Good people… but not that good

(featured image: User18526052 via Freepik)

The good news is that we are prosocial; in other news, it comes with strings and conditions attached

Take a look around you. Unless you’re in the middle of a nature reserve, miles from human settlements, most of what you see is the result of people working together – buildings, machines, clothes, food, transportation, you name it. And even beyond the stuff that is constructed, or made in factories, we can see collaborative efforts everywhere.

Think of the arts (yes, orchestras and bands obviously, but even solo musical artists rely on others to get their music to their audiences), or of sports (yes, team sports obviously, but individual athletes too rely on others to coach them or supply them with tennis rackets or track spikes).

This tendency to collaborate with others to achieve more is not something that is unique to humans. In The Social Instinct, Nichola Raihani describes how it has been instrumental in the development of many species in the natural world – including us. Arguably, it is precisely because of our highly sophisticated social instinct that we discovered the principle of division of labour, and have become as successful as we are.

This allowed us to collaborate in ways that were not just transactional or rule-based, but often driven by deliberate strategic thinking, especially in economic interactions. Both between businesses, and between companies and consumers this is largely thanks to trust, goodwill and reciprocity. We all trust others to do things for us that we do not want to, or are unable to do ourselves, and to do them reliably, competently and honestly, and they trust us to compensate them fairly – and vice versa.

We don’t even necessarily always expect a clear quid pro quo: we also collectively ensure the provision of public goods and common pool resources. (Public goods are both non-rivalrous, which means that consumption by one individual does not reduce the amount available to consume to others, and non-excludable, i.e., individuals who have not contributed cannot be prevented from using it. Street lighting is an often-cited example. Common pool resources are similar in that they are also available to everyone, but excessive use can lead to a reduction of availability, like on public roads or in parks or schools.)

In sum, we seem to be pretty much good, intrinsically cooperative people, and that is why we have it as good as we do. Or are we?

Are you from my parish?

[Plenty of public goods, at least here in my parish (image: Roel Wijnants/Flickr CC BY NC 2.0)]

Such cooperation can naturally only deliver optimum results if there are no impediments to it, such as legal barriers to international trade, which can prevent or hinder such collaboration. But these are not the only possible obstacle.

It appears that we are less cooperative with people from other groups than from our own group – we tend to be rather parochial in our willingness to work together with others. New research by experimental economist Angelo Romano at the Max Planck Institute and colleagues has investigated the issue on a large scale, in a study with over 18,000 participants from 42 diverse countries, and hence wide validity.

They used a classic two-person Prisoner’s Dilemma type game: both individuals received an initial endowment, and could freely decide how much of this they would give to their partner and how much they would keep. The amount they gave to their partner would be doubled (what they kept for themselves would not). Each participant played this game 12 times, every time with a different partner, who was chosen at random between (a) a compatriot, (b) a person randomly selected from one of 16 different countries, and (c) a person whose nationality was not revealed. In order to make decisions comparable across nations, the endowment was 10 units of a hypothetical currency (MU), equal to 2.5 minutes at the average hourly wage in the participant’s country. The strength of the cooperation was assessed through the number of MUs people sent to their partner, and then aggregated by country. While inevitably somewhat stylized and abstract, this nevertheless mimics the unconditional investment that characterizes the collaborative partnerships with strangers in the real world.

Across all 42 nations, participants were found to cooperate more if they knew their partner was from their nation, compared to when they knew that the other person was from another nation, or of unknown provenance. For all nations except Hong Kong, Nigeria and Peru, this difference was statistically significant. Moreover, parochialism barely varied across nations, despite their different levels of wealth or political stability, and when the countries were grouped according to cultural similarity, all groups exhibited significant parochialism. This does therefore indeed seem to be a phenomenon common around the world – and an important limitation to our cooperativeness.

Big Robber is watching you (or at least eyeing your earnings)

Beyond mutually beneficial cooperation, we are also capable of remarkable generosity, making sacrifices without expecting any material gain in return. We can see this around us, and it is backed up by statistics: data from 2010 suggest that 73% of the people in the UK donate money to charity and 29% volunteered time for a charity in the month prior to the survey; in Belgium the figures were 40% and 24% respectively.

Generosity is also studied through experimental games like the Dictator, the Ultimatum and the Trust game, which are variations on the same theme: one participant decides how much of an endowment to give to the other person (and how much to keep for themselves). Typically, people tend to give away between one third and half. One important limitation of such experiments, however, is that they are always between two individuals. Zurich university economist Carlos Alós-Ferrer and colleagues investigated whether people exhibit similar generosity towards groups of people. Inspired by claims of “predatory capitalism”, they established a situation in which a single participant could take a significant amount of money from a large group of participants.

Giving or taking? We do both! (image: Karolina Grabowska/Pexels)

Their Big Robber game takes advantage of the fact that, while the compensation to an individual for participating in an experiment is modest (typically around £10, €10 or $10), the overall budget for an experiment with 30-40 participants runs close to £400-500, making it possible to raise the stakes. Each session had 32 participants, equally divided into groups I and II, and consisted of three stages. First, the 16 members of group I were told that, at the end of the session, one of them would be randomly selected and have the chance to take 50%, 33%, 10% or 0% of the combined earnings of group II, with a personal gain of respectively around €100, €66, €20 or €0. They then had to decide which of those percentages they would ‘rob’ if they were chosen. Simultaneously, the members of group II (the ‘victims’) were informed about the question the members of group I were asked, and that they would be ‘robbed’ by one of them at the end of the session. In the second stage participants of both groups played successive rounds of the Dictator, Ultimatum and Trust games, providing an indication of their social preferences (and earning the victims the money that would be later partially robbed!). The final stage included a question whether participants wished to donate part of their earnings to charity (to examine possible guilt on the part of the ‘robbers’).

More than 56% of the ‘robbers’ chose to take the maximum of 50% of the other group’s earnings, while only 2% decided to take nothing. The biggest robbers were also the least generous in the games of the middle stage and donated a smaller fraction of their earnings, suggesting that social preferences are aligned (those who give the least take the most). But more importantly, the behaviour of all participants in the middle stage was well within the standard ranges reported in the literature, so nobody – not even the big robbers – was significantly more selfish than typical. Generosity towards single individuals appears to coexist very well with highly selfish behaviour when there is a larger group of victims.

The evidence around us suggests that our tendency to cooperate has led to spectacular economic and social wellbeing gains. But these two studies provide some sobering nuance. Not only do our parochialist instincts mean we leave promising opportunities for collaboration unexploited, we also have a dark side that is ready to rob as long as it is from a group and not a single person.

Good people? Yes, kinda, but, it would seem, with some scope for improvement…

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

What do we actually know?

(featured image: PublicDomainPictures via Pixabay)

Much of what we think we know is built on the powdery sands of conjecture and assumptions

Imagine you are joining a new company. Together with 15 other newcomers (about whom you know nothing), you are invited to an induction course. On the first evening, before dinner, you will be able to spend half an hour chatting with just one of them. You receive list of photos of each participant, from which you can either choose one, or indicate that you have no preference. What would you decide?

I conducted this exercise with a group of clients a while ago, using synthetic, photorealistic portrait images. There is little doubt that someone’s face provides no meaningful information about whether they share any interests with you, whether they would be entertaining company, or anything other characteristic that would make the half hour of 1:1 conversation pleasant. On that basis, people would be expected to express no preference.

Yet, in my experiment, only about one in three of the respondents gave that answer. Some of the fictitious new colleagues seemed remarkably popular, with one even collecting nearly 40% of the votes. The preferences may not have been strong (that was not gauged) but the very fact itself that two in three participants indicated a preference in a rather inconsequential situation is food for thought.

A little knowledge is not going to stop us

We often know very little about people, but that doesn’t stop us inferring all manner of things from that limited knowledge. First impressions can dominate our judgement of someone. If we need an electrician, will we be more inclined to contact the one whose van you saw last week parked up in a nearby street, looking all spick and span, or the one whose vehicle was covered in such a thick layer of muck that a merciful passer-by had inscribed in it the exhortation to the owner “Clean me, please!” (with the last word underlined)?

Arguably there may be a connection between how much care a tradesperson shows for their vehicle and how well they do their job (although a super-diligent electrician might be so devoted to their customers that they have no time to wash their vehicle).

Would you buy a used car or insurance from this person? (image: Oosterhof & Todorov)

Yet our propensity to assume one characteristic from the presence (or absence) of another one just as easily links characteristics that are quite unrelated. A study from 1974 by psychologists David Landy and Harold Sigall found that people evaluated the quality of an essay more highly if the writer was good-looking than if she was unattractive, particularly if the actual “objective” quality of the writing was poor. This extrapolation of one positive characteristic to another one is known as the halo effect. We may do the opposite too, and for example assume that someone who speaks with a strong regional or foreign accent is less educated or intelligent than a person with a standard, neutral accent (for undesirable attributes this is referred to as the horn effect).  Similarly, research by cognitive scientists Nikolaas Oosterhof and Alexander Todorov suggests that we infer characteristics like dominance and trustworthiness from other people’s facial traits. Experiments by psychologists Barry Schlenker and Mark Leary suggest that, in the absence of any performance information, we consider confidence as a sign of competence.

Our predisposition to infer one characteristic from another one is not limited to people: we may judge a product, about which we know nothing else than its price or its provenance, as high in quality, because it is more expensive than others, or made in Germany or Switzerland rather than in Vietnam. We assume a product is more ‘fresh’ if the dominant colour of the packaging is blue.

Uncertainty aversion

This urge to project whatever limited information we have, regardless of its relevance or reliability, to complete the picture of someone or something is quite remarkable. If an unknown object or person is shown in the presence of other objects or people that are known, we will even assume they share salient characteristics: a stranger in the company of people we like is seen as likeable, for example (this phenomenon is known as evaluative conditioning).

Why do we do this so frequently? In a way, it is inevitable: many characteristics, especially people’s traits, are hard, sometimes even almost impossible, to establish. So we look for tell-tale signals – a well-groomed person wearing expensive clothes or jewellery is probably wealthy, someone turning up at a job interview with a badly knotted tie and dirty fingernails is probably not the most perfectionist candidate, a sign stating that a shop has been a family business in the same place since 1965 is probably an indication that we can trust them not to screw their customers over.

Disorganized desk, disorganized person? (photo: the author)

But not all such signals are necessarily relevant or reliable, and we still do it. One likely reason is that we are uneasy with uncertainty. We don’t like the unknown. So, from just a simple photo, we will immediately form a view whether the unknown person portrayed is intelligent, competent, trustworthy, or indeed good company for a half hour conversation. From the clutter on someone’s desk we will conjecture that they are disorganized by nature. From the shiny paintwork and chrome of the car on the used car dealer’s forecourt and the new car smell inside, we will surmise that it is in very good condition.

That pursuit of certainty is in part self-serving. In our own eyes, not being certain is a weakness. So, our – potentially imagined – ability to correctly infer characteristics from what we observe confers competence and wisdom upon us: we can confidently tell from their face that a person is clever and diligent, and that this used car is truly a great bargain.

A bit of scrutiny is desirable

We often make all these inferences without giving it much thought, subconsciously, even. And because we’re motivated to establish certainty, we are rarely critical about the inferences we make. Jan De Houwer (a psychologist at the university of Ghent) and colleagues, developed a conceptual framework to describe and analyse such inferences which may be able to help us. It refers to the characteristic we assume as the ‘target’ and the characteristic on which we base this assumption as the ‘source’, and also recognizes different source and target objects (for example if we infer that an old man must be rich because he is accompanied by an attractive, much younger woman). The resulting 2×2 model allows us to pinpoint the mechanics of our inference.

How did we arrive at our conclusion? Say we are judging the quality of a watch we plan to buy. Is our conclusion based on indicators that are actually predictive of quality, like the material of the casing or the glass (cell a)? Or are we inferring its quality from other characteristics like its design, its price or eye-catching features (cell b)? Are we perhaps being influenced by the celebrity wearing it in an advert (cell d)? Understanding this how makes exploring the question why we made the inference, and whether it is valid, a lot clearer.

Might an incorrect inference not easily be rectified once we obtain more accurate information? Not necessarily. Recent research by Duarte Gonçalves (an economist at University College London) and colleagues suggests that we do not fully disregard information when it is found to be incorrect. In other words, unfortunately the original knowledge we acquired – in this case, the inferred characteristic – continues to inform our beliefs. It would seem to be better, therefore, to avoid making wrong inferences in the first place.

Much of what we know, or think we know, we know through inference, rather than through direct verification of the facts. Much of that knowledge is probably correct, but not quite all. And some of those incorrect inferences can lead us to costly mistakes – trusting someone for their looks whom we should not have trusted, or purchasing an expensive washing machine with a German sounding name, wrongly assuming that it would therefore be reliable, for example.

Certainty may be hard to obtain, but it may be wise to at least scrutinize some of our more questionable inferences, even if that means that we remain uncertain.

Posted in Behavioural economics, Psychology | Leave a comment

Beyond game theory

A board game with a small human illustrates how much emotions influence our decisions

The other day, Jenny and I played a game of Ludo with Luka. Its rules are simple enough to make it quite suitable for a five-year-old, even though some more strategic aspects are a bit beyond him. What I didn’t expect was the way in which it would capture some essential aspects of how we make decisions – and I am not thinking of game theory (which is outside my expertise anyway).

In case you are not familiar with Ludo (the name of which signifies “I play” in Latin), it goes as follows. Two, three or four players each have four tokens which they need to race around the board, along a game track consisting of squares, to their “home”. The tokens start off outside the game in the player’s “yard”. They progress according to the outcome of a roll of a single dice: to enter a token on the game track, a player must throw a 6, and subsequently, with each turn, tokens advance the number of squares equalling the value the player rolled. A 6 may be used to enter additional tokens into the game (if there are any left), or to move a token six squares. Rolling a 6 gets a player a bonus roll. Finally, and perhaps most importantly, if a player’s token lands on a square that is already occupied by another player’s token, the latter is returned to the owner’s yard, who must then of course roll a 6 in order to re-enter it into the game from the start.

A good start is only half the battle

It took Jenny about 20 rolls before she produced a 6 and could start the game, but Luka and I quickly had a couple of tokens going round the board. A little later, to his delight, Luka managed to kick one of my counters back to my yard. Then his luck started turning: his tokens barely advanced as he rolled several 1s and 2s, and a short while later I landed on a square with one of his tokens and sent it back to his yard. From the corner of my eye, I could see that his lower lip started trembling, and not long after he started sobbing quietly. He bravely kept on playing, though, while Jenny and I tried to console him.

Games do, of course, almost invariably involve emotion. Typically, their central purpose is to win, and it is therefore unsurprising that events which bring us closer to that goal evoke positive emotions, and events that reduce our chances of victory lead to negative emotions. And while adults do not necessarily burst into tears when things are not going their way, the emotions that arise throughout a game often show very clearly (less so in poker, for understandable reasons).

Can you spot the emotion? (image: Michael Summers/Flickr CC BY NC ND 2.0)

Game theory seeks to model the possible moves of the players in actual games, as well as in interactions that possess key characteristics of games, for example the fact that one person’s chosen moves can limit the possible subsequent choices of another person. However, it is concerned with the behaviour of rational decision-makers of the homo economicus variety. Aside from the implicit assumption that players want to win and not lose, emotions do not figure in game theory. Predicting when a player might start crying or angrily knock over the board is not typically part of a game theoretical analysis.

Emotions at play and outside

Yet, just like in real life, the choices we make while playing a game are not necessarily those of rational decision-makers. You can even wonder how rational the very decision to play a game is: in this case, I had an article to finish and a colleague’s presentation to review – both tasks that would demonstrably deliver utility. And still I chose to play Ludo to please Luka instead. For real humans, this is not such an unusual thing to do: we often make material sacrifices in money, time or effort for others without getting anything in return other than a warm glow and perhaps a sign of their gratitude.

And there were more such ‘irrational’ deviations ahead. On a few occasions, with the number I rolled, one of my tokens could have knocked out Luka’s only remaining one, which would all but have secured my victory in this game of Ludo. The rational decision-maker from game theory would surely have done so, but I opted to move another token instead, and reduce my chances of winning.

One might argue that winning this particular game was not hugely important to me, so the sacrifice I made here was modest – and one would be right. Then again, if my opponent were not a little boy, I would not have chosen to forgo the opportunity to knock him back, even in a friendly, unimportant game. But here, doing so would have made Luka feel sad, and that would have made me feel bad (and sad too). Another small sacrifice for the sake of a little human’s – and my own – emotions.

[Cheating allowed? (image: screenshot The Shooting of Dan McGoo/Tex Avery)

A little later, with only one counter on the board, I rolled a six. This would have landed it on a square with one of Luka’s tokens. I quickly improvised a fictitious rule extension: if you roll a six, you can immediately roll again, add the two numbers together and advance in one go to the destination square without stopping in between. How is that for a bit of moral motivated reasoning? Again, this is not so different from what regularly happens in the real world. We are quite capable of reasoning that breaking some rule or code – especially if nobody is harmed by it and it is an exceptional occurrence – is morally justifiable. Technically it is cheating, but this is where even hardened Kantian deontologists discover they have a Benthamite utilitarian side, and are able to weigh up the pros and cons of a rule violation.

All is well that ends well

Before long, Luka was happy again, especially after – with no intervention from your correspondent! – he proceeded to roll four sixes in a row. And even though, eventually, it was Jenny who won the game, a good time was had by all.

In board games, as in real life, the underlying basis of our behaviour is rational, self-interested and utility maximizing – just like what homo economicus would do. But it doesn’t take much for us to deviate from that, and allow emotions – other people’s and our own – to influence, if not dominate, our decisions. We will even circumvent or break the prevailing rules – not out of immediate self-interest, but for the emotional benefit of someone else about whom we care.

Here, my concern was for a little boy who happens to be my grandson, but out in the wild, we can see plenty of evidence that people are prepared to make similar self-sacrificial gestures even for complete strangers. Perhaps it is this remarkable combination of reason and emotion that is uniquely human.

We are, truly, homo emotionomicus.

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

No such thing as a free dinner

(featured image: UNC Greensboro/Flickr CC BY NC-ND 2.0)

One of our more intriguing and widespread beliefs is that when others appear to pay for something, it is actually free to us. But looks can be deceptive…

Imagine that you are retiring from a job at a large firm, and a dinner is organized in your honour. On the occasion you are presented with a final cheque, but the amount is rather lower than you expected. When you inquire about it, the explanation you receive is that the cost of the dinner has been deducted. How would you feel about that?

This is exactly what happened to economist Robin Hanson’s mother, according to a recent tweet. It did not provide any details, but let us assume that the cheque did not represent her final monthly wages (in which case it would probably have been theft), but a discretionary bonus, and that the practice was common and not peculiar to her in question (which would have been blatantly discriminatory). Even then, though, it feels wrong, as the disapproving reactions to Robin’s tweet illustrated: they were unanimously critical, scorning even, not only of the (unnamed) company but also of capitalist culture in general.

Paid for with my own money?

But what exactly is the problem here? From an accounting perspective, it would make perfect sense to have a single, dedicated budget for when members of staff retire. That would then cover both their retirement bonus and the cost of the entertainment to send the employee off in style. De facto, any money spent on the festivities would not be available for the bonus (and vice versa). Sure, the way in which the modest sum was justified could be considered as not especially tactful, and one might argue about the allocation between dinner and cash. But does that explain the indignation?

With 85% extra this month, one can dream! (image: Darkmoon Art/Pixabay)

The outrage seems to be related to assumption that there are two distinct categories of money (one for bonuses, and one for dinners) where in fact there is only one. It reminded me of the mental transition I went through when we moved from Belgium to the UK. In my native country, my annual gross salary was 13.85 times my gross monthly pay. This peculiar multiplier was based on (a) one month’s paid holiday, (b) a legally guaranteed year-end bonus equal to one month’s pay, known as a “13th month”, and (c) “double” holiday pay (85% – since enhanced to 92% of one month’s pay). In the UK, my annual salary included 20 days’ holiday pay, but nothing else.

The Belgian way of cutting up wages meant that employees are always particularly cheerful in May or June when the extra holiday pay lands in their accounts, and half of them (the other half are not entitled to the year-end bonus) look forward to December, when the 13th month is paid out. British employees don’t get those pick-me-ups, but like for like, they receive a higher salary every month, of course.

The free money illusion

The bonus and the extra holiday pay look like (and are widely considered as) social gains, a form of free money that has been extricated from the employers. Yet I doubt they are anything of the kind. Employers know how much they are willing to pay in total , or for an employee’s services, and precisely how that is sliced and diced is of little relevance to them.

Another difference between my native and my host country concerns maternity pay. Belgian mothers (to be) enjoy a statutory right to 82% of their salary for the first 30 days of their maternity leave, and three quarters of their salary (capped at just under €900/week – $1060 or £771) for the remainder of the 15 weeks they are entitled to. In the UK, statutory maternity pay is available for longer, and the initial chunk is more generous than in Belgium, at 90% of earnings for the first six weeks. However, it then drops to just over £150 (€175, $206) per week for the remaining 33 weeks, or about 20% of what a Belgian mother receives. It is unsurprising that there is ongoing campaigning in the UK to increase the level to minimum wage and above. But here too, should this come to pass, I fear that the expectation of an uplift that is new, free money is misguided. The value to an employer of a staff member is unchanged, and employers are unlikely to compromise the profitability of the business by paying them more. (For public sector employees, it is the tax payer – including the employees themselves, naturally – who foot the bill.)

Payroll taxes can be similarly misleading: they are contributions to the government coffers, ostensibly made by employers. But is there really a difference between, on the one hand, a company paying an employee £100, out of which the employee pays, say, £30 in income tax and national insurance, and on the other hand a company paying £10 in payroll tax, and then paying the employee £90, out of which the employee pays £20 in income tax and NI? Talking about tax, value added tax or VAT looks like a levy on a company’s turnover, but as most consumers will realize, it is not paid by the companies…

And talking about consumers: you have undoubtedly come across the notion of free shipping. How free (to the buyer) is it really? Should we believe that the suppliers pay for the postage and packaging out of their own pockets? Or might they simply be incorporating these costs in the overall price?

It’s all in the presentation

The question is whether it makes any difference to us whether the total price we pay is all-in, or whether we need to pay extra for shipping. The fact that event ticket seller SeeTickets feels the need to explain the booking fee that is added to the ticket’s face value set by the organizer suggests not everyone is happy with add-ons, but it is not necessarily that simple. Different people may respond differently in different circumstances.

“I deliver free of charge, this van and the fuel cost nothing, and I work for no pay!” (image: Tony Webster/Flickr CC BY 2.0)

‘Free’ shipping is attractive, even if only for the convenience. But if Amazon, the biggest retailer in the world, is still charging for shipping on some orders, we may safely assume that ‘free’ shipping is not unconditionally superior. Splitting the total price into its components, even if, as a consumer, your only option is to pay them all, does provide some transparency that is missing in the all-in price, which some consumers might value. The way things are presented certainly matters.

What companies and governments, and indeed we ourselves, are doing is, explicitly or implicitly, establishing a particular mental accounting framework. While money is inherently fungible, mental accounting overrides this through the use of categories. So, for example a dollar spent on a pair of jeans is considered distinct from one spent on shipping it, or a euro earned as double holiday pay is not the same as a euro earned as regular salary, and a pound paid in payroll tax is different from the same pound raised as employee income tax.

That perspective enables the framing of a situation according to a particular narrative: shipping is ‘free’, holiday pay is an ‘extra’ for which we don’t have to work, and payroll tax is paid for by the employer, not the employee. According to that narrative we may end up feeling relatively better or worse, but the underlying facts are the same.

And those facts are that, whether it concerns online orders, concert tickets, payroll tax, maternity or holiday pay (single or double), or a modest retirement bonus cheque, what may appear to be free money is in fact our own money. As the old proverb has it, there ain’t no such thing as a free lunch, or indeed a free dinner.

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

The asymmetrical price of friendship

(featured image: geralt via Pixabay)

If you buy something from a friend, you might ask them for a discount – but if you are selling them something, would you ask them for a higher price?

Humans are social animals. Our interactions with relatives and friends make this abundantly clear: all day long we do small – and sometimes large – favours to them (and they to us), we give and receive gifts, and we help each other out. We don’t even keep a tally, and yet almost everyone keeps at it. But, oddly, there is one favour that always goes in one direction. How come?

Commercial transactions are a key characteristic of our society: we work for money, and then we spend some of that money to buy the goods and services we need and want. But while this undoubtedly contributes considerably to our overall wealth and wellbeing, there may be an even more important social domain alongside this market domain.

The magic of the social domain

At work, we offer to bring back something from the pantry or the drinks machine to the people sitting nearby. At home, we help a neighbour lifting a heavy bag of garden waste into the boot of their car, or mow the grass near the verge in front of their property when we are mowing in front of ours. We shuttle both our own children and their friends to football practice or afterschool gym class and back. We give a colleague a lift to the garage when their car is ready for collection after being serviced. We spend time with our sister’s daughter preparing her for an economics test.

None of these actions, or of the many more ways in which we extend favours to the people in our social network, give us any obvious material benefit, only effort, inconvenience, time and sometimes even out of pocket expenditure. Why do we do this? The magic is the concept of reciprocity.

I wish I had someone to scratch my back (image: Spyros Papaspyropoulos/Flickr CC BY NC ND 2.0)

There is more to this than a transactional “I scratch your back, you scratch mine” interpretation. Perhaps among the stronger of our social norms, reciprocity both captures our expectation that we can count on others in our social group when we need a favour, and our obligation to step up when we perceive a need among a member of our circle. This is why most people don’t keep count of how many times they have gone to get coffees for the co-workers, or how many miles it is from the workplace to the Volvo and to the Renault dealer. Abuse is rare, precisely because it is such a powerful norm, functioning as an implicit membership commitment to the group.

Even when there is an element of immediate quid pro quo, for example when we are invited for dinner or a stay with friends for a long weekend, we seem to resist allowing social relationships to enter the market domain. We would not dream of paying our hosts in money. Instead, we take an appropriate gift – wine or flowers tend to be popular choices. At most, money might change hands if the person doing us a favour is left out of pocket as a result, but even then, we often resort to a symbolic gift or a return favour.

When money and friendship mix

And yet, there seems to be one intriguing exception. A few weeks ago, in a tweet, psychologist, ex pro poker player and decision expert Annie Duke asked the following: “If a friend of a service provider asks them to do them a favour and discount their price, why isn’t it just as reasonable for the service provider to ask the friend to do them a favour and pay them a premium? If your answer is no, why not?

Expecting a discounted price appears to violate the reciprocity concept that is so prevalent, for two reasons. First, it is very unlikely that a similar favour can be returned. The possibility that the friend benefiting from the discounted price will later also be able to similarly and reciprocally discount their price is remote, both when it concerns a commercial transaction (as Annie’s tweet suggests) and when it is a private sale of a sofa, a motorbike, a work of art or whatever. Now, this in itself is not necessarily an issue: if you help a friend move house, and you stay put where you live for the rest of your life, thus denying your friend to return the exact favour, that probably won’t become a worry. There will be other opportunities for them to support you. And even though there is no de facto exchange rate between carrying a wardrobe up two flights of stairs and a lift to the garage, what matters is the knowledge that you can rely on each other’s help when you need it.

So it is very much the second reason that draws our attention: it involves money. No matter how you look at it, in a transaction where the selling price is discounted in the name of friendship, the buyer benefits, and the seller ends up out of pocket. Even if we assume that over time in the relationship, the buyer enjoying the discount will be able to ‘compensate’ the seller through favours in kind, we can be pretty sure that what will not happen is that the next time, it will be the seller asking the buyer to pay more than the going rate.

Annie’s question is clearly very pertinent: why this one-sidedness?

The mystery of the asymmetric norm

It is a bit mystifying. One possible reason is our old acquaintance, the social norm. While asking for a friend’s discount is common, we simply never see sellers asking for a friend’s uplift (and we can well imagine what the reaction would be!). But that is simply restating the problem: why do we have this asymmetric norm?

I need a favour – it’s got to go to the second floor (image: Dennis Freeland/Flickr CC BY NC ND 2.0)

There are a few other possible forces that may be at play. Discounting is common in commercial transactions – we are all familiar with sale prices, volume discounts, loyalty discounts and so on. These are based on justifiable commercial logic: it’s the most profitable customers who enjoy privileges. And, so the thinking might go, if selected ‘special’ customers receive privileged treatment, then it is not unreasonable to capitalize on the ‘specialness’ of the friendship and ask for similar privileges. Conversely, in commerce there is no reciprocal equivalent: good customers can expect a concessionary price, but good suppliers cannot expect (and less still demand) that their customers pay them a premium.

Another explanation might be that the framing is rather different for both sides. The buyer can defend asking for a discount because even then it is a win-win transaction: the buyer gets a bargain, but the seller still gets a sale, albeit at a lower – and still acceptable – margin. As the seller would (naturally) offer such a price to good customers too, there is not really a loss. A buyer paying a premium would most definitely incur a loss (the service or item could be procured for less from a total stranger), and paying a higher price therefore translates to a straight transfer between friends. That is very different from getting a small reduction on the full price.

And yet, I cannot help feeling that all of this is no more than post-rationalization and looking for justifications. As Annie’s tweet implies, there is no inherent difference between asking a friend to pay a premium and asking a friend for a discount. Both are transfers: one from the buyer to the seller, the other from the seller to the buyer. Yet the former feels wrong and the latter feels right.

This may well be why we are seeing this asymmetric social norm: it is rooted in a shared, profound feeling of right and wrong. We make the decision based on what we feel is right, and then rationalize it afterwards. And when we see decisions in this light, the mystery evaporates.

But then again, what is it that makes us feel that something is right or wrong? One mystery resolved, and another one appears…

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

The problem with football

(featured image credit: J Brandt/Flickr)

Football (or soccer), for many, produces such a powerful imagery and symbolism that we cannot help seeing it as a representation for bigger things – and that is what it is, warts and all

Let me begin by saying that I don’t think there is a problem with football per se. Certainly at a time when the sport has got much of Europe (in particular the country I live in) and South America under its spell, I would be loth to attract the attention of fans by suggesting there is something wrong with the game. And yet, I suspect that many devotees might share my reservations.

Last Wednesday morning, a BBC reporter reflecting on the Italy vs Spain semi-final in the Euro2020 football tournament described Spain as by far the better team throughout the match. Unfortunately, it did not manage to capitalize on this superiority with a winning score, not even after the extra time. And so, for the third time in the tournament’s knockout phase, the outcome of a match was decided by a penalty shootout – which the superior team lost.

Who likes penalty shootouts?

Penalty kicks have been the subject of a surprisingly large number of scientific studies: a search on Google Scholar’s database of research papers produces more than 13,000 hits. A notable subset of these are by psychologists, behavioural economists and game theorists, interested in the behaviour of both the kicker and the keeper. The ball travels at a speed of up to 80 mph (130 km/h), taking less than 500 milliseconds to reach the goal line. A goal keeper diving from the centre of the goal to one of the posts takes about 600 milliseconds to reach it, and must therefore anticipate where the ball will end up, either by deciding to stay put, or by setting off before the ball is kicked. The kicker faces a similar choice before knowing what the keeper has decided: aim for the centre, or for one of the sides? A paper by Michael Bar-Eli, a psychologist at Israel’s Ben Gurion university, and colleagues, suggests keepers exhibit action bias (they dive to either side more often – 94% of the time – than that the ball actually ends up there – 71%). If strikers were to kick the ball towards the centre more often, keepers would likely twig this and stay there more often too, which would expose the kickers to criticism for not trying hard enough. It does look like an uneasy, game-theoretical equilibrium has emerged.

Image: via twitter

Anyhow, without doubt, penalties demand skill and tactical thought from both the striker and the keeper. But they are also, to a significant extent, subject to luck. More importantly, the outcome of a penalty shootout is not remotely related to the performance of either team in the match that preceded it.

And yet, that is what determines the outcome of a game that ends in a draw. Not how well the teams performed, not how much excitement they delivered during the 120 minutes of actual play. Just the quantity of goals scored, no matter how. Does this make sense?

I am not a huge football fan, but I suspect that – apart from a handful of game theorists – most fans get more enjoyment – more utility, as economists might say – from 120 minutes of even average game play than from ten or fifteen minutes of penalty kicks. The players too don’t seem to be too keen. A game with a draw on the score board, certainly towards the final whistle, produces offensive (aimed at scoring) rather than defensive play (which one would expect if maintaining the draw and hence a penalty shootout was the aim).

A likely reason for trying to avoid a shootout is loss aversion. When the game ends on a draw, teams and fans on either side consider the ticket to the next round (or the trophy, as finals too may need to be decided by a penalty shootout) as already rightfully theirs. That makes the penalty shootout an event with nothing to win, and everything to lose. Sure, not losing means holding on to the victory, but the stress throughout and the very real chance of losing through bad luck means that, at best, the shootout produces relief – much like someone playing Russian roulette is relieved when the chamber turned out not to contain a bullet. (Fun fact: the longest penalty shootout at a high level* happened in the Namibian cup in 2005, when KK Palace finally beat The Civics by 17-16 after 48 penalty kicks. I suspect “relief” would fail to describe the emotions in the end – even the losers will have just wanted the ordeal to stop …)

But, but… measurement!

Then again, the aim of the game of football (and of most other team and individual ball games) is to score points, and to score more of them than the opponent(s). How else could it be established which of the two sides is the best?

And here we bump into the issue: there is a mismatch between what people value in a team’s performance, and how its performance is measured and rewarded. Naturally the fans dearly want their team to win – the elation when it does, and the despondency when it doesn’t, testify to that. But they also want to see them play well: a well-coordinated attack, with players accurately anticipating not just their team mates’ positions but also what their opponents are up to, is a joy to see. So is a competent defence stopping the opponents in their tracks.

Not only that, such episodes are strong and unambiguous signals of a team’s ability to perform. Of course, if an attack leads to a goal, great, but even if – horror! – a heroic save by the opponents’ goalie prevents this, it is still remembered and enjoyed as a thing of beauty.

But these things do not count when things that count are counted. And it is many times worse when a match ends in a penalty shootout. At least, the score during the game is a reflection of sorts of both the teams’ offensive and defensive performance. Penalties literally bear no relationship to it.

[2 – 1 – does that score mean they played well? (image: Jon Candy/Flickr) ]

The tendency to judge a process by its outcome is known as outcome bias (and not at all limited to football). True, even when there is uncertainty involved, there is still a relationship between the method employed and its outcome. A good quality method that is well executed – whether it is the tactics of a football team operating like a well-oiled machine, a STEM education programme supported by competent, enthusiastic teachers, or a business strategy carried out by switched-on leaders and staff – is more likely to consistently lead to good outcomes (the championship title, exam results, or profits). But the more uncertainty is involved, the less indicative the outcome is of the quality of the method.

Outcome bias is akin to the phenomenon of “resulting”, a term from the game of poker, as psychologist Annie Duke explains (she was a one of the top poker players in the world for many years). Results are salient and easy to establish (especially if they are a binary matter of success or failure), but they don’t tell us quite as much about how they came about as we often like to think.

So, mediocre but lucky employees can get the promotion and pass over their more competent colleague, good government policies can get binned because unforeseen circumstances or poor execution depressed the results, and indeed the football team that shone throughout 120 minutes of play can be eliminated, because their uninspired opponents were fortunate enough to convert one more penalty kick.

And so it will be for as long as we continue to act like resulters, preoccupied with what can be measured and quantified, and determined to use outcomes to judge decisions, processes and competence.

Football is often regarded as a metaphor for human collaboration, tribalism, societal rivalry and even war. But even more than that, it is just perfect as an illustration of our flawed reasoning.

*: An even longer shootout took place in the Czech 5th division in 2017, needing 52 kicks to end up with a score of 22-21.

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The difference (or why utilitarians have a harder time)

(featured image via the author)

What difference does our ethics framework make to anything, and what difference can we ourselves make to anything?

It was already past dinner time on this warm late spring day, but my friend and I were still playing on “the mountains”, the steep, wooded patch of land across the street from where I lived. And then we heard a subdued chirping, emerging from underneath a bush: a young blackbird, fallen from the nest we presumed, and clearly unable to fly. We carefully picked it up and took it to my house. Now what?

My grandma’s old canary cage served as a temporary home, and we found out from a friend of my parents’ that worms from the garden and tinned cat food would be a suitable diet for this young blackbird. ‘Whistler’ (my imaginativeness was boundless back then) thrived, and quickly migrated from the cage in the dining room to a larger one outside on the patio, that my dad had constructed from chipboard and chicken wire. Soon he was ready to fly into the wide world (though my childhood imagination was adamant he stayed around in our garden).

Intriguing motives

This article, however, is not about ornithology or the care of fledglings, but about behaviour and decisions. Why did I decide to take the bird in and care for it? While it is hard to be precise, so many years later, there was clearly an element of excitement (we did not have pets at the time): something I could tell my friends at school and the teacher about. But that was not the only thing. There was definitely also a sense of duty of care: here was a helpless little creature, which would surely soon have been prey to the local cat population. Reflecting on my actions with what I know today, the motive would appear to have been a combination of self-interest and an ethical imperative to prevent needless suffering.

Fast forward several decades… They say that history does not repeat itself, but that it rhymes. For the past few weeks, we have had a couple of blackbirds dabbling around in the garden with their young in tow (they leave the nest before they can properly fly and just follow their parents around, begging for food until they can look after themselves). Then, about a week ago, we noticed what looked like a blackbird’s tail feathers on the lawn, and shortly afterwards we spotted a young blackbird with a pretty sorry looking tail and a slightly wonky wing, hiding in the sheltered storage area where we keep the garden furniture and the lawnmower. We guessed it had experienced a close encounter with the neighbourhood cat, escaping alive but apparently not quite unharmed. As we were contemplating the situation, one of its parents responded to its pleading chirps and arrived with a beakful of grub – so at least the catering was taken care of.

Garden furniture is my protector (image via the author)

For a while the fledgling seemed to stay put, apparently reasonably well protected from its erstwhile aggressor, but a few days later we discovered it had somehow ended up in the well that provides the basement with daylight – a sizeable excavation about 130cm deep. It was easy to see how gravity had helped it in, but much harder to imagine how a non-flying bird might get out again. In there, though, it would surely end up as cat fodder, but seeing how agitated it was as we approached, we feared trying to grab it might just inflict cardiac arrest. The best we could think of was to place a ladder in the pit – a bit of a desperate move, given how far apart the rungs were for its little legs. Remarkably, it did the trick: the next morning, we could see it perching on one of the higher rungs, ready to hop straight onto the patio again. And as I write this, it has gone from strength to strength, pattering around the garden and occasionally flying up onto the wall.

Again, enough with the ornithology, though: what intrigued me was the way I felt about its happy survival and my role in it. What were my motives to intervene this time – even if it was just placing a ladder? The prospect of being able to tell my colleagues or clients did not remotely feel exciting, and I cannot think of anything else that would suggest any direct self-interest at play. But of course, we are not always solely driven by self-interest: people are moral beings, and sometimes ethical considerations influence the choices we make. And that brings us straight to the interface between two distinct approaches to ethics: Benthamite utilitarianism and Kantian deontologism.

Not such a big difference

Utilitarianism (sometimes also referred to as consequentialism) is concerned with the end of an action or decision, rather than the means by which it is achieved. I consider myself to lean in this direction, and perhaps that played a role: urban wildlife can have a hard time, and I figured that even saving one blackbird might be beneficial for all concerned. Then again, would that one bird really make a difference in the bigger picture? Moreover, a statistic from last week’s More or Less BBC radio show (blue tit fledglings eat no less than 35 billion caterpillars every year) reminded me of how nature works: creatures eat other creatures. I don’t know what proportion of blackbirds eventually are so lucky as to die of old age, but I suspect many end up as some predator’s dinner. Blackbirds are not endangered, so the utilitarian case for protecting this one bird was weak at best.

Kant and Bentham – not such a big difference after all? (photos: Wikimedia)

Even we utilitarians are not devoid of deontological considerations, however: sometimes the action does prevail over the result. Somehow it felt wrong to abandon this helpless little bird to its fate and letting it come to a bloody end at the jaws of a cat, knowing I could have done something to prevent it. Intervening to protect it felt right. This is the beauty of pursuing a deontological course through ethical dilemmas: it does not require much reasoning. Utilitarians, in contrast, face complicated moral trade-offs. How does utilitarian ethics justify saving a blackbird, but also swatting a mosquito that keeps us awake at night, or spending £30 for a cool T-shirt rather than on 20 mosquito nets?

Yet the difference is more superficial than might first appear. Deontologist or utilitarian, both trust their gut instinct. We all know, deep down, which option feels right (or wrong). And of course even deontologists sometimes must make a choice between conflicting ethical rules – for example, “be courteous” and let the bumbling learner driver out in front of you, or “don’t disappoint your children” and drive in whatever way is necessary to arrive on time for your son’s school play. “The end result matters” is, in a real sense, just another deontological rule that competes with others.

This means the difference between a utilitarian perspective and a deontological one is not inherently greater than the difference between separate, incompatible deontological perspectives.

What ultimately matters to each of us is the difference we can make, and the difference we are prepared to make. And, no matter how rational we are or think we are, that too is something which our gut instinct will answer for us.

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Priors and prejudice

(featured image: Nicole Köhler/Pixabay)

How open is our mind, really?

A few days ago, a prominent economist posted a table on Twitter. In itself this was not a particularly remarkable event, were it not for the fact that it showed the top-10 “autocratizing” countries in the world alongside their per capita economic growth rate for the last 10 years, which – with the exception of one of them (Brazil) – exceeded the world average. And this observation caused some unrest.

The tweet was entirely factual, citing official growth rate figures and a table from Autocratization turns viral, the 2021 Democracy report of the Swedish V-Dem institute, an academic research organization studying democracy around the world. The table ranks countries according to the change in their Liberal Democracy Index, a measure that looks at things like voting rights, free elections, freedom of association and expression etc. Yet, barely 12 hours later, tweet author Branko Milanović reported it had “produced apoplexy in some people”. Why should this be the case?

It’s not the facts, it’s how they make us feel

The facts themselves were easy to verify, but what appeared to arouse people was the perceived suggestion of a causal link between a drift towards autocracy and economic prosperity. (For example, one comment implied Milanović might be supporting autocratic regimes, another one – incorrectly – accused him of cherry-picking to make that point). And while there are certainly individuals who are positively disposed towards autocracy, the reactions came overwhelmingly from more democratic (with a small ‘d’, just for the sake of clarity) leaning individuals, who didn’t like what they saw. One reason for their “apoplexy” is that the facts as shown were incongruent with their belief in the superiority of democracy as a form of governance. (As Winston Churchill famously noted in 1947, “Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.…”)

What is so objectionable about this table? (image: Branko Milanović/Twitter)

Now, we all believe lots of things all the time, and sometimes those beliefs do end up being contradicted by the facts. Last night, I believed there were some biscuits left in the tin, but upon inspection it turned out that I had eaten them all. It would be foolish for me to maintain that the tin was not empty, and much better to change my belief to correspond with reality.

Of course, not everything is as clear cut as the content of a biscuit tin, and many of our beliefs come with a likelihood attached to it. Observations may then increase or decrease that likelihood. Say we are expecting a visit from a friend who told us she would arrive by 2pm. We know her as very likely a punctual person (this is our prior belief), and so we expect that she will indeed turn up at the anticipated time. However, 2pm comes and goes, and there is no sign of her. Will our posterior belief be different? We know, of course, that there are many possible reasons for her tardiness, some outside her control, others within her control (and these would then cast doubt on our prior). If we consider that a highly punctual person would anticipate possible delays, the fact that she is late, in the absence of any other evidence, compels us to adjust our belief downward that she is indeed punctual.

That is the kind of thing we would expect a scientist in search of the truth to do. When the observed facts are not compatible with a prior hypothesis, then the hypothesis would be incorrect, and needs revising or dismissing. Yet, perhaps, that belief is also one that needs adjusting.

No science without values

A paper by Matteo Colombo, a philosopher at Tilburg University, and colleagues challenges the notion that the appraisal of scientific hypotheses is only influenced by the available evidence, and not by moral, social or political values. Over two studies, they presented participants (who were all students, rather than lay people) with fictitious short reports of scientific research of similar inherent credibility. Half were neutrally moral (e.g., “Eating pizza regularly every day increases the chances of immunity to flu”), the rest were morally offensive (e.g., “Developmental disorders occur more often in children with parents of the same gender”).

In the first study, they were asked to judge each one along five dimensions: “This report is plausible”, “The research described in the report is convincing”, “This research should be funded”, “This study is well-conducted”, and “This study provides strong evidence for the conclusion”. The morally offensive research was judged significantly inferior on all dimensions, which suggests that differences in the perceived moral offensiveness of scientific hypotheses predict differences in explanatory judgments. In the second study, half the participants were incentivized to provide an accurate judgement along these dimensions: if their assessment matched that of an expert panel of faculty members and graduate students, they were promised an extra reward. The results were similar, and the researchers conclude that the evaluation of the evidence was insensitive to an economic incentive to be accurate.

This paper hints at what might be behind the agitated responses to Branko Milanović’s tweet. Someone for whom a liberal democracy is not just one of several forms of government with good and bad characteristics, but one which is morally superior to autocracy, the observation that a shift towards the latter is associated with stronger economic growth produces cognitive dissonance – a conflict between belief and observed facts. Evolving towards a morally objectionable type of government is not supposed to produce prosperity, much in the same way that morally objectionable scientific findings (another one was “Men are more successful than women because they are more motivated and they have more cognitive capacities”) is not supposed to be credible and deserving of funding.

Behind the morals, the emotions

Arguably, it is not even morality per se that drives the response to such cognitive dissonance: it is the importance that a belief has to us, and this counts for much more than the likelihood that it is true. Anything that we believe to be true, and that we consider as important (and of course our moral beliefs belong to this category) is, in a way, an integral part of our identity. So, we experience any challenge to such a belief, any suggestion that it might not be true, as an attack on our deepest self.

Do you call this 2pm? Punctuality my foot! (image: cookie_studio/Freepik)

The emotions that are involved in such important beliefs make it very hard to formulate a dispassionate, evidence-based judgement about either the belief, or the criticism of it that we perceive. That tends to turn our priors – the beliefs we have before they are confronted with conflicting evidence – into prejudices – convictions, favourable or unfavourable regarding someone or something, with no basis in facts, and indeed often impervious to facts.

Even our attitude to people who fail to appear at an agreed time can be subject to such prejudice. If we are positively inclined to the friend who didn’t quite get to us by 2pm, we may downplay that evidence and engage in motivated reasoning that there is surely a good explanation for her being late, and thus ensure her reputation as a dependable person remains unblemished. If the opposite is the case, we may ignore whatever reasonable explanation for the late arrival and ascribe it to her rather careless nature – and commit the fundamental attribution error.

Emotions can be very useful in making decisions. But if they take the lead when we run into evidence that conflicts with our existing convictions, they keep our mind closed, and it is unlikely we will update our priors and achieve a more accurate understanding of the world. Instead, we will just have reinforced our prejudices.

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

Naturally

(featured image: Department for Transport/Flickr CC-BY-ND 2.0)

Is there a “natural” state of things that is inherently superior?

You’re happily driving along on the motorway. It is quite busy for a Tuesday afternoon, and there is a slight drizzle. Suddenly, the red engine management warning indicator on your dashboard comes on. You slow down and move towards the edge of the motorway… but there is no hard shoulder! You are on a “smart” motorway! Thankfully, there’s a refuge 200m ahead. But surely, this cannot be safe? A motorway without a hard shoulder, that is almost against nature, isn’t it?

Smart motorways were first introduced in 2006 in the UK. They don’t have much in the way of intelligence themselves, but thanks to technology and remote management, they can be adapted to the traffic conditions to enhance traffic flow during busy times. One variant (introduced in 2014) involves temporarily or permanently repurposing the hard shoulder for traffic (while reducing the maximum speed). But is such tinkering with the “natural” flow of traffic safe – and more importantly, is it seen to be safe?

Perception is not reality

An official 2021 report on smart motorways shows that both motorways with no hard shoulder, and those where the hard shoulder is dynamically turned into an active lane have, on average, fewer fatalities per billion miles travelled (respectively 1.2 and 0.9) than conventional motorways (1.6). More specifically, an analysis by transport expert Claire Murray of stretches of motorway before and after conversion, found that, in all variants of smart motorways the number of deaths reduced by around 50%.

However, that is not necessarily how it is perceived. The media regularly report regularly on fatal collisions with stationary vehicles on smart motorways (much less on similar incidents on conventional ones). Public opinion reflects this: for example, a survey by the RAC, a motoring organization, found that 68% of drivers think such roads compromise safety. Unsurprisingly, there is ongoing pressure to abandon the concept.

Weapons of mass destruction are not natural (image: James Mathurin/Flickr CC BY 2.0)

The salience effect of the media reporting is likely a factor which exaggerates the perceived relative risk. We may also be observing omission bias, the tendency to favour leaving things as they are rather than to change them, for example because harm resulting from an active intervention is seen as worse or less moral than harm resulting from inaction.

This is something we can also see in connection with the current COVID-19 vaccination programmes. In many countries, immunizing a sufficiently large proportion of the population is proving challenging: large numbers of people exhibit hesitancy or plain anti-vaccination sentiments. And in case anyone thinks only deluded antivaxxers are the problem, it is worth remembering the policy decisions, a few months ago, following the discovery of extremely rare side effects with some vaccines. Their administration was suspended, restarted, and in some cases halted again, because of the risk of blood clots and subsequent thromboembolisms. This was despite robust evidence that a delay to the vaccination programme of even a few weeks would lead to many more deaths than continuing it. People generally seem to be more willing to accept a “natural” risk than the risks of a deliberate intervention – even if the latter is smaller.

Naturalness everywhere

There are numerous other situations in which people prefer the “natural” way to alternative approaches involving human intervention. Anyone who has a parent with Huntington’s Disease, a degenerative neurological disorder, has a 50% chance of developing the condition themselves. There is a simple test that any such person can take, to see if they carry the gene. The result would enable them to prepare for the onset of the disease, and help them decide whether or not to have children (who in turn could inherit the corresponding gene). Yet a study by Emily Oster found that no less than 93% of them refused the intervention of the test. Also in the sphere of medicine, the extraordinary popularity of “natural” remedies, from aromatherapy and chiropractic, to homoeopathy and naturopathy – all at best highly questionable if not outright quackery – suggests that many people do indeed exhibit a naturalness bias. This is a term coined by Marco Dibonaventura and Gretchen Chapman in a paper that describes a set of experiments around the acceptance of flu vaccination. When presented with two, chemically identical, versions of a drug, one ‘herbal’ and one ‘synthetic’, 40% of their participants preferred the herbal one (20% preferred the synthetic one and the rest had no preference). Interestingly, participants exhibiting the naturalness bias (preferring the herbal drug) were least likely to get a flu jab.

What is even more natural than spring water? Organic tree water! (image: via asarasi.com)

There are more examples elsewhere: 42% of prospective American parents prefer to remain ignorant about the sex of their baby while they go for regular scans and want to find out the natural way. Perhaps the broadest indicator of naturalness bias is found in the food and drink market. In the UK, sales of organic produce and products grew from about £300M in 1999 to around £2.3B in 2019, and 58% of Brits bought at least some organic product. In the US, 5% of all food sales are organic. And even non-organic products are often claimed to contain natural ingredients, so the idea clearly speaks to the consumer. Artificialness is unpopular, as a 2020 Pew Research survey confirms: that around the world, genetically modified food is widely seen as unsafe (median proportion: 48%, with just 13% seeing it as safe).

More than just a preference?

It seems many of us are suspicious of human interference. What manifests as omission bias often has its roots in apprehensiveness about the potential consequences of artificial interventions – from genetic modification and food additives to pharmaceuticals and indeed roads. Even if there is nothing strictly natural about a conventional motorway, most people alive have always known them to have a hard shoulder, and to some its removal feels unnatural.

Naturalness bias can be seen as a preference – just like a preference for strawberries, real ale, a detergent of a particular brand, or the music of James Blunt. But that does not mean that whatever we consider natural is inherently and objectively better. (There is very little evidence suggesting, for example, that organic food is healthier or more nutritious.) Moreover, it is remarkably difficult to be consistent in pursuing only the natural: is glass more natural than polyethylene? Is bread natural? Wine? Concrete? Shampoo? Clothes? We could go on.

A preference for natural things, however we define it, is perfectly cool. But if we want to convince others that a natural option is superior, or advocate for policies and laws that restrict the adoption of what is not natural, we need to look at the evidence. That is only natural, isn’t it?

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

The meaning of money

(Featured image: Roman K/Flicker CC BY-ND 2.0)

What money means in economic terms, and what it means to us, are two – or many more – different things

Imagine you have just spent £70 (€80, $95) on something, only to realize that what you have bought is going to be of no use, and that there is no way you can return it for a refund. It’s the kind of experience that would leave even a seasoned stoic a little upset. But why is this? Is that because of the magnitude of the amount, or is there more to it?

Money has the same value for everyone – a pound is a pound – and you can buy exactly the same thing with any pound. That characteristic essentially endows it with its economic significance: money can fulfil three key roles for us (and for the economy as a whole): it allows us to buy goods and services, to measure their price (a proxy for value), and to store value so we can purchase later what we don’t need right now. From these three perspectives, the meaning of £70 would seem to be invariable, and so the experience of the loss (or the gain) of it should be independent of anything else.

Money in the mind

From which mental account are we paying for the ticket? (image: Truus, Bob & Jan too!/Flickr CC BY-NC 2.0

But that is not quite how we work. We engage in something called mental accounting, a term coined by Richard Thaler in 1985. Daniel Kahneman and Amos Tversky provided a clear example in their 1981 paper The Framing of Decisions and the Psychology of Choice. They conducted an experiment with two similar first-person scenarios about going to see a play, with tickets priced at $10 (cheap, but remember, it is 1981!). In the first version, as you arrive at the theatre, you notice you have lost $10: will you still pay $10 for a ticket? 88% of their participants said they would do so. In the second version, you have bought the ticket in advance, but upon arriving you notice you lost it. In this case, only 46% of their respondents would buy a new ticket.

The actual loss is exactly the same in both cases, yet the reaction is very different. We act as if we have multiple budgets, alongside unallocated cash. In the second case, we already depleted the theatre budget, and so we may not be able to justify buying a second ticket; in the first case, we have lost unallocated cash, so we would still only be buying the one ticket.

And there is another way in which the meaning of money can vary. Let’s return to the £70 purchase that was so upsetting. Imagine that the purchase you made was for unleaded petrol (gas in the US), and that you inadvertently put it in your diesel car. You did not realize your mistake until, 500m down the road, your engine started stuttering. Not only is the fuel now an unusable blend, you are also presented with an eyewatering repair bill of over £6,000 (€7000, $8,500), as the petrol has seriously damaged much of the fuel injection system that relies on the lubricant qualities of diesel fuel. (This recently happened to someone I know very well.)

Suddenly, the wasted £70 doesn’t seem so upsetting anymore. The meaning of money is apparently not only dependent on what mental budget it belongs to, but also on the context in which we view it. Here, the original loss seems truly futile. At the same time, though, if squandering £70 was initially pretty upsetting, then losing £6,000 must be, well, about 86 times worse.

Must be? Or might altering the context also change the meaning of £6,000? It makes sense to allocate that expenditure to a car budget. Assuming that such a mishap will only happen once in our lifetime, we can quite legitimately spread it over all our driving years – say sixty years. That equates to about £100 per year – even if you don’t drive much, in a cheap, reliable and very frugal car, that is just a few % of your annual cost of driving – £2 per week. (This approach is akin to pennies-a-day”, the disaggregation of a single larger expenditure into a sequence of smaller amounts.) Sure, it’s not nothing, but in the wider scheme of things it is hardly life-changing. And if we want to nuance its meaning even further, we could compare it with other mental budgets (a pound is a pound, remember!) – the value of our house or of our retirement fund: do we even know to the nearest £6,000 what these are worth right now? I don’t think I do.

Spending wisely, and not feeling worse than necessary

Naturally, none of this makes good the actual loss. In absolute terms, the amount isn’t any easier to swallow, and my unfortunate friend has to take the hit. He now needs to decide whether to have his car repaired, or scrap it (it is worth almost nothing in this state) and buy another car. In this choice too, the meaning of money can clarify the options.

Our intuition tends to be that if the repair cost approaches the book value of a car, it’s scrapped. This is what insurance companies generally decide, but as my (I mean his!) insurance policy doesn’t cover this mishap, it is his choice to make, and it’s worth thinking a bit more deeply about the two options. What is the meaning of £6,000 in both cases?

Fix it, or scrap it? (image: standret via Freepik)

Spending it to get the car fixed means two things: it increases the value of the car back to its book value, and it restores the remaining life of the car as both were before the incident. The former is important in case we intend to sell or part exchange the car in the future: it means that we will recover part of the repair cost. The latter is important if we intend to keep using the car (my friend was planning to replace the car in around three years). The repair cost is then in essence an investment, so it can easily be compared with the alternative option. Putting the £6,000 towards the purchase of a new car means seeing it depreciate over the next three years. Even for a modestly priced used car, a depreciation of the order of £6,000 over three years is, if anything, a bit on the low side. According to this reasoning, getting the car fixed makes financial sense.

So, when we are must make a cool, business-like decision, figuring out the meaning of the money we’re spending in the different options can help us better appreciate the differences. If we look beyond the headline possibilities (repair the old car, or scrap it and buy a newer car) to what each one really means, we get a better idea of the significance.

But it is when we are confronted with the emotional effect of money that exploring the meaning can have the greatest effect. One perspective on a loss may make us (my friend, that is) would make us miserable for days, compel us to relive the faithful moment when we made the fatal mistake, and consider endless “what if?” scenarios. Another one may, at worst, make us shrug and then get on with our lives.

And that perspective, that is ours to choose. It is up to us to choose it wisely.

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