Context counts

In our search for universal truths we should bear in mind the importance of the context

Nobel prizes don’t typically cause much commotion outside their respective scientific domains. Occasionally though, something about the award resonates more widely, perhaps because some people in the media believe it is of particular interest to their readers, viewers or listeners.

So it was when Richard Thaler was awarded the prize for economics on 9 October. Only people who were on a different planet last week will be unaware that Professor Thaler is a behavioural economist. Pretty much every self-respecting newspaper and news programme around the world ran a profile of the man. And local experts were wheeled out to explain what behavioural economics is all about, with stories of (mostly) boosted retirement savings and healthier eating.

You may have been left with the idea that there has been a revolution in the staid old dismal science of Economics. But we should keep a sense of proportion. Thaler himself is rather modest about the status of his niche. At the end of Misbehaving, his very readable autobiography, he sees Behavioural Economics eventually disappear: “All economics will be as behavioural as it needs to be.”

Yet that didn’t stop (and probably won’t stop for a long time) semi-informed journalists going on about the quasi miraculous insights of behavioural economics that have the potential to transform our lives and our businesses. Watch out for articles the title of which consists of a claim and the phrase “according to behavioural economics”.  Be critical of what they proclaim. Better still: just skip them. Such headlines are rarely the sign of a nuanced discussion.

A bit of a crisis

Uncritical treatment of behavioural economics (and more general behavioural science) findings is not confined to the popular press, though. One of the most widely discussed instances is that of the so called priming effect, referring to the phenomenon in which people’s behaviour is influenced by subconscious cues.

In 1996, John Bargh, a psychologist (then) at New York University, and colleagues conducted an experiment in which they purported to activate an ‘elderly stereotype’ in a group of undergraduate students. In the treatment condition the participants had to unscramble sentences which contained words associated with old age, such as worried, old, lonely, grey, retired, helpless and so on. In the control group, participants had the same task, but with sentences that contained no such words. What the experimenters found is that, after the experiment, participants in the treatment group walked down the hallway a second more slowly than those in the control group.

Fifteen years later, Daniel Kahneman called this study an “instant classic” in his book Thinking Fast and Slow. However, not long after, doubts were being raised by other researchers who failed to replicate the effect. (Kahneman acknowledges the problem in a note he wrote as the validity of Bargh’s and other priming studies was being challenged.)

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And don’t forget to pay! (photo: Newcastle University)

The same fate has befallen other findings that caused a big stir at first. Do images of money make people act more selfishly? Does a poster with Big Brother eyes really make people behave more honestly? Does adopting a power pose really boost your confidence? Certainly not always. By 2015, a large replication study by Brian Nosek and 269 colleagues, found that the conclusions of over half of 100 recent psychology studies they investigated were dubious. A true replication crisis.

One explanation for the initial lack of critical evaluation is quite likely confirmation bias, which affects scientists as well as ordinary mortals. (In his email, Kahneman admits to being ‘a general believer’ in priming.)

Context matters

But another possibility is that the context is not fully taken into account. And context matters – also for nudges, the brainchild of Richard Thaler and his co-author Cass Sunstein.

In 2015, a group of Dutch scientists led by René van Wijk of the university of Wageningen, investigated whether they could nudge supermarket customers to buy (healthier) wholewheat bread instead of white bread by giving it a more prominent display position. However, they found that no more whole grain loaves were sold as a result of their manipulation. Making the healthy option more accessible had no discernible effect.

More recently, a field experiment in India by Ling Bai of Edinburgh University and colleagues, evaluated the use of so-called commitment devices to increase preventive doctor visits for patients with high blood pressure. The commitment contract consisted of prepayment for three appointments over six months, plus an additional (imposed or chosen) commitment amount that the patients would receive back in instalments when they kept to their appointments. The researchers found no effect on actual doctor visits or health outcomes: a substantial number of patients paid (and lost) money without experiencing any benefit.

And in the last week, Google trialled and quickly removed a nudge in their Google Maps service. They introduced a feature that showed not just the walking time between two points, but also the number of calories that would be burned in the process. The idea was ostensibly that this would remind people of the health benefits of walking, and encourage them to do so. But instead it was perceived as a crass attempt at ‘body policing’ and ‘guilt inducement’.

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White bread sold out, wholemeal still available? (Photo: source)

Do these three examples prove or even suggest that nudges don’t work? Of course not. What they do show is that the context is of supreme importance, and that no amount of scientific studies can deliver a guaranteed way of achieving a certain result. In the article Nudges that fail, Cass Sunstein explores several reasons why behavioural interventions may be ineffective, from strong prior preferences, to time-limited influence. It is a plea for thoughtful analysis and intelligent experimentation, rather than blind belief.

Unfortunately this subtlety and complexity is not always mentioned by advisors – whether in business or in the popular media. When we are given simple tips, certainly when it is based on the authority of a Nobel Prize winner, it is tempting to accept it as gospel.

In our relentless quest to understand, describe, and predict the world around us, we are sometimes too quick to perceive universal, unconditional truths. Binary thinking is the enemy of progress, though. We should be careful not to accept too easily results that look cool, or that confirm our prior beliefs. We should also not dismiss insights because they fail to replicate, or because an implementation built on it is unsuccessful.

Humans are complicated beings, and if we should draw a single lesson from behavioural economics, it’s that there are no simple explanations for our behaviour.  Behavioural economics refines our understanding, but it is not a magic explanation of everything.

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Selling your soul

(featured image: wikimedia)

The trade-offs we don’t want to make (but believe others should)

Not much is known with any certainty about Johann Georg Faust. Wikipedia describes him as an alchemist, astrologer and magician, who was born in either 1466 or 1480, and who may even have been two different people. However, after his death in 1541, he became the subject of legend, immortalized by numerous writers including Christopher Marlowe and Goethe. Even the cartoon show Futurama had an episode that was based on the Faustian legend.

Faust’s claim to fame was that he is assumed have sold his soul in exchange for unlimited knowledge and worldly pleasures. And his name lives on in the term Faustian pact. The different versions of the legend vary somewhat in their depiction of the hero, but he is essentially a tragic figure who makes a morally wrong choice. You should not trade in spiritual values.

No spiritual economics

Neoclassical economics has little interest in spiritual matters, otherwise someone would surely have come up with a price discovery mechanism to establish the correct sale price for a soul. (Arguably repugnant markets get close, but even those tend to involve the trading of tangible goods like organs, and not ethereal souls.)

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A tragic figure (image: wikimedia)

Behavioural economics may not deal directly with the buying and selling of souls, but at least it recognizes the existence of distinctive mental accounts for different kinds of economic transactions (a concept first named by the recent Nobel laureate, Richard Thaler). It also distinguishes between transactions in the market domain and those in the social domain. This explains why we are sometimes willing to do something for free, but refuse to do the same for a very small sum of money.

Yet even that doesn’t really cover the tension that can arise when a choice needs to be made between money and moral values.

A few months ago, Amazon got some bad press for not pulling its advertising from the Breitbart website unlike some 2,600 other companies, from car company Audi to social games developer Zynga. (Breitbart is the brainchild of alt-right political activist Steve Bannon, who for a short while was Donald Trump’s Chief Strategist.)

We can only speculate as to Amazon CEO Jeff Bezos’ reasoning, but it is not unreasonable to assume that economics play a part in some way. Breitbart attracts around 75 million unique visitors per month, and it would be very strange if cutting off all advertising on the site did not have an impact on Amazon’s sales. Does the man have no moral principles? Or is he a closet alt-right supporter?

In a similar vein, the recent allegations of sexual harassment and worse concerning movie director Harvey Weinstein have led to extra indignation from Republicans in the US. Weinstein has donated more than 1 million dollar to the Democratic party since 2000, and they now demand that the recipients of his generosity pledge that money to charitable causes rather than to funding the party.

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Weinstein’s money: as clean as his manners? image: wikimedia

There are differences between the two cases. Amazon is well aware of the role of Breitbart in the spread of fake news, and so can be said to make a deliberate decision to continue advertising. The Democrats (mostly) were not, and could not have been aware of Weinstein’s debauchery, so whatever they accepted, they accepted in good faith.

But they share the same fundamental question: is it morally acceptable to benefit materially from sources of dubious moral standing? The calls to companies to stop funding Breitbart through ads, and the calls to Democratic politicians to give over Weinstein’s donations would suggest it is not. It is seen as tantamount to selling out one’s morality – selling one’s soul, if you like.

However, there is one important common aspect to this kind of calls: it is people who have not personally benefited who want others to give up their gains, or forego future benefits. Demanding that others put their money where your own mouth is, is easy to do, and not a particularly clear sign of moral rectitude.

Trading of our own morals

Would we act with such purity if we had to choose between morals and material advantage? Experiments on this theme would be ethically tricky to set up. However, an interesting thought experiment, known as the Heinz Dilemma * (nicely described here) shows how hard it is to maintain pure moral standards.

Some people choose to invest only in ethical funds, refuse to work for organizations involved in practices that go against their morals (like arms manufacturers), or boycott the products of companies that make use of child labour. But is this more than superficial virtue signalling? It is the sacrifices we make that indicate what is truly important to us, and the cost of such choices is small.

Would we in general really be as pure as we expect others to be if it were costing us real money? If we ran a shop, would we choose not to serve people who act in conflict with our own morals? And as a customer, would we choose not to buy things from a shop whose owner has an attitude that we find reprehensible… also if the nearest alternative was half an hour away, and 20% more expensive?

Maybe we are not in a position to make that choice – we’re not a shopkeeper, or we are ignorant of the morals of the owners of the places where we shop. But do we always act entirely in accordance with our own morals and values? We could choose to live a carbon-neutral life, but that would mean foregoing some precious material benefits: no car, not flying to distant holiday destinations and so on. We could choose to alleviate poverty and child mortality by donating more money to famine relief and medical charities. But that would mean less (or if you want to be really pure, no) money for pleasant frivolities like going to the cinema, eating out or even a drink in the pub.

Whenever we fall short of our own professed moral norms, we sell a little bit of our soul to the devil. And in the real world with its more than 150 shades of grey, were purity is an unattainable ideal, maybe that is OK.

But perhaps we should be less demanding of others when they do so too.

 

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Monty Hall forever

(credit: khiemtran87/Wikipedia)

A baffling decision-making problem that illustrates surprising irrationalities

Last Saturday, Monty Hall, a Canadian game show host died at the ripe old age of 96. He presented more than 10 different programmes, both on radio and television, in a career spanning over 70 years. But his name will forever be associated with a probability problem bearing his name, which was central to the format of Let’s make a deal.

The problem is deceptively simple. Imagine three closed doors. Behind one of them, there is a big, desirable prize (like a car). Behind the other two, there are undesirable prizes (a goat). The host invites you to pick one of the doors, and you will get whatever is behind it. The host (who knows which of the three doors conceals the car) then opens one of the remaining two doors, revealing a goat, and asks you whether you want to switch from your original choice to the other closed door. Is it advantageous to do so?

Mathematically, the answer is yes. But this appears counterintuitive: there are two remaining closed doors, one with the car behind it, the other one hiding a goat. How could the probability of the car being behind either door be anything else than 50%?

And yet, it is: the chance of it being behind the door you originally picked is 1/3, the chance of it being behind the other remaining closed door is 2/3. (An explanation is at the end of this piece.)

The wrong kind of irrationality

This puzzle is often wheeled out to illustrate the ‘irrationality’ of not switching. But are people who just don’t know how to work out conditional probabilities truly irrational? When my nephew was four years old, he preferred two 5 euro banknotes to one 20 euro note. Quite reasonably, he assumed that two notes were worth more than one – because he did not understand that two very similar pieces of paper could have such a different value. That lack of understanding shouldn’t be really called irrational – and for the same reason, neither should the assumption be that the chance of a car being hidden behind one of two closed doors is fifty-fifty.

However, the Monty Hall problem is an excellent illustration of truly irrational behaviour, which has nothing to do with mathematical ignorance. Only a small number of contestants actually switched doors (and some of those probably had worked out it was better). If people truly believed there was an even chance that the car was behind either door, you would expect them to choose to stay, or to switch, in roughly equal proportion. How come they didn’t?

Maybe the most obvious reason for this aversion to switching is that people are led by the status quo bias. This describes our tendency to take the option with the least effort. We picked a door, the other remaining one (we think) doesn’t offer us an improved chance, so why bother? Arguably, even this is not irrational behaviour if we assume the chances are even: there is indeed a small cognitive effort needed to switch, for no discernible material benefit.

The right kind of irrationality

But some people might decide to stay put because of the endowment effect. This captures the observation that, on the whole, we perceive what we have to be more valuable than what we don’t have – even if both what we have and what we don’t have are identical. Once a contestant has chosen a door, that door becomes ‘theirs’, and even though there is no objective reason to prefer it over the alternative, they are reluctant to swap.

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A goat or a car, or a goat *in* a car? – via imgur

Another reason why people might stick with their original choice is regret aversion, which holds us back from making a decision that we could later regret. What is interesting is that we seem to regret an active decision that turns out wrong much more than a passive decision. Imagine the car was behind the door you first picked, but you switched and ended up with a goat. You actually, literally had the car in the bag with your first choice, and you blew it by switching! That is quite different from the alternative losing scenario, in which you first picked a door with a goat, and decided to stick with it. That is bad luck, whereas the alternative is a bad choice.

But the most striking irrationality related to the Monty Hall problem is not that of the contestants, but that of the people who believe that the probability of the car being behind either door is 1/2. What we see here is the backfire effect, a phenomenon that not only makes us blind to facts that contradict our beliefs, but that strengthens our mistaken belief.

When Marilyn vos Savant dealt with the Monty Hall problem in her Ask Marilyn column in Parade Magazine in 1990, she received many indignant replies from learned professors and doctors (some of which were shamefully sexist) claiming she was wrong to say the contestant would be better off to switch. The one positive takeaway from the unedifying comments to her piece at the time is that we shouldn’t be too downtrodden about our own propensity to fall foul of the backfire effect, if this is what it does to the great and the good.

An explanation

So, why is it better for a contestant to switch, and indeed why is the chance that the car is behind the other door 2/3 and not 1/2? Imagine you are playing the game, and after you’ve picked one of the doors, instead of opening one of the remaining doors, Monty offers you what is behind both remaining doors. Should you switch? Of course: the chance the car is behind your door is 1/3, and so the chance it is behind one of the other two doors is 2/3. The fact that, in reality, he opens one of the other two doors before offering you the swap makes no difference: the chance the car is behind the doors you didn’t pick is still 2/3. And since it is not behind the door he just opened, the chance it is behind the other closed door is… 2/3.

If this explanation hasn’t helped (or if you are still battling the backfire effect!), there are plenty of internet sites which explain the conundrum in numerous ways. And if you do get why it is advantageous to switch, here is a twist to check if you really got it. Imagine your friend walks in just after Monty has opened one of the two remaining doors, and she hasn’t seen the discussion earlier: all she sees is two closed doors. Which one should she pick to maximize her chance of getting the car: the one you originally picked, or the other one?

Monty Hall is dead, but he will live forever. Let’s remember him with this joke that economist Alex Tabarrok tweeted:

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Noisy people

(featured image: Mysid/Wikimedia)

Our decision-making is biased, but an even bigger limitation is that it is noisy. So what?

The loudest and longest standing criticism of neoclassical economics is that it assumes us meatbags are rational, self-interested, utility maximizing individuals, while in reality we’re subject to a raft of biases and fallacies. What’s more, the deviations from rational behaviour that characterizes us would seem to be systematic. The title of one of the books by Dan Ariely, Predictably Irrational captures that viewpoint well.

But it appears there is more to it. (There is always more to it. Always.)

At a conference on the Economics of Artificial Intelligence a few weeks ago, behavioural economist par excellence Daniel Kahneman made a remark that has been going round my head for several days now. He observes that “people are very noisy: you show them the same stimulus twice, they don’t give you the same response twice.” He goes on to state that the main limitation on human performance is not bias – it is just noise.

Artificial intelligence (AI) has been proposed as a way to overcome our irrational judgements. AI doesn’t have problems with self-control, can’t be fooled with astute framing, and are not afflicted by confirmation or optimism bias. Unfortunately, both the algorithms for AI (which are ultimately written by humans) and the learning regime for an AI can introduce prejudices. In 2015 one of Google’s AI algorithms apparently tagged two black people as gorillas. The firm itself explains how this kind of thing can happen in this short video. But it is by no means out of the woods yet. Joanna Bryson, a computer scientist at Bath University in the UK found that Google Translate converts gender-neutral pronouns from other languages to “he” when referring to a doctor, and “she” when referring to a nurse.

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“I’m sorry, Dave. I’m afraid I am less noisy than you.” – source

But if it is true, as Kahneman says, that the larger reason of our suboptimal decision-making is noise, and not irrationality, prejudice and bias, then AI certainly would have the edge. An algorithm, when given the same stimuli, will always respond in the same way.

That raises two questions: how noisy are we really, and is our noisiness really a problem?

How noisy are we really?

We often do seem to react differently when we are confronted with the same stimulus – or apparently the same stimulus. In laboratory conditions it is possible to pretty much control ‘all else’ and make sure it is ‘equal’, and so present identical stimuli. But what about real life?

In an insightful Behavioral Scientist article, Jason Collins points out how easy it is to consider someone’s behaviour as irrational if we don’t know what their motives and objectives are. Might we not making the same mistake when we label behaviour as noisy? Perhaps the variability in decision making that we observe actually conceals the complexity of influences that we have incorrectly simplified away.

If you were to track what a person has for breakfast every morning, their choices might appear noisy. Some days they have porridge, other days there’s a fried egg, muesli or fruit on the menu. It might look unpredictable (although for sure we can predict that they’re not likely to suddenly opt for grass or a tin of petfood, let alone paperclips or wood shavings). But can we truly say that the same stimulus (getting up and feeling hungry) produces different responses? Even when we ignore ad hoc preferences, they may have run out of one particular option, they may have just heard somebody on the news warning people of eating too much egg, or they may be short for time.  If we don’t know the other elements which may consciously or unconsciously influence the breakfast choice, we cannot know for sure how much of it is due to noise.

And if this is the case for something relatively inconsequential as breakfast, it is probably also true for more momentous judgements. We take into account subtle cues that may not be apparent to an observer – that may even not be apparent to ourselves. Sometimes these cues might lead to poorer decisions, but sometimes they might add beneficial nuance, or indeed a crucial insight that changes everything. That might be a challenge for AI: shutting out all the noise is easy, but if we don’t know which subtle influences enhance our decision making, they risk being shut out as well.

Is it a problem?

Still, there is probably a good deal of real noise in the process. But is such noisiness a bug, or is it a feature?

People pay large amounts of money – multiple times the price of a recording – to see artists play their music live. Why? Because of the noise. No, not (only) because of the elevated sound levels at a concert, but because of the numerous small, surprising deviations from our expectations. The specific live interaction between musicians (and indeed between them and the audience) here and now means that no two instances are the same. That is noise.

Imagine the artists played a 100% identical performance every time – every single note in the saxophonist’s solo a perfect copy of what was played yesterday or the day before, every vibrato in the soprano’s high note exactly the same, time after time. How boring would that be?

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Lots of noise, and never ever the same performance twice – photo: Quincena Musical

Or imagine your favourite dish in your favourite restaurant was precisely the same very time – identical seasoning, the same number of carrots arranged exactly the same on the plate. You might as well have a microwave meal.

There are certainly situations where noise can be detrimental, and where precision and consistency are to be preferred. Autopilots do a great job in keeping airliners from crashing into each other, because their decisions are not noisy like those of pilots might. Rigid procedures in operating theatres ensure no instruments are left behind in patients after they’ve been stitched up – a problem that could be caused by the surgeon’s noisy behaviour.

And there are plenty other cases where noise may well seriously limit human performance. Delegating judgement to systems that are not prone to noise can undoubtedly enhance our wellbeing.

But noise is also what makes us human. When we greet a colleague or a friend, we don’t mechanistically use exactly the same words, at the same pitch every time – there is variation, there is noise in the process. We each have our own, unique noisy signature, just like famous or less famous musicians and chefs.

Let us celebrate that noisiness. And even more importantly, for goodness’ sake, let us not get rid of all the noise.

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A token of appreciation

(featured image credit: Crishna Simmons)

About the remarkably behavioural approach supermarkets have taken to buff up their image and engage their customers in the process

Companies are learning that being seen to ‘do the right thing’ is good for their brand image – corporate social responsibility and all that. (Behavioural scientists call this virtue signalling.) Supporting good causes is one way of doing this, but it is hard to develop a strategy that really gains traction among the general public. There are just too many charities to choose from, and what engages one customer completely puts off another one.

But retail chains have an opportunity to engage entire communities. Each one of their numerous stores can support local causes in the towns where their customers are. Doing so has the extra advantage that it reinforces their local character. Sure, they may be part of a national (or even international) chain, but that is no longer so important if the local store funds a playground, pays for the cub scouts’ or the brownies’ camping materials, or supports a homeless charity in town.

If that was all they did, however, it would be a rather passive kind of engagement. What if the local community was given a say in deciding which good causes would get support, and how much?

Make it tangible

The charity token scheme that four large supermarkets in the UK operate is a striking example of how to pull their customers in by giving them a visible stake in the decision making. The idea’s simplicity conceals several behavioural influences, which maximize engagement and minimize any burden.

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Thinking inside the box (photo: me)

Imagine a conventional consultation. As you paid for your groceries the till operator would hand you a form, together with your receipt, on which you could indicate your preferred good cause. You’d need to step aside, read the form, find a pen, locate a suitable surface on which to place the form to indicate your preference, fold the form, and then squeeze it into the slot of the box at the exit. For anyone but the most conscientious shopper, there is plenty of opportunity to postpone and forget, or simply not to bother.

But here, when you pay at the till, you receive some plastic tokens (which, of course, have the corporate colour of the store). The number of tokens you get depends on how much you have just spent. This signals you that you have real influence in the process (much like the Lotto allows you to choose your own numbers, rather than picking a ticket with numbers printed on it already). It also makes the tokens you receive feel like a valuable reward.

So there you are, feeling pretty pleased with your booty. You could, in principle, still decide to put the tokens in your pocket and walk off. When we receive something, however, even if its value is only symbolic, we become more inclined to reciprocate. So when the till operator asks you to place the tokens in the container to help determine who will get what support, you’re much more likely to respond positively.

There is more, though. A form would merely ask you for your opinion. But you are now the bearer of actual carriers of material benefit to one of several good causes, and you have the power to decide. So the moral obligation to actually go to the plastic container (which is of course conveniently placed on your way to the exit) and exert that power is hard to resist.

Sacred duty

That container itself is a thing of behavioural beauty, too. A shiny, transparent contraption, with the colourful tokens your predecessors have dutifully inserted in full view. No better way to visualize the social norm *: decent people don’t walk off with their tokens. They place them in this plastic box.

Above each of the three slots, more information about the good causes between which you can choose is displayed. Will you read it? Hell yes – by now you are persuaded that you are carrying out a sacred duty. Are these initiatives you would have personally supported otherwise? Probably not – you may never have heard of them. But they’re clearly local, and you can’t deny they’re really worthy. The images speak for themselves: happy kiddies in a playground, a homeless guy with a mug of hot soup, a bunch of old people doing gymnastics. Such concrete depictions are a powerful source of persuasion (known as the identifiable victim effect).

And in all likelihood, one of them will tug at your heartstrings a bit more than the others. Then the transparent box does its thing again: it shows how your preferred good cause is doing in relation to the others. There’s nothing like a bit of healthy competition. So without further ado, you drop all your tokens go down the slot corresponding with your favoured cause, a final gesture of benevolence before you trundle off home with your shopping.

Participatory decision making

What the retailers are engaging in is a form of participatory decision making. Simply asking their customers would be one of the most primitive ways of doing so. But the token-based approach acts as a more sophisticated set of nudges that affect behaviour, and ultimately emotions.

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A token of appreciation, but for whom? (photo: Alan Parkinson/Flickr)

Thanks to the tangible stake they receive at the beginning of the process, customers are more likely to complete it than with a conventional consultation. The acceptance of the tokens commits customers much more deeply than a form would, and nudges them towards the next steps: taking an interest in the good causes on offer, and eventually actually indicating their preferences. The symbolic allocation of resources by inserting the tokens into the container gives a much stronger sense of the significance of their action than a tick in a box would.

This in turn plays to the customers’ emotions. While a voting form might produce mostly annoyance, this whole process means they feel extra good as they leave the supermarket… and that is of course a very good result for the retailer. Everybody wins: the good causes get some money, the customers feel happy they have unequivocally participated in deciding which one gets how much, and the retailer has customers who appreciate them just that little bit more. The token of appreciation plays a neat double role.

If a company decides to do the right thing, they might as well do it right.


(This article was inspired by a post on participatory decision making by Chris Bolton at Whatsthepont)

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Pricing under pressure

(featured image credit: Alex W)

Should morality, rather than the market, dictate the right price of goods and services in emergency situations?

In his book Misbehaving, behavioural economist Richard Thaler relates an interesting experiment he conducted with Daniel Kahneman and Jack Knetsch. In the days when Amazon’s Mechanical Turk was but a mere twinkle in Jeff Bezos’ eye, they got a bunch of randomly chosen Canadian citizens to give their views on the fairness (or lack thereof) of economic transactions. In one famous example, they asked whether it is fair for a shop to raise the price of a snow shovel from $15 to $20 the morning after a large snowstorm.

The responses showed most people would find this a despicable action: 82% thought it unfair (and 18% saw no problems with it). This goes against conventional economic theory: when supply is outstripped by demand, prices will rise to a level that will just clear the market. Everyone who is willing to pay at least the market price gets a shovel, and no shovels remain unsold.

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Selling shovels, not pole dancing! (And not a genuine picture)

This is one important role that market prices play. They ensure that scarce resources, in this case the shop’s limited supply of shovels, are allocated where they are valued the most (measured by the willingness to pay of the buyer).

Do higher prices lead to a better outcome?

Yet that economic “law” clearly does not find favour with non-economists. This was apparent again as hurricanes Harvey and Irma devastated Houston and much of Florida. According to a New York Times article, more than 8,000 complaints of price gouging for supplies like fuel and food were made. Many people tend to have a strong intuitive concept of a price: it should be production cost plus a modest profit margin (this is captured in the labour theory of value).  Rising prices, especially if they are manifestly not related to a rise in production cost, look like profiteering.

The problem is that this does not address relative scarcity – the imbalance between supply and demand. If prices are frozen, the allocation of scarce goods and services will happen in other ways, but it is unlikely to be optimum. In The Ethics of Price Gouging, Matt Zwolinski, an ethicist at the University of San Diego, illustrates this with a story about a hotel owner accused of gouging by doubling his room prices to $100 after hurricane Charley in 2004. At the ordinary price, a family might have rented a separate room for the children, for example, while at the actual price they might share one room, thus making the available supply go further.

Something similar can apply to consumables like fuel. Higher prices mean people will only buy what they need (reducing hoarding and leaving more for others), and will be careful not to waste it on relatively frivolous journeys. This applies especially to the behaviour of people who are less affected by the emergency.

High prices are also a signal to increase supply. In an article in Reason, then president of the John Locke foundation, John Hood, relates how his neighbour, a construction worker, took time off after hurricane Hugo in 1989. Loading up his tools and chainsaw in his truck, he said he was off to Charlotte, having “heard that one could make really good money cutting trees and clearing debris.”

Wisdom from the past

Talking of John Locke, the economists’ argument that the market should set the price has authoritative support. More than 300 years ago, the famous 17th century philosopher examined the morality of market prices in a short essay, Venditio (well worth reading). Through four examples, he shows that a supplier selling at the market price is acting morally and justly. For example, if the market price for wheat is 10 shillings per bushel, consumers would not benefit from a supplier selling at last year’s 5 shillings per bushel. “Others would buy up his corn at this low rate and sell it again to others at market rate, and so they make a profit off his weakness and share a part of his money.” However, making “use of another’s ignorance, fancy or necessity” to sell them things at a higher price than to others is cheating.

Locke even describes an emergency situation in which a merchant in Danzig (now Gdansk) sends one ship with wheat to Dunkirk, where the market price is 20 shillings per bushel because there is a shortage, and one to Ostend, where it is 5. Is there any injustice in selling the same wheat at four times the price at which it sells “20 miles off”? No, says Locke. Provided he sells at the market price – the same to Thomas as to Richard – he is acting justly. Again, selling at a lower price would immediately see others buying it up and reselling it at the market price. If the buyer tries to buy as cheaply as possible in the market, and the seller tries to sell as expensively as possible, the market (“the mutually and perpetually changing wants of money and commodities in buyer and seller”) will settle on a “pretty equal and fair account”.

But the market price clearly jars with the general public. And that reflects in particular on the reputation of the companies trading in the run-up to, and the aftermath of emergencies. That means suppliers must weigh up future damage and short term gains, as Richard Thaler suggested on twitter:

Even if there are no mandated price caps and anti-gouging measures, consumers can punish suppliers who appear to raise prices in response to market demand. Social media can seriously dent the image of a company. A tweet accusing Delta of price gouging (by increasing the price of a ticket sixfold) was retweeted nearly 40,000 times (and liked nearly 60,000 times). Nevertheless the airline was actually capping prices for their tickets, and the cheap airfares were no higher than in normal times a couple of weeks before. What people actually saw was the usual hike of last-minute walk-up fares, typically designed to accommodate desperate business fliers, as the founder of AirFareWatchdog.com told the New York Times.

hebstore

It’ll be a while before we can reopen this store. (source: LinkedIn)

Planning ahead is of course one way of avoiding supply problems, and hence redress the imbalance between supply and demand that gives rise to scarcity and price rises. This is what H.E.B., a grocery chain in Texas and Mexico, and Walmart did. And maybe the threat of a consumer backlash, however misguided, will encourage more companies to plan for emergencies. But that is not always possible – there are hard capacity constraints on airline seat availability, and there are only so many planes, and only so many slots at airports.

The inevitable trade-off

Market pricing is the lousiest mechanism for allocating scarce goods or services in an optimum way, and to signal demand increases to potential suppliers… except for all the others. There are extreme circumstances in which rationing is better to ensure that everyone gets some essential goods, economist Tyler Cowen says in his Bloomberg column. But most of the time we have a choice between empty shelves and high prices. We can’t have our cake and eat it.

And that is ultimately the trade-off we, the general public, must face, reluctant as we may be to make it.  Keeping prices down artificially is doing nothing to address the scarcity, and it is doing nothing to ensure that what is available goes to those who need it most. But it seems to satisfy our sense of morality.

Maybe we collectively value apparent moral behaviour more highly than reduced scarcity, even if – as Locke reminds us – there is nothing immoral about selling at market prices. Wise businesses will respond to this and safeguard their reputation, even if it costs them money – but more importantly also, even if it maintains the scarcity and leads to inefficient allocation.

That is the price we, consumers, need to bear.

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

A cocktail of biases

(featured image: delo)

Jumping to conclusions – the easiest kind of exercise, especially on a Sunday morning

I learned three things this week: two things I didn’t know, and one thing I did know, but regularly seem to forget. All of this occurred in less than 10 minutes, last Sunday morning, at the crack of dawn. Here is what happened.

I was listening to the morning news show on Belgian radio, and just after 6am I heard that the people of Australia observe Father’s Day on the first Sunday in September. Well, why not, I thought – they celebrate Christmas in high Summer, and they walk upside down, so it’s hardly the most unusual thing about Oz from the point of view of a dude in Western Europe.

And certainly not particularly worthy of a news report. But there was something afoot with Australian Father’s Day. Every year for the last 15 years, the non-profit organization Dads4Kids produces a television commercial to mark the occasion, encouraging fathers to “love their children and put their families first”. A bit sentimental maybe, but going by this year’s edition, they are really quite charming. Nevertheless, the advert got pulled by the free-to-air TV industry body in Australia.

The reason? The commercial could be seen as making a political statement: it featured only families with mum, dad and children. No trace of same-sex two-dad families.

That is the kind of news item that does wake one up well and good early on a Sunday. Such censorship truly is political correctness gone mad.

Hot topic

But then I learned a second thing. There was more, much more to this, than met the eye. Same-sex marriage is a hot topic in Australia, dominating national politics to an extent way beyond its social significance. In the last election campaign, in a move reminiscent of David Cameron’s regarding the UK’s membership of the EU,  Prime Minister Malcolm Turnbull had promised to hold a referendum on the subject. However, a referendum requires legislation, and parliament voted against the government (which has a majority of just one seat). The government had a plan-B, though: a postal plebiscite, a bit like an official survey (run by the Australian Bureau of Statistics). This will now take place this month, after a legal challenge by one of the two sides failed.

roadtoequality

The road to equality in Sydney? (photo: Steven Cateris)

Why is this plebiscite such a big deal? Recent opinion polls suggest more than 65% of Australians are in favour of same-sex marriage, with a little over 20% against. Australia has compulsory voting, so a referendum would most likely have led to the legislation that would implement it. Conservatives, both within Turnbull’s own Liberal party, and with his coalition partners ensured that wouldn’t go ahead. A plebiscite, however, is both voluntary and non-binding, so it is far less certain that there will be a majority of the votes in favour. That means the outcome is by no means a foregone conclusion. And in such a high-tension environment, innocuous commercials may well turn into political statements.

The third, and most important, thing I learned (or rather re-learned) is how easily my judgement gets clouded by my opinions, especially the stronger ones. At first, I actually thought the ad was being retracted because of conservative objections to the portrayal of same-sex couples. Only as I started paying more attention to the report did I realize that it was the fact that the families depicted were all deeply traditional that was the problem – not that it contained something too shockingly unconventional. Even so, I still assumed it was political correctness gone mad.

Thankfully, I was (literally) laid back on the sofa in a quiet house, and I discovered the complexity of the detail without any effort on my part, simply by keeping my ears open. I am not sure I would so easily let go of my prior assumptions and prejudices in other, less relaxed circumstances. The knee-jerk reaction I experienced not once but twice in less than a minute is due to a cocktail of several cognitive biases. I would expect conservatives to object to the depiction of alternatively composed households, therefore I immediately assumed that this is what was happening here. I was victim to selective perception, combining a few snippets into a fictitious story that fed my confirmation bias, even though the actual facts were in conflict with my belief. I could also be accused of congruence bias: censoring inoffensive commercials is not something you find in liberal democracies, and if it happens there, then it must be crazy political correctness.

The cognitive dissonance as the full story unfolded, and as I felt my mind changing was palpable, and I was rather annoyed I’d let myself be taken in so easily. Still, let it be a lesson (until the next time).

Ozzie bonus

Before leaving this story it’s worth making another observation – not about my own fallibility, but about the intriguing tension between two polarized tribes, and the counterintuitive game theory involved. Why did the conservatives back a plebiscite that might produce a majority in favour of same-sex marriage? And why would pro-same-sex campaigners take the government to court to try and stop the plebiscite that might support their cause?

voteyes

Some will, but how many? (photo: DorkyMum)

Human nature can be quirky and inexplicable, but a likely explanation lies in the non-compulsory nature of the vote. The support for equal rights for same-sex couples is much higher among younger people than among the over-60s (where it is just 50%). Younger people generally are less likely to vote, so a possible motivation for conservative opponents of equal-rights legislation is that they might benefit from this. If enough young people fail to vote, the plebiscite might produce a ‘No’ outcome. This would remove the issue from the political agenda for the foreseeable future. It is a risk, but it’s one worth taking.

For proponents, the risk is the other way round. Even though public opinion is strongly with them, there is a real chance that the opponents might win the plebiscite. This means they had a good reason for challenging the government and prevent it from taking place.

Sometimes things are not quite what they seem. If we want to better understand the world around us we sometimes have to take a few steps back and leave behind our prejudices and certainties. Wisdom doesn’t come easy.

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