The behavioural economics of Brexit, or why referendums suck

Using the phrase ‘The behavioural economics of…’ in a title is a neat trick – a Google search finds nearly 700 such pages, not all of which really justify the link with Behavioural Economics. But bear with me – in this case there is a good reason to look at referendums, and in particular the UK’s referendum on her membership of the European Union, from a BE perspective.

The vote on the EU referendum promises to be tightly contested. Even though opinion polls are not the same as actual polls (as we discovered in last year’s UK parliamentary elections), they do give some indication of the electorate’s voting intentions. A recent surge for the Leave camp has redressed the balance from a slight, but persistent, advantage for the Remain option, and the two choices are now neck and neck.

How do people arrive at their eventual choice? Like any decision, choosing between remaining in the EU and leaving it is a trade-off – the basic element of economic decision-making. Both options have advantages and disadvantages, which a rational homo economicus would dispassionately evaluate, to come to an objective, robust conclusion. Is that how it happens, or are there other elements at play?

Where is the rationality?

Looking at the rhetoric from both campaigns in the press and on radio and TV, and at the reactions of the public in the comments on news website and on social media, signs of rationality can be hard to find. Anyone seeking to demonstrate that humankind is irredeemably irrational, would find endless examples of biases and fallacies.

The most glaring one is arguably the confirmation bias. Many who are already convinced which camp they’ll be supporting resonate with the messages from their side as if they were the strokes of Big Ben (or the tones of Beethoven’s Ode to Joy). Once you are certain of your case, anything that confirms your views also strengthens it, and any challenge from the opposite side is ignored or ridiculed.

Which brings us to the appeal to authority and the ad hominem fallacies. The credibility of the argument is not in the message, but in the messenger. Both sides in the EU referendum invoke the authority of business leaders, think tanks, heads of state, and even celebrities as if these were personalities endorsing a watch or soft drink brand. And where usually the ad hominem argument singles out a particular person, it is now about whole classes of people. The members of the ‘elite’ cannot be trusted as they “are indifferent to the suffering their policies are causing”, and “the people in this country have had enough of ‘experts’”. Posters show leading figures of the opposing campaign in less than flattering poses.

experts
What do experts know, really?

Many prospective Remain-voters may well be led by the status quo bias or the sunk cost fallacy. And there is much more. Whoever is brave enough to trawl through campaign materials, Twitter feeds and Facebook pages for a little while could use this poster as a bingo scorecard. It won’t take long to complete it.

None of this should be particularly surprising: few things are easier than finding examples of dubious rationality in the demagoguery of electoral campaigns. But the kind of trade-off people face in a referendum is rather different from that in other polls. We don’t elect people who will later define and set policy with their colleagues (and adversaries) in a democratic process, where the big trade-offs are handled by our representatives. In a referendum, we must decide on a single issue, and we have to do all the trading-off ourselves – there is no further leeway. The moderating effect of a representative house, where legislation can be (and often is) challenged, watered down and modified, is absent. And there is no re-match: THIS IS IT.

Why beliefs get to dominate judgement

Making a trade-off is never easy, and it doesn’t get much more difficult than in the EU referendum. On the one hand, both the Remain and the Leave routes have numerous positive and negative consequences, which as a voter we should really understand and weigh up against each other. Many of them are uncertain, so we’d need to account for that as well. On the other hand, we have beliefs that come into play – and these too can be in conflict with each other. What if we believe that it is good for the UK to collaborate and trade intensively with her European neighbours, but also that it is good for a country to be independent and sovereign? How do we weigh these things up in our final decision?

Many people struggle to even identify all the different aspects, let alone assess them well enough to make up their mind. So it is very tempting to give up on reasoned consideration and to look at the issue from the vantage point of our most strongly held beliefs. This gives emotions the upper hand, and makes us vulnerable to fallacies and biases. Daniel Kahneman fears that “the arguments look short-term and based on irritation and anger. These seem to be powerful enough that they may lead to Brexit.”

How can beliefs become so potent that they hijack our judgement?

When I first started learning English in secondary school, our textbook (it’s so long ago I cannot recall what it was called) contained a vignette in which an exasperated mother responds to one of her children with the exclamation “I don’t know, and I don’t care!” You could say something similar in my mother tongue, but this English phrase’s splendid symmetry and conciseness struck me at the time, and it’s stuck with me ever since.

And it is precisely this phrase that exemplifies the problem with choices so complex and so momentous as in the EU referendum. It’s hard to even get anywhere near the homo economicus. There are so many aspects to consider that it is not humanly possible to evaluate them all.

If we cannot know everything, then perhaps we might as well know nothing at all. (According to one survey, 4 per cent of the UK population does not know for sure that the UK is currently a member of the EU.) Acknowledging our lack of knowledge is then quite a rational thing to do. Saying “I don’t know” is a way of admitting to the bankruptcy of our capacity to reason.

The only thing we know, the one big, important thing, like the hedgehog in Berlin’s essay, is the security and the certainty of our firmly held belief: “Immigration is out of control”, or “The EU is crucial for peace in Europe” – we can take our pick from a large collection of beliefs on either side. That one big thing, that precious, sincere conviction, then risks becoming divorced from all other considerations. It needs to be defended no matter what, and any price is worth paying. Facts no longer matter: we are disregarding the costs of unconditionally protecting our belief; there is no place for compromises.

An unfair demand on the citizens

That may well lead to cognitive dissonance when we find ourselves being challenged with the potential downsides of our choice. Our response: minimize and dismiss that stuff (using the arsenal of biases and fallacies at our disposal) – “they were wrong then, and they are wrong now”. The world has become black and white. The metaphorical balance that we use to make reasoned trade-offs has lost one of its arms. We don’t care about the consequences: we believe that everything else will remain the same, or that any downsides are irrelevant or negligible. “I don’t know, and I don’t care” has become our logic.

dontknowdontcare

Mainstream economics would see no problem here: what we see is an economic agent’s revealed preference. Why should we be concerned with exactly what motivates someone’s choice? If someone chooses to be led by a profound belief, they effectively attribute infinite utility to it, and are prepared to pay an infinite cost. And that is their perfectly good right.

But behavioural economics has a different perspective. Someone who spends all her income, rather than to save some of it for her retirement, is not necessarily making a conscious, reasoned choice. Maybe she is expressing a genuine preference for immediate gratification, and really doesn’t care whether she will spend her old age in poverty and destitution. But maybe she is being led by short-term influences, blinded by hyperbolic discounting, and she will regret later in life that she didn’t build up a retirement fund.

A recent poll suggests that something similar might apply in the EU referendum. For many, reducing immigration is a strong motivator for voting to leave. When people were asked how much of their annual income they would personally be willing to sacrifice in order reduce the number of EU immigrants, 68% of respondents would not be prepared to lose anything at all. Yet forecasts like that of Treasury and the OECD suggest that leaving the single market (essential to stop the free movement of people) might cost a good deal more than most people are prepared to give up. Those voting Leave for this reason may well experience the short term satisfaction that one gets from an impulsive, emotionally fired decision, but at the expense of the longer-term effects they are ignoring.

Immigration-sacrifice

A small contribution

Referendums are inevitably black-and-white affairs. If the matter to be decided is complicated – as it is in the EU membership case – they put most voters before an unfeasible challenge. It is impossible to be properly informed, and the complexity is overwhelming.

For all their imperfections, parliamentary elections are a giant, self-moderating compromise machine: not just in the composition of the house, but also in the entire policy-setting and law-making process. Referendums have no such capacity for compromise. They may well be the purest form of democracy, but is it proper to put this kind of burden on the citizen? Just imagine what things would be like if that was how the bank of England’s base rate were determined, or the budget, or the rates of income tax.

If you consider the behavioural economics of referendums on complex, weighty matters, you can see why they suck. They don’t suck because the electorate is stupid. Referendums suck because they inherently create a context in which people are forced to make momentous decisions from an unreasoned “I don’t know and I don’t care” position. And that is a despicable.

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About koenfucius

Wisdom or koenfusion? Maybe the difference is not that big.
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