An accidental behavioural economist on holiday

(featured image credit: Stocksnap)

(Behavioural) economics lenses don’t stop working when you’re on break, it seems

It is sometimes said that “economics is the study of human behaviour”. (A Google search of this exact phrase produces over 30,000 hits, so it’s manifestly not just me.) And what better time to observe and study human behaviour than when you’re on vacation? Last year, I wrote about a stroll along the beach, providing several examples of intriguing ways in which (behavioural) economics explains why people do what they do. This year it’s not the beach but shops, streets and boats that provided the inspiration.

The closed greengrocer’s

One advantage of staying in the same place every year – a tiny 4th floor flat (no lift) in a seaside town – is that you become so familiar with the environment that it feels like home. The cognitive load reduces with every subsequent year: no stressing about finding the shops, the best places on the beach, where to leave your car etc. And on holiday or not, the status quo bias applies regardless.

For years, we’ve been getting our breakfast rolls (and pastries!) from the baker on the corner and our fresh fruit from the greengrocer just across the road from there. On the first morning this year, we found the queue at the baker’s a lot shorter than we were used to. The reason became clear when we strolled over to the grocer’s and found the shutters down. Before, being so close to each other, both shops benefited from a positive network externality. Customers who came in the first place for pastries and bread picked up other supplies from the nearby grocer. Likewise, people shopping for fresh fruit and veg saw the queue at the baker’s (a strong heuristic for popularity and, indirectly, value) and also popped over for some tasty breakfast. The closure of the grocer’s meant the end of the externality, and hence the extra business for the baker (and a shorter queue).

The imminent fate of the baker? (Photo: Christophe Frot/CC)

This disruption to our routine also made us reconsider the marginal cost and marginal utility of our morning shop. The nearest grocer was now half a mile in the other direction, and they also sold bread and pastries. These were not quite as good as the baker’s, but they were good enough (we’re satisficers after all!). Besides, on reflection, the additional utility the baker’s pastries would give us was not worth the extra distance, anyway. (In fact, even on the days we didn’t need any fresh fruit, we still ended up going to the grocer’s for our pastries – that’s how quickly the status quo bias gets hold.)

Car parking… expensive, or cheap at the price?

On-street car parking in the area costs €15 (close enough to £1 these days!) per day. Not a huge amount, but if you’re staying a week it’s the cost of a decent meal for two. Being cheapskates we left our car about a mile away in a street with free car parking. Not everyone didn’t, though. On the way to the alternative grocer’s we saw a car parked for days on exactly the same spot, obviously unused all that time.

How much is it worth to you not to have to walk a mile and back? Few people would take a taxi, but as a benchmark, that would typically cost €10 for a one-mile ride. Even if you did so every other day you’d be in the money. Would the owner of that car really value the time of walking to a free parking space a few times so highly? Or was it just a poorly thought-through choice?

Then again, a euro is not a euro. People often rely on so-called mental accounting, a practice of bundling expenditure (and income) in categories. You could, as we did, consider car parking fees as spending money. But what if you bundle it with the rental of a holiday flat? Even a pretty modest place in this central part would cost you at least €700 for a week in August. Maybe the extra €105 to have your car nearby in case you need does not look like such a big expense in comparison.

Reputation and risk pricing

We tend to be quite attached to our reputation, and we’re willing to make sacrifices to protect it. But even if we like to think we have a good name, its worth is really in the eye of the beholder.

At home, we regularly order our favourite bread in advance, in case it would sell out before we get to the shop. The shopkeeper happily keeps my loaf, and we just pay for it when we collect it. Gold-plated reputations as a top customer at home are, however, of no significance at the holiday shops. A little notice at the new grocer’s declared sternly that any bakery orders needed to be prepaid in full. No exceptions (with double underscore).

Reputation and risk are close relatives. The shopkeeper at home runs a risk: if we order bread, but don’t collect it, he is left with unsold loaf at the end of the day. But as we are a regular customer, he has some certainty that we will turn up (or even that we will compensate him if we don’t). This is a simplified version of money lenders’  risk-based pricing. Someone with a good credit score (i.e. a good reputation) can usually borrow at a lower interest. But to the grocer’s at the seaside the tourists are an unknown risk. Making everyone prepay effectively shifts all the risk to the customer: we pay, whether or not we pick up our goods.

The value of time

Mental accounting is not just for money, as our experience disembarking from the ferry on the way back home illustrates. It takes about 15 minutes from the first to the last car to leave the ship. That appears like a lot, and it can be hard to suppress your resentment when you see cars get back to solid ground before you, if they boarded after you. By sheer luck they ended up in a lane that gives them unfair lead of as much as perhaps 2-3 minutes compared to you!

The annoyance of waiting (photo: Gary Bembridge/CC)

Why do we get worked up, though? The few minutes’ difference manifest themselves as a loss (and loss aversion is something we’re rather sensitive to), amplified by a sense of injustice. (This also explains why the pleasure we feel when we are the lucky ones is a lot less intense than the annoyance when it’s us at the back of the queue.)

Many years of crossing the Channel has taught us that a good trick to avoid frustration is to bundle the disembarkation time with the duration of the whole journey. The drive itself can take anything from 2h 40 minutes to 3.5 hours (and more if traffic is really bad). Having to wait a few minutes longer on the ferry is pretty much negligible in comparison, when using that mental frame.

But perhaps the most important lesson is that we cannot overestimate the value of time when we’re doing nothing (as this blogpost encourages us to do). Rory Sutherland captured it well last week, when tweeting this quote from John Lennon: “Time spent doing nothing is very rarely wasted”.