Incentives in the balance

(featured image: Ruslan/Flickr CC BY SA 2.0 and Thamizhpparithi Maari/Wikimedia CC BY SA 3.0)

We respond to incentives, that is true – but not always in the way that might be expected

An insight to which I often return is the following economic observation, from Steven Landsburg’s The Armchair Economist: “People respond to incentives. The rest is commentary.” It has an irresistible simplicity, and it’s not hard to find plenty of evidence for it: positive incentives make a choice more attractive, and negative incentives less so. But things are rarely quite that simple.

Incentives work because we have a built-in mechanism to establish and evaluate costs and benefits. From our most ancient unicellular ancestors all the way to us here and now, only those individuals who reliably made choices that were better for them – so they were able to live long and prosperous enough to procreate – and who avoided worse choices were able to persistently pass on their genes. This ability allowed all our predecessors, and allows us today, to respond to and navigate nature, seeking out and pursue what is good for us, and evade what is not.

Human activation of incentives

For almost ever, this was a passive affair, in which nature provided the situations and living things responded to them. But one day, very recently (in historical terms), we humans figured out that we could actively manipulate costs and benefits to others (and to ourselves), and thus influence behaviour: we invented incentives.

Since then, reward and punishment – for desired and undesired behaviour, respectively – are widely used instruments to change behaviour, from bribes (extra pocket money) and threats (confiscation of smartphone) in the process of education our children, to, well, bribes (bonuses and promotions) and threats (sanctions and firing) in the workplace. And of course, we see incentives in the world of commerce, with special offers, discounts, coupons, free pens and whatnot, encouraging us to buy cheese or insurance.

You can picture a decision (to either do, or not do, something) as a set of scales on which one side represents the costs and the other side the benefits. What an incentive does is either put extra cost or benefit on the corresponding scale, or take cost or benefit away from it, in order to make it tilt the other way. (Often one and the same intervention can be seen either way. If a coffeeshop charges less for a croissant with a cappuccino than for both items separately, that can appear as an incentive to buy two items rather than one, or a disincentive to buy just one item.)

Making things cheaper or more costly is an obvious application, which can even be done conditionally, like off-peak prices for public transport or holidays. But practically anything that is important to the decision-maker (convenience, effort, time, risk, timing etc), can be manipulated to alter the balance between one choice and the alternative, and hence act as an incentive.

The miracle of the Passe Sanitaire (via ourworldindata.org)

From 9th August 2021 the French government, for example, has made the passe sanitaire – proof of immunity to COVID-19 or a recent negative test – compulsory for a wide range of public activities, including eating or drinking in the outside areas of bars and restaurants. This was at least in part intended as an incentive for people to get immunized: it makes failing to do so costly (no vaccine, no fun). It is also coercive in nature: it takes away a previously existing right from people who choose not to get their jab. And it worked: France’s rate of vaccination accelerated remarkably, overtaking the EU curve which it had been lagging since May of this year.

Stuff the scales

The British government attempted a similar tactic with the personnel of care homes. These house people who are often quite vulnerable through age and various morbidities, even when they are fully vaccinated, and so minimizing the risk of infection is very important. Many employees, however, appear reluctant to get immunized. By the end of July, only 78% of personnel in older adult care homes was vaccinated, and the government itself estimates that some 7% of the 570,000 care home staff (40,000 people) will refuse. Last month, it therefore decreed that anyone working in a care home who is not exempt (for medical reasons) must be fully vaccinated by 11th November.

Like the French pass, this too is a coercive incentive. Hey, if people are prepared to get immunized just to be able to continue to have a beer, they should surely be at least as willing to do so in order to keep their job. That assumption would very likely be valid if jobs were scarce. But there are over a million vacancies in the UK, many of which are for jobs with no more qualification requirements than in the social care sector, for instance in hospitality.  Adding conditions to employment in such a climate will certainly work as an incentive – only not necessarily in the intended direction. Unsurprisingly, the measure is a big worry for care home operators, who already face the most severe acute staff shortages in living memory, according to a open letter to the government issued this week.

A jab to keep my job — but who says I actually want to keep it? (photo: Mufid Majnun/Pixabay)

Exactly how people respond to an alteration to the costs and benefits balance depends on what the alternative is. For government ministers and civil servants with a well-paid job that they enjoy, and who consider vaccination at worst as a minor inconvenience, getting the jab and keeping their job might look like a total no-brainer. But imagine someone in a tough, underpaid job, who is deeply suspicious of a new vaccine that is pushed by people with whom they have little affinity, in a climate with plenty of other low-paid, but less burdensome jobs around. They may well opt for the alternative, choose to check out completely, and move on.

Similarly, the Brussels regional government announced earlier in September that a coronapas will be essential to visit places like gyms or, like in France, bars and restaurants. They hoped this would provide a boost for the vaccination rate in the Belgian capital which, at 51%, limps way behind the national rate of 72%. Now maybe the unvaccinated Bruxellois care little about gyms and bars, or they plan simply hop over the boundary into nearby Flanders (which surrounds the city) for a beer or a steak frites, where at present no pass is needed. In any case, unfortunately the compulsory pass appears to have little effect.

Incentives can be a powerful instrument to change people’s behaviour. But it is advisable to take a good look at what their alternative options might be – especially if the incentive assumes they need or profoundly want to do something. Above all, it is important to evaluate how the incentive will influence the choice they ultimately make from their perspective, not yours, otherwise they may well tell you to stuff your balance leave you alone with your set of scales.

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

Like me

(featured image: Goran Has/Flickr CC BY 2.0)

Is it irrational to favour people with whom you have something important in common?

Imagine the prime minister of your country is not someone you naturally align with: in fact, you’d rather see him or her defeated at the next election. But then you suddenly learn that your PM is a life-long supporter of the same football team that you have been a fan of since you were a kid. What effect does this new knowledge have on you?

This very thing happened to Samuel Salzer, one of my fellow behavioural practitioners and an ardent Tottenham Hotspur fan, who recently learned that the Swedish Social Democratic premier, Stefan Löfven, has also been a Spurs supporter for decades. While before, he didn’t like his prime minister or, at best, felt neutral about him, he reported that he “instantly noticed how [his] image of him changed,” despite knowing that this is “irrelevant”.

Is this fact really as irrelevant as Samuel writes, and is this reaction, as he suggests, a case of irrational behaviour?

Affinity matters

It seems evident that politics is a matter of policies, and of nothing else. A rational voter – even a hypothetical one – will evaluate the different policies each candidate represents, weigh them up and determine which of the candidates is most likely to pursue a policy set that best matches their wishes.

But that is not quite how we work.

Should he be employed by the private sector? Photo: Kampus Productions/Pexels

In a Danish experiment by political scientists Rune Slothuus and Claes de Vreese, citizens were presented with a constructed newspaper article on two proposed policies: a conflict issue (contracting out the care for the elderly, something on which the two main Danish political parties oppose each other) and a consensus issue (joining a proposed trade agreement, something on which they agree). The respondents were put in four different framing conditions: a pro- and a con-frame, each of which was presented as sponsored by either one or the other of the two parties, and had to express their level of support for the opinion in the article. The researchers found that citizens tended to respond more favourably to an issue frame – regardless whether it was for or against the policy – if it was sponsored by the party they vote for than if it was promoted by the other party.

Party affiliation thus seems to shape people’s view on specific policy proposals. Otherwise put: whether we are for or against a policy is a function not just of its precise content and nature, but also of the nature of the party proposing or objecting to it.

Might there be other additional factors that might influence our political choices?

Consider this thought experiment: you must choose between two politicians who both propose exactly the same policies (to control for party affiliation, we can even assume they are from the same party, for example if both aspire to become party leader). If you genuinely know nothing else about the two candidates, you might as well vote by spinning a coin. But will you still be inclined to do so if you learn some other factoids about each candidate? Would you perhaps have a slight preference for the person who has the same degree as you, or who is known to share with you a fondness of Kraftwerk, for Harry Potter books or for Stoic philosophy?

While such characteristics – or any other you like to name – are most likely not going to have any material effect on their political actions, they do seem to matter, in some odd way, in shaping your perception of a person. Now, consider a small alteration to the thought experiment: this time, the candidates’ policy proposals differ in some minor, and in your eyes quite insignificant way. Can you imagine still opting for the candidate with whom you feel some affinity – especially if it is a strong, emotional one – even if the other candidate has, albeit marginally, the best fit with your own political views? In other words, might you trade some policy choice for the knowledge that the candidate is in your in-group?

We are more inclined to cooperate with (and tend to have positive feelings towards) members of our in-group (however defined – even in so-called minimal groups, established on the basis of the smallest, trivial choices, e.g., whether or not a hot dog is a sandwich, or how toilet paper should be orientated).  You may have noticed that astute car or kitchen salespeople will seek to boost their chances of a sale by taking advantage of this predisposition. They will ask you some personal questions and quickly bring up a – real or made-up – connection: “That’s an unusual name! Where are you from? Oh, Belgium? I was there two years ago! Lovely country, excellent beer, and Bruges, what a pretty city!” And bingo, as a buyer, you cannot help feeling some degree of connection.

Evolutionary psychology theorizes that in-group favouritism has its roots in the evolution of humans as a cooperative species, capable of surviving and prospering in a wide range of environments. Cooperation requires trust, but indiscriminate trust would be ineffective, and our early ancestors had to be able to trust those who could be trusted to cooperate too. Well-defined In-groups were, and are, a plausible mechanism for this to work. Even though party politics and football were not around when this societal model started to emerge, both clearly map onto the concept of the in-group, alongside numerous other characteristics.

(Not so) irrational preferences

Is it irrational to change your image of someone – even a politician! – because they happen to support the same football team as you? The term ‘irrational’ is widely used to label behaviour judged as illogical, suboptimal and indeed often, frankly, a bit stupid. This is not a very helpful definition, not only because of its implied normative connotations, but because it ignores the aims and preferences of the supposedly irrational individual.

Our choices are, fundamentally, a consequence of our preferences. When we can choose freely, we go with whatever we prefer. Say there are two slices of pie left, a larger and a smaller one. I really like this pie, and I could easily eat the bigger one. Is it then irrational for me to choose the smallest one and leave the largest one for you? Yes, from a very narrow perspective: I should simply self-interestedly take the larger one. But not when taking a broader view: there are ample reasons why, even if I’d rather have the larger slice, I’d still leave it for you, from genuine generosity and reputational concern to deontological or reciprocity motives. In all these situations, I would certainly be acting in accordance with my preferences.

Spot the irrational mode of transport (photo: Alden Jewell/Flickr CC BY 2.0)

Whether or not a choice is rational is inextricably linked with the chooser’s preferences. It can only be irrational if it goes against them. Alice, who places a high value on car’s badge, is not irrational for preferring an expensive model when she could have bought a functionally identical model of a less prestigious brand for thousands of pounds (euros, dollars) less. Bob, who prefers to avoid traveling by plane because the very idea terrifies, them is not irrational for opting to drive long distance, even if that increases their chance of becoming a fatality during the journey.

And neither is someone who prefers, all else being equal, to have a member of their in-group as a prime minister, and who feel a stronger affinity with the PM the moment they learn he is, like them, also a Spurs supporter.

Their more favourable attitude towards the politician is unlikely to be quite enough to also assure him of their vote at the next election. But knowing a political opponent is somehow in the same in-group – especially when, as in this case, it has a pronounced emotional significance – may encourage a more neutral evaluation of his policies than the dogmatic dismissal that is often the typical reaction to the policies of a political adversary. That can’t be bad, can it?  

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

Buyer and seller – one market price, two perspectives

(featured image: abby_mix07/Flickr CC BY NC SA 2.0)

Markets enable prices to reach a level that satisfies both sellers and buyers, but that doesn’t necessarily mean that they see that price in the same way

Do you know what a kilo of brown rice costs, a 350g pot of salt, or a pack of four sponge wipes? If you are like me (and I do the weekly shop!), in all likelihood the best you can do is give a pretty wide price range for these products. As long as the price is within that range, you’d put these items in your trolley without giving it more thought.

You trust that the price is reasonable, because you assume the supermarkets compete with each other in an open, free market, where overpricing items in comparison with their rivals will lose them customers. And so do we all. Even for items that we buy more frequently than salt or sponge wipes, and whose price we know well, we rely on the market to tell us what they cost: there is no ‘right’ price for a pint of milk or a loaf of bread. Supply and demand find an equilibrium, and anyone trying to make excessive profits will quickly be undercut by someone who is happy with a more reasonable margin.

The buyer’s perspective

This is the case for low-cost items like these groceries, but also for more expensive goods and services costing tens, or even hundreds of pounds. But our assumption that the market price is a fair price can end up being challenged when we see it broken down into its constituents.

HOW MUCH for cleaning? (photo: via twitter)

A little while ago, an economist of my acquaintance had hoped to get away for one night in celebration of his birthday, and checked out what was available on AirBnB. Even more than for brown rice or dishwasher detergent, the typical consumer can only guess what a fair price for a night’s accommodation would be, dependent as it is not only on the destination city (and where exactly in that city), but also on the date.

He found an option with a pretty decent rental price for one night of $199 (£144, €167), but that was not the whole picture: on top of that there was the AirBnB service fee ($49), the tax ($41) – and the cleaning fee, which turned out to be an eye watering $150. Even AirBnB’s helpful notice that this price was still a good deal “less than the average nightly rate for the last 60 days” did not do much to sugar that pill.

Now most economists, and even most behavioural economists, would generally tell you that, in a transaction, it is the total price that matters. If the benefits exceed that amount, then the transaction can go ahead. Its components should not matter at all.

However, the cleaning fee here stood out like a very sore thumb. We make decisions based on more than just the numbers, and that is why we might find the total price of $439 much more acceptable if it was composed of $299 for the accommodation $50 for the cleaning, and reject this identically priced arrangement. That’s just how we roll. Nobel Economics laureate Richard Thaler puts it succinctly: we are “humans” with idiosyncratic preferences and feelings, and not “econs”, dispassionate creatures that narrowly focus only on material costs and benefits.

Is it irrational to reject a transaction, not because the total price outweighs the benefits, but because it is revealed that a particular component of it is, in your eyes, excessive? For “econs”, yes, but not if you adopt the “human” vantage point: doing business with someone who appears to take advantage of us would be deeply unpleasant, no matter how enjoyable the actual stay might be.

So it seems that acquiring additional information can alter our viewpoint significantly. But does this decomposition tell us everything, or is there still more that can influence our view? How do things look like from the seller’s eyes?

The seller’s perspective

As it happens, an actual AirBnB host responded to the original tweet, explaining that he uses the cleaning fee “to encapsulate all the one-off costs of a booking”. Doing so discourages 1-night stays (which take just as much effort as longer ones), without eliminating the option altogether: someone who is really, really keen still has the option of paying the fee.

This is an interesting, and economically quite plausible, position to take. Pricing almost always comprises both fixed and variable elements, but hospitality is particularly exposed to the imbalances that might arise. In retail, the sales volumes are usually so high that fixed costs can be spread over many sold items and become relatively insignificant – the transportation component of the price of a pot of salt is a small fraction of the cost of the actual salt. Hotel rooms and AirBnB properties, however, can be let for one night to one guest and for seven nights to the next, with the same fixed cost per stay. In a hotel with many rooms, the average duration of a stay will generally be fairly steady, which makes it sensible to allocate the fixed costs on a per-night basis. That doesn’t quite work for a host with a single AirBnB property, though.

And as a guest, we don’t immediately realize this challenge. We tend to evaluate the price in light of the value we get in return – a night’s stay – and both the magnitude of the fixed cost, and the complexity of recharging, it are hidden to us.

Might guests be underestimating the cost of cleaning? (photo: Matilda Wormwood/Pexels)

Is the amount this particular host charged excessive? Maybe disclosing the actual one-off costs might address would-be guests’ suspicion. Of course, not all of these are really out-of-pocket costs that can be itemized, like hiring a cleaner. Some manifest as effort, time and hassle for which the host wants to be compensated. “But hey, is all that not part and parcel of the business of letting, which should simply be incorporated in the price of the stay?”, I can hear you ask.

This may feel intuitively fair, but it makes poor economic sense. By design, this approach would reduce the total cost of short stays, and increase that of longer stays. As a result, the total revenue of a shorter stay would no longer cover its full fixed cost. More longer stays would thus be needed to subsidize that shortfall, but as this approach would make them relatively more expensive, there would be fewer of them. At the same time, the cheaper shorter stays would become relatively more attractive, and hence tilt the balance in the wrong direction – thus further increasing the total shortfall for the host.

Even more information, in particular the seller’s angle, does indeed add more nuance: splitting off the fixed cost in this way is both a fairer way of pricing (without subsidy) and economically more sensible. As a guest, you may still think the fixed cost fee is too high, and go elsewhere, just like the host can decide to deter guests who only want short stays.

Yet, even here you can trust the market to regulate matters: a host whose cleaning fees are truly excessive will see his custom melt away, and will be encouraged to lower the charges until supply and demand are back in balance.

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

A right to entitlement

(featured image: jEd dC/Flickr CC BY NC ND 2.0)

We often assume we are entitled to something, but that is literally only half of the story

Years ago, my (British) colleagues and I had what we thought was a brilliant idea for a practical joke. We were in a French chateau, at a debriefing session concluding a large international project with ten Germans on the team. Our plan was to sneak into the meeting room late that evening with all our spare towels, and place them on the chairs, a reference to a curious German tourist custom.

Well, perhaps not that curious. You may remember that, once upon a time, German citizens holidaying around the Mediterranean had a reputation of getting up at the crack of dawn to place towels on the best placed loungers around the hotel pool, to assert the temporary ownership they believed to be entitled to (to the detriment of the not-so-early birds among the guests, naturally). In the event, we never got to see the reaction of our German colleagues at the meeting, since the staff of the venue had got up at the crack of dawn and removed the towels before breakfast. (In hindsight, I guess the joke was not all that funny anyway.)

Visible when there is a conflict

Entitlements permeate social interaction in numerous ways. Some are enshrined in law, for example entitlements to free or subsidized healthcare, education, and to welfare like child benefit or a pension. But most form part of social norms, for example the entitlement to a seat on a crowded public transport vehicle for passengers who find it hard to stand up.

They can also influence our behaviour, as illustrated on poolside sunbeds and in aircraft cabins, where conflicts may arise over the allocation of space related to the position of the seat backs. As the distance between airline seats gradually shrunk over the last 50 years, reclining one’s backrest has intruded more and more into the space of the person in the seat behind. While one individual may firmly believe they are entitled to sit back and relax, not least because the seat is a equipped with a button to allow this to happen, the other may be equally convinced that they are entitled to the space for their knees, or to use a laptop computer on the folding table without having to squeeze their elbows in an anatomically unlikely position.

It is indeed especially when conflicts around entitlements (actual or perceived) arise that they become salient. As long as everyone gets what they believe they are entitled to, they are barely noticed, but when people feel short changed, tempers can flare up quickly.

Fuzzy definitions and one-sidedness

I *will* park in front of my house, no matter what (image: Marika Lüders/Flickr CC BY NC 2.0)

This is probably in part because of the fuzzy, malleable definition of the concept. What makes us entitled to something? Unsurprisingly, we may well be a little biased towards simply considering whatever is good for us as an entitlement. Who wants to park their car two blocks away? So, we hypothesize some kind of entitlement to park our car right in front of our house. Even if we know that it is not real, it entitles (!) us to grumble when someone has the temerity to leave their car where ours should be. (We used to have a neighbour who complained whenever anyone parked their car in front of his house, in the firm belief that such an entitlement really existed.) Similarly, in a movie theatre, we like to think we are entitled to seat with an unencumbered view of the screen, and we are annoyed if a tall person – arriving at the 11th hour! – plonks himself down right in the empty seat in front of us.

Imagine you’re in the queue at a café at a tourist spot, and you’ve got your eye on the last slice of strawberry cheesecake in the display cabinet. As you order it, you hear the person behind you sigh that they were hoping to get that piece of cake. But who, in your view, is more entitled to it? You of course, because you were first.

Sometimes being first is not enough, though. I recall one Friday evening, on the last flight home from Amsterdam, a man walking up to the passenger seated across the aisle from me, claiming that was their seat. Both men then produced their boarding passes, which showed the same name and the same seat number, to the bafflement of the cabin crew. It turned out that these two gentlemen had the same surname and initial, and for some reason the staff at the desk (this happened well before online check-in) had issued a duplicate boarding card to the person already seated. Who ended up being entitled to the seat here? Not the Mr Brown who got his boarding pass first, but the Mr Brown who had possession of the seat – in the entitlement stakes, possession is a powerful argument.

Perhaps the most legitimate reason for entitlement in our own eyes, however, is that we have made some kind of sacrifice – we worked or we paid for something: “I slaved all my life, so I am entitled to a decent pension!”, or “I paid £200 for this hotel room, so I am entitled to a sea view rather than one of the car park!”

Two sides to the coin

But all these reasons tend to take a rather self-centred perspective of what an entitlement is, which overlooks something fundamental: there can be no entitlement unless someone else is able and prepared to fulfil it.  Maybe it is precisely this last subset of entitlements that can help us understand this, and abandon the idea that entitlements are only about what we have a right to expect.

Who’ll pay for all that rain? (image via YouTube)

Last Sunday, the Belgian Formula 1 Grand Prix at Spa-Francorchamps was not quite what the more than 70,000 fans (nor the drivers) anticipated: persistent heavy rain first delayed the start of the race by half an hour, then, after just eight minutes, caused the race to be suspended for nearly three hours. When it restarted, the elation of the drenched spectators was short-lived: after barely another two laps it was suspended again, and eventually, a few minutes later, abandoned.

Here, the fans had definitely made a significant sacrifice: some had paid upwards of £500 for a ticket. Surely they were entitled to a refund? That is what many spectators claimed, supported by drivers Lewis Hamilton and Carlos Sainz. But this case shows that an entitlement is one side of a coin, with on the other side an obligation of another party to fulfil it.

It is true that the enjoyment of the F1-fans on that rainy afternoon undoubtedly fell seriously short of their expectations, and it is true that they paid the race organizers significant amounts of money. But does that constitute an entitlement to a refund that the organizers are obliged to meet? They were not responsible for the unusually bad weather, and it is not clear what they could have done differently to give the spectators a satisfactory experience. There was a risk this would happen, but it is by no means obvious that the consequences of the event should be borne by the race organizers.

Of course, it is possible to explicitly reflect in the commercial agreement that the purchase of a ticket represents the obligation to refund spectators in case the race is cancelled because of bad weather, earthquakes, acts of terrorism, all drivers being struck by a severe bout of diarrhoea or whatever (and hence grant them the entitlement). In that case, the organizers would of course have been wise enough to take out insurance… and reflect that extra cost in the price of the ticket.

When we feel we are entitled to something, it is worth checking the other side of the coin, figuring out whose the obligation would be to fulfil this entitlement, and whether that is a legitimate and reasonable expectation. If that is not the case, our entitlement is just a figment of our imagination.

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

We can fabricate data, but we cannot fabricate the truth

(Featured image: Matt Lemmon/Flickr CC BY SA 2.0)

When a renowned behavioural scientist gets embroiled in a case of fabricated data, there may be some lessons for us all

When a behavioural science paper is discovered to have been using fraudulent data, the field understandably experiences some mild, but distinct tremors. If the co-author who was responsible for the data happens to one of the field’s most famous scientists, the tremor becomes a proper shockwave. What has been going on?

Data detectives at work

It concerns a study from 2012, which suggested that asking individuals to sign a declaration of honesty at the beginning of a self-report form (rather than at the end, as usual) makes them complete it more honestly, based on two lab experiments and a field experiment. In the lab studies, for example, students completed puzzles and could claim money according to how many they had solved, as indicated on a form. The setup was such that it appeared to be possible for participants to overstate their performance without being caught (but in reality, the experimenters could compare their claimed results with their actual performance). In the field study, customers of an insurance company reported the actual odometer reading of their vehicle(s). In both cases, the information provided by the participants indicated that it was more truthful (fewer puzzles solved, more miles driven) in the treatment condition (i.e., when they had signed upfront).

On 17 August, Datacolada, a website devoted to critically evaluating behavioural science research, showed that the data regarding the insurance field experiment were almost certainly fabricated. (Do consult the post for a wonderful account of forensic data scrutiny.) The five authors of the study were asked to comment on the findings; four of them did, all agreeing with Datacolada’s findings, while the first author reacted on Twitter. The bombshell was that the co-author responsible for sourcing the data from the insurance company was none other than Dan Ariely, very well-known both in academia and beyond thanks to popular books like Predictably Irrational and, ironically, The honest truth about dishonesty.

They should have signed at the beginning (image: PNAS)

An interesting twist is that the data in question were not posted publicly until 2020, when a paper was published by a team involving the original five authors that failed to replicate the 2012 lab experiments, concluding that signing upfront does not decrease dishonesty. The earlier paper will now be retracted, and arguably, the practical significance of the fraud is limited anyway because of the failure to replicate the results. Nevertheless, the affair offers some useful, more general insights – not just for academics, but for all of us.

The work, not the person

The reactions to the discovery were, as could be expected, varied. Alongside nuanced and constructive calls for a thorough investigation into what went wrong and why, so that similar occurrences could be prevented in future, there were less nuanced ones. Dan Ariely is not someone who shuns the limelight, and he is very popular with the members of the rapidly growing community of behavioural scientists and practitioners. That invites schadenfreude and, unsurprisingly, some reactions contained subtle hints of it that someone who some might see as perhaps a bit too popular for his own good got taken down a few notches. Others saw in it an opportunity to criticize the entire discipline of behavioural economics, addicted as they see it to be to hype and sensational illustrations of supposed human irrationality. Neither of these are really helpful, and both are themselves examples of the kind of biases we all have to some extent. If we are unsympathetic to an individual or to a cause, we will tend to amplify negative information about them, and see it as confirmation of our prior opinion.

The identity of a person involved in questionable practices should not matter: our judgement of their actions should be independent of whoever they are. But this is easier said than done. We tend to be lenient towards people that we feel affinity with or who, in some way, belong to the same group as we do, and we tend to be much more critical of people whom, for whatever reason, we don’t like. Such emotional connections to a person can cloud our judgement: we jump to conclusions (in favour or to the detriment of the individual concerned), and give credence to superficial speculation that fits our view. We are well advised not to become uncritical of people because they are held in high regard – in the field of behavioural science someone like Nobel laureate Daniel Kahneman – and we should likewise not uncritically dismiss all the work by people found guilty of scientific misconduct, like Brian Wansink (who had 18 of his papers retracted). We should judge the work, not the person.

People respond to incentives

One particular point that is often made in cases of impropriety in academia is that there are perverse incentives at work. Scientific journals rarely publish null results and practically all but demand positive results, and to be a successful academic you need lots of publications. The temptation to massage the figures, to be less than diligent in scrutinizing the data, and sometimes indeed to fabricate data, is real. In addition, sensational results bestow status and fame on researchers, and that too can provide an incentive that influences behaviour. Andrew Gelman, a critical statistician, refers to the (Lance) Armstrong principle (after the disgraced American cyclist): “If you push people to promise more than they can deliver, they’re motivated to cheat.”

At least he still has the principle named after him (image: Milan/Flickr CC BY NC ND 2.0)

Given that the way the data were falsified was rather incompetent, it is not very likely that Ariely himself did so; more probable is that it was someone at the insurance company who, for some reason, was unable to produce the agreed data (but I am speculating here, and at least one person argues differently). However, he did not – in his own words – “test the data for irregularities”. Checking third party data might have been perceived as a low-priority task that could be skipped, but neglecting it might also be motivated by a desire to avoid troubling the prospect of a successful publication. The anticipation of success is a powerful incentive.

The trouble with a preferred truth

If analysing the data confirms what we already believe to be true, it is a very human thing to tend to be less than critical, both of the data and of the analysis. Alongside confirmation bias, there are plenty of related tendencies that might encourage us to be not as thorough as we could or should – wishful thinking, selection bias, optimism bias, escalation of commitment and more – all amplifying whatever incentives we may have to navigate towards a positive result, whether in academic research, or in our work or home lives.

But perhaps the most fundamental challenge might be that we have a horse in the race, that we have a preference for a particular result. If we are searching for the truth – and that is the case in science, but in many other endeavours in business and in our private lives too – we should not be concerned with what exactly the truth will turn out to be. We should, literally, not care about the outcome. All we should care about is that we learn the truth, whatever it is – that is where the value resides. If we become attached to a particular theory or claim, the corresponding emotion can make it very hard to remain dispassionate across the entire process – from formulating the problem or research question and designing the experiment or approach, to collecting and analysing the data and drawing conclusions.

We cannot pursue the truth if we have a preference for what the truth should be.

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

An accidental behavioural economist is on holiday – again

Human behaviour continues to be an inexhaustible source of wonder and fascination – even when on holiday

Unexpectedly, your correspondent had an opportunity to return to his native country at short notice for a brief holiday after skipping the annual tradition last year. And yet again, it provided ample educational entertainment (or entertaining education) for any behavioural economist, accidental or not. Take a seat, and prepare for some anecdotes.

International travel has become a bit more complicated since the beginning of 2020. One of the first tasks – other than booking the ferry crossing between the UK and France – was to figure out what hoops we’d need to jump through to get to our destination. Thanks to constant mentions in the British media, we knew we’d need an antigen test before travelling back home and a PCR test upon return, and those were quickly arranged. The conditions to travel to (or in our case, through) France had recently been relaxed from “Don’t even think about it” to “Vaccinated? Do come in!”, albeit with a declaration sur l’honneur that we didn’t have a fever, had not been close to a sick person etc. Easy peasy!

Emotions, irrepressible emotions

Britain may have left the EU, but the rest is still there, so I naturally assumed that Belgium would apply the same relaxed attitude. Or was it wishful thinking, that pernicious cognitive error in which it is our desires, rather than evidence, that shapes our beliefs? Anyway, the day after I had booked the ferry ticket and the tests, I discovered that entering Belgium would entail not only a PCR test within two days of arrival, but also self-isolation until the test was confirmed negative. Our plan was to spend three days at the seaside, but we were going to arrive on a Friday evening, so suddenly the prospect loomed of having to stay indoors all weekend, get a test on Monday morning, and then wait another 24 hours for the result. That would shorten our seaside stay to, well, zero. Eek.

A popular holiday attraction these days (image: Dunk/Flickr CC BY 2.0)

Was it still worth it? Had I realized earlier, I’d probably have given up the idea before making any commitment. But the ticket was non-refundable, and pretty pricey! Pessimism bias in the red corner, sunk cost fallacy in the blue one, two types of loss aversion pitted against one another. Well, my friends, do not diss good old sunk cost fallacy. We decided to persist and not be deterred by the doom scenario – and we’re glad we did. I then found out the local hospital conducted PCR tests during the weekend mornings too (without appointment!). So, on the day after our arrival, we queued up with about 20 others, and by 4pm we had our negative results and at once our vacation could start for real.

Quirky motives

As we arrived, things looked pretty much how we remembered them from two years ago. However, one exception struck me at once. The flat where we have been staying during our summer visits to the old country is located close to the beach, where car parking is scarce and expensive. For many years, cheapskates as we are, we have dropped the bags off, and then driven to the outskirts, a good ten minutes’ walk away, to leave the car where parking is free (as loyal readers might remember from four years ago). Alas, even there, free parking had now disappeared, but for a small consideration of 5 euros (85p, $1.17) I could leave it all day. Time to take my own advice from back then: mental accounting! Bearing in mind the total cost of the trip (not least the cost of all the tests), 20 euros for four days’ parking seemed negligible in comparison – a fine case of motivated reasoning. Since I had no choice but to pay, I might as well reduce the corresponding pain by framing it in that way.

Other things had not changed, including the number of dog owners, and a commensurate amount of dog excrement on the pavements. Even on my walk from the car to the flat, I immediately needed to engage scanning mode: while contemplating the idiosyncratic architecture with one eye, the other constantly glanced ahead to avoid a smelly encounter. It is not that the local council had not adopted some pedigreed behavioural interventions: there are “poo tubes” all over the place, making it easy for dog owners to dispose of the plastic bags containing their pets’ recent production, with plenty of signs reminding them to do so. These classic nudges are complemented by equally classic incentives: a fine for leaving dog poo of 105 euros during the week, with a 40-euro turd surcharge on Saturdays and Sundays. But it was clear that this combination, even underpinned by remedial instruments in the shape of a fleet of poo vacuums roaming the streets, as is often the case, was no match for the prevailing social norm among many dog owners. Changing social norms is hard to do, especially in a town where, over the summer season, most dog owners are tourists with little stake in the upkeep of the place. Behavioural interventions, sadly, have their limits.

Behavioural interventions don’t always work (image: Jonathan Davis/Flickr CC BY NC 2.0)

Principles, profits and irrationality

On Tuesday morning, as the two previous days, we trundled over to the local mini-mart for some fresh breakfast pastries. Retailers in Belgium as most everywhere else have had a tough time, so we particularly wanted to support this store. As we approached, we realized the shutters were down, and a notice informed us that the shop was closed on Tuesdays. Now, in Belgium, shops are obliged to close their doors one day per week, but stores in recognized tourist areas are exempt from this rule. The owner of this one clearly had voluntarily made the decision to sacrifice approximately 1/7 of the weekly turnover. Irrational? Some (behavioural) economists might say so. Your correspondent is not among them, though. Perhaps the weekly day of closure is an important principle for the owner, perhaps he feels he must be there all the time when it is open and at the same time feels he does not want to work 7 days a week. Who are we to question the rationality of whatever his  preferences are to decide to close one day per week?

A similar conundrum arose in a discussion I had while having dinner in a somewhat unusual restaurant in town. It is located in a large old shed, with a décor to match: the simplest chairs and tables arranged in long rows seating well over 100 people, much like a school refectory. It also serves only seafood (no meat or vegetarian dishes), AND NO FRIES (everything is served with bread and butter). Doesn’t that put people off, and might making concessions on the menu widen the net, so to speak? For sure. But the place is pretty much packed every evening, even with a large number of outside tables in summer, so trying to attract more diners would be pointless. Might it instead be possible to increase the margins (by raising prices)? Undoubtedly, given that it was full, even on a rainy weekday. But here too, there are perhaps other concerns are at play than pure economics. The restaurant’s challenge is akin to the artist who sells out night after night. This leaves money on the table: at least some people would be prepared to pay more, and that would be pure profit (as ticket resellers prove time and time again). But raising prices would tarnish their reputation – and the same might well be true for this restaurant. Precisely because they are popular, largely thanks to their reputation (which stretches far) they can afford to decide what is, and isn’t on the menu, and maybe that is what is important to the owners.

Like all of us, these business owners tend to do what feels right, and while earning money may well figure in it, it is rarely the only, or even dominant motive. And ‘doing what feels right’ would similarly seem to be the driver behind the behaviours in the other observations in this piece: the careless dog owners, my rationalizing of the cost of parking, decisions on the basis of wishful thinking or the consideration of sunk cost.

When looking for the reasons for behaviour, perhaps we need look no further than our innermost feelings.

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

Good people… but not that good

(featured image: User18526052 via Freepik)

The good news is that we are prosocial; in other news, it comes with strings and conditions attached

Take a look around you. Unless you’re in the middle of a nature reserve, miles from human settlements, most of what you see is the result of people working together – buildings, machines, clothes, food, transportation, you name it. And even beyond the stuff that is constructed, or made in factories, we can see collaborative efforts everywhere.

Think of the arts (yes, orchestras and bands obviously, but even solo musical artists rely on others to get their music to their audiences), or of sports (yes, team sports obviously, but individual athletes too rely on others to coach them or supply them with tennis rackets or track spikes).

This tendency to collaborate with others to achieve more is not something that is unique to humans. In The Social Instinct, Nichola Raihani describes how it has been instrumental in the development of many species in the natural world – including us. Arguably, it is precisely because of our highly sophisticated social instinct that we discovered the principle of division of labour, and have become as successful as we are.

This allowed us to collaborate in ways that were not just transactional or rule-based, but often driven by deliberate strategic thinking, especially in economic interactions. Both between businesses, and between companies and consumers this is largely thanks to trust, goodwill and reciprocity. We all trust others to do things for us that we do not want to, or are unable to do ourselves, and to do them reliably, competently and honestly, and they trust us to compensate them fairly – and vice versa.

We don’t even necessarily always expect a clear quid pro quo: we also collectively ensure the provision of public goods and common pool resources. (Public goods are both non-rivalrous, which means that consumption by one individual does not reduce the amount available to consume to others, and non-excludable, i.e., individuals who have not contributed cannot be prevented from using it. Street lighting is an often-cited example. Common pool resources are similar in that they are also available to everyone, but excessive use can lead to a reduction of availability, like on public roads or in parks or schools.)

In sum, we seem to be pretty much good, intrinsically cooperative people, and that is why we have it as good as we do. Or are we?

Are you from my parish?

[Plenty of public goods, at least here in my parish (image: Roel Wijnants/Flickr CC BY NC 2.0)]

Such cooperation can naturally only deliver optimum results if there are no impediments to it, such as legal barriers to international trade, which can prevent or hinder such collaboration. But these are not the only possible obstacle.

It appears that we are less cooperative with people from other groups than from our own group – we tend to be rather parochial in our willingness to work together with others. New research by experimental economist Angelo Romano at the Max Planck Institute and colleagues has investigated the issue on a large scale, in a study with over 18,000 participants from 42 diverse countries, and hence wide validity.

They used a classic two-person Prisoner’s Dilemma type game: both individuals received an initial endowment, and could freely decide how much of this they would give to their partner and how much they would keep. The amount they gave to their partner would be doubled (what they kept for themselves would not). Each participant played this game 12 times, every time with a different partner, who was chosen at random between (a) a compatriot, (b) a person randomly selected from one of 16 different countries, and (c) a person whose nationality was not revealed. In order to make decisions comparable across nations, the endowment was 10 units of a hypothetical currency (MU), equal to 2.5 minutes at the average hourly wage in the participant’s country. The strength of the cooperation was assessed through the number of MUs people sent to their partner, and then aggregated by country. While inevitably somewhat stylized and abstract, this nevertheless mimics the unconditional investment that characterizes the collaborative partnerships with strangers in the real world.

Across all 42 nations, participants were found to cooperate more if they knew their partner was from their nation, compared to when they knew that the other person was from another nation, or of unknown provenance. For all nations except Hong Kong, Nigeria and Peru, this difference was statistically significant. Moreover, parochialism barely varied across nations, despite their different levels of wealth or political stability, and when the countries were grouped according to cultural similarity, all groups exhibited significant parochialism. This does therefore indeed seem to be a phenomenon common around the world – and an important limitation to our cooperativeness.

Big Robber is watching you (or at least eyeing your earnings)

Beyond mutually beneficial cooperation, we are also capable of remarkable generosity, making sacrifices without expecting any material gain in return. We can see this around us, and it is backed up by statistics: data from 2010 suggest that 73% of the people in the UK donate money to charity and 29% volunteered time for a charity in the month prior to the survey; in Belgium the figures were 40% and 24% respectively.

Generosity is also studied through experimental games like the Dictator, the Ultimatum and the Trust game, which are variations on the same theme: one participant decides how much of an endowment to give to the other person (and how much to keep for themselves). Typically, people tend to give away between one third and half. One important limitation of such experiments, however, is that they are always between two individuals. Zurich university economist Carlos Alós-Ferrer and colleagues investigated whether people exhibit similar generosity towards groups of people. Inspired by claims of “predatory capitalism”, they established a situation in which a single participant could take a significant amount of money from a large group of participants.

Giving or taking? We do both! (image: Karolina Grabowska/Pexels)

Their Big Robber game takes advantage of the fact that, while the compensation to an individual for participating in an experiment is modest (typically around £10, €10 or $10), the overall budget for an experiment with 30-40 participants runs close to £400-500, making it possible to raise the stakes. Each session had 32 participants, equally divided into groups I and II, and consisted of three stages. First, the 16 members of group I were told that, at the end of the session, one of them would be randomly selected and have the chance to take 50%, 33%, 10% or 0% of the combined earnings of group II, with a personal gain of respectively around €100, €66, €20 or €0. They then had to decide which of those percentages they would ‘rob’ if they were chosen. Simultaneously, the members of group II (the ‘victims’) were informed about the question the members of group I were asked, and that they would be ‘robbed’ by one of them at the end of the session. In the second stage participants of both groups played successive rounds of the Dictator, Ultimatum and Trust games, providing an indication of their social preferences (and earning the victims the money that would be later partially robbed!). The final stage included a question whether participants wished to donate part of their earnings to charity (to examine possible guilt on the part of the ‘robbers’).

More than 56% of the ‘robbers’ chose to take the maximum of 50% of the other group’s earnings, while only 2% decided to take nothing. The biggest robbers were also the least generous in the games of the middle stage and donated a smaller fraction of their earnings, suggesting that social preferences are aligned (those who give the least take the most). But more importantly, the behaviour of all participants in the middle stage was well within the standard ranges reported in the literature, so nobody – not even the big robbers – was significantly more selfish than typical. Generosity towards single individuals appears to coexist very well with highly selfish behaviour when there is a larger group of victims.

The evidence around us suggests that our tendency to cooperate has led to spectacular economic and social wellbeing gains. But these two studies provide some sobering nuance. Not only do our parochialist instincts mean we leave promising opportunities for collaboration unexploited, we also have a dark side that is ready to rob as long as it is from a group and not a single person.

Good people? Yes, kinda, but, it would seem, with some scope for improvement…

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

What do we actually know?

(featured image: PublicDomainPictures via Pixabay)

Much of what we think we know is built on the powdery sands of conjecture and assumptions

Imagine you are joining a new company. Together with 15 other newcomers (about whom you know nothing), you are invited to an induction course. On the first evening, before dinner, you will be able to spend half an hour chatting with just one of them. You receive list of photos of each participant, from which you can either choose one, or indicate that you have no preference. What would you decide?

I conducted this exercise with a group of clients a while ago, using synthetic, photorealistic portrait images. There is little doubt that someone’s face provides no meaningful information about whether they share any interests with you, whether they would be entertaining company, or anything other characteristic that would make the half hour of 1:1 conversation pleasant. On that basis, people would be expected to express no preference.

Yet, in my experiment, only about one in three of the respondents gave that answer. Some of the fictitious new colleagues seemed remarkably popular, with one even collecting nearly 40% of the votes. The preferences may not have been strong (that was not gauged) but the very fact itself that two in three participants indicated a preference in a rather inconsequential situation is food for thought.

A little knowledge is not going to stop us

We often know very little about people, but that doesn’t stop us inferring all manner of things from that limited knowledge. First impressions can dominate our judgement of someone. If we need an electrician, will we be more inclined to contact the one whose van you saw last week parked up in a nearby street, looking all spick and span, or the one whose vehicle was covered in such a thick layer of muck that a merciful passer-by had inscribed in it the exhortation to the owner “Clean me, please!” (with the last word underlined)?

Arguably there may be a connection between how much care a tradesperson shows for their vehicle and how well they do their job (although a super-diligent electrician might be so devoted to their customers that they have no time to wash their vehicle).

Would you buy a used car or insurance from this person? (image: Oosterhof & Todorov)

Yet our propensity to assume one characteristic from the presence (or absence) of another one just as easily links characteristics that are quite unrelated. A study from 1974 by psychologists David Landy and Harold Sigall found that people evaluated the quality of an essay more highly if the writer was good-looking than if she was unattractive, particularly if the actual “objective” quality of the writing was poor. This extrapolation of one positive characteristic to another one is known as the halo effect. We may do the opposite too, and for example assume that someone who speaks with a strong regional or foreign accent is less educated or intelligent than a person with a standard, neutral accent (for undesirable attributes this is referred to as the horn effect).  Similarly, research by cognitive scientists Nikolaas Oosterhof and Alexander Todorov suggests that we infer characteristics like dominance and trustworthiness from other people’s facial traits. Experiments by psychologists Barry Schlenker and Mark Leary suggest that, in the absence of any performance information, we consider confidence as a sign of competence.

Our predisposition to infer one characteristic from another one is not limited to people: we may judge a product, about which we know nothing else than its price or its provenance, as high in quality, because it is more expensive than others, or made in Germany or Switzerland rather than in Vietnam. We assume a product is more ‘fresh’ if the dominant colour of the packaging is blue.

Uncertainty aversion

This urge to project whatever limited information we have, regardless of its relevance or reliability, to complete the picture of someone or something is quite remarkable. If an unknown object or person is shown in the presence of other objects or people that are known, we will even assume they share salient characteristics: a stranger in the company of people we like is seen as likeable, for example (this phenomenon is known as evaluative conditioning).

Why do we do this so frequently? In a way, it is inevitable: many characteristics, especially people’s traits, are hard, sometimes even almost impossible, to establish. So we look for tell-tale signals – a well-groomed person wearing expensive clothes or jewellery is probably wealthy, someone turning up at a job interview with a badly knotted tie and dirty fingernails is probably not the most perfectionist candidate, a sign stating that a shop has been a family business in the same place since 1965 is probably an indication that we can trust them not to screw their customers over.

Disorganized desk, disorganized person? (photo: the author)

But not all such signals are necessarily relevant or reliable, and we still do it. One likely reason is that we are uneasy with uncertainty. We don’t like the unknown. So, from just a simple photo, we will immediately form a view whether the unknown person portrayed is intelligent, competent, trustworthy, or indeed good company for a half hour conversation. From the clutter on someone’s desk we will conjecture that they are disorganized by nature. From the shiny paintwork and chrome of the car on the used car dealer’s forecourt and the new car smell inside, we will surmise that it is in very good condition.

That pursuit of certainty is in part self-serving. In our own eyes, not being certain is a weakness. So, our – potentially imagined – ability to correctly infer characteristics from what we observe confers competence and wisdom upon us: we can confidently tell from their face that a person is clever and diligent, and that this used car is truly a great bargain.

A bit of scrutiny is desirable

We often make all these inferences without giving it much thought, subconsciously, even. And because we’re motivated to establish certainty, we are rarely critical about the inferences we make. Jan De Houwer (a psychologist at the university of Ghent) and colleagues, developed a conceptual framework to describe and analyse such inferences which may be able to help us. It refers to the characteristic we assume as the ‘target’ and the characteristic on which we base this assumption as the ‘source’, and also recognizes different source and target objects (for example if we infer that an old man must be rich because he is accompanied by an attractive, much younger woman). The resulting 2×2 model allows us to pinpoint the mechanics of our inference.

How did we arrive at our conclusion? Say we are judging the quality of a watch we plan to buy. Is our conclusion based on indicators that are actually predictive of quality, like the material of the casing or the glass (cell a)? Or are we inferring its quality from other characteristics like its design, its price or eye-catching features (cell b)? Are we perhaps being influenced by the celebrity wearing it in an advert (cell d)? Understanding this how makes exploring the question why we made the inference, and whether it is valid, a lot clearer.

Might an incorrect inference not easily be rectified once we obtain more accurate information? Not necessarily. Recent research by Duarte Gonçalves (an economist at University College London) and colleagues suggests that we do not fully disregard information when it is found to be incorrect. In other words, unfortunately the original knowledge we acquired – in this case, the inferred characteristic – continues to inform our beliefs. It would seem to be better, therefore, to avoid making wrong inferences in the first place.

Much of what we know, or think we know, we know through inference, rather than through direct verification of the facts. Much of that knowledge is probably correct, but not quite all. And some of those incorrect inferences can lead us to costly mistakes – trusting someone for their looks whom we should not have trusted, or purchasing an expensive washing machine with a German sounding name, wrongly assuming that it would therefore be reliable, for example.

Certainty may be hard to obtain, but it may be wise to at least scrutinize some of our more questionable inferences, even if that means that we remain uncertain.

Posted in Behavioural economics, Psychology | Leave a comment

Beyond game theory

A board game with a small human illustrates how much emotions influence our decisions

The other day, Jenny and I played a game of Ludo with Luka. Its rules are simple enough to make it quite suitable for a five-year-old, even though some more strategic aspects are a bit beyond him. What I didn’t expect was the way in which it would capture some essential aspects of how we make decisions – and I am not thinking of game theory (which is outside my expertise anyway).

In case you are not familiar with Ludo (the name of which signifies “I play” in Latin), it goes as follows. Two, three or four players each have four tokens which they need to race around the board, along a game track consisting of squares, to their “home”. The tokens start off outside the game in the player’s “yard”. They progress according to the outcome of a roll of a single dice: to enter a token on the game track, a player must throw a 6, and subsequently, with each turn, tokens advance the number of squares equalling the value the player rolled. A 6 may be used to enter additional tokens into the game (if there are any left), or to move a token six squares. Rolling a 6 gets a player a bonus roll. Finally, and perhaps most importantly, if a player’s token lands on a square that is already occupied by another player’s token, the latter is returned to the owner’s yard, who must then of course roll a 6 in order to re-enter it into the game from the start.

A good start is only half the battle

It took Jenny about 20 rolls before she produced a 6 and could start the game, but Luka and I quickly had a couple of tokens going round the board. A little later, to his delight, Luka managed to kick one of my counters back to my yard. Then his luck started turning: his tokens barely advanced as he rolled several 1s and 2s, and a short while later I landed on a square with one of his tokens and sent it back to his yard. From the corner of my eye, I could see that his lower lip started trembling, and not long after he started sobbing quietly. He bravely kept on playing, though, while Jenny and I tried to console him.

Games do, of course, almost invariably involve emotion. Typically, their central purpose is to win, and it is therefore unsurprising that events which bring us closer to that goal evoke positive emotions, and events that reduce our chances of victory lead to negative emotions. And while adults do not necessarily burst into tears when things are not going their way, the emotions that arise throughout a game often show very clearly (less so in poker, for understandable reasons).

Can you spot the emotion? (image: Michael Summers/Flickr CC BY NC ND 2.0)

Game theory seeks to model the possible moves of the players in actual games, as well as in interactions that possess key characteristics of games, for example the fact that one person’s chosen moves can limit the possible subsequent choices of another person. However, it is concerned with the behaviour of rational decision-makers of the homo economicus variety. Aside from the implicit assumption that players want to win and not lose, emotions do not figure in game theory. Predicting when a player might start crying or angrily knock over the board is not typically part of a game theoretical analysis.

Emotions at play and outside

Yet, just like in real life, the choices we make while playing a game are not necessarily those of rational decision-makers. You can even wonder how rational the very decision to play a game is: in this case, I had an article to finish and a colleague’s presentation to review – both tasks that would demonstrably deliver utility. And still I chose to play Ludo to please Luka instead. For real humans, this is not such an unusual thing to do: we often make material sacrifices in money, time or effort for others without getting anything in return other than a warm glow and perhaps a sign of their gratitude.

And there were more such ‘irrational’ deviations ahead. On a few occasions, with the number I rolled, one of my tokens could have knocked out Luka’s only remaining one, which would all but have secured my victory in this game of Ludo. The rational decision-maker from game theory would surely have done so, but I opted to move another token instead, and reduce my chances of winning.

One might argue that winning this particular game was not hugely important to me, so the sacrifice I made here was modest – and one would be right. Then again, if my opponent were not a little boy, I would not have chosen to forgo the opportunity to knock him back, even in a friendly, unimportant game. But here, doing so would have made Luka feel sad, and that would have made me feel bad (and sad too). Another small sacrifice for the sake of a little human’s – and my own – emotions.

[Cheating allowed? (image: screenshot The Shooting of Dan McGoo/Tex Avery)

A little later, with only one counter on the board, I rolled a six. This would have landed it on a square with one of Luka’s tokens. I quickly improvised a fictitious rule extension: if you roll a six, you can immediately roll again, add the two numbers together and advance in one go to the destination square without stopping in between. How is that for a bit of moral motivated reasoning? Again, this is not so different from what regularly happens in the real world. We are quite capable of reasoning that breaking some rule or code – especially if nobody is harmed by it and it is an exceptional occurrence – is morally justifiable. Technically it is cheating, but this is where even hardened Kantian deontologists discover they have a Benthamite utilitarian side, and are able to weigh up the pros and cons of a rule violation.

All is well that ends well

Before long, Luka was happy again, especially after – with no intervention from your correspondent! – he proceeded to roll four sixes in a row. And even though, eventually, it was Jenny who won the game, a good time was had by all.

In board games, as in real life, the underlying basis of our behaviour is rational, self-interested and utility maximizing – just like what homo economicus would do. But it doesn’t take much for us to deviate from that, and allow emotions – other people’s and our own – to influence, if not dominate, our decisions. We will even circumvent or break the prevailing rules – not out of immediate self-interest, but for the emotional benefit of someone else about whom we care.

Here, my concern was for a little boy who happens to be my grandson, but out in the wild, we can see plenty of evidence that people are prepared to make similar self-sacrificial gestures even for complete strangers. Perhaps it is this remarkable combination of reason and emotion that is uniquely human.

We are, truly, homo emotionomicus.

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

No such thing as a free dinner

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

One of our more intriguing and widespread beliefs is that when others appear to pay for something, it is actually free to us. But looks can be deceptive…

Imagine that you are retiring from a job at a large firm, and a dinner is organized in your honour. On the occasion you are presented with a final cheque, but the amount is rather lower than you expected. When you inquire about it, the explanation you receive is that the cost of the dinner has been deducted. How would you feel about that?

This is exactly what happened to economist Robin Hanson’s mother, according to a recent tweet. It did not provide any details, but let us assume that the cheque did not represent her final monthly wages (in which case it would probably have been theft), but a discretionary bonus, and that the practice was common and not peculiar to her in question (which would have been blatantly discriminatory). Even then, though, it feels wrong, as the disapproving reactions to Robin’s tweet illustrated: they were unanimously critical, scorning even, not only of the (unnamed) company but also of capitalist culture in general.

Paid for with my own money?

But what exactly is the problem here? From an accounting perspective, it would make perfect sense to have a single, dedicated budget for when members of staff retire. That would then cover both their retirement bonus and the cost of the entertainment to send the employee off in style. De facto, any money spent on the festivities would not be available for the bonus (and vice versa). Sure, the way in which the modest sum was justified could be considered as not especially tactful, and one might argue about the allocation between dinner and cash. But does that explain the indignation?

With 85% extra this month, one can dream! (image: Darkmoon Art/Pixabay)

The outrage seems to be related to assumption that there are two distinct categories of money (one for bonuses, and one for dinners) where in fact there is only one. It reminded me of the mental transition I went through when we moved from Belgium to the UK. In my native country, my annual gross salary was 13.85 times my gross monthly pay. This peculiar multiplier was based on (a) one month’s paid holiday, (b) a legally guaranteed year-end bonus equal to one month’s pay, known as a “13th month”, and (c) “double” holiday pay (85% – since enhanced to 92% of one month’s pay). In the UK, my annual salary included 20 days’ holiday pay, but nothing else.

The Belgian way of cutting up wages meant that employees are always particularly cheerful in May or June when the extra holiday pay lands in their accounts, and half of them (the other half are not entitled to the year-end bonus) look forward to December, when the 13th month is paid out. British employees don’t get those pick-me-ups, but like for like, they receive a higher salary every month, of course.

The free money illusion

The bonus and the extra holiday pay look like (and are widely considered as) social gains, a form of free money that has been extricated from the employers. Yet I doubt they are anything of the kind. Employers know how much they are willing to pay in total , or for an employee’s services, and precisely how that is sliced and diced is of little relevance to them.

Another difference between my native and my host country concerns maternity pay. Belgian mothers (to be) enjoy a statutory right to 82% of their salary for the first 30 days of their maternity leave, and three quarters of their salary (capped at just under €900/week – $1060 or £771) for the remainder of the 15 weeks they are entitled to. In the UK, statutory maternity pay is available for longer, and the initial chunk is more generous than in Belgium, at 90% of earnings for the first six weeks. However, it then drops to just over £150 (€175, $206) per week for the remaining 33 weeks, or about 20% of what a Belgian mother receives. It is unsurprising that there is ongoing campaigning in the UK to increase the level to minimum wage and above. But here too, should this come to pass, I fear that the expectation of an uplift that is new, free money is misguided. The value to an employer of a staff member is unchanged, and employers are unlikely to compromise the profitability of the business by paying them more. (For public sector employees, it is the tax payer – including the employees themselves, naturally – who foot the bill.)

Payroll taxes can be similarly misleading: they are contributions to the government coffers, ostensibly made by employers. But is there really a difference between, on the one hand, a company paying an employee £100, out of which the employee pays, say, £30 in income tax and national insurance, and on the other hand a company paying £10 in payroll tax, and then paying the employee £90, out of which the employee pays £20 in income tax and NI? Talking about tax, value added tax or VAT looks like a levy on a company’s turnover, but as most consumers will realize, it is not paid by the companies…

And talking about consumers: you have undoubtedly come across the notion of free shipping. How free (to the buyer) is it really? Should we believe that the suppliers pay for the postage and packaging out of their own pockets? Or might they simply be incorporating these costs in the overall price?

It’s all in the presentation

The question is whether it makes any difference to us whether the total price we pay is all-in, or whether we need to pay extra for shipping. The fact that event ticket seller SeeTickets feels the need to explain the booking fee that is added to the ticket’s face value set by the organizer suggests not everyone is happy with add-ons, but it is not necessarily that simple. Different people may respond differently in different circumstances.

“I deliver free of charge, this van and the fuel cost nothing, and I work for no pay!” (image: Tony Webster/Flickr CC BY 2.0)

‘Free’ shipping is attractive, even if only for the convenience. But if Amazon, the biggest retailer in the world, is still charging for shipping on some orders, we may safely assume that ‘free’ shipping is not unconditionally superior. Splitting the total price into its components, even if, as a consumer, your only option is to pay them all, does provide some transparency that is missing in the all-in price, which some consumers might value. The way things are presented certainly matters.

What companies and governments, and indeed we ourselves, are doing is, explicitly or implicitly, establishing a particular mental accounting framework. While money is inherently fungible, mental accounting overrides this through the use of categories. So, for example a dollar spent on a pair of jeans is considered distinct from one spent on shipping it, or a euro earned as double holiday pay is not the same as a euro earned as regular salary, and a pound paid in payroll tax is different from the same pound raised as employee income tax.

That perspective enables the framing of a situation according to a particular narrative: shipping is ‘free’, holiday pay is an ‘extra’ for which we don’t have to work, and payroll tax is paid for by the employer, not the employee. According to that narrative we may end up feeling relatively better or worse, but the underlying facts are the same.

And those facts are that, whether it concerns online orders, concert tickets, payroll tax, maternity or holiday pay (single or double), or a modest retirement bonus cheque, what may appear to be free money is in fact our own money. As the old proverb has it, there ain’t no such thing as a free lunch, or indeed a free dinner.

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