help, but there are many obstacles, including present bias, the intention-action gap, and the same collective action challenge that exists at country level.

Not everyone is sold to the idea of a carbon tax just yet (photo: Global Panorama/Flickr CC BY-SA 2.0)

Here, one of the oldest conventional economic instruments in the book holds a lot of promise – and again, it is a policy decision for governments: a carbon tax which, as economist Tim Harford explains, chops the huge challenge up into innumerable tiny, but feasible steps. Even if levies are placed on industry, that will be reflected in the price to consumers. And if they have to pay for every kg of carbon their actions cause to be released in the atmosphere, they will be ready for cheaper alternatives. This will then encourage suppliers to develop them. Whether it’s a holiday flight, a new smartphone, tomatoes from heated greenhouses or simply how we heat our homes, our choices will drive change. (In case anyone is worried that this will hit the poorest disproportionately, I have no doubt that clever economists can devise mechanisms that spread the burden fairly.)

What, no behavioural economics?

So, while it’s not countries and governments that need to change their behaviour, a country’s political leadership can develop and adopt policies that bring about crucial changes in the behaviour of firms and people – altering both supply and demand. But we’ve seen mostly conventional interventions. Is there no way that more behavioural interventions can also provide a nudge, if not a shove?

I am reminded of an op-ed I wrote for a Belgian newspaper in which I made a case for 100% inheritance tax, on the basis of its economic efficiency, and its equality promoting power. It received more than 500 reactions, most of them of outrage: how dare I take away people’s right to pass on their wealth to their children! Well, perhaps there is an opportunity here to make a similar connection to people’s offspring. If that is what they find important, just like they can enhance their kids’ inheritance by making sacrifices now and save rather than spend, they can make choices that help keep the global temperature increase below the threshold needed so generations of their descendants will have a pleasant environment to live in.

Ultimately, all decisions are rooted in emotions. And this emotional connection might be just the cornerstone that provides – at least to parents and prospective parents – that little extra motivation.

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