A little more perspective, a little more understanding

(featured image via Pixabay)

Numbers appear to give precision, but they are often meaningless without a suitable context

“It never rains in Southern California”, the song by Albert Hammond goes. This is untrue – the average annual rainfall over the period between 1877 and 2018 was over 14 inches (37 cm). But as far as I know, nobody ever challenged Mr Hammond about this false claim.

We humans are more used to communicating with words than with numbers. When we want to express how likely we think something is or will be for instance, chances are we don’t use percentages (excepting, perhaps, 100%), but we use words. Always, never, possibly, usually, more often than not, almost certainly – just a small sample of our probabilistic vocabulary.

Inevitably that means there is lack of precision involved, often a bit of hyperbole (as in the song), and even a risk of misinterpretation. A probability of 25% is the same to everyone, but is that also true for our human-language terms?

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Your ‘probably’ is my ‘maybe’

This is something that Michael Mauboussin, an adjunct professor of finance at Columbia Business School and an expert in how luck and skill influence investment behaviour, set out to investigate together with his son Andrew, a data scientist. They created a survey with 23 probabilistic terms, and asked people what numeric probability they would associate with each one. Unsurprisingly, as the figure shows, the interpretations varied considerably, even for the absolutes Always and Never (if everyone saw it the same, then there would be a single vertical line).

This lack of quantitative basis can lead to confusion. It’s the same story when we refer to quantities or amounts: how much money is ‘a lot’, and how many people are ‘a few’? We need context, or perspective.

A quantified perspective

In fact, we need perspective for quantitative information as well. If you heard that there were 3,000 more cases of breast cancer in Belgium in 2018 compared to 2017, would you know whether that is just noise, or a worryingly trend? What if you learned that the UK cut its overall carbon emissions by 1.8 million tonnes between 2018 and 2019 – is that a lot, or a little?

There are plenty of (!) numbers in the news (as well as plenty of vague verbiage), but they often lack the context necessary to help us understand them. We need to be able to compare those numbers with something else – and not just anything else. Imagine a report stating that Microsoft’s profit in 2018 was $35 billion. (I could convert this to euros or pounds, but for most people that would make no difference).

35 billion is a very large number. If you wanted to argue that it is ‘excessive’ in some way, then you’d just leave it at that – a profit of that magnitude is obviously insane. If you wanted to pile it on, you could point out that it is equivalent to 4 million profit per minute, or to the salaries of a million nurses, or to the cost to build 800 schools. But none of this really give much meaning to it. It’s like saying that, if every person on Earth stood shoulder to shoulder, you’d have a row that would stretch from the earth to the moon and back, five times over. So what?

A recent paper proposes a mechanism to provide appropriate perspective to numerical data in the media, and describes how that changes the effect numbers have on us. Researchers Pablo Barrio, a computer scientist at Columbia University and Dan Goldstein, a cognitive psychologist and Jake Hofman, a physicist, both at Microsoft Research, started from 10 perspective templates (e.g. “about X times larger than Y”, or “about X% of the Y of Z”). This allowed them to produce perspectives such as ‘one million left homeless after a storm in Honduras, about 12% of the country’s population’ (so here X=12, Y=’population’, Z=’Honduras’).

Next they hired 80 workers via Amazon’s Mechanical Turk platform, to produce 370 actual perspectives on 64 New York Times quotes. Each worker then evaluated a selection of perspectives generated by their peers.

Finally, the researchers presented participants with 12 quotes (each either with the highest rated perspective, or without) and subsequently asked them to either recall the measurement, estimate a missing measurement, or detect whether a measurement had been manipulated. In each of these three experiments, they found the perspectives had improved comprehension. With perspectives, participants recalled about half of the numbers they saw, compared to a third without them. Similarly, 39% of estimates by participants who saw perspectives were within 10% of the original measure, compared to 33% without perspectives. And participants who had seen the perspective were better at detecting errors in most of the quotes (an average of 3.2% improvement with a peak of 15%).

In search of the right analogy

A follow-up paper by Christopher Riederer (then a PhD candidate in computer science at Columbia University) and the same Microsoft team continues this line of thinking. Here, they consider the question what makes an effective perspective sentence, through randomized experiments involving geographical measures. A U.S. reader presented with the area of Pakistan (307,000 square miles, 880,000 km2) might understand this better if it was compared to an American state. But what would be best – twice the size of California, or ten times the size of South Carolina? Would a European get a better understanding with twice the size of Sweden or 45 times the size of Wales?

Participants in the first experiment were asked to estimate the size or the population of a country, using one of the U.S. states as a reference. Well-known references and simple scaling factors (e.g. twice the size of California) turned out to be more useful, even if some alternatives are more accurate (e.g. twice the size of Montana, or five times larger than Georgia).

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How many people actually live here? Source: d-maps.com

In a second experiment, participants were randomly assigned to four groups with different perspectives, and asked to estimate the area or the population of a given country. The four perspectives were based on: (1) the best modelled error, i.e. those that performed best in the first experiment (e.g. Angola’s population is about the same size as New York’s); (2) their home state (…about 3.9 times the size of Minnesota’s); (3) the approximation with the lowest objective error (…about ten times the size of New Mexico’s); and (4) one that had a similar objective error to the first group, but a worse modelled error (…about five times Oregon’s). There was also a control group where participants were not given any perspective. All four perspectives led to significantly more accurate estimates than the control group (and the first condition, predictably, was the best of the bunch).

The final experiment gauged how long the improved comprehension provided by an effective perspective lasted. The researchers contacted the participants from the second experiment six weeks later, and asked them to estimate the size and population of the same country as in the prior experiment – but this time nobody was given a perspective. Remarkably, the improvement persisted, suggesting that perspectives can have a lasting effect on comprehension of numerical data.

A perspective for one and all?

It is easy to see how this could be widely implemented. Imagine a browser plug-in that, when you hover over a number in an online text, instantly provides a pop-up with a meaningful perspective, comparing a particular government expenditure to total tax revenue or GDP for example. It could also become a feature in document or presentation applications, suggesting perspectives to the authors as they work.

But of course, there are still many situations where we would be on our own. Picture yourself on a trip to a strange town, and you’re looking for a place to eat. You see one that looks OK, just a short walk from your hotel, with a ‘hygiene rating’ of 85 out of 100. If you’d get that result on your Master’s thesis, you’d be pretty chuffed. But for restaurant cleanliness, is that score good, mediocre or bad? Does it mean that the inspectors found a hair on the edge of the bin in the kitchen rather than in it? Or does it mean that there were fresh rat droppings on the worktop? We need a perspective.

As Dan Goldstein told me, what would help here is to convert the score into a percentile score: regardless of the actual reasons why it didn’t score 100/100, a restaurant in the top-15% cleanest should be OK. Another way to provide a perspective is to compare it with an average McDonald’s restaurant – most people know what those are like.

In the absence of such perspectives, we need to be at our guard. What we can do is acknowledge we may not really know what a number means, and make sure that we don’t superimpose one of our own that is inappropriate. And even if a perspective is given, it’s good to be critical – but then that is good advice anyway.


Follow Dan Goldstein and Jake Hofman’s research at dangoldstein.com and jakehofman.com respectively.

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

The devil’s advocate and the steel man

Two ways to challenge your thinking and grow a bit wiser

Imagine you need to buy a new car. The three previous ones have all been from the same make – perhaps you had been aware of its reputation and status since you were small, and as soon as you could afford one that is what you got. Chances are your next car will be the fourth one in a row. Indeed, what would changing to a different make now signal, to yourself and to your social circle?

It might well look like an admission that you had been making the wrong choice on three occasions. Much better to stick with this brand. But is it not overpriced? No, the quality is superb, and so it really is value for money. Besides, these cars maintain their value (you assert, despite never having verified this). What about reports in a consumer magazine that they have more than average reliability problems with the electrics? Well, that’s just a non-representative sample, and you certainly never had a problem all this time, did you?

The mind, it is sometimes said, is like a lawyer: it is more concerned with winning arguments than with uncovering the truth. Several insights from behavioural science would appear to support this observation. Traits like overconfidence, and cognitive tendencies like confirmation bias (seeking out and interpreting information so that it confirms our beliefs) and motivated reasoning (when the way we reason is influenced by our goals or motives) are certainly more useful if you want to come out ahead, instead of admitting you’re not all that certain.

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400 owners cannot be wrong (image via carsifu.my)

So while purchasing a new car, you happily make use of these tendencies. Seeing just one shiny 12-year old specimen of a single car of the same make as yours is proof of its durability. And, of course, if there really were quality problems, you wouldn’t have so many of your colleagues driving cars of that same make. We do indeed find support for ‘being right’ in numbers. We conform to social norms – rather spectacularly illustrated in Solomon Asch’s conformity experiments, in which subjects, regardless of the facts, tended to adopt the opinions of the others in the group. We also feel ‘vindicated’ if people copy our choices, whether it is in purchasing a car, picking a holiday destination, or frequenting a restaurant. We just love being right.

At least, when it matters. Even if we think chocolate flavoured ice cream is the best, we have no trouble accepting that other people may prefer strawberry or even vanilla, and we seem to have no desire to claim our preferred variety is better than the others. But beliefs that are more significant, even if they find their origin in facts, easily gain emotional significance. Our position is superior, maybe even the only right one.

If all we care about is being right (even if only in our imagination), then these tendencies are not a huge problem. After all, as long as we are happy with our car, it is not important whether that is because of the badge, or because it truly is better than others according to objective criteria.

But if we care about the truth, if we want our choices to be based on facts and evidence rather than beliefs and emotion, then these self-serving tendencies are not helping. Thankfully, we can do something about that.

The devil’s advocate

One approach gets its name from an actual role in the law of the Catholic Church: the advocatus diaboli. This person’s function was to adduce reasons against the canonization of someone who had been put forward to be granted sainthood (for example, serious character flaws, or misrepresentation of the necessary miracles – fake news, if you wish).

We can take a similar critical position regarding our own arguments and beliefs. If our mind is indeed like a lawyer, then we are well equipped to adopt this contrary role. All we have to do is mentally switch sides.

What possible reasons are there that we could be wrong? Does the evidence we see in favour of our opinion stand up to scrutiny, or are we glossing over the flaws and holes? Does it only support our case, or is it compatible with alternatives? What evidence can we find that contradicts our argument?

Under this kind of cross-examination, our attachment to our pet beliefs, opinions or hypotheses may put up strong resistance, and pull us back to the comfort of the illusory certainty that we are right, though. Then someone else playing the role can help. Trying to pick holes in someone else’s firmly held view can be great fun – even (or especially?) when this someone else is one’s teenage daughter. It may not feel as much fun for her at the time, but if she then later reports that she has adopted the same stance in discussions with her friends, one’s paternal self-image does get a significant boost (*).

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A good companion? (image via Wikimedia CC BY-SA 3.0)

The steel man

Less well-known, but no less effective, is the steel man, the opposite number of the more common straw man. It is a debating technique, but it can also be used to critically assess viewpoints. A straw man argument caricatures a counterargument, exaggerating its defects and weaknesses, and ignoring its strengths, so we can easily demolish it. The steel man approach, in contrast, is about making the strongest possible case for the counterargument.

In debates, the first step is often to let go of any assumption of insincerity or incompetence on the part of your opponent. But even if we are just testing our own opinion, we may well be tempted to associate any counterargument with a particular type of person or group – one we dislike, or don’t rate or respect. That opens the door to motivated reasoning (“whoever advocates this case is only after their own gain”, or “anyone making this argument doesn’t understand how complex things really are”). Instead, we can imagine it is our best friend, or the smartest person we know, making the opposing argument, and consider it in that light.

Next, we should scrutinize it, not with the aim to take it down, but to improve it: identify the weaker points and reinforce them; consider the advantages and strong points – and bolster them. We need to detach ourselves from our feelings, and look for motivation in the intellectual challenge of coming up with an even better case than our (virtual) opponent.

And then we can step back into our own shoes, and engage with this new, improved version of the opposite view. If we can counter it, then our own position is pretty solid. If we can’t, then we will have convinced ourselves that there is a better option than the one we were pursuing.

 

If our companions in life are the devil’s advocate and the steel man, our life may not be the most comfortable. Constantly scrutinizing our choices and looking for the flaws in our arguments, that is bad news for anyone who only wants to feel they are right.

But if that doesn’t bother us, and instead we are pursuing the truth, then we will be in good company with these two dudes. Even if we realize this search will never end, and we must settle for a permanent state of doubt, with both of them at our side we will grow wiser with every step on our journey

(*) This may have happened to your correspondent.

 

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

Two sides of Subsidy

(featured image: Jannis CC BY)

There is more to subsidies than meets the eye

Somewhere in Worcestershire in the British Midlands, a woman pops into the local pharmacy with a doctor’s prescription for two drugs. She pays £18 (€20, $22), as the standard NHS prescription charge is £9 per item. She has no idea that the actual cost to the NHS of one of them is £9.43 and of the other more than £400. In Dresden, in the East of Germany, a man boards a train to Berlin. His walk-up fare was 49 euros (£45, $55), but is oblivious of the fact that the true cost of his trip is double that (the government pays Deutsche Bahn about 20 cents per passenger kilometre). In a provincial town in Belgium, a man opens his letterbox and takes out his daily newspaper. It is delivered free of charge – that is, the government is paying the post office 170 million euros to do so.

This is the kind of thing we imagine when we think of the term subsidy: the government giving tax payers’ money to a provider of goods or services so the price can be lowered (sometimes as low as zero). The justification is that they make goods and services available and affordable to people who otherwise would not be served by the market – when there are market failures.

Subsidies use the oldest and simplest mechanism to motivate behaviour: material incentives. Give pharmacies, transport companies and the post office money, and they will provide a service that would otherwise be loss-making.

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Good value – especially when it’s subsidized to the tune of 20 cents per passenger kilometre (image: TeaMeister CC BY)

That can appear to makes sense. Some drugs and interventions are indeed so expensive that the vast majority of people could not possibly cough up the money for them. But in other situations, it is more dubious. When museums and opera houses receive state subsidies, does that then lead to more interest from low-income citizens? Critics believe such subsidies are examples of the so-called Matthew effect, after the parable of the talents in the Gospel of Matthew: “For to every one who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.” It is principally the people who are not short of a bob or two who benefit, not the poor. And that can apply for intercity train travel and free delivery of papers too.

One can also wonder about the blatant paternalism of such subsidies: why does the government think the subsidies will enhance the welfare of people on a low income? Is a subsidy of, say, £40 on a ticket to see a performance of Nabucco a better way of supporting them than simply giving them that £40 in cash?

Other subsidies, complex effects

But there is more to the notion of subsidy than meets the superficially looking eye. The guest on a Belgian radio show last Saturday told the story of a small record store in the southern French city of Toulouse. The owner was a great music lover, who took great pleasure in offering suggestions to his regular customers, based on their previous purchases (which he was easily able to memorize). He could easily afford to spend lots of time on them, since he made exactly the same on a record sold to people who were served and on their way in a few minutes, as on those who appreciated his advice. As the way people purchase music changed, sadly, the customers of the former category disappeared, and the arrangement came to an end as the record store closed for good.

Such cross-subsidies are not limited to obscure little shops, and are more common than we may think. Retailers often discount certain lines, or run promotions like Buy one, get one free. Sometimes this is intended to shift items of which there is too much stock, or towards the end of their shelf life. But regular promotional actions attract customers who buy much more than just the bargains, and it is these additional sales that eventually fund the promotion. Here you could say that the customers who fill their trolley to the brim subsidize the astute shoppers who only come for the promotions.

Sometimes such subsidies are essential for the provision of a comprehensive service. Off-peak trains, especially those late in the evening or early in the morning, often carry few passengers. Even with the government subsidy added to their tickets, the total of revenue does not remotely cover the cost of such trains. So why do operators keep running them if they are technically loss-making? Could they not just cancel them?

That was the logic adopted by Dr Beeching, who was instrumental in closing nearly one-third of railway line and more than half of the existing stations in the UK in the 1960s. If a branch line or a station was losing too much money, it had to close. However, what was not always fully taken into account is how closing an unprofitable rural line would also reduce the passengers travelling to and from the connected mainline station – perhaps to the point that it, too, would then become too unprofitable to operate. In the same way, passengers on early or late trains may not justify running those trains by themselves, but they contribute to the profitability of the peak trains – and that may outweigh the loss the half empty trains make.

Subsidy at work

benetton-dusseldorf

You won’t find more neatly folded clothes anywhere (image: Benetton Newsroom)

Even at work, subsidy is at play. It used to be said that the shop assistants in Benetton stores, during quiet times when there were no customers to assist, were instructed to fold the clothes on the displays – even if they were already perfectly folded – “look busy”. That arguably did not add much value to the company, but they were nevertheless being paid a full hourly rate. The same applies to many employees, whatever they do: unless they are paid a piece rate, they receive the same for every hour they work – irrespective of how productive they are. The more productive hours subsidize the less productive ones.

(Companies like Uber and Deliveroo have eliminated that subsidy: the people working for them are only paid when they are doing something productive. When there is no food to deliver or no rider to drive to their destination, there is no salary to be paid.)

But who actually subsidizes whom? Do employees subsidize the employer by accepting a lower wage when they’re at their most productive? Or does the employer subsidize the employees by paying them more than they’re worth when they’re at their least productive?

Do customers subsidize the retailer by buying higher margin goods on their shop so it can offer low-or no-margin promotions? Or does the retailer subsidize the customers, by offering low-or-no-margin goods so it’s worth their while doing their entire weekly shop with them?

Both views make sense: one party makes a concession that influences the behaviour of the other one. Employers benefit because they are assured of workers, when demand for their goods or services is too low the justify someone at full wage. Employees benefit because they don’t need to find an additional job to top up their income if they’re only working at the busiest times. The same reasoning works for retailers and their customers.

And in a way, it doesn’t really matter who subsidizes whom. Sure, In some cases, especially state subsidies can be dubious, but they can also be the lubricant facilitating transactions that make both parties better off.

 

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

The battle between pluralism and purity

(image credit: PublicDomainPictures)

Purity and perfection are alluring, but when they come into conflict with the messiness of pluralism, compromising becomes difficult and we may end up with unintended consequences

 

People are choosing machines. All day long, we make choices. We choose when to get up, what to wear, what to have for breakfast, how to travel to work, where to do our shopping, and what TV programmes to watch in the evening. Some choices are not so frequent, but they are momentous: we choose where to live, what to do for a living, and who to work for. That is a lot of choosing. How do we manage it all?

Do we somehow rate the various options before us on a scale, and pick the one that scores the highest? That would be not be hard to do, if we only had to rate one characteristic that was easy to quantify. But in practice, we often have to choose between options that have many and diverse features. Take, for example, the simple purchase of a packet of biscuits. Milk chocolate or plain? Or no chocolate at all? What about the fat and sugar content? What brand? How much?

Inevitable compromises

If we want to evaluate options like these on a single scale, we would need a clear equivalence between the different features. How much more would we be willing to pay for a posh brand? Would a biscuit with a chocolate filling be preferable over one with nuts? It would drive us insane. Instead we satisfice – we’re not looking for an optimum, but we pick something that is good enough. We let ourselves be guided by the one or two of the features of the biscuits that are truly important to us, and we don’t mind that they don’t score so high on the other ones. We are willing to compromise, provided the most important expectations are met.

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Coexisting side by side – a pluralist plate of biscuits (image: Caro Wallis CC BY)

That works well, and we often adopt a similar approach where it concerns whom we do business with. The supermarket where we shop, the person who cuts our hair, or the plumber who fixes our taps – they’re not remotely scoring a perfect 10/10 on everything. They may not even be among the best on many of the characteristics. But if they’re good enough overall, and meet the important requirements, we are tolerant of their relative weaknesses.

And it’s the same for the town and the street where we live, what our home is like, where we work and so on.

Even among our friends (whom we choose) and our relatives or our colleagues (whom we don’t) we tend to apply the same kind of thinking. Complete paragons of virtue are rare, and most of the people we know have at least some flaws in our eyes. In strangers, these would put us off, but here, given the value we perceive in the relationship, we are happy to overlook them.

In short, we generally don’t expect perfection or purity. We are quite capable of accepting that our friends do not necessarily completely share our tastes in food, sports or music, or that our colleagues may have different political views from our own. That attitude is essential when – as we do – we live in a pluralist environment, with numerous different combinations of tastes, preferences and opinions.

Pluralism under pressure

Talking about politics: political parties are perhaps among the most striking examples of pluralism in action. Large parties, with comprehensive manifestos, have no hope in hell to satisfy every member, let alone every voter in 100% of what they propose. The broad principles on which a party is founded usually leave a lot of room for interpretation, and that allows them to accommodate a great deal of diversity. And even if there are some issues with which one unequivocally disagrees: in politics one has to compromise, and that is what a party’s MPs, members and voters do.

Or do they?

Anyone who has recently been observing the two largest political parties in the UK may well wonder. They both seem to have let go of the idea of being pluralist.

Momentum, a movement of Labour party members that is strongly supportive of Jeremy Corbyn, has been accused of plotting to get rid of moderate MPs who don’t share their more radical politics almost since they Mr Corbyn became the leader in 2015. The latest and most audacious attempt at purging those who are considered ‘disloyal’ happened during the September 2019 Labour party conference. Deputy leader Tom Watson often openly disagrees with Jeremy Corbyn, and his disobedience has long been a thorn in Momentum’s side. When their leader Jon Lansman found it impossible to get Mr Watson fired, he tried to get the post itself abolished to remove him.

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Pluralism, but not as we know it (image via YouTube)

And that is small beer compared to what Conservative prime minister Boris Johnson achieved. He effectively sacked 21 Tory MPs from the party for supporting the Benn Act, a law designed to prevent the UK leaving the EU without an agreement unless parliament approves. One of those expelled, Nick Boles, tweeted “The hard right has taken over the Conservative Party. Thatcherites, libertarians and No Deal Brexiters control it top to bottom. Liberal One Nation Conservatives have been ruthlessly culled. Only a few neutered captives are being kept on as window dressing.”

Both parties appear to have swapped the pluralism of old for partisanship and ideological purity. Such purity comes naturally to single-issue parties, which do not need to compromise. If only one thing matters, it’s easy to check whether someone is “one of us” or not. But it’s hard to see how this can end well for mainstream parties, who traditionally rely on a broad base.

We are all pluralists

For at the end of the day, we are all pluralists in ourselves. The 19th century American poet Walt Whitman wrote, “I contain multitudes”, and so do we all. Imagine we demanded the kind of purity these two political parties are pursuing in where we live, what we buy, who we buy from, who we work for, and from our family, friends and colleagues. Imagine we rejected any town or home, any product, any service provider, any employer that didn’t match our purity standards. Imagine we could only work with, or be friends with people who fully fitted our desired purity profile. We would soon die of starvation, cold and naked, no roof over our head, and desperately lonely.

As we go about our lives and make one choice after the other- in politics and outside – perhaps the most important choice is whether we will follow a purist path, or a pluralist path. If we choose the latter, we know we will need to compromise much of the time. We will need to tolerate imperfection and messiness. We will also have to accept that our own certainties will be challenged by those of others – but that is fine. Because we have nature on our side: pluralism, in the shape of diversity, is deeply embedded in nature: it is an essential condition for evolution, and enables species to adapt to changing circumstances. Likewise, it gives us resilience we need in a world that is never pure and constantly changing.

If we choose the former path, we won’t need to make any messy compromises, and life would look really simple and neat. But we would of course have to cultivate the most profound intolerance of what deviates from the purity of our tribe. And we will have to expect the same intolerance from other tribes towards us, naturally. We will become ever more defensive and inward looking. And soon we will see small impurities appear in our close allies. Having lost the capacity to tolerate these, we will before long have to turn our backs on them too…

The purist path or the pluralist path? It’s our choice. The battle between pluralism and purity is not fought in parliament or at the ballot box. It is fought right within us.

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

A tale of bad luck and good fortune

(featured image credit: abby chicken CC BY)

Wat does a harrowing story reaching the news headlines tell us about our individual and collective response to people affected by fate?

Baby Pia is 9 months old. She lives in Antwerp, Belgium, and has spinal muscular atrophy, a genetic condition that causes the muscles to deteriorate. Particularly in infants, it can cause premature death. There is a promising new drug, not yet approved in her home country, and therefore not reimbursed, but it is available in the US. Unfortunately, it would cost £1.7 million (1.9 million euro, 2.1 million dollar), much more than Pia’s family can afford. Undeterred, the parents started an appeal to raise the money.

This story hit the Belgian national news on Tuesday 17th September. Then, several things happened over a short period of time. Belgian health minister Maggie De Block stated that there was nothing she could do, and called on Novartis, the producer of Zolgensma, the drug in question, to make a gesture and offer the drug free of charge. Social media started buzzing with criticism of the greedy pharmaceutical industry, supported by the comments of high-profile philosopher and newspaper columnist. Simon Mignolet, former goalkeeper of Liverpool FC but now of Club Brugge donated the shirt he wore during Tuesday evening’s Champions’ League match against Galatasaray. Novartis defended the price of the drug as ‘cost-effective’, and confirmed it is willing to talk with the government.

And most strikingly, at around 2am on Wednesday morning, the SMS campaign launched by the parents on Sunday, reached its goal of 1.9 million euro, with more than 970,000 messages sent.

Individuals in action

Only the most hardened cynic could remain impassive at this demonstration of national solidarity with two young, desperate parents and their baby. Assuming most people sent just one text message, nearly 1 in every 10 Belgians supported them to the tune of 2 euros (the telecom operators waived their own charge, for good measure).

It was also a most illustrative example of the so-called identifiable victim effect. In a paper from 1997, Karen Jenni and George Loewenstein propose possible reasons why we are more likely spend resources on saving the lives of specific, identified persons than on saving unidentified, statistical people. In the case of baby Pia what likely played a part is the vividness of the image of a cute baby, and the certainty that, unless action is taken, she will die.

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A little money, a lot of people (image via teampia.be)

Of course, we know that Pia is not the only baby in Belgium with the misfortune of having a condition that can kill her before she’s even a toddler. But she also was fortunate enough to have been propelled to the media headlines. And what stands out catches our attention – this is known as the salience bias.  We may even be seeing some special pleading: the government or the producer of the drug ought to deviate from the prevailing practice (approving the treatment, and making it available for free) in this case.

Is the money raised well-spent? That is not an easy question to answer unequivocally. For the family, for sure. For the individual donors, the utility loss of 2 euros is negligible, and the warm glow many will feel, having contributed to such highly visible a good cause, will outweigh it many times over. But is (possibly – there is no certainty that Pia will respond well to the drug and be saved) one life the most that can be saved with £1.7 million? The Centre for Effective Altruism provides food for thought for anyone wishing to do the most good with their donation. One cause they highlight is the control of malaria: saving one life through mosquito nets treated with insecticide is estimated to cost $3,200. On that basis, more than 600 lives could be saved with the money raised for baby Pia.

The collective perspective

The optimum allocation of scarce resources is, of course, an even more important matter for governments. No matter how it is cut, the amount of money a government can spend is limited. Every pound spent on drugs cannot be spent on education, policing, road maintenance and umpteen other things. In fact, every pound spent on Zolgensma cannot be spent on antiretroviral drugs to control HIV medication, on immunotherapy for cancer patients, or on social care for people with dementia.

One of the roles governments need to take on, on behalf of its citizens, is to help those who, especially if through no fault of their own, are suffering as a result of misfortune. They effectively act as an insurer, taking premiums from everyone (through taxes or social insurance contributions), and paying out claims to unfortunate citizens – like Pia and her parents. But just like real insurers restrict the insured risk and cap pay-outs, so the government must do. Public funds are limited too, and that inevitably means that some therapies will not be considered cost-effective, and therefore not be reimbursable.

zolgensma

How can such a small bottle cost so much? (image: Novartis)

The finger then quickly points towards the pharmaceutical companies, who take advantage of the sick (or of the governments acting on their behalf) to crank up prices. The examples come to mind of the EpiPen (used by people at risk of extreme allergic reactions), whose price increased sixfold over nine years, and of Daraprim (to combat toxoplasmosis) which saw an almost overnight price hike from $13.50 (£10.70, €12) to $750 per tablet. But these excesses are not representative. Developing drugs is a labour-intensive, long-winded, and highly uncertain process, and they enjoy short patent protection. There are fewer and fewer blockbuster drugs that can be used to subsidize those to treat rare conditions, so the cost of such medicines must go up.

When – like Karin Jirofllée, a member of the Belgian parliament for the Flemish social-democrats did on Thursday: “1.9 million for a single injection, a scandal!” – we criticize the high price of a drug, do we have a sensible point of reference? Do we know how much it cost to develop cost of the drug has been, and how large the market is? Do we know what existing therapy it would replace, and what this currently costs? A syringe containing a dose of Zolgensma looks much the same as one filled with insulin. But one is a remedy for a condition with a prevalence of 1-2 per 100,000, while the other controls a condition with a prevalence that is 10,000 times larger. Also, few people have an idea of what drugs really cost. They are heavily subsidized In many countries (like Belgium), and patients pay only a small fraction of the price.

So, the heuristics we use to assess the fairness of the price of a drug are of questionable validity. (This is not to say that the provision of pharmaceuticals is totally efficient and fair. But while we can say how much we are willing to pay for a medicine, we cannot dictate how much it will cost to develop and produce. If we, individually or collectively, are not prepared to pay what a drug costs, then we should not be surprised if it doesn’t get made.)

However, with approval processes and prices for drugs being what they are, what should we think of grassroots campaigns to help people who were dealt a bad hand? Are they a good illustration for the kind of approach small-government Libertarians favour: private charity replacing programmes funded by public money? Could something this exceptional become the norm, and work not just for extreme cases like Pia’s?

It is tempting to think that we all have enough compassion with our fellow citizens to dip into our personal pockets to help them out when they are afflicted by misfortune. Perhaps that is even true. But the reality is that, just like people can have bad luck, they can have the good fortune of catching the nation’s attention, while others do not. Can we really rely on hundreds of thousands of people sending text messages for every baby Pia out there – and for everyone else who is in need?

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The value(s) we trade

(featured image: Capri23auto)

We see trading primarily as involving monetary value, but it is when it involves values that it is truly meaningful

Barely a week ago, a British government minister resigned. This in itself is no longer big news in these somewhat surreal times (another minister did the same just a few days later). But the fact that it concerned the prime minister’s brother gave the event some extra prominence.

Why had Jo Johnson resigned? He was quoted as being “torn between family loyalty and the national interest”. It may not be immediately obvious, but choices like this are, in essence, a matter of economics. One of the issues with which the dismal science concerns itself is the allocation of scarce resources. A piece of cake is a such a scarce resource: you can either have it, or eat it, but not both. Whenever you can either have one thing, or another, but not both – either having the cake or eating it, either serving family loyalty or the national interest – you have to decide which of the two mutually incompatible options is ‘best’. Choosing one means giving up the other. In economic terms, you trade one for the other.

And trading is very much in the realm of economics. In a business context, this is generally not particularly difficult. It’s mostly about money: just apply a suitable discount factor, calculate the return of this investment and that investment, and compare the outcome to see which one is best. At worst, a business economist may have to make explicit some assumptions (like the cost of borrowing), perhaps also some projections (like the profit margins that will be achieved), that kind of thing, but no more than that.

When costs are apples and benefits are pears

Since pretty much every aspect of a business can not only be quantified, yet also expressed in identical actual currency units, you’re simply exploring where to spend money to earn money. That makes carrying out a cost-benefit analysis quite straightforward.

Cass Sunstein, who not only co-authored Nudge with Richard Thaler, but who also headed the White House Office of Information and Regulatory Affairs under president Obama, is a vocal advocate of cost-benefit analysis, especially in policymaking. Yet here, at least one side of the comparison is not easily expressed in a monetary unit: the welfare of the citizens. And that complicates matters.

apples and pears

A tricky comparison

In his paper, Cost-Benefit Analysis, Who’s Your Daddy?, Sunstein illustrates the challenge through some examples. One is a proposed regulatory measure that would prevent 100 deaths (mostly of people over 80) and deliver $150 million by averting non-fatal illness. It would also impose $900 million costs to implement, and cause 3,000 job losses. Looked at simply on a monetized basis, given that a death is valued at $9 million, the benefits of the regulation exceed the costs. But should the age of the victims (is the death of an 85-year-old as significant as that of a 45-year-old?), and the job losses not be taken into account? This is where things become tricky: we need to compare apples and pears.

Many of our personal decisions are, in fact, much like this. Most of what we spend is not intended to make money, but to enhance our welfare in some way. However, since we generally have a limited amount of money available, we would really need to establish, through a similar cost-benefit analysis, whether, say, a bottle of wine is more welfare-enhancing than a cinema ticket. That is hard, and we don’t always do it. But happily, on the whole, we somehow seem to manage to strike a reasonable balance between wine, cinema, and everything else.

The intention behind spending money (or resources more generally, like time and effort) may well be to enhance our welfare, but this is not the only effect it has. How we use our resources also shapes our profile in the eyes of others. If we spend a lot of time and money on keeping our front garden pristine, this says something about us. If our recycling bin bulges with empty bottles every fortnight, that also says something about us. So do whether we wash our car every week, or whether it only gets cleaned by the dealer once a year when it has its service, and dozens of other choices we make.

Of course, each of them only provides a small glimpse of that profile. The state of our front garden doesn’t say anything about whether we buy free trade groceries, or whether we have a season ticket to the opera or for a premier league soccer team. More importantly, outsiders only get an idea of the resources we spend. They cannot really see how we would have spent it otherwise.

empties

The sign of a jolly weekend (image: Chris Stephens CC BY)

This is what economists call the opportunity cost. If others knew we’d have to eat beans on toast three times a week in order to afford the repayments on our car, that would tell them something different than if we paid in cash out of our bonus as a commodities trader.

The opportunity cost, when it involves how we spend money (or even time) is not easy to discover for outsiders, and it’s often not entirely clear to us either. We do not consider all the other ways in which we could spend the money that goes towards a round in the pub, a new jacket, or the fuel for a trip to the seaside.

Which value counts most?

But the opportunity cost does become very clear when we are having to choose between having our cake and eating it – the kind of dilemmas that don’t involve money, and that do not leave room for compromising by spending a little more here and a little less there. Eating the cake means not having it, and vice versa.

We can see such dilemmas in many places. One serendipitous example is that of London pirate radio from the 1980s (by coincidence, while I was working on this piece, the TiVo was playing a documentary on the subject). These stations championed black and dance music ignored by the mainstream radio stations – they were “cool and underground” as one of the DJs remarked in the programme. By the end of the decade, several of the original pirates obtained a licence so they could broadcast legally. But in a changed landscape they had to make a tough choice: continuing to be ‘cool and underground’, or chasing ever bigger audiences. Sacrificing their identity for profit, or sacrificing profit for identity? You can no doubt guess which way most of them went.

We see it also in the case of Jo Johnson. While we can be pretty sure that he is not immediately going to be plunged into poverty, we can assume that he valued his career as an MP and a minister. Giving it up will have meant a significant sacrifice. (This is true, irrespective of the way in which his dilemma is interpreted. Did he place the national interest – disagreement with his brother’s policies – above family loyalty – support for his brother? Or did he place family loyalty – his wife is reported to have said “It’s Boris or me” – above the national interest – staying on as a minister to try and influence his brother?)

And we see it in the choices that all of us make regularly. Like Jo Johnson, we trade values. We may not need to worry about the national interest, but there are plenty of other situations where we may need to decide which value comes first – including family loyalty. Do we sacrifice the last chance to see Elton John perform live in order to see our daughter’s school play – or the other way round? Do we postpone our holiday by a day to help a friend move house, or not? Do we literally drop everything to help out our neighbour care for her baby after a very traumatic birth experience, or is our normal household routine more important after all?

These are the choices that truly tell others, in bold capital letters, what kind of person we are, and we should make them with care. Our profile is not so much defined by the choices we make, but by what we sacrifice to make them.

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Careful with commitment

(image: Sami Panu CC BY)

How our determination to avoid making a bad decision may lead to an even worse one

The comedy show The Two Ronnies used to feature a recurring sketch, In The Chair. Ronnie Corbett, on his own in high-back seat, started what initially promised to be a short monologue – some joke or funny anecdote. The real joke, however, was that he almost immediately deviated from the subject, meandering on and on through a sequence of wholly unrelated topics, only to return to the original tale after six or seven minutes, to complete the sketch.

This kind of raconteurship is an excellent skill if you are comedian. If, however, your role is to introduce speakers at a conference and moderate questions from the audience, verbosity and timekeeping are not the best of friends – no matter how engaging your stories. This is why the team running the show at the 2016 edition of Nudgestock (the annual behaviouralists’ jamboree in the UK) struck a deal with host Rory Sutherland. Rory’s brain harbours a vast collection of highly relevant insights which, given half an opportunity, he generously shares. The risk of 7 minutes Q&A after each session turning into 20 minutes was very, very real. Every time he exceeded the allocated time, he would be fined £50.

A trick to stick to your intentions and your promises

But that was not all: the fines would be donated to the Remain campaign for the Brexit referendum, which would take place three weeks later. Rory was suspected of sympathizing with Vote Leave, so donations to the opposing camp would, so the team thought, be an extra disincentive to excessive meandering. (There were no overruns.)

This is approach is known as a commitment device, an instrument to help you stick to intentions expressed, or promises made, earlier. It is one of the oldest behavioural tools in the box, also known as the Ulysses contract, named after the intrepid traveller. He wanted to hear the enchanting song of the sirens without being lured to jump overboard and perish. So he made a ‘contract’ with his men, instructing them to tie him tightly to the mast and put wax in their own ears, and not to release him under any condition until they were out of earshot of the sirens again.

clocky

The one thing it doesn’t have is a snooze button (photo: Brian DeWitt CC BY)

Commitment devices have a wide variety of applications, typically where an individual intends to follow a certain course of action in the future, but when it comes to making the choice, is likely to choose differently. Often this is a matter of irresistible temptation. To avoid wasting time that should be spent revising, a student might, for example, reveal her Facebook password to a friend, ask him to change it and only change it back when the exams are over. Someone who can’t leave the biscuits alone may lock them away in a cupboard and give the key to another person in the household.

There are even commercial applications out there to help you. A company called StickK automates the process of tracking progress towards your intended goal (e.g. lose 10 kilos in weight, save £1,000, or tidy up the garage). It makes use of loss aversion (users put money at stake which, like in Rory Sutherland’s case, in case of failing to stick to the intention, may be donated to a despised purpose to amplify its effect further), as well as nominated referees that can coach you, supporters to cheer you on etc. Another example is the cute alarm clock Clocky that helps you resist the temptation to hit that snooze button. It jumps off the bedside table, and runs around the room so you need to get out of bed to silence it.

Commitment devices can also be used to signal trustworthiness to other people. A friend once needed to settle a taxi fare but realized he didn’t have enough cash and the driver didn’t take cards. He left his right shoe with the driver while he went looking for an ATM, to underline his assurance he would return rather than disappear without paying.

Such a commitment to others does not even need to involve a material stake, and can be as simple as a verbal promise. Here too loss aversion is the central mechanism that forces you to do the right thing: the loss of your reputation. Friends and colleagues would quickly take a dim view if you kept making and breaking promises to them.

A risky device

The purpose of a commitment device is to make sure you do not select a course of action, from the available options, that is detrimental. That can be done in two ways. One approach is to ensure that, when the choice is to be made, you select the option to pursue through deliberate reasoning, using all available relevant information – not by giving in to temptation. The other one is to eliminate the detrimental options ahead of the moment of choice, or at least make them so costly to pursue that you will go for the advantageous one. Yet both approaches carry risks.

Say you are often tempted to spend way too much using your credit card. An example of the first approach might be to put your credit card in a wallet with the message “ARE YOU SURE?” This would commit you to considering whether the purchase you are about to make is a wise one. But it is, of course, very easy to override. Picture Ulysses, instead of being tied to the mast, had simply put up a notice saying “SURE YOU WANT TO JUMP?” We don’t know how enchanting the siren song really was, but it would certainly have been a risky strategy – just as it would be to trust such a message will stop you overspending when you’ve seen something really, really alluring.

So, like Ulysses, you might adopt a more drastic strategy, and cut off the option of being tempted by cutting up your credit card altogether. But now imagine that your last train is cancelled and there is no way to get home. You need to check into a hotel for the night – easy when you’ve got the magic plastic in your wallet, rather more problematic with just £22.46 in cash…

cutupcard

But what if the unexpected happens? (photo: Mike CC BY)

Most commitment devices are of this type, because they make breaking your commitment much harder than the other one. But that means they must make changing your mind very difficult, if not impossible. This is fine provided two implicit assumptions hold. One is that, once you have committed to an option (ahead of the actual moment of choice), no amount of further deliberate reasoning will lead you to a different decision. The other one is that all will remain as it is: no new facts will emerge or events will occur that would have led you to a different decision, had you known them when you made it.

And that is by no means always the case.

Committing – unconditionally committing – to a particular decision when there is uncertainty, especially when there are unknown unknowns, can be problematic. The ongoing Brexit saga, the gift that keeps on giving, supplies two nice illustrations. Early in the Brexit process, former prime minister Theresa May famously committed to taking the UK not only out of the EU, but also out of the Single Market, out of the Customs Union and out of the jurisdiction of the European Court of Justice (her so-called three “red lines”). That ill thought through decision would become her downfall, when its consequences for the economy and for the border with Ireland became apparent. She had promised she could not deliver. And parliament is currently dealing with the implications of its decision in March 2017 to unconditionally hand over the power for leaving the EU, with or without a deal, to the prime minister. It is, as I write this, now frantically trying to recover the power it rashly gave away.

There is another risk in using public promises as a commitment device, and effectively putting your reputation at stake. That is something a certain successor to Theresa May’s is experiencing these days. When you commit to one group of people that you will leave the EU on 31st October, “do or die”, deal or no deal, and reassure another one you are making good progress talking with the EU and that you are confident you will secure a deal, while there is no discernible evidence of new proposals, or indeed of any negotiation taking place, you are not doing your credibility much good. When you promise not to suspend parliament, only to do just that a few days later, you are not showing great concern for being trustworthy. And when the perception grows that, perhaps, you are not all that concerned about your reputation, you risk rapidly losing confidence and trust in what you promise.

Commitment devices can be very useful and powerful to protect us against making bad decisions. But be mindful of the quote that is sometimes ascribed to the great economist, John Maynard Keynes: “When the facts change, I change my mind.” If you eliminate all possibility to change your mind, you may end up regretting engaging the commitment device. And of course – but you surely knew that already – public promises can only work if there actually is a reputation to preserve.

 

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