From sharing to gigging

(featured image credit: Guercio)

Would-be self-employed workers may be underestimating the true cost of freedom

When I was a little whippersnapper, sitting in the back seat (or on a rare occasion, on the lap of an adult in the front – amazing what was OK back then!), I used to be impressed by the advertising on the side of solitary houses we passed on the way to a Sunday visit to distant relatives. Sometimes it was just painted on lettering, faded by decades of weather, praising brand names that no longer existed. The grown-ups in my life at the time referred to it as ‘getting rich while sleeping’, and that certainly spoke to my imagination.


“Sharing my wall” (image: glasseyes view)

What I only realized much later is that this was an early example of what is now called the sharing economy. The lateral wall of a house obviously has a critical function in supporting the roof and keeping the elements out. But if it is located along a busy road, it has the potential to fulfil another function. The owner of the house could choose to share the wall with someone else, and give them permission to paint or stick messages on them aimed at passing motorists, in return for some money. Maybe not quite the thing that generates a huge fortune in no time, but the income, for no significant marginal cost, will probably have been a nice little extra at the time.

From idleness, an income

Such instances of making money from unused resources were rare, though, until the internet came along. People did sell the occasional sofa or bike through the small ads or went to car boot sales, but it was eBay that enabled a much larger and more dynamic market place. Suddenly, you could trade slightly-out-of-fashion-but-still-perfectly-wearable clothes with people hundreds and thousands of miles away.

A purist might question whether eBay is truly about sharing, since ownership passes to a different person. But the term ‘sharing economy’ is generally seen as a category of peer-to-peer markets, seeking to put assets to use that would otherwise remain idle. The kind of collaborative consumption that eBay represents clearly fits in this view: rather than clogging up your house, your unused clothes, books, games, garden implements and whatnot can be transferred to someone who will use them – and you make some money out of it too!

But the unused stuff traded on eBay is arguably small beer in comparison with the most expensive purchases people make: cars and houses. Enter Uber and Airbnb. Paul Barter, a transport policy advisor in the UK, estimates that on average cars are being actively used barely 5% of the time. The fixed costs of even a cheap runabout (depreciation, insurance, and tax) quickly run to a few thousands of pounds, dollars or euros a year, and 95% of that is effectively money down the drain.

Now it is hard to see how you could get anywhere near 100% utilization of your car. Yet, imagine that you could double its use to 10%, and get paid for it, that might be quite a nice little earner. Ride-hailing platforms like Uber and Lyft made it easy for people to become occasional taxi drivers.

Airbnb does something similar for people with a spare room. A guest room, normally used maybe 10 nights a year, could now be rented out in between – even a sofa, unused during the night, could be a source of a little extra income.

The sunk cost of the sharing economy

Both the economics and the behavioural economics of the sharing economy are peculiar, though.

Part time taxi driving, letting a room to strangers, selling old stuff on eBay and even allowing advertising on the side of your house have one thing in common. They rely on the sunk cost of what you are selling. You already have the wall, the old stuff, the car and the spare room. And that means the economics are different from those in which you’d need to acquire them in order to monetize them.

Often that is not the only aspect that is considered as sunk. eBay sellers often don’t take into account the time it takes to package things up and take it to the post office; Airbnb hosts often don’t split out the wear and tear to sheets, the time it takes to tidy the room and wash the sheets and the cost of the detergent. Even occasional Uber drivers might consider that a couple of hours’ driving is a better use of their time than slouching in front of the TV, and might overlook the cost of the incremental fuel usage and wear and tear.

There is a form of mental accounting at play here: the ‘expenditure’ in time and real money is not treated in the same way that a business owner would. The fact that any income is better than no income from an idle asset may also lower the ‘willingness to accept’ – the price at which people are prepared to make it available. This makes the whole arrangement rather different from what would make sense if you were to regard it as a living.

From sharing to gigging

Nevertheless, a lot of people have taken to Uber (or one of its rivals) as their main, or even only income-generating activity. Uber is estimated to have more than 2 million drivers worldwide (of which more than half in the US). A 2016 study in the UK found that 44% of London’s Uber drivers drive for more than 30 hours per week (28% even more than 40).

But given the economics and the behavioural economics, it’s not surprising that what may be a nice little earner on the side is not necessarily suitable as a main source of income. An MIT study, “The economics of ride-hailing”, by Stephen Zoepf and colleagues last month found that the median profit of an Uber driver is $3.37/hour – with nearly three quarters earning the state minimum wage.

Uber’s Chief Economist Jonathan Hall contested the calculation and the amount itself, and in a great example of open exchange and feedback, Zoepf responded with revised figures of $8.55/hour or $10/hour (depending on the calculation method). Yet even with these figures around half the drivers have an income of well below minimum wage.


Free app, but what is the true cost of freedom?

Uber is widely seen as a prominent example of the gig economy – in which people, rather than take an ordinary, 9-5, five-day-a-week job, become self-employed freelancers. But these figures cast doubt over the viability of such employment. Noah Smith, an economist and columnist at Bloomberg, looked closely at the figures and concludes that “the ride-hailing service requires a commitment to a bad business decision.” He finds support for this view in the vast staff turnover numbers (in 2017, a staggering 96% of Uber drivers stopped driving for the firm within a year).

Not the future

Perhaps it is important to take into account the difference between gigging and a steady job. Not everyone is happy with a routine job, and there are undoubtedly people for whom the ability to work when they want and as much as they want is valuable.  And we should not overlook that half the drivers earn more than minimum wage.

Nevertheless, most people prefer a steady income, even if that means on the whole earning less than in a more volatile situation. This is what another recent study by Kristen Berman and Margaret Gorlin at Duke University’s Common Cents lab discovered. They asked 500 people to imagine they had a job with a very variable work pattern – 60 hours of work some weeks and no work others, with little notice. Would they be prepared to take a pay cut to switch to a consistent job – the same number of hours every week? Yes: participants said they were willing to give up on average $9,900 (23% of their yearly income). That was of course hypothetical, but when the same question was put to people who actually do have a variable schedule, the researchers still found a willingness to sacrifice $4,680, or 12%.

Are Uber and their ilk, as Noah Smith tweets, “profiting from the poor business skills of the average worker”? Uber is a long way from making a profit (it lost $4.5 billion in 2017). This suggests the economics don’t quite work from the ‘employer’ perspective either.

In any case, sharing economy platforms may work well for people who want to make a bit of extra money on the side, but they are not really appropriate as main employment.

And that may well be true for the gigging economy as a whole – sharing or not. People may be attracted by the prospect of being their own boss and being able to work at will. But this requires people to think and act like small business owners, aware of the true costs of the freedom of being self-employed. Many have no idea of the costs an employer carries, over and above their net wage. As Noah Smith says, most people are not good at running a business.

Uber, Deliveroo, Mechanical Turk and all the other sharing and gigging platforms are really a full-scale field experiment in discovering the future of work. It looks like those who were anticipating a future in which significant numbers opt for self-employment will not see their expectations come true.

Neither the economics nor the behavioural economics of such a future seem to withstand the test of reality.


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

Pernicious zero-sum thinking

(featured image credit: Jason Rowe)

The assumption that buyers are losers and sellers are winners is a hardy perennial, and risks making us all into losers

Here is a puzzle (it’s based on an old one, as you can tell by the amounts). Joe buys a horse for $60, and sells it to Jack for $70. He then buys it back for $80 and finally sells it again to Jack for $90. Is Joe better off at the end of this sequence, worse off, or neither? What about Jack?

Money is extremely useful – it is hard to envisage the modern economy without an instrument that allows us to store of value and a medium of exchange. Imagine bartering for the weekly grocery shop, an annual season ticket for the train, or for gas and electricity. But money is also a unit of account **, and that affects how we think about economic transactions.

If you calculate what happens with Joe’s finances, you come to the conclusion that he ends up with $20 more than he started. That would seem to make him a winner. But what about Jack? The $20 in Joe’s pocket must have come from somewhere, and that can be from nowhere else than from Jack. Most people who are not die-hard economists would therefore consider Jack the loser.

We seem to have a deep-seated conviction that buying and selling are zero-sum transactions. And that is not even so strange when you consider bartering. When two people are exchanging ten cabbages for a goat, then there is no obvious reason why there should be a winner. There is simply an equivalence between the two. This kind of transaction is like changing a 5-pound note for five pound coins.

On the winner-loser see-saw

But as soon as we consider that one person gains, then the other loses – as if you get only four coins for your fiver. This overlooks the essential economic truth that, in a voluntary transaction, by definition both parties stand to gain (otherwise they would not engage in it). When Joe sold the horse to Jack he valued the money more than the horse; Jack thought the opposite. So if Jack ends up with a horse he values at more than $90, can he really be a loser?


Still a bargain at $90! (image: Devanath)

One horse always equals one horse, but the $90 price tag of the horse at the last transaction incontrovertibly appears as more than the $60 at the first one. The salience of money reinforces the win-lose frame. It makes us think we are unconditionally richer if we have more of it, and poorer if we have less. Loss aversion can make us feel the pain of paying more than we feel the gain of the good or service we purchase. That fuels mercantilist beliefs that money is inherently more valuable than what it can buy.


So it is hardly surprising we are reluctant traders. We feel every purchase as an erosion of our wealth – as a buyer we end up with less money, and hence worse off, and the seller, receiving the money, better off. Their gain is our loss.

What’s behind the zero-sum?

A new paper by Samuel Johnson, a cognitive scientist at the University of Bath’s School of Management, and colleagues explores people’s profound zero-sum thinking. In particular, the authors investigate the barter mindset and mercantilist beliefs as possible explanations.

In one of their experiments, people were presented with a set of voluntary transactions. These included monetary purchases of goods (a shirt, olive oil, a car and a chocolate bar), monetary purchases of services (like a haircut), and bartering of goods (a Burger King hamburger for one of McDonald’s, or a bottle of soy sauce for a bottle of vinegar). For every transaction, the participants had to indicate for each of the two parties whether it made them better off (positive outcome), worse off, (negative) or the same (zero), compared to before the transaction.

Overall, 94% of participants found that at least some of the parties failed to benefit from one or more of the exchanges – a clear illustration of zero-sum thinking. The graph below shows the detailed results.

According to economic theory, in a voluntary transaction both people should be winners, so the blue bars should be at 100%, and the other at zero. But that is not how participants saw things.

88% of them found that, in monetary transactions, the seller won, but only just over 60% thought they buyer did, and for the bartering exchanges, less than 50% thought the traders gained with the exchange.

The buyer was considered to be a loser in 32% of the cases, five times more than the seller (6%). Bartering was seen as a transaction without winners or losers by 41% of the participants.

These findings appear to confirm the idea that there is a sizeable tendency to consider bartering transactions as zero-sum, and that the use of money creates winners and losers in the perception of those who adhere to this view.

In a second experiment, they provided the participants with a motivation to engage in the transactions for the buyers in the monetary transactions (and for both traders in the barter situation). This dramatically reduced the incidence of zero-sum thinking by about half. The same relative pattern persisted: buyers were still more likely to be seen as losers than sellers. The authors conclude that zero-sum thinking is driven to a large extent by an error in perspective-taking. Unless prompted, we focus on the party is seeking to gain money from the transaction, and neglect the value that can be experienced by the party receiving goods or services.

Politicians vs economists

Generally, this zero-sum thinking does not appear to affect us too badly, though. We may, at some level, feel that sellers enriching themselves at the expense of us, the buyer, but that doesn’t prevent us from happily going shopping every so often.

However, this is not necessarily the case when politicians give in to their (or the electorate’s) mercantilist tendencies. In an intriguing case of double symmetry, while economists from both ends of the ideological spectrum agree on the positive-sum nature of free trade, populist, anti-trade politicians can be found at both sides of the political spectrum.


Would you buy a used horse from this man? For $90? (image: Gage Skidmore)

When they act on the mistaken belief that trade deficits in themselves make a country worse off (and that trade surpluses make them better off), and go so far as Donald Trump earlier this week with tariffs on imports of steel an aluminium, we are truly heading for a lose-lose outcome.

If economists are really as powerful in influencing people as some maintain, a succession of them, all the way since Adam Smith, should have easily convinced people of the positive-sum nature of free trade. The fact that zero-sum thinking is as pervasive as ever casts serious doubt on that belief. Alas.

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

Organ donation in da nation

(featured image: Engin_Aykurt)

Enough with the nudging already – why not simply pay people to donate their organs?

One of my earliest childhood memories is hearing on the radio about an operation performed by Dr Christiaan Barnard at the Groote Schuur hospital in Cape Town. The quirky name of the hospital was one thing that caught my youthful attention (it means “great barn” in Afrikaans as well as in my native Dutch). But what really struck me then (as it does now), is that it was possible to remove the heart from a dead person and transplant it into another person, who then goes on to live with it.

His patient, Louis Washkansky (I even remember his name too, today) only survived for 18 days, but in the following decades the intervention has become much more successful. People with a donor heart can now expect to live a normal life. Transplantations, not just of hearts but of just about any organs, remain complex operations, but have in many ways become routine.

The thing is, you need donor organs. As dead people don’t need a pancreas or a set of lungs, you might think there is an abundance of transplant organs. Unfortunately this is not the case. There are long waiting lists – in the UK 6,300 are actively waiting for a transplant; in the US 75,000, in Belgium nearly 1300 and in the Netherlands nearly 1100. Many of these people will die (20 per day in the US alone) before a suitable donor organ is found. This is because not everyone is a donor.

Donor by default

Last month, two European countries took a first step on the path to new legislation to boost the number of potential organ donors. Both the UK and the Netherlands new organ donation laws will implement an ‘opt-out’ system. This means that citizens who don’t want their organs being used after they die must register that objection. Everyone else will be considered as a willing donor.

This default is a key factor in the number of organ donors. In some countries their proportion is closer to 100% than a dictator’s share of the vote, while in others it is barely in double digits. In 2003, psychologists Eric Johnson and Daniel Goldstein published a very popular (1250 citations so far) short article, “Do Defaults Save Lives?” In it they described the differences in the proportion of donors between countries operating an ‘opt-in’ approach, where only people who have actively register their willingness are donors, and those with an ‘opt-out’ approach.  The figure below shows the stark difference between countries according to the prevailing default. It is easy to see why two laggard countries want to change their legislation.

The default bias is a well-known cognitive tendency, and a prime example of where the choice architecture can influence decision making – the home turf of nudging. We know it well from web forms: the pre-checked box we need to uncheck if we don’t want to be contacted, that kind of thing.

The default effect can be very powerful, as the organ donation statistics show. The logic for the opt-out system is that, as long as it is easy to register as a non-donor, anyone who really wants to hang on to their organs can ensure that their bodily integrity will be preserved to their grave. But nudging a customer into receiving marketing spam from “selected third parties” through inaction is quite different from nudging a person, through similar inaction, to agree to have their organs removed after they die.

Quite understandably the professionals who need to decide whether they can remove a deceased person’s organs do not consider inaction as a firm expression of preference. So they consult the relatives, who then effectively have the final say. This is exactly what happens in practice (for example in Belgium, which has had opt-out legislation since 1986). The end result has no real advantages over a situation where there is no donation register at all.

It is disappointing therefore to see the UK and the Netherlands adopt this line, rather than go for a far superior option. One of the originators of the Nudge theory, 2017 Nobel winner Richard Thaler, is not a fan of the opt-out approach, and advocates a ‘mandated choice’ instead. Ask people the question, for example as part of the application for a driving licence, and make answering the question mandatory. This will make either choice, whether to be a donor or not, a deliberate one, giving clear instructions to the surgeons.

Organ economics

The passing on of vital organs from one person to another is not just a popular theme in behavioural economics. Ordinary economists too are interested in the problem of supply and demand of organs. Why isn’t there a market to ensure supply meets demand?

People whose kidneys are failing are doomed to a life with frequent dialysis, unless they can get a transplant. Since a perfectly normal life is possible with a single kidney, family or close friends are often prepared to act as a living donor, but that doesn’t work if their organs are not compatible. A market for buying and selling kidneys would make economic sense, but the idea is generally considered immoral – economists speak of a repugnant market.

Al Roth, an economist at Stanford and Harvard, has been studying such exchanges for many years (see his 2007 paper “Repugnance as a constraint on markets”). He received the Economics Nobel Memorial prize in 2012 for his work on designing markets, notably a ‘market’ for the live donation of kidneys. In order to circumvent the legal prohibition of the sale of organs, he came up with an ingenious idea: an exchange where donors and recipients can be matched.


Last Christmas, I gave you my kidney (image: Dade Freeman)

Imagine my brother needs a kidney transplant. I would give him one of my kidneys, but our different blood types means we are not a match. At the same time, you would donate a kidney to your spouse, but you have the same problem. However, it turns out that my kidney would suit your spouse, and your kidney would suit my brother. All four of us go under the knife together, and you and I come out with one fewer kidney, having saved both your spouse and my brother through a transplant. Roth extended this idea so that it could work with more than two pairs (eg Alice donates a kidney to Bill’s brother, Bill donates a kidney to Carole’s daughter, and Carole donates a kidney to Alice’s husband.)

This approach, put into practice in the New England Program for Kidney Exchange has undoubtedly saved many lives. But it is still cumbersome, leaving many people waiting for a transplant, at risk of dying before a suitable donor is found. A real market where organs can be bought and sold would save many more people’s lives, as economist Scott Sumner argues. But others disagree: people should not become ‘vendors’ rather than ‘donors’, as Francis Delmonico, a transplant surgeon and Alexander Capron, an ethicist say. And as long as the idea of a market for organs remains repugnant, it will remain mostly an idea (with exceptions few and far between, as in Iran).

The price of our morals

What about selling our organs after we’re dead? Imagine a system in which, by registering as a donor, you enter a binding contract: in return for a sum of money, you permit the removal of your organs after you die. The compensation could come from the individuals on the waiting list (or the scheme could be funded by insurers or the state). Such an incentive is likely to do much more to boost the supply of transplant organs to match the demand, than any behavioural nudge ever could.

The arguments against repugnant transactions lose most (if not all) of their power when it concerns taking organs from a corpse. Individual donors would not be adversely affected while they’re alive, on the contrary.

In last week’s edition, the Economist carried an article about repugnant markets. It rightly pointed out that economists cannot avoid morals, ethics and making value judgements. But isn’t there an equivalent situation faced by ordinary citizens? It is hard to see any material harm in a market for organs of dead people. It is easy to see the benefit: thousands of people who now die waiting for a transplant would live years longer.

Does the indulgence of a vague moral objection against the commercialization of human tissue justify the societal harm of the premature death of thousands of people every year for whom a compatible transplant organ is not found in time?

This is the question us ordinary citizens cannot dodge: where economists must face up to the morality of their economic choices, we have to consider the stark material consequences of our moral choices.

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

All there is

(featured image credit: Mikepaws)

“None so blind as those who will not see”

At the end of last year, Britain’s Royal Statistical Society invited, for the first time, their members and the general public to nominate their favourite statistic. In the world of words, dictionaries like the OED and Merriam-Webster have had a word of the year tradition for over 10 years now. Germany’s national language society, the GfDS, has even been choosing a Wort des Jahres since 1971. It was obviously time for a numerical equivalent.

The UK statistic of the year referred to the percentage of UK land area that is ‘densely built upon’, also known as continuous urban fabric. If you’ve not heard of the statistic, even if you’ve not been to the UK, do take a guess (the answer is somewhere further in this article.)

Not so educated guesses

The statistic is striking (and presumably got voted to the top spot) because it is so different from what most people would guess it is. We could be excused for being ignorant about the tallest mountain on Mars, the length of the river Nile or the total daily production of crude oil, unless we have a special interest in these topics. But you might expect people living in the UK to be able to give a reasonable guess that is off by at most a factor 2 or 3.

Such educated guesses are an intriguing combination of facts and beliefs, and so in a sense they are a collaboration between Daniel Kahneman’s two thinking systems. The fast and impulsive System 1 is quick to tap into our feelings and impressions, and the slow, logical System 2 takes its time to reason and consider. But sometimes there is not a lot of reasoning, and the process is dominated by heuristics and beliefs, without us realizing that’s what happens.  In the UK, 83% lives in cities and conurbations, and of those who don’t, many more work in them. Built-up areas are salient in our experience. We do visit the countryside, of course, and we may occasionally even see the country from the air and be surprised by how small cities are and how much open space there is in between. But the dominant visual picture for most people is one of bricks and concrete, roads and buildings, and that ‘educates’ our guess more than any reasoning we might be doing.

Kahneman calls this WYSIATI – “What You See Is All There Is”. This describes our tendency to be influenced most strongly by our “known knowns”, and is linked to several cognitive biases. One of these is the availability heuristic, the mental shortcut that activates the concepts that are most easily brought to mind. For example, when we think of a swan, most of us would imagine a white one, simply because that is the only colour of swan most of us see. A related one is base rate neglect, which can make us believe in the power of faith healing or other interventions that lack any scientific basis. If we don’t realize how likely it is that a particular condition improves without any intervention, it is tempting to believe that such an improvement is the result of prayer, hand waving or sugar pills. Confirmation bias reinforces the WYSIATI-effect, because it makes us see (and indeed look for) what we already know to be the case. And the overconfidence bias makes us excessively confident of the perception that what we see is indeed all there is. (By the way, the percentage of densely built upon ‘continuous urban fabric’ in the UK is 0.13%, that is just 320 square kilometres. Were you close? The map below shows both continuous and discontinuous urban fabric in red – the actual continuous part is less than 1/50 of all the red colour.)


More open space than you thought – source: A Land Cover Atlas of the United Kingdom

Perilous perceptions

The effect is not limited to what we physically see, though. It can easily be extended to “what we believe is all there is.” The opinion polling company Ipsos MORI has been conducting a regular poll under the title ‘The perils of perception (the 2017 issue is summarized here.) In it, they interview people from a sizeable number of countries about their perception of certain social parameters, like the prevalence of teenage pregnancy, or belief in heaven and hell.

In the most recent one, the subjects had to say in which countries they thought people consume the most alcohol.  Russia came out top (it is actually only in 7th position). This is not so much because we see drunken Russians everywhere, but more likely because it is received (and unverified) wisdom. Only 4% of respondents put the real leader in alcohol consumption (Belgium) in their top 3. Even in Belgium, just 5% of respondents correctly guessed they are citizens of the world’s booziest country.

The Perils of Perception polls are full of this kind of sometimes spectacular misperceptions. The figure below shows some intriguing highlights where people get it wrong by considerable margins, often by a more than an order of magnitude.


(source: The Perils of Perception 2016 and 2017)

(A note of caution: I have obviously been selective in picking the examples to support my cause here. What you see here is not all there is!)

Rushing to a conclusion

WYSIATI is different from bounded rationality. This means coming to an answer or a conclusion which, even though it is well reasoned-through, is not the most rational one, because we don’t have all the relevant facts, and we have limited reasoning capacity. WYSIATI involves a lot less reasoning and a lot more shooting from the hip. We overestimate the relevance of the fraction of the information we have, and confidently generalize. It’s not as if we are unaware that there are vast areas of open space, from Dartmoor and the Lake District to the Scottish Highlands. But we spend our life in and between man-made constructions of bricks, concrete and glass, and that settles it.

The pernicious nature of WYSIATI is precisely that we don’t reason. This old riddle illustrates how easily we jump to conclusions:  a father and his son are in a horrible car crash that kills the dad. The son is rushed to the hospital. Just as he is about to go under the knife, the surgeon exclaims, “I can’t operate—that boy is my son!” How can this be?

Just like we assume swans are white because that is what we mostly see, we think surgeons are men because most surgeons we know (about) are men. Did you, for a moment there, fail to realize that the surgeon was the boy’s mother? WYSIATI makes us unwittingly biased and reinforces stereotyping.

Of course we can never see everything, and there will always be stuff that is outside our immediate field of vision, that we don’t remember, or that is at odds with our received wisdom. But what we can do is remind ourselves of our limited perspective on the world around us – especially when we feel particularly confident about our judgement.

If we’re aware that what we see is not all there is, we already see a little more.


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

All because of the Joneses

(featured image: eugeniu)

Are we doomed to be forever dissatisfied with our lot?


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

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

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

In position

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

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


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

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

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

Pay arms race

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

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

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

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

What’s behind the gap?

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

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

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

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

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The curse of two hands

Is ambidexterity a mixed blessing?

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

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

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

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


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

Emotions on the scales


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

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

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


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

Fake balance

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

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

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

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

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

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

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

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Good drama = good economics

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

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

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

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

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

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


Facing trade-offs (can’t you tell?)

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

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

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

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

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

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

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

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

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

Good drama is, very much, good economics.


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