All because of the Joneses

(featured image: eugeniu)

Are we doomed to be forever dissatisfied with our lot?

 

Imagine the scene. You have just taken delivery of a shiny new car. You are over the moon. At last you have replaced its clapped out predecessor, which excelled in unreliability as much as in lack of cool. This one totally looks the business, drives like a dream, and is more comfortable to sit in than your settee.

But what is this you spot from the corner of your eye? Your neighbours, the Joneses, also have a new car? And it’s bigger and shinier than yours? Way to ruin your day. Good thing you’re an animal lover, otherwise you’d definitely give the cat a good kick.

When we’re talking about the irrationality of us, people, then this kind of situation would seem to be a good example. Your new car met all your needs… except, the Joneses have a better one. To work out the value of a car we don’t just look at the practical, material characteristics like boot space, acceleration and reliability, or even at the emotional satisfaction we experience from placing our derrière in the leather seats or from the badge on the bonnet. We also want it to be a car that puts us at least on a par with to that of our colleagues, our friends and indeed our neighbours. The same often applies to homes, holidays, clothes and even education. We have to keep up with the Joneses.

In position

Economists call these positional goods, a term coined by economist Fred Hirsch (I am writing this piece a couple of miles from the place where he lived until his premature death, aged 46). Hirsch had observed that people are not satisfied with being better off than their parents and grandparents. If everyone is middle class, then nobody is. To be truly middle class, you need to be better off than your neighbours too, and that means acquiring scarce goods that they cannot afford.

This relativity with respect to our peers is quite likely an evolutionary phenomenon. It is not the absolute height of a flower that determines how much sunshine it gets: what matters is that it is taller than the ones surrounding it. To really impress a potential mate, a peacock needs to have a tail that is larger than that of its rivals; to become the leader of the herd, the male elk needs antlers that are more grandiose than that of his challengers.

elkantler

“Hey, Jones, what do you think of these antlers, eh?” (image: werner22brigitte)

Unsurprisingly, we also tend to consider our salaries in relation to that of our peers. In a 1991 book chapter, Amos Tversky and Dale Griffen describe an experiment in which they asked final year students to consider two one-year assignments after they graduated: one paying $35,000, at a company where similarly experienced and trained people earn $38,000, and another one paying $33,000, at a company where similar colleagues earn $30,000. When asked at which job they would be happier, for 62% of the respondents this was the lower paying job where they’d earn more than their peers. Sara Solnick and David Hemenway carried out a similar survey, and found that half of the respondents preferred a world in which they would earn $50,000 per annum while others earned $25,000 over one in which they would earn $100,000 but others earned $200,000.

This is not just a matter of laboratory surveys. The illusory superiority bias (also known as the Lake Wobegon effect, named after the fictional town from Garrison Keillor’s writing, where “all the women are strong, all the men good looking, all the children are above average”) means that we dislike being paid less than our peers. We are (convinced we are) better than most of them after all.

Pay arms race

That is likely why enforced transparency with the aim of lowering the pay of top executives has failed in that objective. Alexandre Mas looked at such a measure imposing disclosure in 1934, and found that average CEO pay actually increased. In a 2012 study Cornelius Schmidt investigated the evolution of executive compensation in Germany after a reform of corporate governance demanded disclosure of individual packages of key executives. He concludes that “enhanced disclosure can lead to a, likely unintended, effect of higher compensation levels and might explain recent excessive compensation.”

This kind of arms race is welfare-reducing, argues Robert Frank, an economist who has been studying positional goods for decades. In his book The Darwin Economy, he compares the evolution of speed in gazelles with that of antler size in elks. In the former species, becoming faster means a greater chance to outrun a cheetah. This confers an advantage to both the individual and the species as a whole. The primary purpose of a male elk’s antlers is to combat other males, and that means natural selection will drive the development of ever bigger, and ever more cumbersome antlers. So what is beneficial to the individual is actually detrimental to the species as a whole: a pack of wolves has an easier time catching elks carrying 18 kilos of bony protrusions. The big antlers are wasteful, and so is, for us people, the chasing of higher income and bigger cars.

But what if it is not individuals that feel hard done by, but whole population groups? Pay discrimination based on gender or ethnicity is a perennial issue. It hit the headlines in the UK again a few weeks ago, following the high profile resignation of Carrie Gracie as the BBC’s China editor because she was vastly underpaid compared to her peers.

A report by PwC found a gender pay gap of just under 7% among 824 BBC journalists. But does that necessarily imply a bias in setting pay? (The report claims to have found none.) One of the problems is indeed the difficulty in controlling for non-gender-related factors in the actual pay. The lack of clarity means it is hard to conduct a meaningful debate: are we talking about annual pay, or pay per hour? Are we mixing up part-time and full-time work? Are we really comparing like with like?

What’s behind the gap?

However, a very recent study carried out by five economists at the taxi platform company Uber, looking at over 740 million trips, shines some welcome light on the discussion. By coincidence, the gap in hourly wages it revealed between male and female Uber drivers is 7% – very close to that found among BBC-journalists. This surprised the authors, who had expected that the gender-blind algorithm allocating rides to drivers would have avoided any discrimination. One of them, the behavioural economist John List, had even predicted a slight advantage for women: since they work less, they could cherry pick the most productive hours during the week, and he also assumed riders would have a slight preference for female drivers.

But no. An advantage of 7% to male drivers… how was that possible? They found the gap is entirely explained by three factors. The first one is driver experience. This favours drivers who drive a lot, and stay in the job for longer: they know better which rides to accept and which ones to reject, for example. This factor explains about 1/3 of the pay gap. The second factor, accounting for around 20% of the difference, is the choice where to drive: men have a higher tendency to pick the most profitable locations. But the most significant factor, explaining half of the gap, is average speed: men prefer to drive faster.

What can we take away from this? The gender pay gap can exist entirely as a result of people’s preferences, as at Uber, without any bias in pay setting. But determining objectively what is behind differentials in wages for most other jobs is very hard to do. And that means unfairness, real or perceived, is likely to carry on influencing our attitude towards pay.

If we don’t know others’ situations, we may well be perfectly content with our lot. But once we find out they’re slightly better off than us, our innate drive to compare ourselves with, and keep up with the Joneses will ensure the arms race continues unabated.

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

The curse of two hands

Is ambidexterity a mixed blessing?

When I started blogging almost four years ago, one of my first pieces(*) was entitled “A set of scales has two arms”. It was a reaction to a few instances of one-sided reasoning: the draining of a water reservoir in Portland, Oregon after a teenager had been spotted urinating in it, and a national campaign in Belgium to ‘Go for Zero’ deaths on the road.

This kind of thing had been intriguing me for a long time before. You could even say that it was instrumental in attracting me to the domain of economics. We are faced with numerous choices in our private life and at work, large and small, between few or many options. Even at the very simplest, we still have to decide between doing and not doing, buying and not buying, going and not going, eating and not eating and so on.

Each has pros and cons – “on the one hand, and on the other”, the phrase that drove US president Harry Truman to exasperation when his economic advisers kept on using it, and he wished for a one-handed economist.

It’s not that we never reason about pros and cons. Cost-benefit analysis is a widely used method in business and public investment – even though those carrying it out don’t always get it right. Cass Sunstein, the legal scholar, co-author of Nudge and polymath of the behavioural sciences has written several papers on its application, and is a great fan, as he explains in this Bloomberg article. We ordinary mortals may not always follow the formalities of public expenditure, but when it concerns decisions in which emotions don’t play a big role, we are often pretty good at weighing up things and making a good trade-off.

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Would a little bit of pee really matter? (image: Dani Roloff/Flickr)

Emotions on the scales

 

When emotions enter the frame, however, that seems to become a lot more difficult. The two examples from the early piece – pee in drinking water, bleh! – and the image of a loved one killed in a traffic accident speak to our imagination. And that often prevents us making more calculated decisions. The concentration of urine in the water was extremely low (1/3 that of the safe limit for toxic arsenic), and the only way we can really achieve zero traffic deaths is by not having any traffic at all. We are not talking reasoned choices here.

Sometimes our one-sidedness is inspired by a particular affiliation. This week the Belgian Society of Cardiologists said it wants to see the number of diesel-engined vehicles in the country scaled back dramatically. The dust particles and the nitrous oxides they produce cause an increase of 15-20% in heart attacks – even if the concentrations are below the European smog limit. What the consequences would be of such a reduction is not being considered in this unconditional plea, though. As a cardiologist, you worry about people’s hearts, not about the economy or about climate change.

But often, one-sidedness has its roots in emotions. Southern Railway is a British train company with, shall we say, a less than stellar reputation. A couple of weeks ago, they started a social media campaign to remind passengers to leave their feet on the floor, not on the seats. This is a good thing, some people thought, irrespective of the company’s failures. But for others, the emotions of the daily confrontation with the railway operator’s ghastly service appeared to inspire a rather more one-sided view of the campaign.

twotweets

Emotion and (perhaps even more) partisanship are undoubtedly also implicated in many people’s assessment of the two biggest political events of recent times: the Brexit vote and the election of Donald Trump as US president. In the UK, Brexiteers are counting down the days until the country will leave this ‘dreadful EU superstate’, dismissing forecasts that predict doom and gloom ahead as nonsense from discredited experts. But Remainers can be one-sided too: most of the talk on the pro-EU side of the tribal divide is about the looming economic disaster after Brexit. Here it is the opportunities that a country unbound by the rules of the EU can pursue that are ignored or minimized. In the US (and beyond), fans of Donald Trump happily disregard his questionable statements and his untruthfulness, and praise the policy decisions that they approve of. Critics tend to focus on the worst of the man (admittedly, there is plenty they can choose from). They find it hard to find anything positive, even in a grand infrastructure renewal plan (with the odd exception, like Cass Sunstein in “Trump did something good this week”).

Fake balance

One of the processes at play here is motivated reasoning, a mechanism that allows us to pretend we are being balanced and detached, while in reality we are being inspired, guided and nudged by our beliefs and desires. If we firmly believe that our side is the right side, we are not really being one-sided if we ignoring the other side: we are simply giving it its fair weight (namely zero).

But even trying our best to be two-handed and look at both sides does not guarantee better decision-making. Philip Tetlock is the author of Superforecasting, in which he sets out how approaching the world in a cool, calculated manner leads to more accurate forecasts. “One-siderism is the weakness of the dogmatic”, he says, but “both-siderism is the weakness of the open-minded.”

A fundamental issue with being two-handed is that there are almost always subjective as well as objective elements on either side. Emotions, preferences and belief systems also put weight on the scales, and they are different from one person to the next. That makes it hard to determine whether a choice is good or bad. Is it a good decision for someone to stick with a lousy, poorly paid job because they are scared of having to look for another one? Is it a bad decision for someone to resign after a few weeks because they have developed a deep dislike to a particular colleague, and they’re optimistic they’ll quickly find a new one?

It seems so much easier to follow your gut all the time, and not bother too much with what is on the other side of the scales. You will certainly avoid wasting any undue time weighing up pros and cons. The risk of a two-handed approach is that you end up in an interminable ‘on the one hand, on the other hand’ loop, and become utterly equivocal and indecisive.

Two-handedness and both-siderism can be a curse. But once you’ve experienced the pleasure of taking the opposite view, of enhancing your understanding by playing devil’s advocate, it’s hard to let go of it.

Maybe I am engaging in motivated reasoning too, but hey, so be it: it suits me fine.


(*) It was written in Dutch and never got translated – if you fancy a go with Google Translate, you’ll find it here.

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

Good drama = good economics

Drama is truly compelling when it exposes the raw, painful trade-offs its characters face

When the term economics is used in relation to drama, what springs to mind is the financing and the box office takings of a film, or the sale of broadcasting rights for television series. There are also a few movies in which economics itself features, like Margin Call or The Big Short, with a cameo appearance of Richard Thaler, the behavioural economist and 2017 Nobel laureate.

But last week I realized there is much more to it. I was watching the Saturday night slot on BBC Four, a special treat for a European expat in the UK, with super shows like The Bridge, Inspector Montalbano and I know who you are. (It even broadcast a Belgian crime series, Salamander, some time back.)  The current series is a French crime drama, Spiral (Engrenages in French), and watching the trials and tribulations of the characters, it suddenly hit me.

Economics is essentially about making choices, not just for central bankers setting base rates, or chief executives approving an investment proposal. If we could have our cake and eat it, if resources like time and money were plentiful and inexhaustible, if having one thing did not necessarily imply not having another, there would be no such thing as economics. But we need to make trade-offs, we need to weigh up the upsides and downsides of the options ahead of us, under uncertainty, under pressure, and burdened with an array of cognitive biases.

And, goodness me, don’t the people in this drama face tough choices.

The central character is Laure Berthaud, a captain in the Paris judicial police, a serious crime unit. She leads a small team of detectives currently investigating the brutal murder of a policeman. A first source of tension for her is the split allegiance to her job and to her prematurely born daughter Romy, who is still in intensive care. But in her work too she continually faces the choice between sticking to the rules, and bending or even breaking them; between obeying orders and disregarding the instructions of her superiors. Search warrants? No time for them!

engrenages

Facing trade-offs (can’t you tell?)

As the investigation progresses, they uncover a child prostitution ring run by a couple of corrupt policemen in a neighbouring suburb. Was their murdered colleague implicated in this activity, or was he on the contrary on their tail? Some people in Berthaud’s team made up their mind early on that he was victim rather than perpetrator, and the cognitive dissonance they experience rises as the connections he had with people in criminal network emerge. Their belief he was a good guy inevitably influences their developing theories and their choices in the investigation.

The mayor of the municipality where all this is happening has her own dilemmas to deal with. There is a large group of volatile African youngsters, always just one minor incident away from rioting. In order to keep the peace after the brother of the charismatic leader of the ethnic youths is shot dead by the local police, she tries desperately to keep the peace. Her choice? To engage (or not) in a shady deal with him, which involves the laundering of the proceeds of a series of robberies.

One of captain Berthaud’s team, facing financial pressure in his personal life, gives in to temptation and actually pockets some stolen gold he finds during a search operation in the house of a criminal – a nice example of the struggle between Daniel Kahneman’s System 1 and System 2. But he has second thoughts, confesses to his boss, and finds a way to return the gold.

Unfortunately, as becomes clear in the middle of an operation where they are hot on the heels of the ring leaders, there are CCTV images that show him actually taking the gold. Berthaud faces yet another tough call: if she pursues the operation the footage will be made public, and that will mean the end of her colleague’s career. Loyalty or catching the criminals?

And there is more. The examining magistrate in the case, a highly experienced and dedicated judge who takes pride in his integrity, is accused of perverting the course of justice to protect a prosecutor, and is forced to lie to a tribunal to save his skin. An ambitious lawyer is drugged, raped and dumped under a railway bridge. The rapist turns out to be her boss, who is also being accused of unfairly dismissing another female employee who refused to give in to his advances. Should she expose him, or go along with his request for her to defend him before a disciplinary hearing at the bar?

Once you’re primed to look for the signs, they’re everywhere.

And it is precisely these decisions, these choices, these trade-offs that truly bring the characters to life. Going for immediate gain rather than thinking more strategically, placing friendship or collegiality over adherence to rules and laws, letting the end dominate the means however questionable, giving up principles and values to save our ass… in one way or other, we can empathize with the moral difficulties protagonists in good drama have to deal with.

We are all economists, I wrote in one of my earliest posts hereabouts – not just because we have to manage scarce money and time, but also because of the choices we need to make between much more ethereal matters.  And so it is not surprising that drama that portrays such deeply human predicaments in a way that makes our own trade-offs resonate in sympathy is the most absorbing.

And perhaps it is also not surprising that probably the most famous utterance in all of literature expresses the ultimate choice: “to be, or not to be”.

Good drama is, very much, good economics.

 

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

Nationalization or privatization?

(featured image credit: Krahsman)

Do private and public organizations (and their employees) make inherently different trade-offs?

Todd Dewey is on his way from Winnipeg, Canada to North Spirit Lake, 500 km to the north east. He is one of the Ice Road Truckers, famous from the eponymous TV show. They are rugged guys (of both genders!) trying to make as much money as possible during the coldest months in Northern North America, by taking vital supplies to remote communities over the winter roads, which often consist of no more than a layer of ice floating on a lake (or even the ocean).

Todd is driving on a bumpy track that is only passable because there is a lot of packed snow on it, behind his truck a trailer with 30 tons of building materials. But his truck is losing power and it struggles to maintain speed on the steep slopes.

A cool trade-off

Behind him Darrell Ward, also heading for North Spirit Lake, is catching up. Eventually Todd is forced to stop, and Darrell pulls over too. He has got a much lighter load, just a bunch of huge empty plastic tanks. It would make sense for the drivers to swap their loads, but the two drivers work for different transport companies. Normally that might not be a problem, but Darrell, who used to be a colleague of Todd’s, had a falling out with Todd’s boss not so long ago. He left in anger and set up a competing business, so he’s now very much not just a competitor, but a rival.

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Things are tough on the winter roads (image: Natalia_Kollegova)

He shares his thought process with the camera. On the one hand, he’s there to make money by delivering loads on time, not to worry about the problems of a competing company. On the other hand, you don’t leave a fellow driver behind to fend for themselves, a hundred miles from civilization, in temperatures of 20 below freezing. And of course you have a duty to bring supplies to people to whom you are literally a lifeline. So without much ado, Darrell makes the trade-off, and swaps loads with Todd. A few hours later they drive into North Spirit Lake in convoy, and make their deliveries as planned.

On 15 January, Carillion, a huge global facilities management and construction company was forced into liquidation, with debts totalling more than £1.5 billion ($2.1B, €1.7B). The implications are significant, not just for the 43,000 employees (of whom nearly half in the UK), but for the many subcontractors with outstanding invoices that are unlikely ever to get paid, and for the many customers and clients, whose services or building projects are now in jeopardy.

Flipchart Rick has written a comprehensive post about the background of Carillion’s (longstanding) problems. Some are inherent in the low margin, high-volume nature of the business, vulnerable to unexpected mishaps and general uncertainty; others are to do with the mismanagement by company bosses and by the government as the client. One recurring topic in the aftermath of Carillion’s collapse centres on outsourcing of public services and the use of Public Private Partnerships for capital projects. Are these a good way of supplying services to the citizen?

Uncool trade-offs?

The answer to this question lies in the potentially very different ways trade-offs are made in private companies and in public organizations. As Flipchart Rick’s blog illustrates, there is a strong suspicion among the British general public towards big business (and it is generally big business that is involved in the private provision of public services). The reason behind this is the assumption that the profit motive of private companies affects the trade-offs that are being made, in favour of the shareholders, and to the detriment of the employees, the taxpayer and the citizens.

bigbusiness

Suspicious minds (via Flip Chart Fairy Tales)

The trade-offs people make follow from an intricate combination of intrinsic and extrinsic motivation. Say you want me to come and clean your house. I am a friendly kind of guy, but there are other things I’d rather do. My intrinsic motivation is insufficient to get me to spring into action, so you’d need to add some extrinsic incentive: pay me some money. But once I am busy cleaning, my intrinsic motivation will influence the eventual result. If I am inherently driven by doing a good job, or by making you satisfied with my work, I will scrub with great diligence. If I am of a less meticulous disposition and all I am concerned about is getting paid my wage, my performance may leave something to be desired. But I should of course bear in mind that if my work is too sloppy, you could withhold some of my money, or indeed sack me (or not hire me again next time).

My profit motive gives you at least some influence over how well I work, or indeed over how well your house is cleaned. Perhaps a really good cleaner, someone who is intrinsically motivated, costs a bit more, and so if you’re willing to fork out extra, you can make sure your house is really spotless. If I am a slacker with little intrinsic motivation, you can get someone else. But my extrinsic profit motive can also work against you: if I try to boost my margin by using inferior cleaning materials, that might leave you with a smudgy rather than shiny house.

Motives and trade-offs

This play between intrinsic and extrinsic motivations also applies within larger organizations, up and down the chain of command – including those delivering public services, and regardless whether they are in private or public ownership. Are the former, providing outsourced services, more likely to make trade-offs that are detrimental to the citizen, whether as a service user or a taxpayer? They can certainly boost profit margins by skimping on materials and labour in a way that reduces the value to the user. And unlike a cleaner you engage yourself, citizens don’t have a simple, straightforward way of sacking the firm that collects the rubbish, or the cleaners and caterers in the municipal swimming pool if they perform poorly.

Does that mean public ownership is guaranteed to deliver better trade-offs? The profit motive is absent, so there is no risk of abuse. But it also means there is no extrinsic motivation, and so citizens rely entirely on the intrinsic motivation of the supplier. If that is lacking and service quality is lousy, you are just as powerless to obtain better rubbish collection, or a better café or better cleaning at the swimming baths as in the case of greedy outsourced private sector suppliers. Arguably, poor outsourcing  can be the consequence of  the lack of intrinsic motivation on the part of the administration: if those who purchase or oversee the delivery of services to ensure they are adequate and provide value for money don’t do their job properly, it’s the tax payer and the citizen that suffers.

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Collective ownership, ahoy! (source: Yougov)

The British public is firmly in favour of public ownership of many sectors, and a majority would want to see buses, utilities and railways renationalized, as a YouGov poll in May 2017 found. A Populus survey in August 2017 found even higher numbers desiring national ownership (Trains 76%, Water 83%, Electricity and Gas 77%, Banks 50%).

But does it matter all that much whether someone is employed by the state or the local district, or by a private firm? As Adam Smith wrote in his Inquiry into the Nature and Causes of the Wealth of Nations  (Book 1, chapter 2), “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” That ‘own interest’ is the combination of intrinsic and extrinsic motives for people to perform well in the eyes of those whom they serve.

Darrell Ward was motivated by profit, but that didn’t stop him putting helping out his fellow Ice Road Trucker above securing his income. I once had the occasion of being served superbly by a civil servant in the Belgian Home Affairs Ministry: she was not motivated by profit, and still managed to get me a new passport to replace a faulty one in less than 24 hours.

Ideology is a distraction in the debate on public service provision. What truly matters is the right balance of intrinsic and extrinsic motivation, and that is just as important under private as under public ownership.

Posted in Behavioural economics, Economics, Management, politics | Tagged , | Leave a comment

Dissonance in human nature

How do we resolve the inevitable perceived contradictions in the traits of the people around us?

In The 7 Habits of Highly Effective People, Stephen Covey relates how he was riding on the New York subway one Sunday morning. The carriage was peaceful, with people quietly reading their papers, or just resting. Then a man and his children got on, and the scene changed completely. The children were loud, throwing things, grabbing at people’s papers and so on. Their dad, sitting next to Covey with his eyes closed, seemed oblivious to what his offspring were up to.

What kind of insensitive, inadequate parent would let his children run wild like that without even attempting to take responsibility? So eventually Covey turned to him, and asked him whether he might at least try to control them a little more. The man appeared to come out of a state of unconsciousness, and said softly, “Oh, you’re right. I guess I should do something about it. We just came from the hospital where their mother died about an hour ago. I don’t know what to think, and I guess they don’t know how to handle it either.”

This is a great example of cognitive dissonance. We start off with a certain belief, and are then confronted with a completely different picture that is at odds with it. That dissonance can be pretty uncomfortable.

It’s hard to change your mind

One way of dealing with this kind of thing is to change our mind. We let go of the original belief and adopt a new one – the dad is not an irresponsible parent, but someone who deserves our understanding and sympathy.

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Two pure Ecuadorians. But who is the good guy, and who the bad guy? (Photo: Wikimedia)

But that is the exception rather than the rule. Most of the time, once we have categorized a person we don’t easily move them into a different category. That is particularly the case when we have a strong positive or negative opinion of a public figure, someone we don’t know personally, but whose character and nature we nevertheless believe to know very well. That belief is like a valuable investment to us, which we don’t give up just like that.

The writing of this article was triggered by the mention of Julian Assange, the founder of WikiLeaks, in the news last week (when it was reported that he has obtained Ecuadorian citizenship). Mr Assange is a hero in the eyes of his supporters, for publicizing secret material that compromises the great and the good, and that lays bare some of the more shady dealings that are going on unseen to the public eye. But he has also been accused of sexual assault and ‘lesser degree rape’. If someone is your hero, but allegedly also a sexual predator, does that make him a good guy or bad guy? The cognitive dissonance is evident.

Some supporters the Republican party in the US must be experiencing something similar. They would probably not hesitate to rebuke certain aspects of the president’s behaviour if it was displayed by anyone else (especially if it were a Democratic politician). But as they have nailed their colours to his mast so to speak, such critical feelings would cause unbearable cognitive dissonance.

The opposite happens too. We expect members of another tribe (certainly if they are really opponents like in politics) to say and do things we oppose. When they say or do something that, if it was said by someone on our side, a good guy, we would applaud, that is incongruent with our belief. We experience cognitive dissonance.

If we feel unable to reclassify a person on the basis of new information – and it is indeed we, for this phenomenon is by no means limited to supporters of Mr Assange or Mr Trump – we resort to other tactics. The easiest one is simply ignoring the contrary information.  Confirmation bias  is very helpful in this respect: we only look at the behaviour of the person that neatly fits with our prior perception.

If we cannot escape the facts, then another possibility is motivated reasoning. We develop an explanation for the incongruence that preserves our image of the person in question. We work back from the immutable belief that he or she is a good guy (or a bad guy) and come up with alternative reasons for the facts. Assange is being framed by the FBI, Trump is not doing or saying anything that an ordinary bloke in the pub wouldn’t do or say, so hey, what’s the big deal? And if a bad guy says something that is actually quite good, of course they have ulterior motives or are being hypocrites.

No more, Mr Nice Guy

The problem with this is the strong heuristic that good guys are basically right, and bad guys are basically wrong. This finds its origin in the halo effect, a cognitive bias that generalizes positive traits. (The similar generalization of negative traits is called the horn effect.) Thinking in that way can cloud our judgement and make us lose sight of the facts.

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Taleb, Tetlock, Thaler – who’s got the halo, and who the horns? (Images via Twitter)

Even in the world of academia, which you might have thought is dominated by truth and facts, it can be hard to pretend there is no tension between two apparently incongruent sides of a person. Should the behaviour of an intellectual that, one might say, lacks in civility, affect how much credence we give to their argument? Or should we accept that if you are Mr Right Guy, you don’t need to be Mr Nice Guy? A recent twitter spat involving Nassim Taleb, author of among others Fooled by Randomness, Philip Tetlock, author of Superforecasting, and Richard Thaler, the 2017 Economics Nobel laureate, provides the perfect backdrop for pondering those questions.

 

We cannot eliminate cognitive dissonance. We are continually confronted with information that challenges our beliefs. But what we can do is try not to oversimplify our judgement of people into good and bad, like in the old cowboy movies (where the colour of the hats provided a handy hint).

What if we acknowledged that people are a bit more nuanced? Surely we can simultaneously find someone a source of great wisdom and think they behave like an asshole. It is not because we appreciate someone taking action to implement policies we are in favour of, that we cannot denounce them for inappropriate language or behaviour. It is not because we disagree with someone’s politics that everything they say is nonsense or suspect. Heroes and villains are fine in stories and movies, but let’s not reduce our verdict on real people to such simplistic terms.

Human nature is, by nature, dissonant.

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The immaterial economy

(featured image credit: torstensimon)

The peculiarly human nature of economics

On Wednesday 10 January Philip Hammond, the UK’s chancellor of the exchequer, and his cabinet colleague David Davis, the secretary for Exiting the EU, flew to Germany. The aim of their trip was to present Britain’s view of what a ‘strong and close’ post-Brexit relationship with the EU, and in particular with Germany, should look like. Earlier the same day, an article written jointly by both gentlemen was published in one of the main German dailies, the Frankfurter Allgemeine Zeitung. In it they argued that it would make no sense for either Germany or Britain to put in place “unnecessary barriers” that would damage businesses and economic growth.

Sounds like a no-brainer – why would anyone erect unnecessary barriers? Why would there need to be impediments to trade, compared with the present seamless situation that the UK enjoys as a member state of the EU (and by implication of the Single Market and the Customs Union)?  Why impose tariffs, or non-tariff barriers (such as paperwork and border checks) that would depress trade, and hence cause a material economic loss?

Living in an immaterial world

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Does this look like an unnecessary barrier? (photo: distel2610)

Material losses  are not unusual though – in fact they are incredibly common. Every time we buy something, our wallet ends up lighter, our bank account gets depleted, or we increase our credit card debt. But that financial loss can be compensated by a corresponding material gain. When we buy a washing machine we gain time through its efficiency, as it can clean our clothes much more quickly than we could, doing it all by hand.  When we buy home insurance, the fact that we can claim on our insurance when our house goes up in smoke is a clear material benefit too: we don’t gain anything directly, but we prevent economic loss.

But not everything transaction has a purely material balance. When we purchase curtains for the bedroom, lest the neighbours see us in dramatic states of undress, there is not really any demonstrable tangible benefit. So why do we spend money on them? We make the expense to satisfy a spiritual need – not in any religious sense, but in a philosophical sense. We don’t want our neighbours to see us in the nude. It would make us feel embarrassed or ashamed – and the avoidance of this feeling is worth the cost of the curtains.

Much of our economic life is conditioned by such immaterial considerations. A lot of the stuff we buy has marginal or no direct material benefit. We could perfectly function with a small fraction of the clothes in our wardrobe, with cheap food, without a television and so on. They all provide us with utility that is immaterial.

Some of us prefer more expensive fairtrade goods, even though they do not provide any superior material value. Some prefer to buy local, or national – again, with at best highly debatable concrete benefit. Even choices that don’t directly involve money can be made based on immaterial considerations: maybe we frequent a newsagent that is a bit further away because the nearby one is a grumpy git.

It is not really different in Brexitland. The EU-27 want to preserve the integrity of their internal rules, and for example not compromise on the four freedoms of movement: capital, goods, services and people. It is clear that, if the eventual deal between the UK and the EU-27 reduces these freedoms, there will be an economic cost. But they are prepared to bear that cost, in order to preserve what is essentially an immaterial value.

Is that mystifying? Not really, or at least no more mystifying than any other trade of material benefit for some immaterial utility. And certainly no more mystifying than the UK’s decision to leave the EU (and its subsequent intention to leave the Single Market, the Customs Union and the jurisdiction of the European Court of Justice). The motivation was ostensibly “to take back control”. Sure, in theory there is a material upside of around £8.5B net every year, but if trade is hindered by a restriction of the freedoms of movement, the likely consequential cost are likely to be considerably higher. This cost must therefore necessarily be offset by the immaterial benefits of sovereignty: no longer being subject to EU laws, and of being able to restrict immigration.

So both the EU-27 and the UK are incorporating immaterial elements in their decision-making. And unlike material assets, they cannot be objectively valued. The best estimate we have is based on an economic concept of questionable validity, that of revealed preference. By making the choices they make, both sides ‘reveal’ the value of the immaterial part of the equation.

Not irrational

We should not make the mistake of uttering the I-word here. All too often, poorly understood immaterial utility is misinterpreted as irrationality. Is it irrational for a child to prefer two 50p coins over a single £1 coin? Not really. The little kid quite likely derives very genuine pleasure from holding two pieces compared to just the one. Unless we know what the immaterial utility is of something people pursue (or, in case of negative utility, seek to avoid), we cannot and should not conclude they are being irrational.

But the problem with valuing immaterial benefits or costs doesn’t just affect our perception of others’ choices. When we need to make trade-offs between material and immaterial consequences of a choice, can we really work out precisely what the true price is of the immaterial element? Hardly.

Or actually, yes. Our physical requirements are to a large degree determined by our physiology. We need food, which needs to be of a certain energetic value, and of a certain composition to provide us with the essential nutrients we need. We need water to keep our anatomy working. We need protection from the elements, so we don’t die prematurely of hypothermia and so on. We share that type of need with every living organism. They are outside our control – we cannot decide to survive on fewer calories than we really need, or without water or vitamin C.

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The stuff that happens behind closed curtains… (photo: Juergen_G)

But our immaterial needs? There we would appear to have a choice. Do we worry about whether the coffee and sugar in our pantry are fairtrade? We decide. Do we care whether the people living in our street were born in our own country or not? What colour their skin, or what their religion is? Up to us.

We can even decide whether or not we care that the neighbours can verify whether we have naughty bits (just like they have), and save the cost of curtains in our bedroom – although we may need to check we’re not falling foul of laws regarding exhibitionism.

The great economist John Maynard Keynes spoke of animal spirits to refer to the emotions that sometimes guide our economic decisions. But actually, it’s the immaterial aspects of our economy and economic behaviour that reflects our humanity, rather than what we share with the animals.

 

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Someone else’s shoes

(featured image: Three-shots)

Metaphorically wearing other people’s shoes can help us understand them better… but what if they don’t fit?

“Before you criticize someone, you should walk a mile in their shoes. That way when you criticize them, you are a mile away from them, and you have their shoes.” Undoubtedly excellent advice, and quite funny to boot, from humorist and comedian Jack Handey (in a 1991 episode of the TV show Saturday Night Live). But it is of course a riff on a much older piece of common wisdom, encouraging us to see things from someone else’s viewpoint, before we find fault. Are we any good at actually doing that?

Many of us have probably uttered the words “If I were you” more than a few times. There is a movie by that name, and a (humorous, again) podcast, and if you google the phrase you find more than 38 million hits. At first sight, this would suggest that there is plenty of putting on other people’s shoes going on. But when we say these words, what do we actually mean? Are we truly seeking to understand the other person’s perspective and situation?

We’re all better than average

Unfortunately we are prone to a few annoying cognitive quirks that may complicate matters a little. We tend to judge situations and behaviour by our own standards – this is called egocentric bias. Not only are we evidently more familiar with how the world looks through our own eyes, but we also believe that our capacity for evaluating it is superior to that of others. Our view is the best view and the only right view. This is a case of the Lake Wobegon effect (or illusory superiority), after the fictional town in the work of Garrison Keillor, where “all the women are strong, all the men are good looking, and all the children are above average.”

Egocentric bias makes us believe that others will find a TV sitcom as funny (or as awful) as we do, have the same opinion on exotic food, popular music or cars – and if they don’t, then they bloody well should. We are looking for validation of our beliefs, and the knowledge (even if only in our imagination) that others share what we think does that perfectly.

We are also prone to commit the Fundamental Attribution Error. Philosopher Cristina Bicchieri describes it as “the tendency to believe that what people do reflects who they are.” When we judge other people’s behaviour, we ascribe it to their character, rather than to external and situational factors. If someone you’ve emailed fails to respond, it’s because they’re an inconsiderate so-and-so, devoid of basic manners; but when we haven’t yet replied to someone else’s email, it’s because we are so incredibly busy. It’s just so much easier to reduce others’ actions and motives to who they are, rather than to consider all the circumstantial reasons that could be behind their behaviour.

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To be successful, simply wear our shoes (photo: Alexas_Fotos)

That also leads us to believe that our successes are the result of our attitude, our hard work and our diligence in making decisions (and to overlook the role of good fortune). If others end up with problems, it’s because they don’t apply themselves in the same way, and what they should really do is take a leaf out of our book. As author Sandra Newman tweeted: “Rich people believe that, if they were poor people, they would be rich.”

So when we say “If I were you”, it’s not entirely surprising that we are probably more intent on impressing our own views and values on the other person, and giving them the benefit of our superior advice, than on trying to appreciate the full extent of their situation before we pass judgement.

Drop the shortcuts

Are we therefore doomed to misunderstand each other forever more? Not if we choose to think a bit differently when we observe others.

Rather than starting our reasoning from what we would do “if we were them”, we can take another angle. What if we thought instead, “in what circumstances would I act in the same way?” When a driver cuts you up, don’t just conclude he is an egotistical barbarian. Instead think about the kind of situation that would make you do the same – is your wife about to give birth and are you rushing to the hospital, or are you hurrying to catch the last plane? If your brother cannot make a long standing family get-together because he’s going to a colleague’s funeral, don’t feel vexed that he puts a workmate above his family. Instead, imagine the kind of person whose death would be so upsetting to you that you’d pull out of a rare family gathering to attend their funeral service.

When you judge someone’s decisions, be it your neighbour, a colleague, or a political or a business leader, try to look beyond ideology and stereotypes, and envisage in what context your decisions might not be all that different.

Mental shortcuts are an easy way to make sense of the world around us: our view is the correct view, and when others behave in a way we dislike, it is a sign of their true character. Imagining the complex reasons behind the behaviour of others is a bit harder – walking in other people’s shoes can be uncomfortable if they’re not a good fit.

But if dropping these mental shortcuts is the small price we can pay to understand our fellow human beings a bit better and respect their choices, isn’t it worth it?

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