The meaning of money

(Featured image: Roman K/Flicker CC BY-ND 2.0)

What money means in economic terms, and what it means to us, are two – or many more – different things

Imagine you have just spent £70 (€80, $95) on something, only to realize that what you have bought is going to be of no use, and that there is no way you can return it for a refund. It’s the kind of experience that would leave even a seasoned stoic a little upset. But why is this? Is that because of the magnitude of the amount, or is there more to it?

Money has the same value for everyone – a pound is a pound – and you can buy exactly the same thing with any pound. That characteristic essentially endows it with its economic significance: money can fulfil three key roles for us (and for the economy as a whole): it allows us to buy goods and services, to measure their price (a proxy for value), and to store value so we can purchase later what we don’t need right now. From these three perspectives, the meaning of £70 would seem to be invariable, and so the experience of the loss (or the gain) of it should be independent of anything else.

Money in the mind

From which mental account are we paying for the ticket? (image: Truus, Bob & Jan too!/Flickr CC BY-NC 2.0

But that is not quite how we work. We engage in something called mental accounting, a term coined by Richard Thaler in 1985. Daniel Kahneman and Amos Tversky provided a clear example in their 1981 paper The Framing of Decisions and the Psychology of Choice. They conducted an experiment with two similar first-person scenarios about going to see a play, with tickets priced at $10 (cheap, but remember, it is 1981!). In the first version, as you arrive at the theatre, you notice you have lost $10: will you still pay $10 for a ticket? 88% of their participants said they would do so. In the second version, you have bought the ticket in advance, but upon arriving you notice you lost it. In this case, only 46% of their respondents would buy a new ticket.

The actual loss is exactly the same in both cases, yet the reaction is very different. We act as if we have multiple budgets, alongside unallocated cash. In the second case, we already depleted the theatre budget, and so we may not be able to justify buying a second ticket; in the first case, we have lost unallocated cash, so we would still only be buying the one ticket.

And there is another way in which the meaning of money can vary. Let’s return to the £70 purchase that was so upsetting. Imagine that the purchase you made was for unleaded petrol (gas in the US), and that you inadvertently put it in your diesel car. You did not realize your mistake until, 500m down the road, your engine started stuttering. Not only is the fuel now an unusable blend, you are also presented with an eyewatering repair bill of over £6,000 (€7000, $8,500), as the petrol has seriously damaged much of the fuel injection system that relies on the lubricant qualities of diesel fuel. (This recently happened to someone I know very well.)

Suddenly, the wasted £70 doesn’t seem so upsetting anymore. The meaning of money is apparently not only dependent on what mental budget it belongs to, but also on the context in which we view it. Here, the original loss seems truly futile. At the same time, though, if squandering £70 was initially pretty upsetting, then losing £6,000 must be, well, about 86 times worse.

Must be? Or might altering the context also change the meaning of £6,000? It makes sense to allocate that expenditure to a car budget. Assuming that such a mishap will only happen once in our lifetime, we can quite legitimately spread it over all our driving years – say sixty years. That equates to about £100 per year – even if you don’t drive much, in a cheap, reliable and very frugal car, that is just a few % of your annual cost of driving – £2 per week. (This approach is akin to pennies-a-day”, the disaggregation of a single larger expenditure into a sequence of smaller amounts.) Sure, it’s not nothing, but in the wider scheme of things it is hardly life-changing. And if we want to nuance its meaning even further, we could compare it with other mental budgets (a pound is a pound, remember!) – the value of our house or of our retirement fund: do we even know to the nearest £6,000 what these are worth right now? I don’t think I do.

Spending wisely, and not feeling worse than necessary

Naturally, none of this makes good the actual loss. In absolute terms, the amount isn’t any easier to swallow, and my unfortunate friend has to take the hit. He now needs to decide whether to have his car repaired, or scrap it (it is worth almost nothing in this state) and buy another car. In this choice too, the meaning of money can clarify the options.

Our intuition tends to be that if the repair cost approaches the book value of a car, it’s scrapped. This is what insurance companies generally decide, but as my (I mean his!) insurance policy doesn’t cover this mishap, it is his choice to make, and it’s worth thinking a bit more deeply about the two options. What is the meaning of £6,000 in both cases?

Fix it, or scrap it? (image: standret via Freepik)

Spending it to get the car fixed means two things: it increases the value of the car back to its book value, and it restores the remaining life of the car as both were before the incident. The former is important in case we intend to sell or part exchange the car in the future: it means that we will recover part of the repair cost. The latter is important if we intend to keep using the car (my friend was planning to replace the car in around three years). The repair cost is then in essence an investment, so it can easily be compared with the alternative option. Putting the £6,000 towards the purchase of a new car means seeing it depreciate over the next three years. Even for a modestly priced used car, a depreciation of the order of £6,000 over three years is, if anything, a bit on the low side. According to this reasoning, getting the car fixed makes financial sense.

So, when we are must make a cool, business-like decision, figuring out the meaning of the money we’re spending in the different options can help us better appreciate the differences. If we look beyond the headline possibilities (repair the old car, or scrap it and buy a newer car) to what each one really means, we get a better idea of the significance.

But it is when we are confronted with the emotional effect of money that exploring the meaning can have the greatest effect. One perspective on a loss may make us (my friend, that is) would make us miserable for days, compel us to relive the faithful moment when we made the fatal mistake, and consider endless “what if?” scenarios. Another one may, at worst, make us shrug and then get on with our lives.

And that perspective, that is ours to choose. It is up to us to choose it wisely.

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

Pricing principles

(featured image: David Trawin/Flickr CC BY-SA 2.0)

Are our principles absolute and unassailable, or are they for sale?

In Florida, the COVID-19 vaccination rate among the staff of nursing homes and other long-term care facilities is, by any standard, worryingly low, at barely 38%. Yet in one facility, more than 80% of the staff are fully vaccinated. This remarkable feat was achieved after management offered their people a bonus of $1000 ($100 upfront and the remainder as soon as at least 75% got their jabs). What is going on here?

Staff member Tammy Chandler had her doubts, in particular because she doesn’t quite trust such a new vaccine, but she concedes the bonus pulled her over the line. The plot twist of requiring a minimum proportion of personnel to be inoculated was definitely instrumental in achieving the high vaccination rate (an earlier scheme with just an individual bonus did not have much effect). But ultimately, the actual cash clearly provided the necessary incentive for each individual.

Incentives everywhere

Incentives are not uncommon, quite the contrary. Anyone intent on stimulating or attenuating certain behaviour – whether it is making cats go on their litter tray, keeping children on the straight and narrow, or improving employee productivity – will be well aware of the power of reward and punishment. Pretty much all living things respond to what is good for them and what is bad for them (even plants grow towards the light), and that mechanism, central to life as we know it, is what incentives seek to activate.

Any organism that can discern what is beneficial and detrimental can hence be influenced: a positive incentive will reinforce current behaviour, a negative one will discourage it. That is just how we roll: from amoeba to human, we all make trade-offs, and incentives alter those trade-offs. If we initially judge that doing X is better for us than doing Y, adding a sufficiently large positive incentive to Y (or a sufficiently large negative one to X) will tilt the balance in the other direction.

So far so good, but wait until he needs to get out (image: Shelly T./Flickr CC BY-NC 2.0)

And so, parents promise recalcitrant toddlers a favourite story before bedtime to make them agree to get into their bath, and threaten to withhold the story when they subsequently refuse to come out before they have flooded the bathroom, and teachers hand out gold stars to pupils who hand in their homework five days in a row, and warn them they will lose their turn to feed the class guinea pig if they don’t stop chattering in class.

Money makes it even more straightforward to encourage people. From performance bonuses at work to a reduction on the amount of a fine if it is paid early: people do, by and large, tend to respond to financial incentives. As the example of the Florida care home suggests, they may even decide to get vaccinated.

Different sacrifices

And yet, the vaccination case does seem to be somewhat different. Productivity incentives or encouragements to pay on time are interventions that do no more than move the default equilibrium. Most employees perform decently, but the prospect of additional money might make them pull out a few more stops. Most people would – albeit without great enthusiasm – pay a fine, but the authorities can minimize the amount of chasing of late payments by offering a discount which encourages the transgressors treat it as a higher priority. In both cases, people do the same thing as before a little more efficiently or a little more quickly. They make a small sacrifice in time, in return for some money.

But incentives can also encourage us to do something we would not otherwise do. There is a somewhat unpolished story, going back nearly a century that illustrates the idea (it has, without justification, variously featured many famous people including Groucho Marx, W.C. Fields, even Bertrand Russell). A man asks a woman at a celebrity do whether she would sleep with a stranger for a million pounds. She answers that she would, upon which the man asks whether she would do so for five pounds. Her indignant reply goes something like this: “Five pounds? What kind of person do you think I am?”,to which the man responds, “We have already established that. We are now trying to determine the degree.” (You may recall a similar idea from the 1993 movie, Indecent Proposal.)

The story, unrefined as it may be, suggests that while we may have principles about what we would and would not do, we may well be prepared to sacrifice them for a sufficiently large incentive. In their classic paper The Value of Saving a Life, economists Richard Thaler and Sherwin Rosen established the value of a statistical life, based on labour market and life insurance data. In principle, most people would avoid jobs in which they run an elevated risk of death, but because employers are offering higher wages for, say, boilermakers than for painters, enough people are prepared to sacrifice their “keep safe” principle for the extra income. Likewise, an incentive makes some people abandon the “weekend is home time” principle and work on Saturdays and Sundays, or the “keep close to friends and family” principle and accept an expatriate posting.

From incentive to decision aid

Interestingly, money does more than providing a handy instrument to incentivize people. It also provides a measure for how strongly they hold a given principle. The magnitude of the incentive literally reveals the willingness to accept, the price at which they are willing to sacrifice that principle. Many of the Florida care home staff had chosen not to get the vaccine out of principle – because , like Ms Chandler, they didn’t trust an unproven vaccine, or maybe even out of a general mistrust of vaccines. But for 80% of them, $1000 was enough for them give up their principle.

Ka-ching! $1000 better off! (image: CDC/Unsplash)

The insight that money can quantify how important a principle is can help us too, even when there are no incentives involved. Sometimes, we find ourselves struggling to choose between two options, and that is often because they benefit you in different ways that are hard to compare. Imagine that, this coming weekend, you have time to either dig up the vegetable patch, or go for a bike ride. Both are good, but which is the best? Instead of pitting them against each other, consider them one at a time. If there was no vegetable patch to dig up and you were planning to go cycling, how much would, say, your boss need to pay you to come into work on a Sunday afternoon instead? If, alternatively, your bike was being repaired and the only thing you were planning to do was tend to your kitchen garden, what would your price be to give that up? The difference between the two will tell you whether to go for the spade, or for the bike, this weekend.

(All of which makes me wonder, how much would someone have had to pay me not to write this piece? I will have to think about that!)

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

Categorically wrong

(featured image: Thomas Quine/Flickr CC BY 2.0)

There is one heuristic we use a lot. We also misuse it quite a bit.

(Warning: this piece contains references to activities which may temporarily not be available in your area.)

Bedtime was not always quite sleep time, back when my age could still be expressed as a single digit. Often, my younger sisters and I (we all, conveniently, slept with our bedroom doors open) used to play a guessing game for as long as it took for us to finally doze off. Two of us needed to find out, by asking yes/no questions, what the third one was thinking of. This could be a person, an animal or an object, and the category had to be announced (this was also the symbolic start of the game).

Knowing the category in which to guess gave us a head start, but it also prevented us from making inadvertent category mistakes – a concept that was well beyond us at the time. Category mistakes are errors in which attributes and categories are mismatched. Asking whether my sister was thinking of a man or a woman would be a category mistake if she was thinking of the dining table downstairs, for example, for members of the category ‘object’ do not have the attribute man/woman. The canonical definition provided by Gilbert Ryle, the philosopher who coined the term, is that of a tourist who, after a tour of Oxford, asks where the university is. (The University of Oxford consists of several colleges, scattered over the city, without one main campus; the category error is therefore the assumption that a University is a member of the category “physical infrastructure”, instead of that of an “institution”.)

Categories as heuristics

Categories are an extremely useful concept, allowing us to make sense of the world. People, objects, abstract concepts – you name it – we place them all in categories, often in many categories simultaneously. For example, wellington boots can be a member of the category of footwear (along with flipflops, trainers and smart leather shoes), and at the same time also be in the categories “suitable for a walk on a wet day” (together with a waterproof jacket and a pair of old jeans), and “unsuitable for a black- tie event” (besides a t-shirt bearing a risqué pun and a swimsuit).

The “Ugh, it’s a musical” category heuristic – or the “It’s Hugh Jackman/Helena Bonham Carter!” heuristic? (Wikimedia/fair use)

We widely use categories as a heuristic in making decisions: by verifying whether something is (or is not) a member of one or more categories, we can include it in (or exclude it from) a final set of options. We will, for instance, generally not even consider wearing sandals to a wedding reception, because while they are definitely a member of “footwear”, they do not belong to the “suitable for formal occasions” category.

Preferences (or aversions) can define categories too. A new movie may have your favourite actress or actor in the principal role, or may have been directed by someone whose previous films you liked a lot. Another one may be a musical, or a romantic comedy, and you happen to have a strong dislike of that kind of entertainment. Based on the categories a movie belongs to, you can skip finding and reading reviews, and simply use that heuristic for determining whether you’d enjoy it (and you would often be right).

You might reason in a similar way when you visit a restaurant you have not been to before. As you consult the menu, you spot a dish with some of your favourite ingredients. That is a category that might make the dish stand out, and influence your choice. Alternatively, if you feel adventurous, the category “have never had this before” might appeal to you and lead you to choose a very different dish. In either case, your decision is inspired by categories.

Categorical flaws

Unfortunately, efficient as they are, heuristics can tempt us into error, and two specific kinds of mistakes are closely associated with the concept of categories. When we reason that something that is true for a category as a whole, is also true for every member of the category, we commit the fallacy of division. The Dutch are the tallest people in the world, but it would be wrong to claim, on that basis, that any Dutch citizen is necessarily very tall. The converse is the fallacy of composition, which happens when you conclude that, because something is true for some member, it is also true for the whole category. We’d be committing it if we assumed that, because one multiple Tour de France winner was caught using illicit performance-enhancing substances, the whole sport is rife with doping.

Both these fallacies can be seen as instances of blurring the lines between two categories, and it is precisely this blurring that can mess around with our judgement.

Your song sucks, but we like you (source)

Last weekend, the long-awaited Eurovision Song Contest, postponed from last year, took place. The most important rule in the voting mechanism is that both the professional jury and the audience cannot vote for the artist that did represents their own country (or at least the one from which they phone in their vote). It is not hard to see why: the category “represents my country” would, for many, be a heuristic so strong that it would replace a more objective judgement of the quality of the performance. This restriction may prevent the most egregious nationalist voting, but it does not remotely eliminate it, as a paper by Alex Mantzaris, a data scientist at the University of Florida, and colleagues suggests. They examined the votes between 1957 (when the event started) and 2017, and established strong evidence supporting the hypothesis of regional collusion (countries giving high scores to each other) and bias arising from factors like proximity or cultural affinity, instead of artistic merit.

We might dismiss favouritism in matters of entertainment as frivolous and nothing much to worry about, but the category heuristic lurks elsewhere too. We should, of course, judge a decision on the basis of the robustness of the logic and the strength of the evidence, but the category “decisions that are beneficial to us” might be a tantalizing heuristic to override that reasoning. When a new book is published in which the authors make far-reaching claims, we should evaluate these on the basis of the soundness of their argument, and our judgement should not be influenced by whether the authors belong to “smart people”, or “assholes”. Yet, isn’t it tempting to take the simple route of the category heuristic?

If a close colleague at work, belonging to the category “people towards whom I feel loyal” is accused of inappropriate behaviour, will we approach the affair with the same dispassionate attitude as if it concerned someone from the category “complete strangers”, or “people I don’t get along with for whatever reason”? The category heuristic beckons insistently. Should someone challenge us about whether we took the right action, might we be seduced into blurring the line between the categories “worked really, really hard” and “considered the trade-offs and made the right calls”?

• • •

Like all heuristics, the category heuristic (which we use much more than we realize) can be a very useful shortcut – but only when it is used correctly. Ignoring the trade-offs involved in a choice or judgement and failing to engage in deliberate reasoning is a common error. In this particular case, however, the cardinal sin, the true category mistake, happens when we blur the lines between a category that is relevant, and one that is not.

When we blur those lines, we deservedly end up in the category of “people who misapply the category heuristic”.

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Why?

(featured image: allaboutfunandgames.com)

The power of a word that, despite its brevity, is verily a key to wisdom

Long ago, even before I was “age 12 to adult”, a friend of mine had a copy of the board game “Why”. Vaguely inspired by (and clearly seeking to capitalize on the popularity of) a TV show introduced by Alfred Hitchcock at the time, it taught me one of the very first English words (after “I”, “you”, and “Paperback writer”). Little did I know at the time, though, how important that little word really was.

My friend and I didn’t play the game very often, but I do remember that winning it required establishing “why” a murder was committed. I cannot profess to have any direct inside knowledge in what it takes to resolve a murder, but going by the numerous Agatha Christie and Georges Simenon novels I read in my formative years (not to mention the countless crime series on TV I have watched since), it does seem that discovering why the victim got killed is mostly instrumental in unlocking the mystery.

Small question, big scope

The question is not limited to murder inquiries, though. Anyone who has, or has ever had, access to small children will know that about one-third of everything they say starts with “why”. Sometimes the question does relate to someone’s motive or intent – “Why are you spending so much time on Twitter, dad?”, or “Why do people make rules, only to break them straight away?”*. But more often, why goes beyond the notion of a deliberate motive and is concerned with cause and consequence, for example, “Why does it rain?”, or “Why am I hungry?”.

Why does this chicken want to get to the other side? (image: Jianshui – Huajiaozhai cun/Wikimedia CC BY-SA 3.0)

In any case, this diminutive word embodies the curiosity that drives us towards gaining new knowledge, whether we’re a detective trying to figure out who the killer was, a 5-year-old wanting to know why a leaf floats on a stream in the wood, or a neurologist wondering why we feel pain. We find it in the powerful “five whys” technique to get to the root cause of a problem, developed by Japanese inventor and founder of Toyota Industries, Sakichi Toyoda. And it has even penetrated the world of wit, with numerous humorous riddles such as the perennial classic, “Why did the chicken cross the road?”

And there is more. We can also ask why to establish on what basis certain assertions are made. Say we hear someone make an implausible proposition. We could simply dismiss it as outrageous – or we could ask why this person is making this suggestion. Do they have any particular expertise that might give credence to the idea? Do we know them as a reasonable individual, who would not make up crazy shit, but who would consciously and critically consider the facts and trends? Asking this why-question can help us arrive at a better judgement. If our buddy Frank had predicted music streaming forty years ago, we might not have been too impressed. But if we knew the suggestion was made by Frank Zappa – about whose expertise in music and the music industry there is little doubt, and who reportedly had an IQ of 172 – we may have taken it more seriously (and rightly so). He saw record companies that would put their catalogue “in a central processing location, and have them accessible by phone or cable TV, directly patchable into the user’s home taping appliances.” He even foresaw that billing and royalty payments would be “built into the software of the system”. (Venture capitalist Paul Graham describes why it is better to reserve judgement when it is a knowledgeable person who proposes a preposterous idea in a recent blogpost.)

When we see a newspaper headlineAir Pollution now leading cause of lung cancer”, instead of taking it at face value, we can ask why that would be a reasonable claim to make, and look for any evidence in the article underneath (there is none). When, earlier this week, the day after international travel was allowed again in England, health minister Lord Bethell asserted that going abroad is “dangerous”, instead of accepting his authority, we could ask why, based on what facts, that might be a sensible statement to make. Asking why a conclusion is drawn, a proposal is formulated or a decision is made stops us too easily dismissing or accepting something that shouldn’t be dismissed or accepted.

We can, of course, also ask the why question to examine the motives behind a claim or a decision. Is it, for instance, an attempt to impress, is there a particular agenda being pursued, or are they trying to gain support for a controversial view? This too will give us a better idea how we should interpret any evidence provided, or even how much effort we should put in scrutinizing that evidence.

Our inner why

If we can use that tiny word to cast a critical eye over claims we see being made around us, might we use it for ourselves too? After all, we make choices, develop views, and draw conclusions almost all the time. And often, we do so without much reflection: cognitive misers as we are, we are happy to be guided by intuition, gut feel, biases and heuristics. They may be right, but they may not be.

Of course that red card was (not) justified! (But that’s just my opinion, not a reasoned, evidence-based argument) (image: master1305 via Freepik)

A little dose of why will reveal how much evidential backup we can muster. Do we have a solid case for our claim that Audi drivers never use their indicators, or for having chosen organic eggs? Or have we allowed ourselves to take the lazy route? One example of a driver failing to indicate is not really statistically significant – and by the way, was that really an Audi, or a Seat? And have we ever actually seen evidence that organic eggs are in any way superior to ordinary ones?

While we’re at it, we might as well inspect our own motives as well: why did we conclude that the ref should definitely (not) have shown that player a red card? Did the replay clearly show there was (not remotely) an inexcusable foul, or was his decision (not) what would have liked him to do? Of course, we are entitled to a biased, motivated opinion – but isn’t it better to be aware that is what it is?

Our inner why is like an annoying, but ultimately well-meaning companion. We don’t have to consult it all the time, and even when we do, we may ignore its outcome. But it’s a good thing to know it’s there.

Now, isn’t this a good moment for you to ask why I wrote this piece?

*: Authentic question posed to me by Luka (5 ½ )

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

So, are we then really not all economists?

(featured image: Arek Socha via pixabay)

Economics is part and parcel of most human interaction, but does that mean we understand it?

My very first post hereabouts carried the somewhat bold title, “We are all economists”. Even if we know nothing about economics, we do face competing calls on our scarce resources (money, time, or attention, for example) that cannot all be fulfilled at the same time, and we need to make trade-offs in order to resolve this. Two core aspects of economics happen to be the allocation of scarce resources and trade-offs, so the claim that early post makes is not without merit.

We have been paying attention to how we allocate scarce resources since long before, in 1776, Adam Smith marked the start of modern economics. Being able to utilize scarce resources efficiently is advantageous. When our ancestors Ug and Ag figured out which foodstuffs kept longer and which went off rapidly, and consumed them accordingly, they wasted less food, and needed to spend less time hunting and gathering than their ignorant neighbours Og and Eg, who often first ate the stuff that would have kept longer. Whether Ug and Ag’s offspring inherited this valuable ability, we do not know. But while Og and Eg were busy getting more food, Ug and Ag would have had a more enjoyable time (perhaps engaging in activities that might produce offspring).

Society’s killer app

That is, however, not the whole story. There is another economic phenomenon: the win-win transaction. While we encounter scarce resources and trade-offs even when there is nobody else involved, transactions take place between people. Some transactions have a winner and a loser: what one party gains, is the other’s loss. Stealing – not uncommon among animals and humans alike – is a prime example of such a zero-sum transaction.

But it is win-win transactions that are the killer app of complex human societies: voluntary exchanges in which both participants bring something to the party, and leave with more than they came with. Magic!

Nice, but I do fancy a bit of boar with berries now and again (image: nastyasensei via Pexels)

Imagine Ug, Ag, Og and Eg’s descendants, at the time when farming was gaining currency. One couple might have been especially good at hunting and gathering, while another was skilful at cultivating grain and baking bread, and making cheese from their sheep’s milk. Occasionally the farmers may have fancied boar and berries instead of bread and cheese (or vice versa) – but the farmers were lousy at hunting and gathering, and the hunter-gatherers hadn’t a clue about growing wheat and herding sheep. What if instead they swapped some of their production, thus getting something they valued, but could not produce cost-effectively themselves? Hey presto, a win-win!

Unwittingly, they had discovered the economic surplus: the value that a transaction itself creates. The farmers value some boar and berries as a change more than the cheese and bread they already have, and for the hunter-gatherers, it is the other way round. Through the exchange, both end up better off. For thousands of years, this has been the way in which communities organized themselves efficiently, and indeed the engine of economic growth and welfare, at both a local and at a global scale.

Fast forward to today, and we observe something strange. People often engage in zero-sum thinking, assuming that if one party benefits from a transaction, the other party must necessarily be losing out. We see politicians considering international trade as something in which it is better to be an exporter than an importer, and campaigning for protectionist measures, like putting tariffs on imported goods, if not for outright trade wars now and then. We see it also on a smaller scale. Consumers perceive manufacturers end up the winners by taking their money without considering the value they get (think of the debate around the profits pharma companies make from their COVID-19 vaccines). Even when we frequent a local shop, the intuition of the zero-sum transaction is hard to suppress: every pound, euro or dollar we hand over to the shopkeeper is one they get, and we lose.

This denial of voluntary exchanges as win-win transactions is detrimental in at least two ways. It can depress the number of transactions and hence economic activity, thus leaving people worse off than they would otherwise be. And if a transaction takes place, it will leave the party entertaining the misperception that they are the loser unnecessarily miserable.

The strange case of win-win denial

A team of psychologists, led by Samuel Johnson at Warwick University, investigated this remarkable case of win-win denial, in search for explanations. They identified four possible mechanisms that might contribute to it. First, they considered evolutionary mismatch. Our distant ancestors engaged in bartering. Both parties were clear what they gave and what they got, and both were clear that they valued more what they got than what they gave. These direct exchanges did not involve money, though, and so one possibility is that the mental mechanisms they evolved are not adapted for transactions using abstract currencies and market prices.

Next was a hypothesis related to mercantilist theories. The economic policy of mercantilism seeks to maximize exports (which bring in money) and minimize imports (which cost money), in the belief that wealth equates to money. From this perspective, a transaction in which money changes hands would lead to a loss for the buyer and to a gain for the seller.

The third possibility is based on the theory of mind, which refers to our ability to consider someone else’s viewpoint. This is critical in the concept of a win-win transaction: our ancestors could only barter cheese and bread for boar and berries provided they preferred what they didn’t have, and provided both parties could understand that this was true for the others too. If we are unable to appreciate this difference in preference, then only one party can win.

Finally, the authors propose that people may fail to see the win-win nature of a transaction because they ask the wrong question (they call it heuristic substitution). Instead of considering whether or not a buyer ended up better off after a voluntary exchange, people consider whether the buyer got the best possible deal, or whether the seller overcharged them.

$30 for this shirt? I am losing out (image: Nimble Made via Unsplash)

The researchers conducted four studies, in which participants were presented with a set of transactions – purchases of goods (e.g., a shirt) and services (e.g., a haircut), and barter (e.g., a McDonalds burger for a Burger King one) – and then had to evaluate whether both parties were better off, worse off, or the same, compared to before the transaction. One variant compared a conventional money frame (“the shirt costs $30”) with a time frame (“Sally worked for 1.5 hours to pay for the shirt; she earns $20 per hour”); another compared transactions where no reason was given with one in which the buyer was said to “want” the good or the service. A final variant varied the price of the goods or services between 50% and 150% of the nominal value in the earlier studies.

Not quite economists after all

The results were unequivocal. The researchers found strong evidence for win-win denial: across all studies the buyers were seen as benefiting less than the sellers, consistent with the idea that whoever gets the money is the winner. Welfare is seen as determined by monetary wealth, rather than useful goods and services – naïve mercantilism. This was further supported by the study where the transactions were presented with a time frame, as this decreased the denial effect.

Explicitly stating a preference for the purchase (even as trivial as “Mary wanted the chocolate bar”) also decreased win-win denial. This supports the theory of mind hypothesis: unless prompted, people tend to neglect others may have different preferences to their own. The studies provide little or no support for the other two hypotheses – the study varying the price showed that this had little effect, for example – leaving these two as the main reasons behind win-win denial.

It is hard to maintain that denying that transactions can leave both parties better off is rational, or even that it simply reflects a preference for monetary wealth. This would be inconsistent with the vast number of actual transactions that take place, which cannot possibly all be detrimental to welfare. But while this research pinpoints the causes of win-win denial, it leaves us with a huge conundrum: if people believe that purchases are zero-sum transactions (where we, as purchasers, are the loser!), how come the economy doesn’t grind to a halt? We can speculate, but there is no conclusive evidence that solves the puzzle.

Perhaps we can conclude, to borrow an old Northern English saying: there’s nowt so queer as folk –people can behave very oddly sometimes. And I will certainly have to revise my earlier claim that we are all economists.

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A good choice for a good cause

(featured image: Howard Lake/Flickr CC BY-SA 2.0)

Should we be guided by our head or by our heart? Or is this the wrong question?

If you want to share some of your wealth with others, there are literally thousands of charities that are happy to take your money and distribute it to the needy on your behalf. But which charity is best? Even if you have a preference for a particular kind of beneficiary you want to support, there are often still many organizations that serve your particular preferred target. How to choose between them?

If you were an effective altruist, you would – as the name suggests – look at the effectiveness of the charities’ work. The extent to which they realize their mission (and indirectly also yours) is then the primary criterion by which you would evaluate the possibilities and make your final selection. However, that is not always easy to establish. And isn’t charity really something that you should do with your heart, rather than based on cold, impersonal calculation?

Harvard psychologist Lucius Caviola and colleagues have reviewed the reasons why people select particular causes, and why they are often not effective altruists. They identify two main categories of reasons: motivational (emotion focused) and epistemic (knowledge focused).

The heart

In the first bunch, we encounter the catchall factor “preferences”. We have many predilections – for food and drink, clothes, entertainment and so on – that are not based on any reasoned evaluation. What we prefer simply feels good and right, and that can just as well apply to charities. Closely linked is what the researchers call narrow affective motivation. Especially where our intent is to help, we are motivated by whatever activates our empathy or sympathy. Why? We cannot rationally explain it any more than why we prefer sauvignon wine to chardonnay: we just feel more inclined to support this rather than that.

Sauvignon or Chardonnay? It’s a matter of preference (image: jarmoluk via Pixabay)

Another factor that may be at play is the existence of an apparent personal connection, for example through an illness we, or a loved one, experienced. This influence is a form of heuristic: a rule of thumb telling us that, if we experience a recognition effect linked with an important part of our life, then that’s the one to go for. A related element might be proximity in space or in time: charities that work nearby (or near a place that is meaningful to us) will have the edge. Likewise, charities that provide immediate support rather than focus on future generations (“what has posterity ever done for us?”, the authors joke). This is more like a cognitive bias, a propensity to favour what is close and familiar to what is distant and unknown.

We also tend to be moved proportionately less by large numbers and statistics, a phenomenon known as scope neglect. One reason is that we may feel that our donation would be a mere drop in the ocean, and would be worth more per recipient, and hence more meaningful, if there are fewer of them. In addition, we are generally averse to comparing charities and prioritize them according to how worthy they are. A final factor is the effect that a donation may have on our reputation – the social reward our peers bestow on us for supporting a given charity may be wholly unrelated to its effectiveness.

The head

But we also tend to measure generosity (ours, and others’) by the size of the sacrifice, not by the size of the result – we value the input more than the output. This is reminiscent of an anecdote behavioural economist Dan Ariely tells: when they locked themselves out of the house, people happily pay the fee when a junior locksmith takes a full hour to help them, and even breaks the lock in the process; but they complain when an experienced locksmith, who takes barely five minutes and leaves the lock intact, charges the same amount.

Next, many people use an inadequate heuristic for a charity’s cost-effectiveness: how big its overheads are (or what percentage of donations is passed on to the beneficiaries). This measure is a poor predictor of overall effectiveness (to do good, a charity does need infrastructure and competent staff, and that costs money). Moreover, the researchers found, we don’t really believe that the effectiveness of a charity can really be measured, and we believe that any difference between charities is negligible. Of course, we do so without actually checking whether these beliefs are justified (they are not).

An effective altruist would not be swayed by all these spurious factors, and simply collect the right kind of evidence to work out where their charitable pound, dollar or euro has the most impact.

Good feelings, not just for good causes

Emotions: not just fluffy stuff, but also part of solid, evidence-based decisions (image: Kranich17 via Pixabay)

It is easy to generalize many of the obstacles to effective altruism to other settings where we need to make choices. We are often led by preferences we have had longer than we can remember. If there ever was a deliberate choice involved, it is long forgotten. No need for reasoning: following our preferences just feels good. We also tend to be attracted to that which has a personal connection. Salespeople know this very well. When they try to sell you a car, a kitchen or a three-piece suite, in their chitchat they quickly try to find out something about you – your work, your hobby, the football team you support – that they can make a link to. Buying local – whether it’s from our village, our region or our country – or choosing options that deliver immediate benefit rather than sometime in the future (think of retirement saving) too are tendencies we can widely observe in others and in ourselves.

In many ways, we often seem to be guided by what feels good, while we really ought to dispassionately consider the evidence and work out what would really serve us best. But is this contrast between the head and the heart, between reason and emotion, really an accurate reflection of what happens? Not quite.

For what happens after a deliberate, reasoned, process that has produced a decision or a choice, and in which all the evidence that matters was level-headedly taken into account? We feel that it is good. When we work out whether or not to take a job, or move house, we don’t do so on a whim, and yet the emotion we experience when we have made up our mind is palpable. The same is true for the effective altruist who considerately weighs up where best to put their money.

It is true that we don’t always need to systematically consider all the evidence to make a good choice. Acting directly on our emotions can very well be the right thing to do. But we should not believe that by making evidence-based decisions, we sacrifice emotions on the altar of reason. Whether or not we reason our way to a choice, it will always be emotion that concludes the decision-making process.

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Ignorant opinions

(featured image: wayhomestudio via Freepik)

There are many things about which we don’t know much, but that ignorance doesn’t stop us having an opinion

An indoor swimming pool. The smell of chlorine in the air is palpable, and the kids are coughing. You’re not the only person to notice, and another parent asks what you think an acceptable concentration of chlorine in the air should be. You take a wild guess: “4ppm?” The other person seems to be in the know: “It’s 2ppm now,” she says. “Oh, then it should be less,” you state.

There doesn’t seem to be anything amiss with this conversation. You are not a chemist or a health and safety expert, so you had no real idea. You nevertheless gave an opinion based on your superficial knowledge about concentration levels of noxious gases, offering a vaguely plausible number. If you had had to estimate how much chlorine there actually was in the air, you’d probably have suggested something like double your guess at the acceptable level.

Equivalent or perhaps not so equivalent

Now picture a very similar conversation about a different subject: taxes. You ask a friend, if the total personal income tax revenue is 100%, what proportion of that would be acceptable for the top 1% earners to pay. “20%”, she says. Asked how much she thinks they actually contribute, she ventures a guess that it’s something like 5%. You have of course looked up the correct figure, and reveal to her that it is close to 40%, and then ask again, what proportion of total income tax revenue would be acceptable to be paid by the 1% highest earners. “Oh, a lot more than 40%,” she answers.

”I don’t know the chlorine concentration, but I do know it’s too high!” (image: Omar de Armas via Flickr CC BY-ND 2.0)

These two dialogues are formally entirely the same. The first data point is an estimate of an acceptable value for a given variable (chlorine concentration – “4ppm”; proportion of income tax paid by the 1% highest earners – “20%”). The second data point is an estimate of the actual value (implied in the pool conversation at 8ppm, and 5% in the tax discussion). Next is the revelation of the actual value (2ppm and 40%).

Crucially, these values turn out to be ‘better’ than the acceptable value as initially estimated: 2ppm is lower than 4ppm, and 40% is higher than 20%. Yet at that point, the reaction is not to say, “Great!”, but to reject the original estimate for the acceptable value, and demand a more extreme one even than the actual value (even less chlorine, even more tax).

The uninformed opinion about what would be an appropriate value would be was adjusted once the real value – more extreme than the initial estimate – was revealed. That may seem strange, but there is, in principle, nothing unusual about updating one’s estimate about an unknown variable when more information emerges.

Imagine, for example, that you are visiting a friend in a part of the country you don’t know well. You are walking through a street with some sizeable houses. As you pass a particularly impressive mansion, your friend says that it recently sold, and asks you to guess at what price. “£700,000”, you venture. He then tells you that an average house in this street is valued at £1 million. It is then perfectly sensible to update your original estimate to, say, £1.5 million, because you have learned something about the price distribution that you did not know before – your opinion will be more informed.

But is that also true for the discussion about the tax? Here are two other equivalent conversations. Two colleagues are discussing a court case. Alex has just described the crimes that the perpetrator committed and asks Chris what sentence he should get as a punishment. Chris ponders for a moment, and suggests, “12 years”. Alex then says that he was sentenced to 15 years, upon which Chris says, “In that case, it should have been 20 years.” Some time later, we find Alex and Chris at the watercooler again and Chris, who went out for a meal with her team the night before, asks Alex what proportion she should have covered of the total bill. “I’d say a third would be adequate”, says Alex. “I actually paid half of the bill”, Chris says. “Oh, I think you really should have paid two-thirds”, Alex concludes.

Two kinds of ignorance

There is something odd about these conversations. In the anecdotes at the chlorine-rich pool and the expensive street, there was an objective, but unknown norm (the safe concentration, and the average price). When that became known, it was perfectly logical to update the estimate accordingly. You knew that the chlorine concentration was too high, so whatever the current level was, the safe limit would have been lower. You knew the large house was larger than average, so learning the average price allowed you to update your guess.

“The price is above average, but the taste is a different matter.” (image: Erika Wittlieb via Pixabay)

But when it concerns prison sentences or the proportion of the bill for a meal that a team leader should pay, there is no such objective norm to be determined. There is only a personal, subjective opinion – and that seems to be rather a movable feast: one gets the impression that it is never enough.

Is that the case for the discussion on taxation too? Not necessarily. Someone might be of the opinion that the current tax revenue is insufficient to properly fund all the public services they think are essential, and that the people who earn the most should contribute more. If they believe that the tax revenue should be 20% higher, that the 1% top earners should provide that extra revenue, and that they currently contribute 5% to the total, then their guess that they should contribute 20% is about right (5+20/120 = 21%). If they are then told the actual contribution is 40%, it should be increased by a quarter to 50% to meet their desired 20% revenue increase (40+20/120=50%).

Few people think that way, though, and it is more likely that the thinking is more in line with the “never enough” viewpoint of the slippery subjective norm. And that is indicative of a different, and altogether more pernicious kind of ignorance. It is perfectly acceptable to have an uninformed opinion, and update it when you obtain more information (as in the pool and the house anecdote).

But someone who maintains the view that it ought to be ever “more (or less) than whatever it is now” not only signals they will never be satisfied, but also exhibits an ignorance of the trade-offs that is not rectified with new information. For whether it concerns prison sentences, taxation or even the boss’s contribution to a dinner with the team, the unlimited escalation of the key variable will have other consequences. Wilfully ignoring these might be allow for some pompous posturing, but intelligent reasoning it is not. There are always trade-offs.

So, if you have to be ignorant, make sure it’s ignorance of the right kind.

(This article was inspired by a Twitter thread started by Shane Frederick, a Decision Scientist at Yale University’s School of Management, and several others, including Daniel Read, Oleg Urminsky, David Hagmann and Alex Imas. The conversation about taxes paraphrases real ones in this clip.)

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When time is not money

(Featured image: Mona Tootoonchinia via Pixabay)

Time is money, it is often said, but that doesn’t mean “no time” is equivalent to “no money”

We are social beings, but we are also economists: we interact with others in various social relationships, and at the same time these relationships sometimes make material demands on our scarce resources, notably money and time. These can be sizeable (a friend can invite us to her wedding on a Caribbean beach), or rather modest (an evening out with colleagues, with a show and a nice meal, or perhaps just a coffee and a chat with an acquaintance). Our inner economist will evaluate the sacrifices the invitation requires, compare them with the gains we stand to make, and advise us to accept or to refuse accordingly.

If we accept, no problem, but if we’re inclined to refuse, our inner social being steps up with a warning: what will this do to the social relationship and to our reputation? We may reconsider, but if we decide to decline anyway, we cannot simply say that we don’t feel like accepting the invitation. We need to come up with a good excuse. “Ah, but that’s the evening I wash my hair” might not quite do the trick.

Shifting the blame

Ideally, the excuse should lay the blame elsewhere than with ourselves. If we can say simply don’t have the scarce resources that the invitation requires, that’s perfect. But which of the two – time or money – should we claim we lack? Money is more associated with pure economic transactions, so it might serve poorly as a reason why we need to decline a social request. Time is more closely linked to social activities, and so perhaps declining an invitation for lack of time might be regarded more favourable than for lack of money.

“Decline with regret” – but what excuse should we use? (image: freepik)

On the other hand, it may seem more plausible that, with all the financial obligations we all have, there is often not much money left to spend at our discretion, while time is something over which we have more control. Is it credible to say we have “no time”, or would we be signalling that we have better things to do than accept an invitation?

What a dilemma…

Thankfully, research by Grant Donelly, a psychologist at Ohio State University and several Harvard colleagues sheds some welcome light on this thorny issue. They looked at how the two types of excuses affected the relationship between the inviter and the invitee, and in particular at two mediating factors. One was the perceived degree of control (an excuse is more valid if the reason is seen as genuinely outside the invitee’s control); the other was the perceived trustworthiness (to what extent does the excuse damage the invitee’s image of reliability).

A preliminary study found that excuses claiming lack of money found more favour. The researchers gathered 8,000 tweets containing “don’t have time” and “don’t have money” over the period of a week, and discarded those that did not actually communicate scarcity of time or money. About 2,300 tweets were left, slightly more than half claiming lack of time (e.g., “I have a paper to write, I don’t have the time to leave the house”). They also looked at how much ‘likes’ (a positive engagement by other users) each one received, and found that for tweets reporting time scarcity this was considerably lower (24%) than for those expressing money scarcity (42%).

Next, the researchers conducted a recall experiment. Participants had to reflect on a recent instance where an invitation of theirs had been refused with an excuse involving lack of either time or money, and rate the perceived closeness to the person making the excuse, before and after the excuse, as well as their perceived trustworthiness, and how valid they thought the excuse was. The difference between the two excuses was significant: with those who had claimed lack of time, the drop in closeness was a lot larger, and the perceived trustworthiness and the validity of their excuse a lot smaller.

Another experiment used a hypothetical scenario: participants imagined inviting a friend to a concert of a mutual friend, in which the invitee declined with one of the two excuses. The findings were similar: “no time” corresponded with less closeness and less trustworthiness, because time was seen as something over which people have more control.

What if the controllability was explicitly manipulated? The researchers thought of that too. In a further experiment the scenarios stipulated two different reasons for the lack of time and money: in the low control context, the invitee declined because they needed the time to study or the money to buy study books; in the high control context, they needed their money to register to take part in a marathon and their time to train. In the low control scenario, there was no difference in closeness or trustworthiness between the money and the time excuse, confirming the earlier hypothesis that controllability is indeed a key factor.

An interesting finding from the study (which included a few more experiments) was that when people themselves make an excuse, they really do not appreciate the difference in controllability that the receiver of the excuse perceives. Consequently, they fail to realize the effect this difference has on their reputation and on the relationship.

Put your money on the money

The authors conclude that lack of money is widely seen as a valid, external and non-controllable excuse for social rejection, while time is not (unless it is explicitly externally constrained, for example a business trip out of town). Remarkably, even if you can legitimately claim that your time is not yours, invoking a constraint on your finances turned out to be still a better way to minimize damage to your reputation or to the relationship. If the invitation is for an event in several weeks or months, claiming lack of time is definitely not a good idea: control over one’s time is seen as even greater in the distant future.

Exhaustion – the ultimate excuse for refusion an invitation? (image: Phyliis Buchanan via Flickr CC BY-SA 2.0)

But what if shortage of money really seems not appropriate as an excuse, for example if the invitation involves almost no actual expenditure, or if, as an invitee, you are much wealthier than the person inviting you? Intriguingly, the researchers found that, even then, a money excuse is perceived as more trustworthy. This control aspect really counts.

And if you believe neither money nor time would work, the authors have one final tip: claim lack of energy. This is something everyone can sympathize with, and best of all, everyone knows that there is nothing you can do to quickly restore your energy level.

Right. It’s not that I don’t have the time to carry on writing, but I am actually exhausted now. Until next week.

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

There is more

(featured image: Zak/Flickr CC BY-NC-ND 2.0)

We cannot possibly be aware of everything, but sometimes acting as if what we see is all there is can be embarrassing – or worse.

A long time ago, when my hair was long and not so grey – well it is pretty long again, the barbers have only just reopened after the latest lockdown – a friend of mine had come up with a new, jocular greeting. We were deeply into jocular phrases at the time. They combined attempts at sophisticated wit with our own private slang. The kind of thing you do as a teenager.

Anyway, my friend’s new greeting, instead of a more conventional variant on “how are you?”, was “how’s your mum?” Slightly absurd, slightly mysterious even – but he thought, and we all thought, that it was hilarious. He used it with actual friends, and indeed with perfect strangers, whose perplexed reactions just added to the fun.

Until, one day, the mother of the person he greeted had actually died a few weeks earlier.

Limited visual range

When you’re 16, 17 years old, your mum is not supposed to die. None of our sizeable circle of friends had experienced this unfortunate event, and so none of us had considered that possibility. Understandably the mood turned, cheeks became red, and that was the last time that particular jocular phrase was heard.

A clear case of WYSIATI – what you see is all there is – a concept coined by Economics Nobel laureate Daniel Kahneman in his book Thinking, Fast and Slow. Unlike some other cognitive phenomena, it has a pretty self-explanatory name.

Ideally, when deciding on a course of action, we ought to consider all relevant information. But that is problematic: we cannot possibly identify and consult all information that is germane to what we want to do. Imagine you need to buy a birthday cake – how many different types exist, or can be made especially for the occasion? What about the decoration – chocolate sprinkles, marzipan figurines, little flowers shaped in sugar? How big? Should it be themed? You see what I mean (or YSWIM, to stick with acronyms).

Yet, while we cannot look at everything, we can make reasonable assumptions. The birthday girl or boy, for example, happens to be a fan of Toy Story and has a strong dislike for chocolate, so that narrows down the options considerably. Before long we can come up with something that is suitable – not the very best possible cake, but certainly good enough (the great polymath Herbert Simon called this satisficing).

Toy Story, check. No chocolate, check. But is that all there is? (image: Chris Gerty/Flickr CC BY-SA 2.0)

We can use our judgement about what exists (or might exist), and decide what to ignore, what to focus on. But imagine we have never heard of gluten intolerance, something the birthday girl or boy is afflicted by. Our ignorance limits the field from which we will make our selection – we literally don’t look elsewhere, we don’t consider that there might be certain kinds of cake that are unsuitable for reasons other than taste, so what we see is all there is – and we’d make a very bad choice.

WYSIATI is often implicated in overconfidence in momentous decisions, like capital investment in a business, or the purchase of a house or a car privately. A remarkable business example is the dispute between the popular American singer Taylor Swift and her former record label, with which she made her first six albums (as told in a Twitter thread). According to her original contract, the company owned the rights to these recordings. When the contract came to its natural end, they failed to agree on a new one, apparently because Ms Swift wanted to regain ownership of the recordings. Subsequently, the record company was acquired by Ithaca, a private equity firm, for the tidy sum of $300M, which included an estimated $100-200M for Swift’s recording rights. The buyers seemingly thought that what they saw was all there was. But there was more…

To use a recording in a movie, a film maker needs two licences: one to use the recording, and one, known as the sync licence, to use the song itself. The rights to use the song are usually owned by the writer – and the writer of songs on Taylor Swift’s first six albums is Ms Swift herself. So, having been denied the chance to acquire the recording rights to her back catalogue, she has been systematically denying requests for a sync licence to any song from these first six albums. She is also rerecording these albums – something she is at liberty to do. This means she can offer both the recording and the sync licence to any film makers, and even do the equivalent with streaming services like Spotify. Thus, she has cut the value of the recording rights to the original six albums pretty much to zero.

It can be a good idea to check if there is more.

Computers know no embarrassment

The magnitude of the consequences of a WYSIATI blunder may differ, but the embarrassment at realizing there is more than what you had seen – things you should have thought about – is common, whether it concerns an ill-conceived greeting or an astonishing due diligence oversight. Interestingly, it is not just human agents who may fall foul of WYSIATI.

25 years ago, the web was an exotic playground for nerds, and data entry was usually done by professional employees at the end of a telephone line. Since then, billions of consumers have become de facto data entry operators too – we register on web shops, news sites, social media and whatnot, and every time we must provide data. The designers, to ensure that these inputs are valid, set the computer at the far end up with rules to reject input that does not conform. So, for example, what should be the minimum length of a surname? Three sounds reasonable, think of “Lee” or “Fox”. Chances are you have never seen a name with just two characters, let alone one.

Bad news, though for the 120 or so Belgian citizens whose surname is “O”. Yes, just one letter, and that can be the case for transcriptions of some Asian names too. Imagine the frustration of Mrs O trying to book a ticket to a show, only to be told over and over that her name is not long enough – until the show is sold out. If all you see is longer surnames, then the problem people with one-letter names remains invisible.

Validation is one thing, but as the Internet gained in popularity during the 1990s, it became a sport among predominantly juvenile users to use profanities online. AOL, the erstwhile service provider with a clean image wanted none of that filth, and introduced a “profanities filter” to spot and block unsuitable terms. That led to what has become known as the Scunthorpe problem: the rejection of addresses in that pretty English town because – well, you can see why (check the link for many more examples). Here too, the obscenities the developers saw was all they thought there was – that no-no words might be embedded in innocent placenames had not occurred to them.

Not really a joyful memory (image: Twitter)

These problems have since been fixed, but I recently came across an issue that is curiously like my old friend’s: inadvertent algorithmic cruelty. To increase engagement with its users, social media like Facebook and Instagram remind them of the important moments from their past. Algorithms analyse their account activity (pictures posted, messages from friends associated with them, likes and so on), and produce personalized messages, excitedly stating “here’s what your year looked like!” with a picture… of a child that died less than a year ago. Or they encourage users to share a memory, picking the most liked images in a montage, helpfully enhanced with animated characters. Even if the most liked image was that of your mother’s grave.

These events, like my friend’s faux pas, are rare, but they’re not that rare, and because computers cannot experience embarrassment and learn from it, the phenomenon can escalate rapidly and widely. Of course, software developers can fix these problems too. Their technical field even suggests a valuable approach, also for non-programmers, to help avoid WYSIATI. A common building block in a program is the IF-statement: IF <condition> THEN <action1> ELSE <action2>. The key word here is ELSE, and that can serve us well.

We are at risk of WYSIATI when we make implicit assumptions, and we are unaware of what Donald Rumsfeld, George W Bush’s Secretary of Defense, famously termed the unknown unknowns. If we made our assumptions explicit – what do we think will happen and why? – we become aware of the conditions that are necessary for what we want to happen, and then it becomes easier to also ask ourselves what else could happen when those conditions do not apply.

That will at the very least hint at what more there is that we don’t see, and give us a chance to avoid embarrassment – and perhaps even more importantly, inadvertent cruelty.

(WYSIATI is a phenomenon that regularly triggers my attention, and I have written about it before: see here, here and here.)

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

Our behavioural fingerprint

(Featured image: pch.vector via Freepik)

Fingerprints have long been associated with our identity, but more than a bit of skin at the tip of a finger, it is our behaviour that is characteristic of who we are

There is a song that, when I first heard it, really struck home. Not, I hasten to say, that I have ever been engaging in a strange drinking game with a bunch of Belgian businessmen; I don’t even have a son, let alone one that played football. But the sentiment it expresses resonated with me – and still does today.

The song Come Home, Billy Bird by The Divine Comedy – relates the predicament of an international business traveller who the night before drank too much, missed his wakeup call, and now – in the company of a phenomenal hangover – must overcome various obstacles in order to catch his flight home and be there in time to see his son play an important match. It finely sketches the unwise choices one may make, especially when away from home and under peer pressure, to just have another drink, paying scant attention to the potential consequences in a few hours’ time. Then, the emotional rollercoaster of – through no one’s fault but one’s own – being late for a flight, having to grovel, and giving up one’s cultivated, polite and reserved image to become a red, sweaty, ill-mannered guy elbowing his way to the gate. Above all, it sketches the angst of the parent who is torn between work (even if it is socializing in the hotel bar) and family.

Signalling who we are

What kind of person are we? We may like to think that we are a good colleague, and a good parent. And it is not too hard to be a good parent when there are no work obligations in sight, or to be a good employee during a normal working day when there are no family concerns. But it is when the two roles are not compatible, when we have to choose between them, that our behavioural fingerprint becomes clear.

Will Billy’s sacrifices have been in vain? (image: youtube)

Choices are inherently trade-offs. By definition, they mean selecting one thing, and rejecting another. Choosing is giving something up, and it is what we choose, and what we give up, that signals to the world (and to ourselves) the kind of personality we have.

These signals matter. We are social beings, and we care about the personality of the people we interact with. We want to know whether we can trust them and whether we could rely on them not to let us down. We want to be able to predict how they might act in the future, and what we might be able expect from them (or not).

There are plenty of instruments that purport to reveal someone’s personality, from the frivolous (Which Harry Potter character or Star Trek captain are you?) and the pseudoscientific (like the Myers-Briggs Type Indicator and similar) to the somewhat more robust and scientifically valid (the Big Five personality traits). But even the latter are not very practical to evaluate the people with whom we socialize. We rely on what we observe, directly and indirectly, to shape our judgement.

That judgement can be formal, for example in assessment centres, where candidate new employees are placed in controlled real-life conditions, and where their behaviour is observed in team settings and role play. Rumour has it that one manager invited candidates to dinner at a place where he had arranged for the server to screw up when bringing the prospective recruit’s food, to see how they’d react to the error. (I have never seen it confirmed, but it’s an interesting story.) Mostly, though, the judgement is informal.

Either way, it is one aspect in particular of how people choose to behave that we seem to concentrate on in our evaluation: the externalities inherent in people’s choices. Who comes off better, and who comes off worse as a result? Are they focusing on their own advantage, to the detriment of someone else who is not even involved? Or are they sacrificing their own gain in order to ensure someone else does not lose out?

Compelling drama relies almost entirely on the trade-offs the characters make to give us an idea of their personality. Their choices resonate with us and allow us to imagine whether or not we would do the same when faced with the same situation. Often the gains and sacrifices are larger than life, or at least larger than our own life, where thankfully matters of life and death are rare. But that doesn’t prevent them from activating our emotions in sympathy (or antipathy), and shining a light on our own boundaries of the choices we might, and might not, make.

Complex choices

Billy Bird, the hero in the song, made a choice the night before. He could have chosen to go to bed in time to allow him to comfortably make his way to the airport the next morning. But instead, he made a choice that nearly made him miss his plane, and hence his son’s match. The lyrics are silent about the context, but we can readily assume that he had promised his son to be there, which would make that promise the centrepiece of the musical vignette. Failing to keep a promise is the kind of externality we have all experienced, and on the basis of which we have all judged others (and possibly been judged).

But life is complex. How we behave – the choices we make – does not just depend on what kind of person we are, but also on the circumstances. We may be less considerate when we’re stressed, annoyed, or sad, than we are in more normal conditions. In his famous 7 Habits of highly effective people, Stephen Covey tells the story of how a peaceful Sunday morning subway ride turns tumultuous when a man and his children enter the carriage. He sits motionless with his eyes closed, oblivious to his offspring yelling, throwing things, and even grabbing other passengers’ newspapers. Eventually, Covey – who, no doubt, has made a judgement of his character – addresses him and asks him to control his children. The man agrees, adding, “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.” It is an example of what is known as the Fundamental Attribution Error – the tendency to ascribe behaviour to personality and underemphasize situational factors.

Are you the kind of person who does this? (photo: Stephen Mitchell/Flickr CC BY-SA 2.0)

Yet, imperfect as they are, we tend to be guided by our observations of others to form a view of the kind of person they are – as they are guided by watching our choices to do the same about us. This is worth bearing in mind, both as the observer of the signals that others transmit, and as the sender of signals ourselves. Actions do speak louder than words, and leave behind our behavioural fingerprint.

We should try not to judge others too quickly: we might be seeing a state (a temporary condition) rather than a trait (a long-term characteristic). But we should also be aware that others are watching us too, and making up their minds on the basis of what they observe. And this is largely not about things like not getting behind the wheel when we have had a pint, or grand gestures at someone’s birthday. It is about whether we are the kind of person who, at the supermarket, parks in a parent and children spot because it’s conveniently wide and close to the entrance, even though we are on our own, or the kind of person who conscientiously returns their trolley; who, at work, systematically arrives late at meetings, or the kind who diligently washes up their coffee mug; who, at home, leaves the hair in the plughole of the bath, or the kind who, like Billy Bird, moves heaven and earth to be able to attend one of the children’s big football match or performance in the school play.

So much of what we do means choosing between us and others. And we are, very much, the sacrifices we make.

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