Numbers large and small

(featured image credit: Yeji Lee CC BY)

Why is there no £8 coffee at Starbucks?

Imagine you’re in the market for a small car, something like a Citroën C1 maybe, a Volkswagen Up! or a Toyota Aygo. Looking at the catalogues, you find there is some variation in the price, depending on the power of the engine and the trim, but they’re all around the £10,000 mark, plus or minus a few thousand pounds. You certainly wouldn’t expect any of these manufacturers to offer a version in this segment that is 2, 3 or 4 times that price. It stands to reason that there is no demand for a £40k Fiat 500 or Ford Ka, doesn’t it? Even the most expensive Audi A1 costs less than twice the price of the cheapest variant.

Likewise, you would not expect the leftmost of two semidetached houses next to one another to be offered at 2, let alone 3 or 4 times the price of the rightmost one (unless it was a ruin). Yet for other stuff, we seem not to be in the least surprised to see very similar goods or services offered at even larger multiples. Supermarket chain Tesco sells a 2-litre bottle of its own brand of Cola at £0.50, 1/3 of what it charges for a similar bottle of a well-known brand. Moreover, it sells an ‘everyday value’ variant for £0.17 per bottle – making the £1.50 branded version nine times more expensive.

carwash

The difference between a £2.99 wash and a £11.99 one – can you see it? (Photo: k ryan CC BY)

The car wash adjacent to the supermarket sells a range of washes, ranging from £2.99 to £11.99. Whether the dearest one is really four times as good as the cheapest is an open question, but even at that price ratio, it does not remotely feel as outrageously expensive as a £45,000 Renault Twingo would.

The small price bias

A recent paper by Tristan Roger, a financial economist at the Université Paris-Dauphine and colleagues may shed some light on this phenomenon. The researchers examined the target prices financial analysts issue, and found that these are considerably bolder for small price stocks than for large price stocks. Both when they are optimistic and when they are pessimistic, they forecast larger movements for the cheap shares.

This so-called small price bias is consistent with recent neurological research cited in the paper. People tend to use a linear scale for small numbers, and a logarithmic scale for large numbers. This means that when we compare small numbers, we look at the distance, or the difference, between them, while for large numbers, we look at ratios. Another way of looking at this is that we look for absolute differences with small numbers, and relative differences for large ones.

As a consequence, we tend to underrepresent the absolute distance between large numbers. We consider two cars, costing £10,999 and £11,995 respectively, as pretty similarly priced: we see them as less than 10% apart and pay little attention to the fact that the difference is nearly £1,000 (a considerable sum for most people). At the same time, we look at the two bottles of cola, and see that the difference in price is £1.00, rather than that one is three times as expensive as the other.

One particular area where this quirk is exploited by pump-and-dump scammers is that of so-called penny stocks ** or penny shares. These are shares that trade at a very low value (originally for less than a dollar). Some people see them as an effortless way to make money, because they believe “it is so much easier for a stock to go from $0.25 to $0.50 than from $50 to $100.” An increase by an insignificant amount in one case seems much more likely than a doubling in value in the other.

But we don’t need scammers to be misled – we can perfectly do this ourselves. Interest rates, both for mortgages and for savings accounts, are still near historic lows. The difference between the available options is usually of the order of 0.5-1%, and that looks pretty inconsequential. But if we are actually comparing accounts or loans with, say, interest rates of 1.5% and 2.25%, a 0.75% difference means that we will pay 50% more interest (or earn 50% more) with the second one than with the first one. If you borrow £100,000 over 20 years, the former will cost you about £16,500 in interest; the latter will cost you nearly £9,000 more. This is not immediately apparent from the difference of 0.75%.

It’s complex

But is it really as simple as that?

A washing machine is not quite as expensive as a small car, but it is still for most people a considerable outlay. Currys, a popular seller of white goods, has a cheap ‘Essentials’ one for £150, and eleven more options below £200. The most expensive one costs £1,500 – ten times the price of the cheapest, and there are ten more washing machines above £1,000. Arguably we may not be comparing like with like – we should not do so with a small Fiat and a large Mercedes either. But while these two cars may not be substitutes for each other, washing machines arguably are. We buy them primarily for their utility, not for their looks or the hipness of their brand, and that utility is not wildly different across the range. A factor 10 – more than you’ll see for cheap groceries – is remarkable. Even when looking at just one brand we find that the most expensive Bosch costs more than 3 times the cheapest model.

At the other end of the scale, consider the bewildering array of coffees available at Starbucks. If we exclude the espresso and look only at full-size beverages, we see that, even the most expensive large latte is still not twice as expensive as a standard Americano.

The large/small numbers effect would have predicted the price range of relatively expensive washing machines to be more like that of cars, and that of relatively cheap coffees to be more like that of cola, but we see the opposite. Does this mean the phenomenon described in the paper is not real? As is the case for so many biases and fallacies, the strength of this effect can be highly dependent on the context. It will in practice also combine with other influences which in turn may boost or attenuate it, or completely dominate it.

Leigh Caldwell, the author of The Psychology of Price, sees a theoretical opportunity for much more expensive beverage at Starbucks, a Blue Mountain organic latte or something. This would push up the anchor and make the £4.50 Frappucino look better. But it’s not happening, presumably because coffee such a habitual purchase that they feel it wouldn’t work. Consumers do indeed buy coffee more frequently than most groceries, and that might lock the common price point for a coffee very tightly in the customer’s perception.

washing machine

An ecologically sound model, no doubt, explaining the premium price. (photo: Till Westermayer CC BY)

That German washing machines tend to command higher prices than, well, other ones, is not surprising – the image of superior engineering and quality is strong and persistent. But how come Bosch gets away with a ratio of 1:3? Successful differentiation through additional features that have value in the eye of the buyer – higher capacity, faster spin, quicker quick wash programme, quieter operation – undoubtedly helps.  Its reputation helps too. Hoover’s cheapest model is £260, and its most expensive one £600 (a ratio of 1:2.3); Beko’s are £180 and £400 respectively (1:2.2).

According to Leigh Caldwell, real product differences, competition, and how much permission customers give a supplier to differentiate probably make a bigger impact than this psychological effect. In the pure liquid world of investments, the psychology becomes visible because all those other effects are arbitraged away by a relatively efficient market. But in the consumer space category noise makes the psychological signal hard to discern.

Nevertheless, next time you are comparing prices of substitutable goods or services, it could be a smart move to use both perspectives. Look at both the difference in price and the ratio. Taking the ‘other’ view might reveal whether what you thought was a bargain really is.

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Springonomics

(featured image credit: Aaron Brown)

Economics, economics everywhere, even more so as spring has sprung

We may not be quite like the mythical homo economicus, but every year when spring arrives in the Northern hemisphere, along with the return of blossoms and migratory birds, we see evidence popping up of the profound economic nature of our species.

All manner of businesses that went into hibernation because they would not survive the (economic) winter climate tentatively start up again, luring tourists and locals alike. On a particularly nice day recently, we visited a little harbour town on the English south coast. It was quieter than we remembered it, but it was a weekday, and this trip was earlier in the year than any of our previous visits.

So we were a little surprised to see the little booth inviting people for a half hour river cruise open for business. There didn’t seem to be all that much demand, and yet they appeared to operate a full schedule, every 45 minutes. The cruiser is a relatively modest affair, seating about a dozen people along the sides, a simple canopy all there is to protect the passengers from the elements. From my vantage point on they quay I saw it return from a trip, with on board just one young couple with their two small children.

The (not so ir)rational skipper

With tickets priced at £7 for an adult, I wondered about the economics of the operation. The skipper is needed for more than just the sailing time – say 45 minutes, so even at minimum wage the cost of one trip would be more than £6. A small outboard engine burns about 9 litres of fuel an hour, adding another £5 or so for a 30-minute trip. Add depreciation and maintenance of the boat, the wage of the guy in the booth selling the tickets between 10am and 4pm, and the rental of the jetty, and this very trip could not possibly have broken even.

It is of course important to look at the bigger picture. Some of the relatively scarce tourists early in the season might come back later on, perhaps even in a larger party. Or they might just tell others who might visit later on. Seen like this, a loss leader might be a sensible marketing investment, with a payback in peak tourist season.

lymington

Just sitting at the dock of the bay, or waiting for a last minute bargain? (image: Alwyn Ladell)

But as the next sailing was getting ready to set off, this time with four adults, I wondered about the empty seats on the boat. Hotels and airlines often operate ‘last minute’ schemes, selling the remaining capacity at heavily discounted prices to fill empty rooms and seats. The marginal cost of an additional guest or passenger is quite small, and so most revenue goes straight to the bottom line. It’s a very rational thing to do. Should the skipper do the same? Why doesn’t he? Is he irrational or what?

For the river cruise the marginal cost would be negligible: a few additional bums on seats would be no burden for the motor. But look at the role of information, and another picture emerges. Prospective hotel guests and air passengers know that there are sometimes cheap last-minute opportunities, but they don’t know exactly when. The hotels and airlines have a much better view of this, but they don’t tell their customers. Because of this information asymmetry, certainty of having a seat or a room comes at a (full) price. Since for most travellers the need for a flight or a room is connected to other commitments, their need for security means that they will pay for this certainty, whether it is necessary or not.

Not quite so for the skipper. If he were to offer the empty seats at a reduced price to the people near the jetty, he would have a hard time concealing the information when his little boat will be full and when it won’t. A tourist watching the trips from the quayside would quickly figure out which trips typically have seats going spare. For a while there might still be some naïve customers who pay the full price. But the information would quickly spread, and soon nobody would buy a standard ticket, and everyone would linger around the jetty, waiting for the discounted fares.

There is another case of information asymmetry that does not apply here. When you stay in a hotel or take a flight, you do not know whether others have paid the same as you, or a lot less. Here, however, full-fare paying customers can see others can enjoy the same for a fraction of the price, and they might not appreciate that. But they paid the full amount willingly, on the basis that they found it good value for money, didn’t they? Sure, but people implicitly assume that prices are fairly applied to everyone. If that turns out not to be the case, they will feel they are being cheated. Aside from the potential argument with the skipper this might lead to, the information about how he acts will also spread, and that won’t do the reputation of the cruise firm much good.

So, on second thoughts, once you introduce information into the transactions, the skipper is probably not quite that irrational.

Rearranging the (prices of the) deckchairs

The same day, a tweet caught my eye, announcing that a season ticket to sit down in London costs £120 ($170, €140). It concerned of course the price of a deckchair in one of the London Parks. That sounded quite big sum. You could buy a deckchair four times over for that kind of money.

There is of course a bit more to this than meets the eye. Looking at the various rental options, £1.80 ($2.50, €2.00) – less than the price of a coffee – for an hour in the sunshine in more comfort than on a hard bench, and not having to worry about grass stains on your skirt or trousers, well that doesn’t seem quite so bad.

Imagine you enjoy having your lunch in the park whenever the weather allows, just for an hour. For the cost of 67 such lunch hours (covering about 60% of the number of workdays between mid-April and end-September) you’d get a season ticket for unlimited use. That’s not an unreasonable deal, and if you’re a regular and the weather is playing ball, you may well end up in the money. You also don’t need to faff around with small change every day – and paying upfront may nudge you out of the office and take a proper lunch break when otherwise you might be tempted to the horrible habit of eating your lunch at your desk.

But figuring that out is a lot of cognitive effort which most people won’t make, and the £120 headline figure might well put them off the idea. The offer might look a lot more attractive if it were framed as ‘pennies-a-day’ – something like “unlimited use of a deckchair all season for less than £1 per day”. That small amount could even be compared to that of a latte, or of an entire lunch – a case of mental accounting – to make it look even more insignificant. Applying some behavioural insights might improve the chair rental operator’s season considerably.

boathireopen

Yes, yes, we’re open!

To conclude this vernal ramble, a little vignette. Last weekend I noticed that the boat hire place in one of our local parks was open too. I mean, I really, really noticed it. If the presence of rowing boats and pedalos on the river didn’t make it blindingly obvious they were open, there was a message on every other swan-shaped pedalo in big letters: “boat hire now open”.

My first reaction was, “Well duh”. But then it occurred to me that this was actually a very enterprising ruse. For a start, I was spending a lot more time thinking about boat hire than I otherwise would have. More importantly, while otherwise the sight of the water craft from the corner of my eye might not even have registered, the presence of the letters was reinforcing the message, pushing it into my conscious attention. Both may well give a casual stroller through the riverside park a little nudge towards including a little self-propelled excursion on the pretty river Avon.

And I smiled at the clever insight of the boat operator. When you look at the world through economics glasses, you never cease to be intrigued by our species, especially on a nice early spring day.

 

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Personal framing

(featured image credit: H. Uechi)

We have more power over how we make choices and how we feel than we may realize

Imagine you are an oncologist, and you discuss a course of action with a lung cancer patient. There are two possibilities: surgery and radiotherapy. You know that 90 out of every 100 people will survive the operation, 68 will be alive one year after the operation, and 34 will be alive at the end of five years. With radiotherapy, all 100 patients survive the treatment, 77 will be alive one year later, and 22 will be alive after five years. Which option would you recommend?

Now consider the information was presented differently. Of 100 patients undergoing surgery, 10 will die during the treatment, 32 will have died within one year, and at the end of five years, 66 patients will have died. With radiotherapy, none of the patients will die during the treatment, 23 will die within one year, and after five years 78 will have died. Would you make the same choice?

Both versions were part of a questionnaire from a study by Barbara McNeil,  Stephen Pauker and Amos Tversky into the framing of medical decisions. Among students at Harvard Medical School and Hebrew University in Jerusalem, one group was given the first set of descriptions, and a second group got to see the alternative set. In the first case, 18% of the of the respondents favoured radiation therapy over surgery; in the second case, that proportion was 47%.

You will probably have spotted that both the survival and the mortality formulation contained exactly the same facts. Yet the mortality data in the second set appear to “have more impact than the survival data.” Framing clearly matters.

Reframing the dilemma

Such choices of life and death are not common in the lives of most of us, thankfully. But we can sometimes find it hard to make a rational decision between two possibilities. It occurred to me that framing can help here when, a while ago, a friend travelling back from Tokyo to London tweeted about a dilemma. Was it worth paying something like $1000 for a business class upgrade, and fly in comfort after a week’s hard work? He could have agonized about how long the effect of spending $1000 would have lasted, or considered the numerous alternative uses there were for the money.

businessclass

Does this look like $1000? (image: Andrew Currie)

But instead imagine you had already booked the flight in business class for $1000 more, and you’re looking forward to a relaxing return flight. At the gate, they give you some story about overbooked business class, and they offer you a downgrade to economy class, and a cash refund of $1000. How can this help settle the dilemma? If you already have (in your mind) the luxury option, and you feel you’d be loth to give it up even for $1000, you should pay for the upgrade – it’s worth the money. If, on the other hand, when (in your mind again) presented with the downgrade option, the hard cash is more appealing, you should put up with your economy class seat, food and entertainment, and keep the money to enjoy it in another way.

Another fine example of framing is illustrated in this tweet from Daniel Read, a behavioural economist at Warwick University. A local pub has responded to the new UK sugar tax by making all sugar free drinks the default, and charging ‘extra’ for sugary drinks. The default effect can be a powerful nudge, and making the tax on the sugary drink salient can act as a further deterrent against the temptation. (Nevertheless it’d be interesting to run a trial in the pub with the default reversed. Might some customers be influenced more by the apparent rebate they’d get from opting for a cheaper diet choice instead of the full-sugar default?)

Feel the frame

Framing can also help us when there is nothing to gain but how we feel. Not long ago I was due to travel back home through the Channel Tunnel. Having booked a 9pm crossing, aiming to get home by about 11pm, the news by SMS that there was a delay of 3.5 hours due to an incident (whatever goes wrong, Eurotunnel always reports unspecified ‘incidents’) was unwelcome. The prospect of not seeing my bed until well after 2am had little appeal. But by the time I got to the check-in delays were down to less than an hour. Framed like this, a one-hour delay was a delight.

How we perceive experiences does indeed depend a lot on what we compare them with. Being stuck in a traffic jam because of an accident ahead feels rather different if we think, “if we’d left five minutes earlier, that could have been us”, than if we think “if we’d left ten minutes earlier, we’d have avoided this delay”.

It doesn’t even need to be as dramatic as that, as this tweet from Bob Nease, a behavioural scientist and author of The power of fifty bits, exemplifies. Relaxing in an exclusive airport lounge when waiting for your flight is appealing, not just because you get free drinks and nibbles, but also because it confirms so beautifully that you’re a bit special compared with the ordinary mortals out there. Would it feel the same if you have to remain with the common travellers because you don’t happen to have a ticket that gives you lounge access, or if you are entitled to enjoy the lounge, but it’s closed for refurbishment? Never having something is quite different from (virtually) having it but then to have it taken away, as Bob seemingly felt that day in the airport.

presentation

Short and sweet! (image: Andy)

Even if we cannot change our circumstances, we can determine how we think about it. We can choose the counterfactual with which we compare it: yes, we could have been luckier, but we could also have been a lot more unfortunate, when we are delayed in our travels. We can also choose to separate our situation from the reason why we are where we are. Not being able to make use of the lounge is disappointing, but should it really be more so in one configuration of events than in another one? That’s up to us.

A final example of the potential of our personal thinking frame comes from this short post by Seth Godin. Presentations often overrun – irrespective of the allotted time. We try to squeeze a seven-minute talk into five minutes, and that rarely works. Instead, frame it differently: give a four-minute presentation, and take your time. You have the power.

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

Rules vs instincts

(featured image credit: Gary J. Wood)

Economic and social forces condition our behaviour in traffic – and not always for the best

“Get out of my way!” If you’re a driver, this phrase has probably crossed your lips (and if not actually said aloud, then most likely crossed your mind) at some point, and maybe more than once. It may just look like a matter of speech, but the use of the possessive pronoun implies that we – even just a little bit – consider the way in front of us ‘ours’.

One reason is that road space is scarce. When two drivers simultaneously attempt to occupy the same piece of road, it usually doesn’t end well. So it is not surprising that we claim bits of the road as ours. And where you have scarce resources and property rights, you see economic transactions and behaviour.

Governments or private operators may charge drivers for the right to use particular roads, but the economics of road use goes well beyond tolls and congestion charges. We don’t ‘buy’ and ‘sell’ particular sections of the highway to each other, but that doesn’t mean we don’t use mechanisms to facilitate the smooth and effective exchange with others of scarce road space.

Rules rule

Most countries have traffic codes that set out the rules and define the instruments that do much of the heavy lifting. Vehicles are supposed to be driven on a particular side of the road. Traffic lights allocate ownership of the road at an intersection to a particular traffic stream, preventing others from claiming it simultaneously. Give way arrangements can use signs, markings on the road, or even default rules (like the priority to the right in many European countries), but they all grant priority status to some road users when it comes to claiming ownership.

Such lights, signs and rules are a great help. Without them traffic could be a lot more challenging, maybe something like this:

But traffic codes are not the whole story. Drivers leaving a roadside parking space, for example, are supposed to defer to the higher-status traffic, but at busy times it may take a long time before there is a sufficiently large gap for them to do so. People without infinite patience might therefore need to negotiate: signal their intention and hope that someone will let them in. This usually happens before long – not all drivers claim the priority they are entitled to.

In some places drivers behave very assertively, signalling their intent by squeezing into a narrow gap and effectively forcing the driver behind to hold back. If that is part of the social norms, this can work very well. Elsewhere social norms may be built on courtesy: if you’re on a busy road and see a parked driver using his indicators, you just let them in.

In either case, the lower-status driver has got little to offer other than a smile, a wave, or a couple of blinks of the hazard lights. How come such exchanges happen all the time? Reciprocity could be one explanation: you do it for one driver today, someone might do it for you tomorrow. Maybe fairness plays a part, too. It does feel kind of unfair for someone to be waiting forever, and that might encourage many higher-status drivers to give up their ownership right. Yet not everyone does so – perhaps that is an instance of the bystander effect: we are in a hurry, but surely someone behind us will be able to afford the minor delay.

Regardless, we see how de facto, informal customs can augment the general rules and deliver greater efficiency. Whether the behaviour of a driver is guided by courtesy, pity, or simply by adherence to the prevailing social norms, the few seconds lost is quite small in comparison to the gain of the lower-status driver, and so the driving community ends up better off.

The dreaded lane closure

But sometimes social norms, rules and efficiency are not so well aligned. When a road with multiple lanes narrows down and the traffic needs to squeeze into a reduced number of lanes, there are two ways drivers can respond. They can merge early, as soon as the bottleneck in announced; or they can merge late, close to point of confluence.

According to the US Federal Highway Administration, if the traffic is free flowing, merging early is preferred by the traffic engineering community, while late merging is better when traffic is slow, with few or no gaps. That view is echoed elsewhere too, like in the UK and in Belgium. But not every jurisdiction has explicit rules, and even if there is signage, it often has a hard time combating the conflicting moral instincts of the drivers.

The fundamental problem is that, as soon as a sufficiently large number of them decides that merging early is morally the right thing, social conformity bias makes the ideal situation – two parallel traffic queues of the same length merging in turn at the bottleneck – impossible. Anyone wishing to do the right thing from an efficiency viewpoint will be seen as a cheat. The pressure for the others to conform is overwhelming, even without busybody drivers who feel it is their duty to actively prevent whizzing past by straddling both lanes.

merge

“What does ‘use both lanes’ mean anyway?”

Before long, everyone except the odd antisocial barbarian is queuing in a single lane. Signs telling drivers to “use both lanes” are too vague to be much use: do they really mean all the way?

The phenomenon of cutting in at the last moment is right up Freakonomics’ alley. When this very topic arose, economist Steven Levitt told his co-author Stephen Dubner that he does not (or at least no longer) engage in this practice. Despite the clear efficiency gains of late merging (and despite the fact that by merging early, he contributes to the problem), he is “not that kind of person”. However, he also decried the poor signage that confounds the conflict between morals and efficiency. A sign that read something like “Lanes merging in 1 mile. Stay in lane” would be much better, an authoritative and unambiguous nudge for drivers.

Creative and destructive thought

Of course, nothing stops you trying out your own solution. In writing “Why not?”, Ian Ayres and Barry Nalebuff came up with an ingenious approach. Instead of zooming past the inside lane’s slow-moving traffic, simply track the speed of the last vehicle in the queue. Yes, there’s free road space ahead of you, but as you advance it fills up behind you, and by the time you reach the bottleneck, the perfect conditions for late merging are a fact. You may get some angry light flashing and tooting behind you, but hey, doing your civic duty doesn’t come easy. And those are jerks anyway.

prang

“But I was in the right!” (image: cygnus921)

Ayers and Nalebuff discarded the idea, but in any case, it is much better than what I once witnessed in – where else – the capital of my native country. Rush hour meant traffic was bumper to bumper in two lanes at the point where one lane was blocked by road works. The alternating zipper approach worked well until, just ahead of me, a misunderstanding arose between two drivers in the adjacent lanes with respect to who was entitled to go next through the bottleneck. What happened next was the slowest collision I ever saw. Neither driver wanted to give in, and inescapably the bodies of both cars touched, first gently, then squeezing harder and harder, as if they were lovers, but with the sound of crushing metal.

For some people, a bent car is a price worth paying when you are convinced you are in the right. Remember this when you’re next on the road. Have a safe journey.

 

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

Influence from beyond the grave

(featured image credit: MemoryCatcher)

How our relationship with a dead person guides the choices we make

Have a look around you, and pick the first object that your eye catches. How much is it worth, would you say? Maybe you’re trying to remember what it cost to buy, or perhaps you wonder how much you might sell it for. Markets where things are bought and sold give us the idea that objects (or indeed services) have an objective value – the market price. But that is not necessarily so.

Arguably, a generic pair of shoes might be worth a very similar amount to anyone who doesn’t have any shoes yet. But what if you’ve just bought a pair? Would an identical second pair be worth the same to you as the first one? It would duplicate something you already have, so probably not. If you were going to spend the same amount again, you might prefer a different style, or maybe some specialist footwear.

Perhaps you’d even be prepared to pay more for specialist shoes anyway because they are essential for a particular use. A good pair of tennis shoes might be worth more than a decent normal pair, and a well-known brand might be more valuable than one from a German discount store – for those who wish to play tennis. But someone who prefers gardening might value a pair of wellington boots more highly and not even pay a fiver for two tennis shoes.

Perceived value

Could a used pair be worth more than a brand new one? It depends who used it – at least for some people: a £70 ($100) pair of trainers that was previously owned by the actor Benedict Cumberbatch, sold at auction for $2,000 (£1420). If the buyer has the same sizeable feet as Mr Cumberbatch (UK size 11), they could continue to enjoy the use, although having paid that much, they might prefer to put them in a display cabinet instead.

So establishing ‘the’ value of a pair of trainers – or of any object – seems pretty tricky, and the market is not really helping. Value is much more in the eye of the beholder than in that of the market. True, many objects do have some relatively objective practical use. A plate can be used to put food on, and pictures can be hung on the wall to embellish a room. But almost always, the significance to you – which is what truly determines the value to you – is about more than just the functional use.

Even for people with no interest in celebrity or brands, objects can have great significance over and above their direct practical utility. This often becomes apparent when a relative dies, and their possessions need to be disposed of. Sure, sometimes the heirs have a specific unmet need that is addressed by one of the deceased’s belongings; in other cases, they are able to find a use for another set of wine glasses or a small fridge.

eiffeltower

Cheap treasure

However, recent personal experience suggests that practicality is by far not the only thing that matters. Of course, some items may have sentimental value – the tacky miniature Eiffel tower your grannie brought back from her honeymoon in Paris, that you remember being on her mantel from when you were just this tall, or your dad’s beloved fountain pen. Objects without any objective market value, yet they are treasures to you.

But it would seem something else is at play as well. When as an heir you’re tidying up the deceased’s possessions, you can feel a very intense feeling of ownership. A folding table, an old cassette deck, a pile of DVDs – items that you would not even consider buying for 50p at a car boot sale, now seem very hard to let go. It’s as if your legal ownership combines with the expired ownership of your departed relative, to produce a super endowment effect. And so you end up with an extra folding table, a cassette deck with a broken fast forward button, and 100 DVDs, some with movies that you’ve never even heard of.

 

What they would have wanted

Our relationship with the dead reveals something else about what drives our choices, which doesn’t even involve material items. It seems most of us have a strong tendency to fulfil the wishes of the deceased. Sometimes a will gives these wishes legal power, stipulating conditions upon the distribution of the dead person’s assets, but we generally don’t need the force of law and written instructions to do ‘what he or she would have wanted’.

Introspection is not necessarily a good guide to understanding general human behaviour, but think about it: would you go against the express, or even the implied wishes of a dead relative? Would you arrange a (cheaper) cremation (and inherit more), even if you knew they wanted a (more expensive) proper grave with a tombstone? If you promised someone you’d scatter their ashes at sea, would you decide against all that trouble, and just dump them with the trash once funeral is over?

Most people would do their utmost to fulfil the wishes of a dead person. Perhaps they’d do so because they know others are aware of those wishes, and they want to avoid the social disgrace of being seen to disregard them. Perhaps they are religious, and believe that the spirit of the deceased still exists and can observe them – a kind of internal watching-eyes effect (which, by the way, has been found to be very weak or non-existent).

But even in the absence of social pressure or religious motivations… would you promise something to a person prior to their death, and then later on, out of self-interest, break that promise?

wateringplants

Keeping the memory alive (if not the plants)…           (via Twitter)

Our remarkably deep sense of duty here illustrates the power of inherent motivation. In the absence of any external force, we still choose to do something that is materially to our detriment. It’s not even altruistic: nobody benefits from our sacrifice.

And sometimes, keeping a promise to a loved one leads to an unexpected consequence much later on, as the family of Phedre Fitton discovered years after she died. In the final days before she passed away, she had asked her husband Nigel to make sure he continued to water the plants in the bathroom. When, three years later, Phedre and Nigel’s daughter Antonia helped her dad move to a retirement home, they found the plants were in fact plastic ones – a prank from beyond the grave, which gave the memory of a beloved wife and mother new vigour.

Maybe that is what motivates us to make sacrifices in order to honour the wishes of the deceased: the most valuable thing to us is the memory, deep inside, of a loved one who has passed on. That is truly priceless.

 

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

Honest meat at a low price for everyone?

(featured image credit: Ann1992)

Every benefit has a cost, and this is often borne by those who are least able to bear it

Recently my native country was mired in yet another food related scandal. Meat had been repackaged and relabelled to conceal that it was way beyond its expiry date, and was exported to Kosovo. A slaughterhouse is suspected of processing meat unfit for human consumption and selling non-organic meat as organic. The Food Standards Agency was accused of being slow to act on reports of these irregularities. The good news is that apparently nobody was ever at risk of eating rotten meat, and supermarkets immediately stopped the supplies from any suspect supplier. The bad news is that this was another blow to the general public’s trust in the food chain.

The perfect climate for consumer activists to grab the initiative. A group of organizations including the Consumer Union and Fairtrade Belgium have joined forces under the header “I am more than my till receipt”. They want the supermarkets to treat their customers not just as a source of money at the checkouts. In particular, they would like retailers to educate the consumer, spokesperson Ingrid Renders said in a radio interview, “we want to be able to trust the food chain once again.”

One of their recruiting slogans is “Would you too like supermarkets to make sustainable food the easiest choice?” An almost perfect instance of Richard Thaler’s summary of nudging: make it easy.

Inevitable trade-offs

But this involves trade-offs. The more animal-friendly and sustainable the livestock production, the more expensive the eventual produce. And if you want, in Ms Renders’ words, “the best buy, not the lowest price, but the most honest low price”, that would mean more expensive meat.

This is fine for people who share this persuasion, and who are able and prepared to pay more for products that are – by some definition – more sustainable. But not everybody is willing, or indeed able to spend more on food, said Peter Heirman from the Network against Poverty, also in a radio interview. Some households have a food budget of just 50-70 euros (£45-60, $60-85) per week. For them, the difference between the lowest price and low, honest prices will be the difference between meat on the table and no meat on the table.

As long as cheap and premium produce are available alongside each other, this should not be a problem. But if the supermarkets find that a majority of customers have a preference for more expensive, sustainable produce, they may decide to drop the inexpensive option because the low demand makes it uneconomical. Low-income families would thus be priced out of the market for meat.

Cash is not the only barrier though. Mr Heirman also spoke of the social pressure that people on low budgets are experiencing when they choose the cheapest, non-sustainable option out of necessity. Either way, it is people who struggle to make ends meet who risk ending up worse off.

Good intentions

The intentions of the advocates of sustainable produce that is easier to buy are undoubtedly sincere. But what looked like a benign nudge – an encouragement to opt for a different choice, that enhances people’s welfare without any material cost – turns out to put the welfare of the most vulnerable people at risk.

Reducing choice almost always makes losers: anyone whose optimum trade-off is removed will be worse off. This is even more starkly the case when it is mandated regulation that prevents particular choices from being offered by the market, for example for reasons of safety, health or hygiene.

Behavioural and conventional economics come together here. Proponents of more sustainable produce for everyone may overlook the fact that not everybody shares their willingness to pay more for premium food (this is known as the false consensus effect: the belief that one’s own values are typical and widespread). They may also lack contact with low-income families, and so be unaware that some people may be unable to afford the new norm – an instance of WYSIATI (what you see is all there is – see this previous article.

cow

“Who’s paying for my welfare?” (image: Peter Heeling)

Regulators too don’t always consider the fundamental economics of new constraints. Every benefit has a cost, and it is not always obvious who will be paying it. The bill of better animal standards and sustainable farming methods may look like it ends up with the farmers and breeders. But it is ultimately the end of the food chain that will eventually bear the cost. The buck almost always literally stops with the consumer.

 

The cost of freedom

The authors of Nudge refer to nudging as a form of “libertarian paternalism” – leaving people free to choose, while paternalistically steering them in the direction of the ‘best’ option. Not everyone likes this form of surreptitious patronizing, but it is rather innocent in comparison with regulation, a far more forceful way for the government to express that they know best.

Regulations and laws inevitably reduce choice and take away people’s freedom to make the trade-offs that correspond with their preferences. Sacrifices of freedom should not be made lightly. Long before Nudge, Cass Sunstein was already intensely promoting the use of systematic and comprehensive cost-benefit analysis in the formulation of laws and regulation, precisely for this reason.

It would be good if regulators, law makers and campaigners alike would heed his advice, and carefully consider the full effect of the societal trade-offs they advocate. For the true cost of a loss of freedom is often borne by those who can least afford to do so.

Posted in Behavioural economics, Cognitive biases and fallacies, Economics, Law, Psychology, Society | Leave a comment

A bias too far

How behavioural science is becoming a victim of its own popularity

Not so long ago most of the stuff published on behavioural economics and behavioural science had a limited audience of practitioners and academics. It may have been a bit dry (the majority were scientific papers), but then again, the readership was generally after facts and findings, rather than fancy pictures. More recently, when you come across a reference to behavioural science, chances are it will be something like this.

That looks like it could be a good thing. A topic that, for a long time, was only of interest to specialists, is now gaining the attention of a wider public. Efforts to educate, especially in a scientific field that is deeply relevant to how we act and interact with each other, has to be applauded.

But it is not so clear whether the popularization of behavioural science in this way is actually serving that educational purpose all that well.

Popularity pitfalls

A first problem is the way the information is framed. Putting an attention-grabbing title over a scientific paper may not have that great an effect on citations and downloads. But articles in the popular media tend to have headlines that emphasize the more spectacular aspects of the content. There is a more than passing parallel here with medical research findings. Anything that (apparently) dramatically increases the risk of cancer is a good bet to attract eyeballs, notably for the British tabloid the Daily Mail. The behavioural science equivalent is the cognitive bias – invariably wheeled out as something that makes us all incredibly irrational. Biases screw up decisions, convince us the world us falling apart, impact trading decisions, prevent us from being rational, or will drive the future of marketing. Hyperbole is rife, and nuance is scarce.

A second problem is that behavioural science is still evolving: insights get refined, or sometimes contradicted and relegated. But that doesn’t stop findings being widely reported (especially if they fit a popular narrative, hello confirmation bias!), before they have been replicated.

For example, a 2014 article by Alain Cohn et al provides evidence for the idea that bank employees (and only they) act more dishonestly when their professional identity as banker is made salient. They conclude that “the prevailing business culture in the banking industry weakens and undermines the honesty norm”. This is a message that resonates well with the popular perception of the finance industry, and so it easily found currency.

biasedbuildings

Are these buildings biased to the left, or is it just my cognition? (image: robertino_wild)

Yet a new paper by Jean-Michel Hupé suggests the statistical methods used were flawed and led the authors to distort the “evidence”. Will this change public opinion back to what it was? This is doubtful: the finding lacks the sensational characteristics of the original (“evidence of culture of dishonesty in banking industry”). More importantly, it is hard to unlearn something, as another example from the field of medicine illustrates. In the 1990s cholesterol rapidly became the ultimate health bogeyman: it was responsible for pretty much all of mankind’s cardiovascular troubles. We had to seriously restrict our cholesterol intake or risk early heart attacks and clogged arteries. More recently, the picture has become dramatically more nuanced, yet the meme that cholesterol is evil lives on undiminished.

Perhaps the biggest problem is not what people think, but what they do. Behavioural science is complex, messy and fuzzy. Human behaviour is subject to multiple influences, which combine in elaborate ways and often work against each other. The effect of an intervention cannot easily be predicted without proper consideration and indeed experimentation. The context in which a phenomenon is observed can play a huge role, but is not always taken into account.

Way(s) to mislead

Attempts at simplifying this complex, messy and fuzzy domain create impressions that can be misleading:

  • “Biases are bad”
    Almost invariably, they are pictured as the source of mistakes, poor decisions and undesirable outcomes. What is rarely mentioned is that biases have evolved over a long time, and have served us, as arguably the most successful species ever, very well. Biases are like tools: they can be used well, and for benign purposes, but they can also be used inappropriately and with unwanted outcomes. That subtlety is generally lost in fancy infographics.
  • “Behavioural science is really a collection of effects, fallacies, heuristics and biases”
    It is true that, in order to understand a topic well, having a vocabulary that describes it is essential. Dilip Soman, a behavioural economist at Toronto University, explains how this works for categories like wine, classical music and quilting: if we have terms to describe what we see, we can make sense of a complex subject. But a list of terms is not enough. You will not become a proficient speaker of a foreign language just by memorizing the definitions of a list of words, and you will not become a behaviour expert by being able to recite a list of biases.
dictionary

Not the right way to learn French. Or Behavioural Science.

This can tempt people who believe they have acquired the necessary competence, thanks to popular articles and infographics, into making behavioural interventions. A remarkable example of the Dunning-Kruger effect (behavioural economics edition) is United Airlines ill-fated attempt to replace conventional performance bonuses with a lottery system in which a handful of lucky employees would ‘win’ large amounts of money, a luxury car or a holiday. The mind boggled.

In his 2015 blogpost, “Please! Not another behavioural bias”, Jason Collins shines the light on this obsession with biases as a fundamental problem in behavioural economics (and by extension in behavioural science). At the time, I thought he was a bit overcritical and alarmist, but I now realize that he was right on the money. Time has proved him right.

Dealing with the genie

So, what to do about it?

Unfortunately, the genie is well and truly out of the bottle, and that means the possibilities are limited. (Would it have been possible to keep the genie locked in? Looking at the field of medicine, probably not.)

One thing we can all do is to be more critical about simplifying infographics. As Albert Einstein (may have) said: “Everything should be made as simple as possible, but not simpler”, and many of them would appear to cross that boundary into oversimplification. Infographics, even efforts like Buster Benson and John Manoogian III’s massive Wikipedia biases cheat sheet, risk giving the uninformed the illusion of knowledge and understanding. Don’t make the mistake of believing that a superficial summary has the full story. It is not possible to condense the essence of quantum physics in an infographic – and neither is it possible to do so for behavioural science.

cheatsheet

No more cheating?

Even though it may feel like a futile effort, given how much more quickly fake stories spread than the truth, anyone with knowledge in the field, should challenge and call out any dubious or oversimplified material. A single critical tweet or blogpost may not make much difference, but if many people do so systematically, the effect could be significant.

Perhaps the best antidote to the abundance of oversimplified and misguided material is to spread correct information: source material, solid explanations, material that approaches the field in a nuanced rather than a sensationalist manner. The lack so far of a unifying theory of behavioural science doesn’t help, but recent work by Harvard professor and scholar Xavier Gabaix, for example, looks promising. In time this may make it easier to make the distinction between superficial clickbait and valuable insights.

Let us ensure that the abbreviation for Behavioural Science prevails, and does not get confused with that other term with which it shares the initials.

 

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