Noisy people

(featured image: Mysid/Wikimedia)

Our decision-making is biased, but an even bigger limitation is that it is noisy. So what?

The loudest and longest standing criticism of neoclassical economics is that it assumes us meatbags are rational, self-interested, utility maximizing individuals, while in reality we’re subject to a raft of biases and fallacies. What’s more, the deviations from rational behaviour that characterizes us would seem to be systematic. The title of one of the books by Dan Ariely, Predictably Irrational captures that viewpoint well.

But it appears there is more to it. (There is always more to it. Always.)

At a conference on the Economics of Artificial Intelligence a few weeks ago, behavioural economist par excellence Daniel Kahneman made a remark that has been going round my head for several days now. He observes that “people are very noisy: you show them the same stimulus twice, they don’t give you the same response twice.” He goes on to state that the main limitation on human performance is not bias – it is just noise.

Artificial intelligence (AI) has been proposed as a way to overcome our irrational judgements. AI doesn’t have problems with self-control, can’t be fooled with astute framing, and are not afflicted by confirmation or optimism bias. Unfortunately, both the algorithms for AI (which are ultimately written by humans) and the learning regime for an AI can introduce prejudices. In 2015 one of Google’s AI algorithms apparently tagged two black people as gorillas. The firm itself explains how this kind of thing can happen in this short video. But it is by no means out of the woods yet. Joanna Bryson, a computer scientist at Bath University in the UK found that Google Translate converts gender-neutral pronouns from other languages to “he” when referring to a doctor, and “she” when referring to a nurse.

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“I’m sorry, Dave. I’m afraid I am less noisy than you.” – source

But if it is true, as Kahneman says, that the larger reason of our suboptimal decision-making is noise, and not irrationality, prejudice and bias, then AI certainly would have the edge. An algorithm, when given the same stimuli, will always respond in the same way.

That raises two questions: how noisy are we really, and is our noisiness really a problem?

How noisy are we really?

We often do seem to react differently when we are confronted with the same stimulus – or apparently the same stimulus. In laboratory conditions it is possible to pretty much control ‘all else’ and make sure it is ‘equal’, and so present identical stimuli. But what about real life?

In an insightful Behavioral Scientist article, Jason Collins points out how easy it is to consider someone’s behaviour as irrational if we don’t know what their motives and objectives are. Might we not making the same mistake when we label behaviour as noisy? Perhaps the variability in decision making that we observe actually conceals the complexity of influences that we have incorrectly simplified away.

If you were to track what a person has for breakfast every morning, their choices might appear noisy. Some days they have porridge, other days there’s a fried egg, muesli or fruit on the menu. It might look unpredictable (although for sure we can predict that they’re not likely to suddenly opt for grass or a tin of petfood, let alone paperclips or wood shavings). But can we truly say that the same stimulus (getting up and feeling hungry) produces different responses? Even when we ignore ad hoc preferences, they may have run out of one particular option, they may have just heard somebody on the news warning people of eating too much egg, or they may be short for time.  If we don’t know the other elements which may consciously or unconsciously influence the breakfast choice, we cannot know for sure how much of it is due to noise.

And if this is the case for something relatively inconsequential as breakfast, it is probably also true for more momentous judgements. We take into account subtle cues that may not be apparent to an observer – that may even not be apparent to ourselves. Sometimes these cues might lead to poorer decisions, but sometimes they might add beneficial nuance, or indeed a crucial insight that changes everything. That might be a challenge for AI: shutting out all the noise is easy, but if we don’t know which subtle influences enhance our decision making, they risk being shut out as well.

Is it a problem?

Still, there is probably a good deal of real noise in the process. But is such noisiness a bug, or is it a feature?

People pay large amounts of money – multiple times the price of a recording – to see artists play their music live. Why? Because of the noise. No, not (only) because of the elevated sound levels at a concert, but because of the numerous small, surprising deviations from our expectations. The specific live interaction between musicians (and indeed between them and the audience) here and now means that no two instances are the same. That is noise.

Imagine the artists played a 100% identical performance every time – every single note in the saxophonist’s solo a perfect copy of what was played yesterday or the day before, every vibrato in the soprano’s high note exactly the same, time after time. How boring would that be?

symphony orchestra

Lots of noise, and never ever the same performance twice – photo: Quincena Musical

Or imagine your favourite dish in your favourite restaurant was precisely the same very time – identical seasoning, the same number of carrots arranged exactly the same on the plate. You might as well have a microwave meal.

There are certainly situations where noise can be detrimental, and where precision and consistency are to be preferred. Autopilots do a great job in keeping airliners from crashing into each other, because their decisions are not noisy like those of pilots might. Rigid procedures in operating theatres ensure no instruments are left behind in patients after they’ve been stitched up – a problem that could be caused by the surgeon’s noisy behaviour.

And there are plenty other cases where noise may well seriously limit human performance. Delegating judgement to systems that are not prone to noise can undoubtedly enhance our wellbeing.

But noise is also what makes us human. When we greet a colleague or a friend, we don’t mechanistically use exactly the same words, at the same pitch every time – there is variation, there is noise in the process. We each have our own, unique noisy signature, just like famous or less famous musicians and chefs.

Let us celebrate that noisiness. And even more importantly, for goodness’ sake, let us not get rid of all the noise.

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A token of appreciation

(featured image credit: Crishna Simmons)

About the remarkably behavioural approach supermarkets have taken to buff up their image and engage their customers in the process

Companies are learning that being seen to ‘do the right thing’ is good for their brand image – corporate social responsibility and all that. (Behavioural scientists call this virtue signalling.) Supporting good causes is one way of doing this, but it is hard to develop a strategy that really gains traction among the general public. There are just too many charities to choose from, and what engages one customer completely puts off another one.

But retail chains have an opportunity to engage entire communities. Each one of their numerous stores can support local causes in the towns where their customers are. Doing so has the extra advantage that it reinforces their local character. Sure, they may be part of a national (or even international) chain, but that is no longer so important if the local store funds a playground, pays for the cub scouts’ or the brownies’ camping materials, or supports a homeless charity in town.

If that was all they did, however, it would be a rather passive kind of engagement. What if the local community was given a say in deciding which good causes would get support, and how much?

Make it tangible

The charity token scheme that four large supermarkets in the UK operate is a striking example of how to pull their customers in by giving them a visible stake in the decision making. The idea’s simplicity conceals several behavioural influences, which maximize engagement and minimize any burden.

tokenbox2

Thinking inside the box (photo: me)

Imagine a conventional consultation. As you paid for your groceries the till operator would hand you a form, together with your receipt, on which you could indicate your preferred good cause. You’d need to step aside, read the form, find a pen, locate a suitable surface on which to place the form to indicate your preference, fold the form, and then squeeze it into the slot of the box at the exit. For anyone but the most conscientious shopper, there is plenty of opportunity to postpone and forget, or simply not to bother.

But here, when you pay at the till, you receive some plastic tokens (which, of course, have the corporate colour of the store). The number of tokens you get depends on how much you have just spent. This signals you that you have real influence in the process (much like the Lotto allows you to choose your own numbers, rather than picking a ticket with numbers printed on it already). It also makes the tokens you receive feel like a valuable reward.

So there you are, feeling pretty pleased with your booty. You could, in principle, still decide to put the tokens in your pocket and walk off. When we receive something, however, even if its value is only symbolic, we become more inclined to reciprocate. So when the till operator asks you to place the tokens in the container to help determine who will get what support, you’re much more likely to respond positively.

There is more, though. A form would merely ask you for your opinion. But you are now the bearer of actual carriers of material benefit to one of several good causes, and you have the power to decide. So the moral obligation to actually go to the plastic container (which is of course conveniently placed on your way to the exit) and exert that power is hard to resist.

Sacred duty

That container itself is a thing of behavioural beauty, too. A shiny, transparent contraption, with the colourful tokens your predecessors have dutifully inserted in full view. No better way to visualize the social norm *: decent people don’t walk off with their tokens. They place them in this plastic box.

Above each of the three slots, more information about the good causes between which you can choose is displayed. Will you read it? Hell yes – by now you are persuaded that you are carrying out a sacred duty. Are these initiatives you would have personally supported otherwise? Probably not – you may never have heard of them. But they’re clearly local, and you can’t deny they’re really worthy. The images speak for themselves: happy kiddies in a playground, a homeless guy with a mug of hot soup, a bunch of old people doing gymnastics. Such concrete depictions are a powerful source of persuasion (known as the identifiable victim effect).

And in all likelihood, one of them will tug at your heartstrings a bit more than the others. Then the transparent box does its thing again: it shows how your preferred good cause is doing in relation to the others. There’s nothing like a bit of healthy competition. So without further ado, you drop all your tokens go down the slot corresponding with your favoured cause, a final gesture of benevolence before you trundle off home with your shopping.

Participatory decision making

What the retailers are engaging in is a form of participatory decision making. Simply asking their customers would be one of the most primitive ways of doing so. But the token-based approach acts as a more sophisticated set of nudges that affect behaviour, and ultimately emotions.

tokensofappreciation

A token of appreciation, but for whom? (photo: Alan Parkinson/Flickr)

Thanks to the tangible stake they receive at the beginning of the process, customers are more likely to complete it than with a conventional consultation. The acceptance of the tokens commits customers much more deeply than a form would, and nudges them towards the next steps: taking an interest in the good causes on offer, and eventually actually indicating their preferences. The symbolic allocation of resources by inserting the tokens into the container gives a much stronger sense of the significance of their action than a tick in a box would.

This in turn plays to the customers’ emotions. While a voting form might produce mostly annoyance, this whole process means they feel extra good as they leave the supermarket… and that is of course a very good result for the retailer. Everybody wins: the good causes get some money, the customers feel happy they have unequivocally participated in deciding which one gets how much, and the retailer has customers who appreciate them just that little bit more. The token of appreciation plays a neat double role.

If a company decides to do the right thing, they might as well do it right.


(This article was inspired by a post on participatory decision making by Chris Bolton at Whatsthepont)

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

Pricing under pressure

(featured image credit: Alex W)

Should morality, rather than the market, dictate the right price of goods and services in emergency situations?

In his book Misbehaving, behavioural economist Richard Thaler relates an interesting experiment he conducted with Daniel Kahneman and Jack Knetsch. In the days when Amazon’s Mechanical Turk was but a mere twinkle in Jeff Bezos’ eye, they got a bunch of randomly chosen Canadian citizens to give their views on the fairness (or lack thereof) of economic transactions. In one famous example, they asked whether it is fair for a shop to raise the price of a snow shovel from $15 to $20 the morning after a large snowstorm.

The responses showed most people would find this a despicable action: 82% thought it unfair (and 18% saw no problems with it). This goes against conventional economic theory: when supply is outstripped by demand, prices will rise to a level that will just clear the market. Everyone who is willing to pay at least the market price gets a shovel, and no shovels remain unsold.

shovelmommy

Selling shovels, not pole dancing! (And not a genuine picture)

This is one important role that market prices play. They ensure that scarce resources, in this case the shop’s limited supply of shovels, are allocated where they are valued the most (measured by the willingness to pay of the buyer).

Do higher prices lead to a better outcome?

Yet that economic “law” clearly does not find favour with non-economists. This was apparent again as hurricanes Harvey and Irma devastated Houston and much of Florida. According to a New York Times article, more than 8,000 complaints of price gouging for supplies like fuel and food were made. Many people tend to have a strong intuitive concept of a price: it should be production cost plus a modest profit margin (this is captured in the labour theory of value).  Rising prices, especially if they are manifestly not related to a rise in production cost, look like profiteering.

The problem is that this does not address relative scarcity – the imbalance between supply and demand. If prices are frozen, the allocation of scarce goods and services will happen in other ways, but it is unlikely to be optimum. In The Ethics of Price Gouging, Matt Zwolinski, an ethicist at the University of San Diego, illustrates this with a story about a hotel owner accused of gouging by doubling his room prices to $100 after hurricane Charley in 2004. At the ordinary price, a family might have rented a separate room for the children, for example, while at the actual price they might share one room, thus making the available supply go further.

Something similar can apply to consumables like fuel. Higher prices mean people will only buy what they need (reducing hoarding and leaving more for others), and will be careful not to waste it on relatively frivolous journeys. This applies especially to the behaviour of people who are less affected by the emergency.

High prices are also a signal to increase supply. In an article in Reason, then president of the John Locke foundation, John Hood, relates how his neighbour, a construction worker, took time off after hurricane Hugo in 1989. Loading up his tools and chainsaw in his truck, he said he was off to Charlotte, having “heard that one could make really good money cutting trees and clearing debris.”

Wisdom from the past

Talking of John Locke, the economists’ argument that the market should set the price has authoritative support. More than 300 years ago, the famous 17th century philosopher examined the morality of market prices in a short essay, Venditio (well worth reading). Through four examples, he shows that a supplier selling at the market price is acting morally and justly. For example, if the market price for wheat is 10 shillings per bushel, consumers would not benefit from a supplier selling at last year’s 5 shillings per bushel. “Others would buy up his corn at this low rate and sell it again to others at market rate, and so they make a profit off his weakness and share a part of his money.” However, making “use of another’s ignorance, fancy or necessity” to sell them things at a higher price than to others is cheating.

Locke even describes an emergency situation in which a merchant in Danzig (now Gdansk) sends one ship with wheat to Dunkirk, where the market price is 20 shillings per bushel because there is a shortage, and one to Ostend, where it is 5. Is there any injustice in selling the same wheat at four times the price at which it sells “20 miles off”? No, says Locke. Provided he sells at the market price – the same to Thomas as to Richard – he is acting justly. Again, selling at a lower price would immediately see others buying it up and reselling it at the market price. If the buyer tries to buy as cheaply as possible in the market, and the seller tries to sell as expensively as possible, the market (“the mutually and perpetually changing wants of money and commodities in buyer and seller”) will settle on a “pretty equal and fair account”.

But the market price clearly jars with the general public. And that reflects in particular on the reputation of the companies trading in the run-up to, and the aftermath of emergencies. That means suppliers must weigh up future damage and short term gains, as Richard Thaler suggested on twitter:

Even if there are no mandated price caps and anti-gouging measures, consumers can punish suppliers who appear to raise prices in response to market demand. Social media can seriously dent the image of a company. A tweet accusing Delta of price gouging (by increasing the price of a ticket sixfold) was retweeted nearly 40,000 times (and liked nearly 60,000 times). Nevertheless the airline was actually capping prices for their tickets, and the cheap airfares were no higher than in normal times a couple of weeks before. What people actually saw was the usual hike of last-minute walk-up fares, typically designed to accommodate desperate business fliers, as the founder of AirFareWatchdog.com told the New York Times.

hebstore

It’ll be a while before we can reopen this store. (source: LinkedIn)

Planning ahead is of course one way of avoiding supply problems, and hence redress the imbalance between supply and demand that gives rise to scarcity and price rises. This is what H.E.B., a grocery chain in Texas and Mexico, and Walmart did. And maybe the threat of a consumer backlash, however misguided, will encourage more companies to plan for emergencies. But that is not always possible – there are hard capacity constraints on airline seat availability, and there are only so many planes, and only so many slots at airports.

The inevitable trade-off

Market pricing is the lousiest mechanism for allocating scarce goods or services in an optimum way, and to signal demand increases to potential suppliers… except for all the others. There are extreme circumstances in which rationing is better to ensure that everyone gets some essential goods, economist Tyler Cowen says in his Bloomberg column. But most of the time we have a choice between empty shelves and high prices. We can’t have our cake and eat it.

And that is ultimately the trade-off we, the general public, must face, reluctant as we may be to make it.  Keeping prices down artificially is doing nothing to address the scarcity, and it is doing nothing to ensure that what is available goes to those who need it most. But it seems to satisfy our sense of morality.

Maybe we collectively value apparent moral behaviour more highly than reduced scarcity, even if – as Locke reminds us – there is nothing immoral about selling at market prices. Wise businesses will respond to this and safeguard their reputation, even if it costs them money – but more importantly also, even if it maintains the scarcity and leads to inefficient allocation.

That is the price we, consumers, need to bear.

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

A cocktail of biases

(featured image: delo)

Jumping to conclusions – the easiest kind of exercise, especially on a Sunday morning

I learned three things this week: two things I didn’t know, and one thing I did know, but regularly seem to forget. All of this occurred in less than 10 minutes, last Sunday morning, at the crack of dawn. Here is what happened.

I was listening to the morning news show on Belgian radio, and just after 6am I heard that the people of Australia observe Father’s Day on the first Sunday in September. Well, why not, I thought – they celebrate Christmas in high Summer, and they walk upside down, so it’s hardly the most unusual thing about Oz from the point of view of a dude in Western Europe.

And certainly not particularly worthy of a news report. But there was something afoot with Australian Father’s Day. Every year for the last 15 years, the non-profit organization Dads4Kids produces a television commercial to mark the occasion, encouraging fathers to “love their children and put their families first”. A bit sentimental maybe, but going by this year’s edition, they are really quite charming. Nevertheless, the advert got pulled by the free-to-air TV industry body in Australia.

The reason? The commercial could be seen as making a political statement: it featured only families with mum, dad and children. No trace of same-sex two-dad families.

That is the kind of news item that does wake one up well and good early on a Sunday. Such censorship truly is political correctness gone mad.

Hot topic

But then I learned a second thing. There was more, much more to this, than met the eye. Same-sex marriage is a hot topic in Australia, dominating national politics to an extent way beyond its social significance. In the last election campaign, in a move reminiscent of David Cameron’s regarding the UK’s membership of the EU,  Prime Minister Malcolm Turnbull had promised to hold a referendum on the subject. However, a referendum requires legislation, and parliament voted against the government (which has a majority of just one seat). The government had a plan-B, though: a postal plebiscite, a bit like an official survey (run by the Australian Bureau of Statistics). This will now take place this month, after a legal challenge by one of the two sides failed.

roadtoequality

The road to equality in Sydney? (photo: Steven Cateris)

Why is this plebiscite such a big deal? Recent opinion polls suggest more than 65% of Australians are in favour of same-sex marriage, with a little over 20% against. Australia has compulsory voting, so a referendum would most likely have led to the legislation that would implement it. Conservatives, both within Turnbull’s own Liberal party, and with his coalition partners ensured that wouldn’t go ahead. A plebiscite, however, is both voluntary and non-binding, so it is far less certain that there will be a majority of the votes in favour. That means the outcome is by no means a foregone conclusion. And in such a high-tension environment, innocuous commercials may well turn into political statements.

The third, and most important, thing I learned (or rather re-learned) is how easily my judgement gets clouded by my opinions, especially the stronger ones. At first, I actually thought the ad was being retracted because of conservative objections to the portrayal of same-sex couples. Only as I started paying more attention to the report did I realize that it was the fact that the families depicted were all deeply traditional that was the problem – not that it contained something too shockingly unconventional. Even so, I still assumed it was political correctness gone mad.

Thankfully, I was (literally) laid back on the sofa in a quiet house, and I discovered the complexity of the detail without any effort on my part, simply by keeping my ears open. I am not sure I would so easily let go of my prior assumptions and prejudices in other, less relaxed circumstances. The knee-jerk reaction I experienced not once but twice in less than a minute is due to a cocktail of several cognitive biases. I would expect conservatives to object to the depiction of alternatively composed households, therefore I immediately assumed that this is what was happening here. I was victim to selective perception, combining a few snippets into a fictitious story that fed my confirmation bias, even though the actual facts were in conflict with my belief. I could also be accused of congruence bias: censoring inoffensive commercials is not something you find in liberal democracies, and if it happens there, then it must be crazy political correctness.

The cognitive dissonance as the full story unfolded, and as I felt my mind changing was palpable, and I was rather annoyed I’d let myself be taken in so easily. Still, let it be a lesson (until the next time).

Ozzie bonus

Before leaving this story it’s worth making another observation – not about my own fallibility, but about the intriguing tension between two polarized tribes, and the counterintuitive game theory involved. Why did the conservatives back a plebiscite that might produce a majority in favour of same-sex marriage? And why would pro-same-sex campaigners take the government to court to try and stop the plebiscite that might support their cause?

voteyes

Some will, but how many? (photo: DorkyMum)

Human nature can be quirky and inexplicable, but a likely explanation lies in the non-compulsory nature of the vote. The support for equal rights for same-sex couples is much higher among younger people than among the over-60s (where it is just 50%). Younger people generally are less likely to vote, so a possible motivation for conservative opponents of equal-rights legislation is that they might benefit from this. If enough young people fail to vote, the plebiscite might produce a ‘No’ outcome. This would remove the issue from the political agenda for the foreseeable future. It is a risk, but it’s one worth taking.

For proponents, the risk is the other way round. Even though public opinion is strongly with them, there is a real chance that the opponents might win the plebiscite. This means they had a good reason for challenging the government and prevent it from taking place.

Sometimes things are not quite what they seem. If we want to better understand the world around us we sometimes have to take a few steps back and leave behind our prejudices and certainties. Wisdom doesn’t come easy.

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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).

patissier

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!

ontheferry

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”.

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

Why choosing can be better than picking

(featured image credit: Penn State)

Life is an endless string of choices. The way we make them matters

In the 1982 movie Sophie’s Choice (after the eponymous book by William Styron), the central character (played by Meryl Streep) faces a dramatic choice. As she arrives in the Nazi concentration camp of Auschwitz with her two children, a camp doctor extends to her the ‘privilege’ to determine which of her children she will keep, and which one will die. If she fails to make the choice, both will be sent to the gas chamber.

Thankfully, such extreme situations are rare in our daily lives. But we do make choices all day long, literally from the moment we wake up. Which leg out of bed first? Which pair of socks from the drawer? Such selections between mutually exclusive options are the stuff of economics (and behavioural economics).

meryl

A terrible choice

The selection challenge

So it was not entirely surprising to learn that Cass Sunstein, co-author (with Richard Thaler) of Nudge and prolific writer of papers related to behavioural economics, named a paper on exactly this subject as the one that has influenced him most. In Picking and Choosing, two philosophers, Edna Ullman-Margalit and Sydney Morgenbesser, explore two very different mechanisms for selecting from two or more options. They develop a robust, fascinating explanation of human decision making.

Choosing is defined selecting from a set according to our preferences. If we are indifferent to the elements of the set, then selecting is labelled picking. Intriguingly, much of the literature appears to skirt around or even deny the existence of the latter possibility.

Conventional economics relies on preferences. Even if there is such a concept as an indifference curve, it is generally seen as a theoretical concept. People simply choose between options based on their preferences, and reveal these preferences through their choices. The assumption is that, in practice, there will always be some feature that leads to a difference in preference, no matter how small. Some go so far as to say that if there truly is no option that is more attractive than the other, then no choice can be made. A thought experiment known as Buridan’s ass (and a variant of earlier instances going back to Aristotle) illustrates this: a donkey, located precisely between two identical piles of hay, must starve to death as it cannot rationally choose between the two.

Widespread picking

Yet the authors of the paper build up a strong argument for not only the existence of picking situations, but for their widespread existence. Selecting one of many cans of soup on a supermarket shelf, for example, is a picking operation. We simply cannot express a meaningful preference between two undamaged cans with the same use-by date of the same brand and variety.

Sure, there may be differences (e.g. one may contain a little more soup than the other), but the effort of figuring out such differences far exceeds the benefit we could obtain from that knowledge. In other cases, we know there is a material difference between two options and we do have a preference, but we cannot possibly establish it – for example, a game in which one person hides a coin in one of her hands, and the other person must select the correct hand to win. Like a contestant in a Monty Hall challenge, we are compelled to pick.

Anyway, just like Buridan’s donkey doesn’t actually starve to death, so we don’t linger paralysed with indecisiveness at the shelf with the soup tins. We simply pick. But how do we go about it?

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Pick a tin, any tin (photo: Dave Nakayama)

Key to understanding what really happens is the insight that, while we have no preference, we also have no reason to regret our eventual selection. That allows us to delegate the selection to some random method, for instance. Of course, we’d need to decide whether we’ll use, say, a coin toss, or a dice throw. And we’d then need to select which coin or dice to use. So trying to avoid picking, we need to pick again…

 

What if we decided to adopt a strategy by which we’d always take the leftmost, or the first mentioned alternative?  This doesn’t absolve us from needing to pick either: we still need to pick between leftmost and rightmost, or between first or last mentioned. And we’d need to pick between the two approaches of course!

If we cannot escape having to pick, we are manifestly capable of doing so. What is more, we may even choose to pick in situations that might be seen as choosing situations. Some people may choose a scarf to go with a blouse in the morning, or a tie to go with a shirt – and others may simply pick one, if they consider the actual selection to be inconsequential. The cost of choosing may outweigh the benefit of making the ‘best’ choice.

Ullman-Margalit and Morgenbesser conclude that an objective separation between picking and choosing situations is not possible. Instead, they propose a continuum, with ‘core cases’ of picking at one end, and of choosing at the other – on the understanding that even at these extremes it is possible for us quirky humans to flip to the alternative selection approach.

Choosing to avoid losing

I can only concur with Cass Sunstein on the significance of this paper. Its fine analysis of how, day in day out, we make our way through an endless succession of choices tosses aside the idea that we are rational decision-makers. It explains why most of us are, most of the time, not utility maximizers but satisficers. And it provides new insights every time you return to it, hinting at new, unexplored ideas and implications.

Indeed, as I was reflecting on all this, my wife was looking for somewhere to put our passports (as we were travelling at the time). And suddenly I realized that this was another instance of picking vs choosing.

A study conducted at Princeton and Indiana University in 2010 found that information presented in a harder to read font was better remembered than easier to read material. This was the case both in a controlled lab setting, and in a high school classroom. The cognitive strain is assumed to be the underlying force.

Similarly, the cognitive effort is higher if you consciously choose where to place an item than if you simply pick somewhere to leave it. This would then forge a slightly stronger memory, so that you’ll find it easier to recall – and find the item when you need it.

Keeping our passports safe didn’t quite constitute a controlled trial, but I am happy to report that, later that week, we had no trouble locating them. (Earlier occasions had been somewhat more frantic.)

So next time you need to put away your passport, put down your car keys, or leave that important letter somewhere until you go out , maybe try to choose a place rather than to pick one. The subsequent panic avoided is most likely well worth the small cognitive load.

 

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Shaping our reality

(Featured image credit: Free-Photos)

Is there an objective reality, and are we capable of observing it?

On the day after Donald Trump officially became the US president, the then White House press secretary stated the crowd “was the largest audience ever to witness an inauguration “. This was not the first time the president or people from his entourage were constructing a reality that was, shall we say, at odds with the facts – or indeed to advocate that this is as a good thing to do.

Last month an old tweet by his daughter and presidential adviser Ivanka was circulated widely. In it she apparently quotes Albert Einstein:

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If that sounds an unlikely thing for the Nobel prize winning physicist to have said, that is because he did indeed never say anything of the kind. Unsurprisingly, there was widespread derision. It fitted perfectly in the mindset of alternative reality (or even ‘alternative facts’, a phrase made popular by Counsellor to the President, Kellyanne Conway) that seems to prevail in the White House. But are we perhaps not a bit quick in mocking others? How good are we in separating what we want to be true from what is objectively true?

Beliefs and desires

Anyone with a passing interest in behavioural economics (or who occasionally reads my writings) is most likely familiar with the confirmation bias, the tendency many people have to seek out evidence that confirms our prior beliefs, and ignore or dismiss evidence to the contrary. But Ben Tappin, a psychologist at Royal Holloway University in London, and colleagues suspected there was something else beyond simply the tendency to confirm our prior beliefs. We also appear to assign greater weight to information when it is desirable (irrespective of what we actually believe) – the so-called desirability bias.

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A record crowd! (Source: Snopes)

Often, our beliefs and our desires or hopes coincide. We believe that we will find a good job after college, that our children will be healthy and smart, that we will climb the career ladder pretty swiftly, and so on. We also wish for all these things. Tappin et al designed an experiment in which they could separate the two, in the context of political beliefs.

In the 2016 US presidential election, they surmised, many Trump supporters believed that Clinton would win. New poll information that gave Clinton the advantage would be simultaneously confirming and undesirable, and polls indicating a win for Trump would simultaneously desirable and disconfirming. In either case, desirability bias and confirmation bias would have opposite effects.

By providing the participants in their study with selective, but real poll outcomes, they could control whether they received information that was either consistent or inconsistent with their desire, or their belief of who would win the election.

And they did indeed find a robust desirability bias effect. People tended to incorporate information significantly more if it was consistent with the desired outcome, and this was independent of their prior beliefs. For example, people who wanted Trump to win but who believed Clinton would win, were significantly more confident of a Trump win after they were given poll information boosting Trump’s chances. But with the same information, people who wanted Clinton to win but who believed Trump would win, made much smaller adjustments to their confidence level.

Unwanted solutions

In another paper, Troy Campbell and Aaron Kay at Duke University explore what could explain the widespread public distrust of the scientific consensus, e.g. in climate change. There has been intensive communication stating the statistical evidence and proposing government policies, like Al Gore’s documentary, An Inconvenient Truth. How come this failed to resonate with the (largely conservative) climate change ‘deniers’?

Conservatives have been found to be more sensitive to scary information. Perhaps that motivates them to deny climate due to a stronger fear of the consequences? But the researchers started from a different hypothesis.  They proposed that aversion of the consequences of the proposed solutions, rather than fear of the problem, motivates scepticism of the scientific evidence.

In their experiment, they first gave participants the scientific consensus on global temperature increase by the end of the 21st century as held by the Intergovernmental Panel on Climate Change (IPCC). Then the participants were asked to evaluate a proposed policy measure, after which they had to indicate whether or not they agreed with the IPCC’s prediction.

If the proposed solution was new government regulation, like a carbon tax, only 22% of Republican-leaning agreed that temperatures would rise by at least the IPCC’s predicted value of a 3.2 degrees Fahrenheit rise. But when the policy option emphasized the role of a free market (e.g. innovative green technology), the proportion of Republicans in agreement with the IPCC was 55%. For Democrat-leaning participants, the choice of policy measure made no significant difference to their stated belief (68% in agreement).

Is this kind of solution aversion a typically conservative phenomenon? The researchers conducted a similar study, in which they explored people’s perception of the severity of the problem of violent home break-ins. And indeed, here participants with more liberal ideologies (i.e. favouring tighter control on the possession of fire arms) were much more likely to downplay the problem if the proposed solution called for looser gun control.

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Not that big a problem, actually. (photo: TheDigitalWay)

They concluded that, irrespective of a person’s politics or ideology, the more threatening a solution is to them, the more likely they are to deny the problem.

A reality for everyone

We are often good at noticing and calling out the tendency of others to interpret the world in a subjective way. If we want to be unkind to them, we say they are living in an alternative reality. Even if we don’t say so explicitly, we imply that we ourselves are much better at seeing the world as it really is.

As the research suggests, that is likely to be a case of illusory superiority, though. We are often unduly influenced by what we want to be true (or untrue). We tend to adapt the size of a problem according to how much we like the solution.

Perhaps not all of us go so far as Ivanka Trump suggests, and change the actual facts to fit our assumptions. But we had better be aware that we are shaping our own subjective reality.

 

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