No uncertain terms

We are all suckers for certainty

Earlier this month, it was announced that Paul Dacre, the editor of the Daily Mail since 1992, would step down in November of 2018. The Mail is the second best selling newspaper in the UK (after the Sun), with an average of around 1.4 million copies per day in 2017.

It is also, to put it diplomatically, rarely far from controversy, and near-universally despised by people even vaguely on the liberal left for its firmly conservative editorial stance. Recently, in particular its position on immigration is regularly being denounced. Following calls from Stop Funding Hate, a social media campaign launched In 2016 in the wake of the Brexit referendum, Lego decided to end advertising with the paper. In January of this year, Virgin Trains reported it would no longer be selling the Mail on one of its services. An internal memo referred to “considerable concern” about the paper’s “position on issues such as immigration, LGBT rights and unemployment”, which was “not compatible” with the Virgin’s own beliefs.  The decision was reversed one week later, but the media kerfuffle surrounding this episode is illustrative of the Daily Mail’s divisive potential.

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No uncertain terms in the headlines

The comments following the announcement of Paul Dacre’s ‘retirement’ were as predictable as his headlines: praise from one side and vilification from the other. But there was one comment that struck me: Dacre gave his readers certainty. Indeed, one thing you can safely say about the Mail is that it is not a great example of nuance. Just like with their reporting on what causes or cures cancer (or sometimes even cures it the one day, and causes it the other!), their views on immigration, Brexit, crime, social media, human rights, drugs, LBGTQ, Muslims and so on are decisively clear-cut.

Ambiguity, no thanks

Generally we do indeed not like ambiguity. As a young economist, Daniel Ellsberg (who would later gain fame by leaking the Pentagon papers) researched decision making, and came up with an ingenious experiment to establish this ambiguity and uncertainty aversion. Imagine you have two urns in front of you. The left one contains 50 black balls and 50 red ones. The right one also contains black and red balls, but in an unknown ratio, with every of the 101 possibilities equally likely. You can pick one ball from either urn (without peeking), and if that is a red one, you win £100 (or $100 or €100). Which urn do you choose?

Ellsberg found that people overwhelmingly choose the urn with a clear 50/50 chance of a win. How likely is it that you would draw a red ball from the right hand urn? There is a slim chance (1/101, just under 1%) that there are no red balls so you would be guaranteed not to win. But there is an equally small chance that there are only red balls, in which case you’d be guaranteed £100. In the same way, it is possible there’s just one red ball, but it’s equally likely that there is only one black one, etc. On the whole, the chance of winning by picking from the right-hand urn is also 50/50*.

We find this preference for the known and the certain also among the human cognitive biases. Maybe most prominent among them is confirmation bias. Being confronted with facts and evidence that conflicts with our prior beliefs makes us feel uncomfortable, so we prefer information that supports them. Another favourite is status quo bias, which describes our preference for the current, known state of affairs, over the uncertainty of the future. Shall we go on holiday to a different country, or with a different provider? Or still “better the devil you know”?  Social proof too is a manifestation of our aversion of uncertainty: when we don’t know what the right thing is to do, we copy others. “Nobody ever got fired for buying IBM” has been losing some of its shine, but for a long time it was a superb illustration of uncertainty aversion in the IT industry. Today, we seek certainty in ratings systems, from eBay ‘s feedback scores to Tripadvisor’s bubbles.

If we are attracted by certainty in situations with balls and urns, holidays or restaurants, then it’s not surprising to see the same thing with even deeper issues of morality. When three judges ruled the government needed the consent of Parliament to give notice to the EU of its intention to leave, did they perhaps have a point? Nope, they were “enemies of the people”. What with gay rights? “NHS to fund sperm bank for lesbians” tells you all you need to know. Are there arguments in favour of legalizing the use of pot? “Cannabis, the terrible truth” leaves no doubt.

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Urns of (un)certainty – photo: Beatrice Murch BY CC

The Daily Mail is exceptionally successful in giving its target audience the simplification and reassurance it so appreciates, and to bind it together in a world view utterly devoid of shades of grey, cognitive dissonance and conflict. But that world view, and indeed that kind of unquestionable and unquestioning world view, which appears as unshakeable as religious scriptures, is of course not for everyone.

Certainty, or nuance after all?

Some people feel more at ease with ambiguity, uncertainty and complexity, and believe them to be a better reflection of reality. At first sight that preference looks to be a more rational one than that for unconditional certainty, but to what extent is that true, in particular if we consider striving for happiness as a rational endeavour?

Several studies in the UK (Wales and Essex) and the USA demonstrate a significant positive correlation between happiness and attitude towards Christianity. A similar result was found with respect to Judaism in Israel among female and male participants. A study in Oman observed that, regardless of the religious belief, the level of happiness among people increases with the increasing level of religiousness.

Does the moral certainty that religious people derive from their faith – and by extension perhaps also the moral certainty Daily Mail readers obtain from their daily paper – actually lead to greater happiness? Is a life in which there are few or no uncertain terms a happier life?

Perhaps not so fast. A study, similar to those in the UK, the US and Israel found no correlation between religiosity and happiness among German students. And a meta-analysis on the correlation between religiousness and mental well-being found support “for each position that has been taken within the religiosity-mental health debate”: for a positive relationship, a negative relationship), and indeed no relationship at all.

So it looks like nuance wins out after all. But even people comfortable with ambiguity need some degree of certainty in their lives. Providers of such certainty, real or perceived, will therefore always do well – Paul Dacre and the Daily Mail leading the pack.

 

*: For a hard proof, imagine there are only 4 balls in the urn, but you don’t know how many of each colour. Each of the five possibilities is equally likely: RRRR (four red balls), RRR+B, RR+BB, R+BBB,  and BBBB – each have a 1/5 probability. The chance of picking a red ball for the five possibilities is, respectively, 100%, 75%, 50%, 25% and 0%. To calculate the overall probability, multiply these with the 1/5 probability of each distribution, and add: 100% x 1/5 + 75% x 1/5 + 50% x 1/5 + 25% x 1/5 = 20% + 15% + 10% + 5% = 50% or 1/2. The same reasoning applies for 100 (or any number of) balls.

 

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

Your own personal dogma

(featured image credit: Thomas Hawk)

Much of what we do, we don’t really question. That is a mixed blessing

Last Friday evening I was driving back home on the M20 towards London. In the distance I could see a small white car reversing on the hard shoulder. As I approached, I realized what the driver was trying to do: having missed his exit, he was backtracking to back to the junction. By the time I reached him, he had succeeded in his endeavour (to the sound of honking of the other drivers on the slip road).

Just half an hour earlier I had left Nudgestock, the annual behavioural jamboree in Folkestone, and I could not help reflecting on what might have been the driver’s thought process leading to his hazardous manoeuvre. When you miss a junction, there are really only two options: either you stop and reverse (let’s not even entertain the possibility of turning around), or you carry on to the next junction and make your way to your destination from there.

Convenience rules

The first option is by far the most convenient. Continuing your journey as originally planned seems the easiest and quickest. The alternative will not only take you longer, but you also may find yourself on unfamiliar terrain – more inconvenience. However, the second one is undoubtedly much safer than reversing on the hard shoulder, where you run the risk of inadvertently steering your car into the path of the traffic on the main carriageway. If you manage avoid that, you still have to weave into the high-speed stream of vehicles that is leaving the motorway.

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Stupid crazy shit on the motorway (yes, that car is actually reversing) (image via youtube)

Earlier this week, the Belgian Railways Infrastructure company launched a campaign around safety at level crossings. In my native country, there were 51 level crossing accidents in 2017, in which a total of 9 people were killed (up from 4 the year before, and just under the long running average). Few accidents are as avoidable as those at level crossings: in almost all cases they are the result of a deliberate choice to ignore signals and barriers – as a newspaper also just last week illustrated with pictures posted on Facebook, of a group of cyclists riding around the closed barriers.

For some people, it seems, waiting for a closed barrier to let a train pass through is inconvenient – so unbearably inconvenient that they decide it is worth running the risk of being hit and smashed to bits, much like the choice of the reversing driver on the motorway.

Convenience is a powerful force. In a post last Sunday my friend David observes that most of us are full of willingness and good intent to do the right thing – standing up for the weak whenever we can, challenging inequality every single day, diverting any excess income to worthy causes and so on. As long as it is not too inconvenient. Convenience prevails.

The unmade trade-off

It looks as if we, like the driver and the cyclists, we consciously weigh up the effort of doing something that has merits against the ‘convenient’ alternative. But is that really what happens? Did the cyclists deliberately consider whether or not to weave around the barriers to avoid an annoying wait? Did the M20 driver weigh up the risks he was taking against the time he would be saving?

I am not so sure. Convenience can be seen as a heuristic for efficiency. And efficiency is vital for us people (as it is for everything that lives). Nature tends to take the path of least resistance, and for living organisms that means being efficient: not wasting resources on that which does not provide a commensurate benefit. Being efficient has helped us survive and prosper, generation after generation. But if we had to constantly work out in detail whether effort is beneficial, we’d be doing little else. So long ago, in our ancient ancestors, a tendency emerged to err on the side of the least effort when the benefit of an action is unclear without the need for much thinking. Over the centuries, this thinking shortcut, this mental habit has become a prominent factor in our day-to-day decision-making.

That is why “convenience prevails”. More often than not, we don’t make any trade-offs at all. We just follow the heuristic.

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Stupid crazy shit at the level crossing (image via Facebook)

And heuristics are things we rarely question – if only because they generally seem to serve us so well. But being beyond questioning is a characteristic they share with another principle that influences decision-making: the dogma. That can be problematic for a heuristic as broad as “do what is convenient”, because there are too many situations where following it blindly is not in our interest.

If heuristics are so strong, though, how come it is rare for people to reverse on the motorway, jump closed barriers on level crossings or do otherwise stupid things in the name of convenience? How come I (and I would hope you too) would never dream of doing anything like that?

A more powerful (rule of) thumb

I guess the reason is simple: another heuristic. When I miss a junction on the motorway I carry on until the next junction. When the bell is ringing, the red lights are flashing and the barriers are closing or down, I just wait. I don’t do so because I make a conscious trade-off, I do so because my “Don’t do stupid crazy dangerous shit” rule of thumb is not negotiable.

Perhaps that makes it look like a dogma – well so be it. Maybe, ideally, we should stay away from such immutable rules that take away our freedom to choose, and assert our right to weigh up all the options at all times. But we cannot possibly do that, so we have to rely on rules of thumb that we can follow without thinking. They are part of how we function for good reasons.

That doesn’t mean we cannot use them to our advantage. We cannot get rid of the dogma of the “convenience” heuristic, but we can override it with other ones. By developing and adopting additional rules of thumb, we stop ourselves doing stupid crazy unsafe shit, saving ourselves a great deal of trouble. With a bit of effort (yes I know, it’s not convenient), maybe we can also forge personal dogmas that helps us do the right thing whenever the convenience of inaction and postponement beckons.

We are all hardwired to obey our personal dogmas. But it’s up to each of us to determine what they are.

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

When things are not what they seem

credit: Steve/Flickr CC BY

Numbers look so very absolute, but that may be deceptive

If you bought a car for £1,000 yesterday, and you sold it today for £1,200, did you make a profit? Most likely you’ll say yes. £1,200 is more than £1,000, so you are £200 better off, of course. But what if it is a car you bought not yesterday but ten years ago? The difference is still £200, but is that still your gain?

The potential problem here is monetary inflation: the process by which money becomes “worth less” over time. Money, the economics textbooks say, is “a medium of exchange, a store of value, and a unit of account”. Inflation makes using it as a unit of account a little precarious. Imagine measures of distance shrunk with time like money does. Your grandchildren would come to visit you and moan about the six mile walk from bus stop to your door, and you tell them that, when their mum was a little girl, that distance was barely half a mile.

The incredible shrinking currency

We are familiar with the fact that physical measures do retain their value, and that money doesn’t. Or are we? In 1928, the economist Irving Fisher wrote a little book entitled The Money Illusion, noting that in those post-war days, few people were aware of the fact that their contemporary dollar was only worth 70 cents of its pre-war equivalent. People thought of money in nominal terms, the number written on the note or coin, and failed to “perceive that the dollar, or any other unit of money, expands or shrinks in value.”

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Inflation: smaller hole, or bigger donut? And what about the price? Photo via Twitter

Two behavioural financial economists, the later Nobel prize winner Robert Shiller and George Akerlof, devote an entire chapter to the money illusion in their book on the important role of human psychology on the economy, Animal Spirits. Of course, we know better now than to believe that money, like a chair or a table, keeps its value over time. But, the authors say, that realization only seems to work up to a point. In many countries, for example, labour contracts do not contain automatic adjustments to wages based on inflation. The same applies to debt – the principal of a mortgage is always expressed in units of the past, not of the present.

 

Two more future economics Nobel prize laureates, Daniel Kahneman and Richard Thaler, together with Jack Knetsch, made a similar observation in a paper from 1986. Through a household survey they explored what people consider as fair or unfair behaviour. In one of the questions they asked whether a firm deciding to decrease wages by 7% in a no-inflation situation was acting in an acceptable manner. 68% of the respondents found this unfair. Other participants received a variant of this question: inflation ran to 12% (this was not implausible in the 1980s!), and the company decided to increase workers’ pay by 5%. 78% of the respondents found this acceptable, and only 22% thought it was unfair. Yet in real terms, the effect to the employees was approximately the same in both cases. But that is not how we see it, and workers are likely to feel more pleased with a 9% raise with an inflation of 9%, than with a pay increase of 0% when inflation is 0%.

So we may have some appreciation of inflation, but money illusion has not vanished. A typical savings account interest rate of 1.5% will see a deposit of £10,000 grow to £10,150 over a year. That doesn’t look too bad: a gain of £150 is not a trivial amount of money. But with a modest inflation rate of just 2% per year, the real value of what’s in the account will be just £9,950. You’d have lost £50 rather than gained £150.

It is not only time, but also space that can confuse us. We’re all used to our home currency, so when we travel abroad we see familiar goods and services priced differently. When I first came to London on a school trip in the days before the euro, even a relatively expensive record costing £4 would appear cheaper than one at home costing 300 francs, yet at the prevailing exchange rate it was nearly 10% more expensive. Conversely, I remember paying over 150,000 Italian lira for a far from extravagant Rome hotel room in the 1990s (about £80 at the time). Exchange rate or not, it’s hard not to see 4 as less than 300, or 150,000 as more than 80.

The introduction of the euro in 2002 presented this kind of shock to more than 300 million people overnight. Two researchers, Benjamin Bittschi and Saskia Duppel, looked in the German tax records for an unusual real change in charitable donations following the currency changeover. And they found it. Even controlling for a range of potentially confounding factors (like regional GDP and age, and the presence of potentially distorting specific disaster appeals), they found the money illusion effect to be between 2.4% and 7.6%. 1 euro is approximately 2 marks, and that made the Germans donate between €89 and €281 million more than they would normally have done.

Not just money

The money illusion is not limited to money and more generally known as the nominal illusion. we know that the we are misinterpreting the figures we see, but we are still influenced by them as they are. When I drive on the European continent, I cannot help feeling pleasantly surprised that it’s a lot faster to travel 200km than 200 miles. But in the months after I moved to the UK, I often underestimated the reality of a 50 mile distance (which is 60% more than 50km).

And there is more. Economist Justin Wolfers recently asked on Twitter for examples of nominal illusion, and among the responses were some real gems. One that I could leave unmentioned is that of behavioural economist Richard Thaler’s tough exam (related in his book Misbehaving). He had composed it such that the average score would be 72 points out of a possible 100, but the students found this unacceptably low. How to deal with that discontent? Thaler had a flash of inspiration: he would increase the total number of points available to 137. 70% of the points would thus be “a cheery 96 points” in nominal terms – to the delight of the students. Along the same lines, someone reports that Austan Goolsbee (perhaps not surprisingly, also an economist) once accidentally wrote an exam that added up to only 90 points. When the students pointed this out, he announced that the whole class would get a 10-point bonus – to widespread cheering.

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What’s the point? Photos via Pinterest and Pinside

Pinball machines have also been subject to a quasi-Zimbabwean points inflation. Chicago Coin’s Moonshot machine from 1969 accumulated players’ points in just 4 digits. In 2016, a pinball wizard by the name of DirtyDeeds reached a high score of 43 billion points on the Ghostbusters machine. A maximum score of 9,999 would not get you very far today.

 

If you’re not into arcade games, consider the use of loyalty points. These often have less value than even the smallest coin in circulation. The British supermarket chain Sainsbury’s uses the Nectar scheme: for each pound spent, cardholders receive 1 point, worth 0.5p (making it equivalent to a 0.5% discount). Often you receive extra points for certain purchases, so typically you’d earn about 200 points at the till. This, of course, sounds more impressive than £1 in cash. Furthermore, with points worth so little, it’s not very expensive to occasionally run an attention-grabbing “10 x points!” promotion.

The nominal illusion is an intriguing effect, which has the power of influencing us even if we know very well how it distorts our thinking. The best we can do is try to be even more conscious of its existence, and make our decisions as conscious as we can.

We can use it to our advantage too. For example, some people put their watch forward by 5 minutes or so. Even though they know that the real time is earlier, the nominal time makes them consider leaving for the train, or preparing to conclude a meeting in good time. (I can confirm that it works.)

But possibly the best way to remember the nominal illusion and what it does is this little clip from the mockumentary This is Spinal Tap, with a guitar amplifier with knobs that go not to 10, but all the way to 11:

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Good processes and bad outcomes

(featured image credit: credit: Kurt Komoda)

Even good processes can lead to tragedies – we should not let hindsight bias make us believe otherwise

When you think about it, your personal life is actually quite complex. You’re faced with a huge number of possibilities pretty much every waking minute of the day. How on earth can you, every time, make a choice that is in your best interest?

Every morning I need to decide what shirt I am going to wear. I have not really counted them, but there are dozens in my wardrobe – T-shirts, polos, formal shirts, casual shirts. Of course I don’t really weigh up the pros and cons of wearing each one of them, every morning. I use a process. I decide what category is most appropriate, and within that category, I simply take the shirt that is on top of the pile. (Just in case, I perform a quick mental check to verify that it is appropriate for the day ahead, and in the unlikely event that it isn’t, I swap it with the next one.) Even with this small addition, my approach vastly simplifies what would otherwise be a daunting task.

We also use processes to help us overcome potentially detrimental influences, for example the way we sequence our meals. The dessert is generally the least healthy course, and most of us leave that for last. This widespread convention helps us have the most nutritious input first, and protects us from the temptation to stuff ourselves with pudding or cake too early on.

What works for individuals can also be beneficial for society as a whole. Jurisprudence – laws and the way they are implemented – acts as an intricate process to help ensure that all citizens are treated in the same way, without arbitrariness or preferential treatment. On occasion such a process can go against our individual self-interest. When we are caught out parking where we shouldn’t or driving too fast, wouldn’t it be good if a friendly civil servant of our acquaintance could make our ticket disappear, and save us a few bob? But we accept that, on the whole, as members of society we are better off with a process that is blind to who we are, or whom we know.

Unfortunately, even good processes don’t always lead to good outcomes.

When things go wrong

Imagine I take the top T-shirt from the pile to wear to a garden party one afternoon. Pretty standard issue, no offensive slogan on the front, so it easily passes my ‘is it OK?’ test. A few hours later, helpful as I am, I am carrying a tray full of glasses outside. Then the sleeve of my T-shirt gets caught on a door handle. Unable to keep my balance, I stumble, and I let go of the tray. Mayhem ensues: I fall to the floor amidst the breaking glass, suffering a large cut on my arm, and worst of all, breaking my phone.

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Not suitable for children’s parties, probably, but what about the sleeves? – source

The T-shirt I was wearing – the choice my process had produced – had the widest sleeves of all the shirts in my wardrobe. With any other T-shirt, I most likely would not have caught the handle with my sleeve.

 

It’s tempting to engage in counterfactual thinking after the event. What if I had chosen to wear a polo shirt instead? I knew this shirt had comfortably wide sleeves – why didn’t I consider that in my mental check? What if I had given more thought to deciding what to wear, instead of this stupid process of picking the one on top?

It is also easy to be taken in by hindsight bias. Once an event has happened for certain, it seems straightforward to trace it back to a decisive point in the past, when we could have known the disastrous consequence ahead.

So it is with processes in society. Last Tuesday, a man attacked and killed two police officers and a member of the public in the Belgian city of Liège. (Later it would emerge he had murdered another person the night before.) The killer was a petty criminal, serving a sentence for drug offences and burglary, and on temporary release from jail ahead of his forthcoming release. It later also emerged that he had converted to the Muslim faith in 2012, and that he was named in two national security files.

Unsurprisingly, in the hours and days following the murders, there was plenty of blame flying around. Newspaper commentators wondered whether the killer should have been able to benefit from day release – “it was known that he was not a reformed citizen, that he had converted to Islam, and that he associated with would-be terrorists in goal – could this tragedy have been averted?” “How could this man walk freely?” Someone clearly made a mistake. For the opposition MPs there was no doubt: the responsibility of this tragedy lay with the government and in particular with the Justice minister, who should of course immediately resign.

But it is not the ill-considered attribution of blame that is the biggest problem with hindsight bias. The risk is that hindsight bias becomes instrumental in the decisions made in the aftermath of a tragedy like this.

Of course, it is crucial to investigate the exact execution of the process that led to the release of murderer. Every single fact that was known about the perpetrator, at the time of every single step in the process, should be reviewed and reconsidered. Did those who made certain decisions have access to all the facts? Were the facts properly evaluated? These are all important, valid and necessary questions.

Tragedies: triggers for our thinking

There is only one fact that should not figure in this enquiry: the fact that the person who was on temporary release committed four murders. Because he was not the murderer at the time of the release – he was the eventual murderer. We all know that now with certainty, but nobody knew this at the time the decision was being made. Nobody could therefore have taken this fact into account at the time.

When we look back in time, we see only certainty. We know that four people were murdered. There is no doubt about that. But hindsight bias makes us believe that we could also have known with certainty that earlier signs would inevitably lead to the tragedy. We see the path to what happened in reverse. We overlook the fact that, when we look forward to the uncertainty of the future and not to the certainty of the past, at every juncture the decision was a matter of probabilities.

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A trigger for our thinking, but not a guide – photo: Cory Doctorow

It is not because the murders actually happened, that they were necessarily and inescapably the result of the process that allowed the day release of the perpetrator. Perhaps the criteria were not applied correctly, or perhaps the criteria themselves should be revisited and changed. The enquiry should provide clarity and guidance for possible changes.

Tragedies should trigger our thinking about how we can better try to avoid them. But they also seem to accentuate our desire for simple solutions, and hindsight bias appears to tell us that such simple solutions are easy to get. But hindsight bias fools us by presenting what is a probability as a certainty.

This illusion of certainty is a very poor guide to decision making. We had better be on our guard for hindsight bias.

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Signals from the unexpected

(credit: didgeman CC BY)

The messages that are sent when expectations and reality are at odds can be revealing and powerful

A few weeks ago, three things happened to me on three consecutive days. All three involved choices other people made, and all three made me change my view.

On the first day, I went to the bank for a relatively complicated transaction. It required the intervention of a member of staff but, for reasons that are the bank’s own, it was not possible to make an appointment. I expected, like on previous occasions, a waiting time of 10-15 minutes, but this time it was fully an hour before someone came to collect me. He was quite apologetic (nothing unusual there) and said something like “I will do something for you”. I was expecting I might get a free coffee or maybe a couple of months’ free banking, but when he said “I will transfer £100 into your account”, I was rather dumbstruck.

On the second day, I had travelled some distance and arrived late in the evening at a hotel where I had reserved a room via a booking website. I knew it was full, as a colleague had had to stay elsewhere, but I expected a smooth check-in and looked forward to putting my feet up. So when, well after 9pm, the assistant said she could not find a reservation in my name, my mood began to deteriorate. She kept on tapping away on her keyboard, clearly without much success. I opened the reservation website’s app on my phone to track down my booking number, but even that secret code appeared not to be enough to let me in. Eventually a colleague with the right incantation managed to unlock my reservation. The assistant apologized once again but before she let me go with my plastic smartcard key, she wanted to compensate me for the inconvenience. I’m not sure exactly what I was expecting, but it was definitely not a bottle of mineral water (500ml).

Water bottle

“A generous gift, or an affront?” photo: Dmitriy CC BY

On the third day, we were waiting in the reception area of the company we were visiting. These days most places are equipped with electronic gates that magically open when a badge is waved over a sensor, and it was not different here. I had expected to be given the customary visitor’s badge, but instead our host simply used his own pass and then proceeded to keep the gate open until all four of us had gone through it. Once again, not quite what I had anticipated.

Reality check(ed against expectations)

Had reality, in any of these anecdotes, been close to what I had been expecting, I would have forgotten about them already. I would certainly not have drawn any conclusions about anything, and less still have changed my mind.

But in each of these situations, there was at least one instance of a mismatch between reality and expectations. And that is when perceptions are formed or changed.

We all know that there is a risk of having to wait when you go to the bank, so we anticipate a little delay. But when we are told by the receptionist that “it shouldn’t be long”, and an hour later we’re still sitting on the kind of uncomfortable bench that seems exclusive to reception areas, our perception of the bank inevitably changes for the worse. Eventually it is our turn, and we expect some kind of half-hearted apology. But when Instead we are given a non-trivial amount to indemnify us, we experience cognitive dissonance. Is this an awful bank, or a splendid one? The signal sent by the remarkably generous compensation suggests our pitiful experience is not a common one (the unusualness of the amount evokes the unusualness of the event it is intended to compensate). It also tells us the bank is not pussyfooting when it messes up: no debate, and an amount so high that we can only conclude that they will make sure this does not happen again. The delay may have been the result of bad luck (staff sickness) or of the bank’s own doing (cost cutting, or poor management processes), but the compensation itself was very much a deliberate act. Such acts are the strongest possible indicator of ‘what kind of organization we are’. It makes us forget an hour’s wasted time, and allows the bank to rise in our estimation once again.

The second experience was, in many ways, very similar. A long delay at the reception desk, an apology, and compensation. Only, in comparison with what I got at the bank, half a litre of water was distinctly underwhelming as a token of remorse. For sure, the hotel receptionist could have stopped at saying sorry – she really did seem sincere in doing so – and I would have got to my room with a different perception, even though a fully rational person would of course have been happier with an apology and some water, than with just an apology.

But as numerous experiments with the ultimatum game have shown, that is not how we humans work. In this game, one player (the ‘decider) must divide a sum of money between herself and the other player (the ‘receiver’), deciding as she sees fit how much she keeps and what she gives away. The twist is that the receiver can refuse the gift, in which case nobody gets anything. While a rational person would accept even the smallest amount of money, in practice people find offers that are too low unfair. Studies have found that the majority of receivers reject offers at or below 20% of the original sum – thereby not just punishing the decider, but also themselves.

Giving somebody something good is not an unconditionally positive act. Leaving a tip of just a few pennies, if 10 or 15% is the norm, is a clear signal that the service was below par (unlike leaving nothing, which could just be forgetfulness). Was the bottle of water intended as an affront? Not very likely. But I could not help make the comparison: was this all my inconvenience was worth to the hotel? One interesting observation we can make here is how the sequence of events matters. Had I gone to the bank after my stay in the hotel, even a bottle of water might have been a pleasant surprise. But now the bank had set the norm, and so the hotel’s compensation was decidedly disappointing.

Signs of trust

In both these cases there was another message as well, telling us something about the relationship between the organization and the employee that served me. Both were empowered to offer me something, without going through complex authorization procedures, that would cost the company money. This signifies not only a willingness to solve customer issues smoothly, but also a certain degree of trust in the employee (obviously higher at the bank than at the hotel). Timpson, a large chain of shoe repair and key cutting shops in the UK is a leading light in this respect. They allow employees to spend up to £500 to settle a complaint without requiring permission from higher up.

security gates

“Cool gates, but cumbersome” photo: Nick Southall CC BY

As I got over my initial surprise at the entrance gates on the third day, it occurred to me that here too I could be seeing a signal of trust. At first I thought I observed an example of sloppy habits and leaky security – not a good sign for the kind of company we were visiting. But perhaps the gates were there just to keep out unannounced and unaccompanied visitors without a badge granting them entry. For visitors that were known to their own staff, the company could indeed just be placing their trust in their people to behave sensibly – and do away with what is, in many cases, a cumbersome procedure that adds little if any additional security. (When was the last time a receptionist or security employee verified your identity?) So even here, the unexpectedly pragmatic process for visitors entering the building changed my mind about the organization in question.

When expectations and reality bump into one another, we pay a great deal of attention to the choices other people make, and to the trade-offs we assume lie behind them. And often, we evaluate what we see on a simple good-bad scale, moving the marker of our esteem up or down accordingly.

That may not always be just or fair, but the more we can see that their actions are deliberate, the more we will see them as a true reflection of a person or organization’s true nature.

Such are the powers of the signals from the unexpected.

Posted in Behavioural economics, Economics, Emotions, Management, Organization Development | Tagged , , | Leave a comment

The point of tipping

(credit: Lea Latumahina BY CC)

An old and persistent custom offers rich insight in our profound economic nature

I have to start with an embarrassing confession. On my very first business trip to the US, having arrived on a Saturday evening, I thought I’d treat myself to a proper breakfast the next morning. The bill came to – I remember it well – $12.45, and when I settled it with a $20 note, I left just the small change on the saucer and pocketed the banknotes. The waitress looked distinctly unimpressed at my generosity, but it was only later during my stay that I realized that the American custom of tipping was rather different from what I was used to.

In Belgium, service charges have been included in the prices in bars and restaurants for almost as long as I can remember. Leaving a tip on top of that is neither expected nor common, and even then, most people would simply round off the bill to the nearest full euro. And there is a remarkable variety across countries regarding which professions expect tips, and the typical (or should that be tippical) magnitude of the gratuity. Michael Lynn, a professor at Cornell University and self-confessed tipping expert and Mark Starbuck studied the potential factors behind these differences. The authors propose three key influences: national differences in attitude toward tipping, sensitivity to the duty or obligation to tip, and the sensitivity to social pressure to tip.

Tipping is also an old custom, which some people trace back to the 17th century London Coffee Houses (where much business was conducted). Even the term itself would be an acronym (“To Insure Promptness”), but sadly, as the myth busting website Snopes says, this explanation and similar ones are “long on fanciful theory and short on practicality”.

Nevertheless, it is a widespread practice which, if you want to understand the complexity of human interaction, it provides much food for thought. At first sight it is really rather mystifying. It adds complexity to what would otherwise be a simple economic transaction. Consumers generally like clear all-in prices, and the need to work out an appropriate level of tip is a further complication. Furthermore, if tipping is voluntary, you would expect rational consumers to pay as little as they can get away with – indeed nothing at all.

And yet, there are good economic advantages to the custom, argues Anthony Gill, a professor in Political Science at the University of Washington, in a paper from 2017. Gill sees tipping as an imaginative mechanism to solve three common economics problems: the principal-agent problem **, the capturing of gains from trade through price discrimination, and the establishment of cultural trust that is crucial for exchanges between strangers.

The principal and the agent

The waiting staff in a restaurant work for the manager or the owner – they are the agents working for the principal. Both share similar ambitions: lots of customers, who all go home happily (and hopefully will visit again). Yet, at the margin waiters and waitresses may prefer to take it a little easier, while their boss would rather see them work a bit harder. But of course, the manager has better things to do than constantly watch the staff to ensure they pull their weight.

If customers have the chance to tip, we can assume that they will reward good service more handsomely than mediocre service. So, diners can effectively become the mechanism to enforce quality service through incentives. In fact, the customers do not only take over some of the owner’s operational supervision of the waiting staff. They also help improve overall performance by ensuring that the best servers stay (by giving them big tips), and that the poorer ones either get better (so they too get more money) or leave.

There is no upfront contract though, so the customer holds all the cards. But experienced waiting staff will be skilful at spotting who is likely to appreciate superior service (and indeed what superior service means for individual patrons). As they hone their craft, they can ensure their attention and time goes to customers who will reward them after the event. The interests of all three parties are well served: the owner needs to worry less about the performance of the staff, the customers get what they pay for (or pay for what they get), and waiting staff can boost their earnings by delivering the right service.

A larger slice

Voluntary transactions make both parties better off. A restaurant owner sells the meal for more than the bare minimum she is prepared to accept, and customers buy it for less than the maximum they’d be prepared to pay (their reserve price). But if the price is fixed at such a level that it covers the full cost of the service, it may be above the reserve price of some customers, and leave tables empty. If the owner sets a lower fixed price to ensure every table of her establishment is occupied, she won’t be able to afford as many servers and the service quality, especially with more customers, will be lower. Moreover she will miss out because many of her customers would be willing to pay more.

Splitting the total price in a fixed portion for the food and a variable portion for the service can help avoid the deadweight loss of empty tables, because it attracts diners with a low reserve price and few expectations from the service. And those with a high reserve price can pay extra for better service.

In comparison with a fixed price arrangement, such price discrimination provides an advantage for all parties. The owner can reduce her fixed costs by lowering the wages of the waiting staff, and so lower the price of the meal and attract more customers. The servers will not only benefit from a fuller restaurant, but also from the fact that they can earn more than the average service cost by providing superior service to customers willing to pay for it. Together owner and staff obtain a larger slice of the gains from trade. And the diners who do value high quality service know waiting staff have an incentive to deliver it.

The missing ingredient

This is all very rational, but it still does not explain why people tip, and especially why they do so for example on foreign travels, when there is no future reputation to build or protect. Gill speaks of “thinly rational” people who would indeed enjoy a free ride, but believes most of us are “thickly rational”. We care about more than just the content of our wallet, and there are solid, rational reasons for this too.

Economic transactions benefit greatly from mutual trust between the parties, the confidence that the other side is not suddenly going to cheat us. Making a visible, voluntary sacrifice – like a tip – is an effective way of signalling our good and decent nature. Tipping is a pattern of behaviour that is consistent with care and attention for other parties in a transaction, way beyond narrow selfishness. So the entire society benefits from the custom of tipping, as it contributes to a larger collection of social norms that oil its wheels (much like other such customs, like holding doors open for strangers, do).

tipjar

I trust you, you sexy beast! (photo: Bradley Gordon BY CC)

This last justification of tipping on economic grounds stretches far into our human nature, though, and forms a good illustration of how economics and humanity are strongly intertwined. Perhaps it is not surprising that the father of Economics, Adam Smith, not only understood (and explained) very well why specialization and trade leaves everyone better off. He was also acutely aware of the deeper motivations of us humans. “Man naturally desires, not just to be loved, but to be lovely”, he wrote in the Theory of Moral Sentiments.

Maybe the economic constructs to defend tipping that Anthony Gill summarizes are simply a case of post-rationalization. Perhaps the most profound explanation why we tip is simply the fact that we wish to recognize others’ efforts on our behalf, because we want to be lovely people. That is a hard ideal to reach, but leaving a tip for the people who serve us is one small act that brings us a little closer.

 

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

The Meaning of Milestones

(credit: Simon Clayson BY CC)

We often give milestones more significance than they objectively have

Do you have a mortgage? If you live in Northwestern Europe, you probably do. According to Eurostat, more than half the population in the Nordic countries, the Benelux and, at a stretch, the UK and Ireland, live in their own home and are repaying a mortgage for the privilege. In the USA, more than 35% of homes are owner-occupied with a mortgage – a slightly different measure, but considering household size, quite similar.

If so, you may occasionally be thinking about the day that your loan will be paid off. At long last you will be free of the lender’s shackles, and you will be able to call every single brick, every rooftile, every door handle your own. Not only will you feel wealthier with a house that is paid off, you will also be able to actually save all the money that went back into the lender’s coffers. A highly symbolic moment, for sure. But how much substance is there to this?

A roof as a milestone

Home ownership is an emotive affair: the security of a roof over your head is, well, priceless. But economically, there is no real difference between renting a house, and borrowing the money to buy a house. Picture two pairs of identical twins: Anna and Alice, and Bob and Ben. Anna is married to Bob, and Alice to Ben. They move into adjacent semi-detached houses, but while Anna and Bob rent their house, Alice and Ben take out a mortgage to buy theirs (for, say, £243,500). Or, as we can reframe it, they rent the money to buy their house. For that is what renting means: you obtain the right to use an asset (a house or a sum of money), pay a monthly fee (the rent or the interest), and give it back to the owner at the end of the term.

Alice and Ben make capital repayments throughout the term, while Anna and Bob make identical payments in a savings account. Although the buyers start with an asset (the house) balanced by a liability (the loan), and the renters with neither, the two couples’ net wealth increases in very much the same way. Over time, Alice and Ben reduce their liability, and Anna and Bob build up an asset (their savings).

semidetached

Can you spot which house has passed the milestone? (photo: Victor Mazar CC BY)

The day Alice and Ben make their last mortgage payment, Anna and Bob have accumulated exactly the amount of the loan in their savings account. But they are unlikely to experience having saved £243,500 as a milestone in the same way as their neighbours (and siblings). One house may be a clear, round number, but £243,500 is very much an arbitrary amount. If Anna and Bob continue to save (and there is no reason why they should suddenly stop at this amount), the specific point in time that Alice and Ben pay off their mortgage makes no difference to them. And neither does it for Alice and Ben. The monthly amount they used to repay the loan added exactly as much to their wealth as the same amount going into their savings account now the loan is paid off. There is no financial discontinuity for either.

We see such arbitrary symbolism in the financial markets too. A Google search for ‘Dow Jones 20000’ produces over 2 million hits. ‘Dow Jones 21000’ yields just 276,000 results, and ‘Dow Jones 21443’ a mere handful. And yet, there is nothing inherently relevant about round numbers, as this somewhat sarcastic tweet from Gerald Ashley indicates.

Clocks, cards and charities

marathon

Every second counts, but some count more than others (source: Reference-Dependent Preferences: Evidence from Marathon Runners)

That doesn’t mean symbolism does not affect us, though. A study by Eric Allen of the University of Southern California and colleagues looked at nearly 10 million marathon finishing times. You would expect these times pretty much to follow quite a smooth, normal-like distribution. Instead, the researchers found significant bunching just before round times (3 hours, 3.5 hours etc). For example, there were around 100,000 finishers in each of the minutes before the 3:58, 3:59, and 4:00 marks, compared to around just 70,000 finishers in the 4:00, 4:01, and 4:02 bins. This is no coincidence. When the authors looked at the proportion of runners speeding up in the last 2.195 km, they discovered that approximately 30% of runners increase their speed. However, that fraction increased to almost 40% for runners who were on target to finish at a round number.

This is an example of a so-called reference-dependent preference: it is because runners strongly prefer to finish with a time of 3:59:59 compared to a time of 4:00:01 that they notch up the pace. Such symbolic milestones are also used in loyalty schemes and by charities.

valois

It gave us a sore tongue, but this milestone made us 50F richer (source: Pinterest)

Hairdressers and coffee shops, among many others, often give their customers a card which is stamped with every purchase. The milestone to strive for is that of a completed card in order to obtain a discount or a free coffee or haircut. (This is not at all new, of course. I remember the colourful stamps our local grocer used to hand out every time we bought something, when I was little. I was sometimes allowed to help stick them in a little booklet which, when it was full, my mother then swapped for some money back.)

What is interesting is that our effort increases when the goal becomes more clearly within reach. The goal-gradient hypothesis is a concept linked to behaviourism, first formulated by Clark Hull, a psychologist at Yale University in 1932, when he discovered that rats ran faster when they were getting closer to the food used to reward them in experiments. Likewise, marathon runners turn out to accelerate when a ‘good’ time is within their grasp, and indeed donors are more likely to give (or give more) when a charitable goal appears within reach, as Cynthia Cryder from Washington University in St Louis and her colleagues found. They say this is partly because donors get a heightened sense of personal impact from their late-stage effort, more than from donations earlier in the campaign.

rewardcards

The same, yet different (source: The Goal-Gradient Hypothesis Resurrected)

The fact that we seem to be more motivated as we get closer to a milestone is further supported by another intriguing observation, described in a study by Ran Kivets from Columbia University and colleagues. They set up a reward programme experiment at a café on the university campus, involving 108 customers in two conditions. The control condition was a conventional, “buy 10, get the 11th free” arrangement, while the treatment condition required 12 stamps, but with two bonus stamps already on the card. In both cases, the customer needed 10 stamps to complete the card. However, there was a difference in behaviour: the customers with the conventional reward card took on average 15.6 days to complete their card, but those in the experimental 12-stamp group completed it in 12.7 days, nearly 20% faster. This phenomenon is known as illusionary goal progress: we believe we are closer to a milestone when we’ve already made some progress towards it.

Milestones are by and large symbolic. Their precise position is often arbitrary and almost always dependent on arbitrary measures (1093 yards, 1 foot and 10.06 inches is only a milestone if you express that distance as 1 kilometre). Yet they can be significant in providing focus and motivation – for others… or for ourselves.

Posted in Behavioural economics, Cognitive biases and fallacies, Economics, Psychology | Tagged , | 1 Comment