The right priorities

How traffic can be made safer and smoother – if you’re not bumping up against status quo bias

Until we are all moving about in autonomous vehicles, we have to do the hard work of driving ourselves. And when I say hard work, I am not being sarcastic. Operating the pedals and the steering wheel in a car may not require much physical effort, but the cognitive load of getting to our destination without hitting other road users and obeying the rules is significant.

One such situation where there is plenty of scope for collisions is at road intersections. I grew up in Belgium which, like its neighbouring countries, operates a general rule stipulating that traffic coming from the right takes priority. The origins and justification of the rule are unclear, but it was apparently first introduced by a Parisian police commissioner in 1910 (although it was only adopted in Belgium in 1961).

At first sight, the rule seems simple enough: most people know their left from their right side, and so there should be no confusion whether to give way, or whether to enjoy one’s priority.

Exceptions, and more exceptions

Unfortunately, reality can be a bit more complicated. It doesn’t take much imagination to understand the chaos that would ensue if the rule applied to major roads with heavy traffic, which would need to give way to all vehicles coming out of every single side street to its right. Similar trouble would arise at roundabouts (which run anticlockwise in continental Europe) with vehicles already on it needing to give way to traffic about to join.

So, exceptions are necessary. A special traffic sign is used on major roads, indicating (among others) permanent priority over all side roads until revoked. On roundabouts, a specific rule overrides the general priority rule, giving priority to traffic that is already on the roundabout. And for countless other junctions where the general rule is, for one reason or another, not applicable, another traffic sign is used to override it just for the next junction.

junction

Look ma, no traffic signs, and no priority rule!

For more than two decades, I rode bicycles and drove a succession of cars in this environment, which gradually became as normal and comfortable to me as water to a goldfish in a bowl. To me, this was the natural way, nay the only way, to ensure smooth and safe traffic at intersections. Until I moved to the UK – where there is no overriding priority rule.

How on earth do they avoid utter mayhem at every junction? To my surprise, apart from a very occasional octagonal STOP sign, there were no traffic signs relating to the priorities. None. What I did notice immediately, though, were the road markings: white lines clearly indicated who needs to give way to whom – at pretty much every single junction.

But what struck me the most, as I began to clock up the miles in my new country, was the fact that I rarely had to look at the lines to know whether I had priority, or whether I needed to give way. It seemed entirely natural.

This is, I now realize, why it is such a successful approach. Drivers who, at every junction, need to work out which rule applies, and search for signs that might overrule it, inevitably divert attention away from the road, and of course they may miss a vital road sign. This is making it difficult to do the right thing – the exact opposite of the first principle of good behavioural design: make doing the right thing easy.

Sometimes this does mean making the wrong thing harder. Most of us will be familiar with traffic calming measures like speed bumps and chicanes with plant containers that actually force us to reduce our speed if we don’t want to damage our car: they make speeding more difficult. At hazardous junctions, the road layout is sometimes changed with the addition of a roundabout and curves in the road, to slow down the traffic. And sometimes the interventions are entirely visual, using fake 3D road markings or simply lines to trick drivers.

fake speedbumps

Fake speedbumps, real effect. (photo via iNudgeyou)

But the way priorities are managed at junctions in the UK shows that sometimes very little is needed to reinforce what is already hinted at by the environment. If a road feels like a main road, then it is given priority, and if it is not, then it is made to give way to the main road.

In countries where the ‘priority to the right’ rule prevails, many collisions happen at junctions where the general rule is in conflict with the environmental cues. On a straight, wide road, you do not expect to have to give way to traffic coming out of a small side street, yet – unless a sign tells you otherwise, that is exactly what you have to do.

Small town wisdom: 1, ministerial wisdom: 0

On November 10th, 2017, the small Flemish town of Glabbeek abolished the rule on its local roads. Nearly 85% of the population had supported the idea in a poll, and the council decided to put their citizens’ wishes into practice. Just two junctions needed adjustment, and in all other situations, a system of main and side roads was the easy, logical choice. Did it work?

Mayor Peter Reekmans thinks so: “It is one of the best decisions the town council ever took to improve traffic safety, as there is now no longer any doubt that smaller side streets need to give way to main roads.”  And the figures seem to confirm that aligning priorities with the actual situation was a good idea. The number of collisions due to violation of the priority rules dropped from 18 per year to just 3, and the number of speeding offences fell by 30%, with a similar reduction in the offenders’ actual maximum speed.

Not surprising then that the VAB, one of the largest motorists’ organizations in Flanders, is now advocating scrapping the priority to the right rule nationwide. Spokesman Maarten Matienko believes it will lead to a similar reduction in the 15,000 accidents each year, which result from drivers who do not obey the rule: “there should be no doubt who needs to give way at a junction.”

reekmans

Begone, priority to the right! Your mayor commands you!  (image via peterreekmans.typepad.com)

But the proposal got the cold shoulder from Flemish Mobility Minister, Ben Weyts. It would be too expensive to place hundreds of thousands of new traffic signs, and we need to hang on to it as a fall-back solution, in case the signs are damaged, and people are confused again. This is because, according to the Belgian highway code, making a road a main road requires road signs – as many as four at every intersection (two on the main road, and one on each side street). You can see his point.

It nevertheless looks like a bad case of status quo bias. The minister could have taken a very different approach. He could have looked at the potential benefits of the suggested measure. How many of the 15,000 collisions annually would need to be prevented to justify the installation of new signs? Perhaps even more radical, he could have considered how priorities are managed at junctions in the UK, and learn how safe and smooth traffic can be achieved without signs. He could have proposed a change in the traffic code, and rely on road markings to reinforce what, in most places, already feels natural as a result of the road architecture.

15,000 accidents each year (that is in for every 200 households) strongly suggest that the ‘priority to the right’ rule, more than 50 years after its introduction, has not been able to override the cues drivers receive from the road layout.

Here is an opportunity to make traffic safer, based on evidence from a small town and a large country. Sadly, it is an opportunity that is not a priority.

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

The wisdom of the process

(featured image credit: Sarah Slade CC BY)

We are often tempted to act impulsively, even though it is not in our interest. Good processes can help us avoid giving in to short-term temptations

One of my oldest memories is learning how meals worked: if I ate what was on my plate, I could have a dessert (which was often one of my mum’s superb home-made puddings). If I didn’t, then I couldn’t. That was the mealtime process.

And it worked, for me and for my two sisters who came behind me. The process meant there was no pleading or negotiating – it was just the way it was. The same for all of us, at all times. It was only much later that I realized why that process was in place. Leave children to choose whether they’ll eat their beans, carrots or cauliflower first, and dessert afterwards, or whether they’ll start with the pudding or the cake and then – if they’re still hungry – have some vegetables, and we can be pretty sure what they will prefer. It’s not necessarily that kids don’t like vegetables, it’s just that they like sweet stuff more.

Processes everywhere

Arguably, that same process still guides us as adults. We no longer have to obey our parents, yet despite the attractions of a piece of black forest gateau or banoffee pie, most of us still have them at the end of our meal, rather than at the start. And our daily life is full of such processes we follow without much reasoning – often without any reasoning at all.

In traffic, we stop for red lights and we give way to main roads. At work, we don’t just go and occupy a meeting room without booking it. The prevailing processes make traffic safer, and at work they stop us being an arsehole – even if we are tempted to go through the red because we are in a hurry, or to just grab a meeting room because we forgot to organize one, and we really need one. They also mean that when we are on a main road, we can proceed smoothly, and when we have reserved a meeting room we will not have to contend with squatters.

meetingroom

“Did you guys book this room or what?” (photo: Kazuya Minami CC BY)

Maybe you follow a process for exercising (I do: I go running in the morning on fixed days – no need to ponder, and my gear is ready as I get out of bed), or perhaps you don’t drink coffee after 2pm. The processes that guide our actions can take the shape of habits, of rules, or of fixed procedures, but they’re always a systematic way of doing things, without requiring us to do consciously think about which way to proceed. And often they help us act against our base, short-term, self-interested impulses.

One such process caused a fair amount of commotion in the British House of Commons last Monday. Unless you have just come back from a trip to the outer reaches of the solar system, you will know that the atmosphere in the UK’s parliament is a little febrile. On 18 March, the country was less than two weeks away from exiting the EU. And it was still not clear whether (a) this would actually happen and (b) if so, whether it would be according to the withdrawal agreement that the government and the EU have negotiated, or without a deal at all. The agreement has been put to a so-called meaningful vote twice. On 15 January of this year it was voted down by 432 votes to 202, the worst defeat for a British government in modern history. On 12 March, parliament got a second opportunity to approve a marginally modified version, and again voted it down, this time by 391 votes to 242.

Hated (and loved) for the wrong reasons

Prime minister Theresa May was intending to put the same deal to a third vote, in a final attempt to get parliament to support it. As I am writing this, the EU is saying it will only grant the extension to the UK’s leaving date Mrs May is asking for, if the deal is approved. (Things have since changed slightly, but approval of the deal is still crucial in the weeks ahead). However, the Speaker of the House of Commons, John Bercow, threw a spanner in the works.

The Speaker is an important character in the Commons. Elected by the MPs (usually unopposed), he (or she – one woman, Betty Boothroyd, held the post between 1992 and 2000) is the person calling for “Order!” when the debates get too rowdy. But the Speaker also has a final say over how the House conducts its business, and is, in particular, responsible for deciding which tabled motions and amendments are put forward to be voted on. And on Monday 18 March, he announced that the Withdrawal Agreement could not be brought back to the house, unless there were substantial changes compared to the previous two instances.

He was not acting on a whim, but relying on long-standing rulebook of parliamentary practice known as Erskine May, after the clerk who produced the first edition in 1844. It states that a motion or amendment “which is the same, in substance” as something already voted on in a session of parliament should not be brought forward again in the same session.

Speaker

“Order! Order! I am the defender of Parliamentary Practice!” (image via YouTube)

From a distance it is not so hard to see why this process is in place. Quite apart from the waste of parliamentary resource that repeatedly putting a motion to a vote represents, it is questionable whether legislating through grinding down the resistance of MPs achieves good laws. Many reactions to the Speaker’s announcement were predictably self-serving, and actually illustrate why a process that surpasses the partisan tendencies of MPs is important.

The proponents of the withdrawal agreement were dismayed. The Solicitor General, who advises the government on legal matters, said the country is in “a major constitutional crisis”. Of course, they did not appreciate this process, since it prevented them achieving the outcome they aspired to. In contrast, members of the hard-line European Research Group welcomed the news because they believed it made their preferred result, a no-deal, clean break exit on March 29th more likely. And pro-EU Remainers were pleased too, because they believed it made a delay (or indeed a revocation) more probable.

Very few people supported the Speaker’s move because it is the prevailing parliamentary practice, and most evaluated it according to the outcome they find most desirable. You may find this disappointing (I certainly do), but it is how we tend to react when things don’t (or indeed do) go our way. Yet, processes are not good or bad because, in hindsight, they delivered a particular desirable or undesirable outcome.

Processes are good when they embody key trade-offs at a time where our short-term wants may lead us to ignore them. They are established when the mood is calm, when there is no pressure, and when it is possible to come to a reasoned conclusion about the trade-offs. A good process ensures that I go running four times a week, even if on a particular morning I don’t quite feel like it; a good process ensures that meeting rooms are available to people who planned for them, and not to people who sneak in and occupy them; and a good process ensures that laws are not made by tiring out the members of the law-making body until they’d vote for anything just to make it stop.

A good process has the wisdom of calm and measured decision-making built in. And it is the best defence against acting according to our impulses.

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

Who you (think you) are shapes what you think

(featured image credit: Settergren)

We have multiple identities, and see the world accordingly

Say you spent your youth in Scotland, but have been living in London for over 20 years. Are you a Scots person living in London, or a Londoner with Scottish roots? That may matter more than you might think.

The renowned British sitcom Yes, Minister and its successor Yes, Prime Minister remain, more than 30 years after the last episode aired for the first time, an example not just of superb comedy, but also of splendid depictions of cognitive phenomena in the wild. One of the finest illustrations of framing (the way in which a particular piece of information or proposition is formulated in order to elicit a given response) is an exchange between the cunning civil servant Sir Humphrey Appleby and PM Jim Hacker’s Principal Private Secretary Bernard Woolley.

yesministerIt concerns the possible reintroduction of military conscription or national service. An opinion poll commissioned by his party has convinced the PM it is popular with the electorate. Sir Humphrey explains how a new opinion poll would produce the opposite result, simply by framing the key question differently.

This is a bit different from the more common applications of framing we encounter, in particular when we go shopping. For example, ‘Buy one, get one free’ offers are more appealing than a 50% discount (even though both offer the same advantage, and even though you need to purchase twice the amount to benefit!). In fact, we are rather sensitive about how numbers are framed in general. In a classic paper, Amos Tversky and Daniel Kahneman describe an experiment in which people had to choose between two interventions, (a) and (b) to counter a disease which would kill 600 people. They divided the participants in two groups:

  • Group 1: (a) 200 people will be saved, (b) 1/3 probability that 600 people will be saved and 2/3 probability that nobody will be saved
  • Group 2: (a) 400 people will die, (b) 1/3 probability that nobody will die and 2/3 probability that 600 people will die

The two versions of (a) and (b) represent identical outcomes, but in Group 1, where the options were framed as ‘lives saved’, 72% chose option (a), while in Group 2, with the ‘people dying’ frame, only 22% chose option (a).

It’s not just the presentation

As the dialogue between Sir Humphrey and Bernard suggests, some clever sleight of hand can manipulate us into changing our preferences, even if there are no numbers involved. But we would be mistaken if we believed that how we think about prices, combating disease, or military conscription only a matter of how the information is presented to us by others.

Jenny Xiao and Jay Van Bavel, two American psychologists, examined how our social identity can influence implicit attitudes. They divided participants arbitrarily in a red and a blue team, and assessed their implicit evaluations towards their own in-group and the out-group. In a second experiment, they first told participants whether their team was competing or cooperating with the other team before the evaluations, and in a final experiment they tested whether the implicit group evaluation changed within an individual who was reassigned to the other team.

The researchers found the participants quickly developed implicit preferences for members from their in-group, relative to the out-group. When the intergroup context was given as competitive, the results were similar, but when participants were told that their team was cooperating with the other team, there was no implicit preference. Most strikingly, when people were switched to the other team, they instantaneously favoured their new in-group (i.e. people who were in the out-group mere moments earlier). This effect was more pronounced for people who feel a stronger need to belong.

legopeople

Is this your in-group? (photo: eak_kkk)

 

Implicit preferences have traditionally been assumed to be in the realm of the unconscious, and the emotional – hard coded almost, and hence hard and slow to modify. This research puts this into question.

While these are laboratory experiments, the results suggest that the identity we ‘feel’ at a particular time may strongly influence implicit, automatic preferences more generally. Favouring in-group members can mean that we are more likely to accept and share their opinions, or support their proposals. It can also mean that we might be more tolerant to their transgressions of moral values. But it seems that this may shift quickly if we change in-group – if we activate a different identity. And of course, we do have different identities, each with different in-groups and outgroups. Members of our family or strangers, people who share our nationality or foreigners, divisions along racial lines, level of education, social class… the list goes on.

In a tweet Jay Van Bavel, one of the authors, observes why this may mean efforts to reduce implicit racial bias may fail. About a year ago, an incident in a Philadelphia Starbucks branch caused a lot of commotion. Staff had asked two black men to leave the premises, apparently because they had used the toilets without ordering anything. When they declined to do so (they said they were waiting for a friend), the police were called, and when they continued to refuse to leave, they were arrested for trespass. (At that moment, the friend they were waiting for turned up). Starbucks boss Kevin Johnson apologized profusely and announced the company would deliver training to reduce unconscious racial bias to 175,000 employees.

Alias ourselves

There seem to have been no further similar incidents, but that doesn’t allow us to conclude the training has worked. Research by Calvin Lai, a psychologist at Washington University, Saint Louis, and colleagues, found that 9 interventions of the kind used in the Starbucks training (of which one was a sham) did indeed briefly reduce implicit preferences. However, after a delay of at most a few days, the effect had worn off. This supports Mr Van Bavel’s doubts.

Earlier work by John Turner, a British social psychologist, and colleagues, provides a context for these observations. The so-called self-categorization theory distinguishes between a ‘personal’ identity (how we see ourselves different from other members of our in-group) and a ‘social’ identity (how we define ourselves through shared similarities with members of certain social categories in contrast to other social categories). And that social identity can vary considerably with the social context: we can see ourselves as members of a wide range of in-groups.

sirhumphrey

Watch out, there’s Sir Humphrey about (image: youtube)

How we perceive and interpret the world depends on what identity we adopt at the time. So what? A first take-away is that, contrary to what it may feel like, we often don’t have a fixed view on matters. We may not even be consciously aware of the identity that is inspiring our opinion. Maybe it would be good if we took both our own views and that of others with a pinch of salt. We should also treat with suspicion anyone who, in the style of Sir Humphrey, tries to persuade us for or against a cause by appealing to a particular identity.

We can use this insight in situations of conflict too. Disagreements with others can look very much less dramatic when you discover a shared identity – imagine how a heated conversation might change when you find your opponent has, like you, teenage children, or a love of Shakespeare.

But perhaps the ultimate take-away is that it is not so much who we are that shapes what we think, as who we choose to be. Better choose wisely.

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

Find your inner economist

(featured image credit: Ulleo)

To make good choices, we have to be able to compare apples and pears

Perhaps the most fundamental error that people make when discussing, or thinking about, economics is the belief that, confronted with two or more options, we should always choose the one that delivers the most material benefit (the most utility, as economists call it). This is wrong for at least two reasons.

One is that it fails to take into account the complexity of pretty much every real-life choice. The idea that there is some linear relationship between the quantity of something, and the utility it provides, only holds if we can keep everything else the same. That is rarely true. We can agree that earning more money is better than earning less money, but if we have the choice between two jobs, the salary is usually not the only thing that distinguishes them. The work of the higher-paying position may involve unpaid overtime, travel in your own time, high-risk activities, and whatnot. A bigger house may have more appeal than one with fewer rooms – if it comes with free cleaning. Otherwise the prospect of having to dust and vacuum the library, the TV room, the games room, the music room, the dining room, the study and an array of bedrooms may dampen the appeal somewhat.

But this trade-off neglect is not the worst problem. Assuming only the material aspects of a choice matter overlooks the fact that, ultimately, almost nobody is interested in wealth per se. The cartoon character of Uncle Scrooge, who seems to positively enjoy spending time literally sitting amid his money is just a figment of Walt Disney’s imagination.

uncle scrooge

The inherent utility of money is only for Uncle Scrooge

Material wealth is a means to an end. We use money to buy things, these things provide us with utility, and that utility, in the end, corresponds with the positive emotion we experience as a result. We sacrifice material wealth in return for emotional utility. A three-piece suite, a comfortable and amusing T-shirt, a nice bottle of wine, a CD, a haircut, a holiday, a new car, and even a full tank of petrol (doesn’t being able to drive where you want make you happy?) – they all give us emotional utility.

Obvious, when you think about it. But there is something strange about it. Like the duckrabbit, or the young woman/old lady visual illusions, it is almost impossible to see both views at the same time. When it concerns something that makes us happy, for example, we look at the emotion rather than the corresponding sacrifice. When it’s something that makes others happy but not us, we only see the material downside and wonder how on earth they can spend that much money on something so worthless.

Political climate

A few days ago, British PM Theresa May’s former chief of staff, Nick Timothy, was interviewed by the BBC. On the predicament in which the government finds itself, he said, “I think one of the reasons we are where we are is that many ministers, and I would include Theresa in this, struggle to see any economic upside to Brexit.” Mr Timothy is a Brexiteer, but he is voicing a common viewpoint among the pro-EU side, and delivers a splendid example of this split view.

People who have a positive (or at least a neutral) view of the European Union are baffled that anyone could want a future without an economic upside, or indeed with the disastrous economic downside of a no-deal Brexit. To them, the economic advantages of being part of the customs union and the single market – free movement of people and all – are a self-evident win-win. For people who, in contrast, take a dim view of the EU, there is a trade-off to be made, and leaving the EU may well merit the economic downside of a sacrifice.

Such a political choice is no different from the choices we make every day concerning food, furniture, entertainment and hundreds of other things. Whether we buy a jar of jam or a tin of caviar, an IKEA chair or a designer sofa, a ticket to the cinema or ticket to the opera: there is no economic upside here either. On the contrary: we make a material sacrifice, in return for emotional utility.

Actually, there is a difference. We don’t feel deeply connected to what we put on our toast, where we place our derrière, or what we do for entertainment on a Friday night. The emotional utility we get when we buy these things may be foremost in our mind, but we do not necessarily completely lose sight of the cost. The more the emotional side of a choice is linked to our deepest beliefs or to our identity, however, the more weight it carries, and the harder it is to even attempt to consider the material side.

Weighty emotions can drive a choice, but they can also constrain the choices we are prepared to make. Policymaking regarding climate change tends to focus primarily on switching to renewable energy – that is very much the prevailing narrative. But can solar and wind power really meet all our energy needs, or is there a degree of wishful thinking among their proponents? Should we not consider nuclear energy as an alternative or a complement to renewables to reduce our carbon emissions, or is that too much of a taboo?

When profound beliefs are concerned, we may be tempted into motivated reasoning. If we are convinced our preferred option is the only right one and the other(s) wrong, our own reasoning process gets distorted and we evaluate possible outcomes (or routes to an outcome) accordingly. We build our argument based on a one-sided reading of the evidence. We selectively invoke examples where our preferred option is manifestly superior, or where the alternatives miserably fail. It is almost always possible to find real facts, and certainly hypothetical ones, that serve our position – but that means little.

Arguments produced by motivated reasoning feel totally rational if they’re our own, and wholly unfounded if they’re not. This is what leads to the typical futile discuss around complex and controversial issues: both sides debate from an unshakeable perceived position of being right.

When belief meets reality

But the problem with the deep belief that our preferred choice is the only right one does not just materialize in discussions with people holding a different view. There is nothing wrong with being convinced about the best course of action, and to dream about a world in which that course of action is being pursued. But for that dream to really come true, our conviction needs to survive the confrontation with reality.

nuclear windpower

Nuclear or wind – which is right? (photo: Jeanne Menjoulet CC BY)

We can dream of a world in which we have stopped blowing carbon into the atmosphere thanks to wind turbines and solar cells, or thanks to nuclear reactors, but the emotional upside of that world will not arise of itself. There will be costs (in cash, or as the hassle of lifestyle changes), there will be conditions that need to be met, or that will be attached to the chosen solution. There will be side effects that need to be dealt with, and there will be sacrifices that need to be made.

There will be a material downside.  And to make good choices we need to compare the apples of the emotional upside with the pears of the material downside.

But promoting or defending what we believe to be absolutely right focuses us too much on the emotional upside, and makes us neglect the material downside. Because life is, after all, not about material things, but about emotions, right? That’s handy, since we don’t like spending money, we don’t like having to change our lifestyle, or dealing with undesirable side effects and consequences. But sooner or later, we need to settle the material bill for our emotional upside.

The economic way of thinking can stop us from being blinded by our belief that we are right, and ensure we don’t overlook the downside of our choice. Let’s look at the so-called facts that we are citing to support our position. Would an opponent use the same facts, in the same way? If not, we are probably being selective. We also have to consider the facts that go against our preferred position, and build a picture of the material downside – and hence the emotional downside. If we act as if the downside doesn’t exist, the upside is just hot air.

Will doing this not stop us from dreaming? It shouldn’t. What it will do is burnish our dreams, by putting them up against reality. If they can stand the challenges of the harsh real world, if we understand the sacrifices they will demand from us, they’re dreams worth pursuing, because they can come true. And if, in the process, we need to adapt our beliefs, hey, so be it.

Find your inner economist. Let them loose on the emotional upside and the material downside of your beliefs. That’s the way to realize your dreams.

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

Trade-offs, fast and slow

(featured image credit: domeckopol)

Our biology determines how we make decisions, but we have a secret weapon

Economics and biology are not the most obvious bedfellows. Standard economics has a reputation of assuming agents who have access to all relevant information and sufficient computational power to work out the optimum choice. But real, biological people from flesh and blood generally don’t behave according to this idealized model. Are they separated by a chasm that is hard to bridge, or are the two domains closer than it seems?

The contrast between an idealized representation and the messy reality is not that unusual. A real wheel is not a perfect circle, yet in many situations, engineers happily use a circle as an entirely reasonable approximation for a wheel. But the difference between what we humans actually do, and what standard economics expects us to do, is often so large that the homo economicus model is not much use in predicting our behaviour.

Economics and biology, peas in a pod

This is quite remarkable. One of the core concepts of economics is the trade-off, and that same concept is also quite central in living organisms, from single cell creatures to much more sophisticated ones, all the way to mammals. Even uncomplicated unicellular organisms are sometimes faced with multiple options: different things they could eat, or different directions in which they could travel. This way are more nutrients but further away, that way there are fewer, but they’re closer. Which way to swim?

It would perhaps be a bit too far-fetched to ascribe to amoebae the capacity to perform a cost-benefit analysis, but if you don’t mind a little reductionism that is, in a way, exactly what they do. Those organisms whose DNA helps them make such trade-offs well and pick the more beneficial option are the ones that survive and replicate.

OLYMPUS DIGITAL CAMERA

Hello, I am a micro-economist (photo: PROYECTO AGUA CC BY)

And evolution carries on along similar lines. Natural selection is the mechanism by which organisms that are better than others at gaining access to and utilizing resources are more likely to thrive and persist. We can see that very same mechanism in action in the economy too: by much the same logic some businesses are successful and grow, others disappear.

A great deal of the behaviour of animals (as well as plants, though that might stretch the term behaviour a bit too much) can be explained and predicted using concepts at the core of economics: trade-offs, costs and benefits. Even the efficient allocation of resources can be seen all over nature: plants channel the right amount of energy towards producing flowers (to ensure fertilization by insects) and ultimately seeds, and birds spend or the right amount of time feeding their young. Why are humans so different?

A recent article in the scientific magazine Nautilus, by evolutionary biologist and psychologist David Barash, sheds some light. Dr Barash deals with the question why we are so bad at tackling climate change, and argues the reason is that our cultural evolution has been outpacing our biological evolution.

For many thousands of years, our ancestors found life tomorrow was identical to life today. They, like their ancestors, were wired to respond to instantaneous threats and opportunities. The decisions they needed to make had a scope of, at a stretch, a few months. Their trade-offs were fast trade-offs: they could experience the consequences of their choices very quickly.

And year after year, generation after generation, the environment in which they lived remained the pretty much the same. The glacial pace at which it changed was matched by the speed at which our ancestors’ biology evolved: infinitesimally small genetic changes between parent and child. And all along, there was little reason for advanced decision-making to emerge, or the ability to interpret complex conditional probabilities, or conduct long-range scenario planning. Even if some human specimen had, through some mutation, acquired this capability, they would not have gained any comparative advantage by it.

Not so good at the slow trade-offs

Until very recently, the assumption that life would be pretty much the same in 20 or 50 years’ time as at present held completely true. The status quo was our ancestors’ reality, and it got hardwired into the neuro-cerebral circuitry they needed to make the choices that allowed them to survive and prosper: it was good enough and fit for purpose. Small wonder we find ourselves behaving as if that is still the case… and having had to invent labels like status quo bias, hyperbolic discounting and present bias.

So today we are still pretty good at fast trade-offs, like deciding to open our umbrella when it starts to rain, or to turn down the heat underneath the pan with the potatoes the moment it reaches boiling point. But when it comes to choices that have consequences way into the future, slow trade-offs as it were, that is a different affair.

congestion

Slow traffic, slow trade-off (photo: World Bank Photo Collection CC BY)

Think of the amount of traffic on motorways and in town centres. In the UK, the number of motor vehicles has grown nearly eightfold since 1950. That means we are spending more time queuing in traffic than ever. Yet so many of us keep on doing it, day after day. But imagine that the extra 20 minutes it takes you on average to get to work was not the result of a gradual process over maybe 20 years. Imagine that, last week, it took you, say, 30 minutes each way, and every day this week that jumped to 50 minutes. You’d be quick to look at alternatives – take public transport, work from home, stagger working hours, car sharing… all the things we know we could do now, but by and large don’t. The fast trade-offs we’d make with a rapid change, we don’t make when they’re slow trade-offs.

If by saving for our retirement today we would feel the benefit tomorrow, we’d be much more eager to do so. But it is distant, and our biology assures us our lifestyle tomorrow, and the day after, and in 20, 30 or 40 years’ time, will be the same as today by default. We see poignant illustrations of the eventual consequences of making fast trade-offs where we ought to make slow ones: a couple in their sixties, having for years spent their money trying to keep up with the Joneses, expecting to retire soon, and assuming they will be able to maintain their present lifestyle of an oversized house (with 25 years to go on their mortgage), expensive new cars, and getting pricey in-home care.

You might imagine that people with a scientific slant are better at taking the long view, and do not assume that things will forever be the way they are. Not so. Computer software developed in the 1960s and 1970s used just two digits to represent the year in dates so precious storage space could be saved – everyone knew full well that the first two digits were ‘19’ anyway. Sure, that would become problematic in the year 2000, but that was so far into the future that nobody worried much about it. And release after release of the programs kept the two-digit year. Software developers made the fast trade-offs: investing in changes and upgrades that offered immediate benefit, not a fix for a distant problem. And as the turn of the century approached, still nothing had been done, leading to the frantic scramble for resources to deal with the Millennium bug.

Challenges ahead

Did we learn? We’ll have to see. A new problem is looming. Many computer systems using (or based on) the Unix operating system represent time as the number of seconds since January 1st 1970 as a 32-bit number. The largest number that can be stored thus is 2,147,483,647. That looks like (and is) a huge number… but in seconds, it’s not that big: it corresponds with less than 70 years. So, unless something is done about it, on 19th January 2038, a little after 3am UTC, numerous computer clocks will suddenly jump back to 13 December 1901. And that is small beer compared to the challenge of climate change.

Our cultural development has given us powers to change our environment in ways that were unimaginable a couple of centuries ago, and our wiring has not kept up. Our biology is much as it was 100,000 years ago and doesn’t help us with making the slow trade-offs we need to make today, choices that cast their shadows decades, if not centuries, into the future.

catweazle

Same biology, big culture shock (via youtube)

Dr Barash uses a very nice thought experiment to illustrate this: imagine swapping a baby born 200,000 years ago with one from today. “Each would undoubtedly grow up to be a functional member of her society: hunting mastodons or gathering roots and berries in one case, and perhaps running a hedge fund or piloting jet aircraft in the other,” he writes. But do the same thing with two adults and you get a different picture. Like the new born babies, they do not differ in biology, but they would be utterly maladapted to their alternative environment: it would be culture shock, not biology shock. (Readers from a certain vintage may remember the TV-series Catweazle in which a medieval wizard who inadvertently ends up in the 1960s had a similar experience).

Thankfully, we do have a secret weapon (although we are not always equally good at using it): we can learn. Baby dogs and cats are born with the instinct not to soil their dens with their waste products; baby humans are not. But while it takes a good few years, small humans can “learn to pee and poop in a toilet”.

If even toddlers can overcome the limitations of their hard wired instincts by complementing it with their soft cognitive abilities, there is hope for us all. We can learn to make not just good fast trade-offs, but also good slow ones. Let’s just do it.

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The trouble with tax

(featured image credit: Archives of Ontario CC BY)

Taxation affects the economy, because it affects our behaviour. Is that impossible to avoid?

Taxes are generally considered to be an inevitability, as the words of Benjamin Franklin, written in 1789, remind us: “…in this world nothing can be said to be certain, except death and taxes.” Governments need money to fund a wide variety of stuff, and discussions about taxation are mostly not about whether to tax, but about what to tax and how much.

It should be straightforward, really. You decide what thing you’re going to tax, you work out how much of that thing there is, you set a taxation rate, and by simply multiplying these two figures, you know what your revenue is going to be.

Of windows and geese

Say you’re the ruler of a country, and you toy with the idea of taxing windows. Sounds like a clever thing to do: everyone needs windows and they’re hard to hide, so evasion is going to be minimal. It is even a fair tax: bigger houses have more windows, so people who can afford to live in a mansion will pay more than people who live in a small cottage. Count the number of windows in your fiefdom, multiply that by the tax you’re planning to levy on each window, and hey presto, you know what will hit your coffers.

Not quite. People don’t take taxes lying down. 350 years ago, Jean-Baptiste Colbert, Louis XIV’s Minister of Finance already knew this: “The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.”

But it’s not just the hissing that is a problem. Taxes also change behaviour. People may not be entirely rational, some say, but when what they do or what they buy is being taxed (and all taxes are ultimately paid by people), they will, all else being equal, do or buy less of it. Your window tax works as a disincentive. Your subjects will seek to reduce the cost by building houses with fewer windows, or by bricking up existing windows, so your revenue will be less than expected. And your tax will also depress economic activity: bricklayers may have a bit more work, but carpenters will certainly see their business diminish.

windows

It’s a bit dark, but with the tax we save, we can buy lots of candles! (photo: Elliot Brown CC BY)

Window taxes went out of fashion quite a while ago, but the taxes that are commonly raised today likewise weigh on the economy. Let’s look at the biggest chunks: income tax and payroll taxes (such as National Insurance), and VAT (or similar sales taxes). According to Eurostat, together these represent between two thirds and three quarters of the total tax revenue (respectively 46% and 21% in the UK, 60% and 15% in Belgium, and 55% and 18% across the EU).

Payroll taxes make hiring employees more expensive to employers, so they will use less staff. Income tax makes an hour’s work worth less to people who work, so they will work less. Sales tax makes the goods and services households buy more expensive, so they will buy less of it.

If taxation reduces both the demand for and the supply of labour, and the demand for goods and services, there will be less economic activity than would otherwise be the case. This makes taxation – as Colbert observed – troublesome: in a complex economy, finding the optimum is, in practice, an impossible task.

Insensitive to disincentives

Are there any things where the extra cost of tax has little effect on the demand? Maybe the necessities of life, like housing, food, or clothing? We need a roof over our heads, something to eat, and something to wear after all. But of course we can still reduce our consumption of necessities as the cost goes up, as the we’ve seen with taxing windows: a smaller house, eating less expensive stuff and wearing our clothes until they’re no longer fashionable. What about petrol? We’ve been driving ever more frugal cars for decades, and now there is not much left to gain, we get people in yellow vests protesting against high fuel duties. The geese are hissing.

And all the while the economy is running more slowly.

Tobacco and alcohol are perhaps a better idea: some people keep on consuming them, despite rising taxes on them. But aside from the dubious ethics of governments relying on the weaknesses of addicts for their revenue, there is the risk of smuggling. A 2002 report for the World Health Organization estimated the UK’s annual tax revenue lost to smuggling at £2.5 billion (£4.2 billion in today’s money, around €4.5 billion or $5.5 billion). So we can forget that too.

Maybe there is stuff we cannot avoid, that governments could tax? Inheritance tax or estate tax, sometimes called a “death tax”, seems a good candidate. What could people do – refuse to die? They could of course try to dispose of their assets before they die, and so still escape the tax. (It is also a very unpopular tax.)

Less politically controversial is the idea of taxing luck (as long as it is the good fortune of an inheritance). Clearly Bill Gates and Jeff Bezos, the richest two people in the world, have been pretty lucky to amass so much wealth. We may not be able to tax good fortune directly, but how about taxing the assets their luck got them? Seems like a genius idea, were it not for the fact that Gates, Bezos, and most other rich, lucky entrepreneurs didn’t get rich by sitting on their backside all day. Taxing their wealth would not really be taxing their luck, but their labour. Entrepreneurs are no less insensitive to disincentives than the rest of us, so this kind of tax would also harm economic activity.

Is there no way to accumulate wealth by sitting on one’s backside? We already had to dismiss inheriting, but another one is the lottery – can we not tax lottery wins without detriment to the economy? Let’s see. You’ve just become a lottery winner and they call you up: “Congratulations! You’ve won more than eight million! But wait, don’t order that yacht just yet – first we’re going to take away half in tax!” If that was how it worked, many people would lose interest in the lottery, and if raising money was really that easy, governments would already be doing it. (And of course, they are taxing lotteries – only not quite so blatantly. It is not a large proportion of the wins, but a large proportion of the ticket price that goes to the state. Here too, it’s not luck that is being taxed, but the activity of trying to be lucky.)

So is there really nothing that can be taxed without inevitably also suppressing economic activity? Could we get people to pay tax voluntarily, and not surreptitiously through levies on what they do?

Conspicuous taxation

Joshua Gans, an economist at the university of Toronto, has made an intriguing proposal: take a leaf out of commercial companies’ book. Airlines manage to sell first class seats for a large multiple of those at the back of the plane, credit card companies charge eye watering annual fees for an exclusive platinum card. Their customers happily pay good money because it allows them to signal their status quite openly.

licenceplates

Albert and Bill, the licence plate brothers

Governments could award people who have contributed at least a billion in taxes over the last decade with, say, Rhodium (even more precious than Platinum!) status, with commensurate lower tiers for more modest taxpayers. Who knows, just like people taking an extra flight to move up a tier or maintain their status, people would even voluntarily pay more taxes too.

Far-fetched, perhaps, but a tax on signalling already exists. In the UK, the Driver and Vehicle Licensing Agency sells and auctions personalized licence plates for cars. You can buy a plate that vaguely spells your name (AL66ERT sold for £2,000 earlier this month) – just search the site for something that tickles your fancy. Everyone will know that you’ve got the dosh to pay for a private plate, while your money ends up in the government coffers.

A few years ago, the Belgian government introduced an even fancier scheme: much like in the US you can (within limits) specify any combination of letters and digits. You do pay for the privilege, though: it’ll set you back a one-off fee of €1000 (£900, $1150). Unfortunately, even this is not a miracle solution. When the government raised the fee to €2000, the number of applications fell by nearly than 75%. Even here the geese are hissing.

No wonder taxation remains a contentious affair, in which various interest groups argue about what should be taxed and how much. But whatever choices the government of the day makes, somebody somewhere in the economy will be doing less than they otherwise would.

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

The price of attachment

(featured image credit: Les Chatfield CC BY)

Value is in the eye of the holder, even more than in the eye of the beholder

Something terrible happened to me last weekend. Well, that is what it felt like, anyway. My email had dried up. Not even spam came through. At first, I didn’t even realize there was something amiss: perhaps it was just a temporary lull, and normal service would be resumed. But towards Saturday evening I started getting a little worried – even more so when I started getting messages via other channels from people who reported mail they had been trying to send had bounced.

Thankfully, after a bit of sleuthing, I discovered the reason why no mails were coming through, and fixed the problem. Technically, it was a doddle, but that was only part of the whole story. It was not the fact that I had missed a few emails over the course of maybe 12 hours that was so terrible.

A time machine

The trouble was a Gmail account through which all the incoming mail of my multiple primary work and private mailboxes passes. It has a capacity of 15GB. That is a huge but abstract number which, so I discovered, corresponds with more than 170,000 mails (some with large attachments). For more than 7 years since I created it, it needed no attention at all. But eventually, last weekend, it had filled up and refused to let any more mails pass through.

mails

Hanging on to my emails. *My* emails!

I do routinely manage my primary mailboxes, regularly deleting the oldest mail after archiving the important messages. But here I was suddenly confronted with emails going back all the way to 2011. It was like stepping into a time machine. I could see an email exchange with an old friend I’ve not heard from for years. The agenda of a management meeting at a previous employer. A purchase I’d made on eBay. A joke from one of my children. All these emails, my emails, contained so many traces of my past I did not even realize I still had.

Here were many messages that, for sure, I would not have archived, and the mere discovery of them all made me very reluctant to delete them. I almost felt physical pain as I dispatched 30,000 of them to the bin to make space and restore my email service. I had a bad case of the endowment effect.

This is the name given to the propensity most of us exhibit to attribute more value to things we possess. The stacks of old magazines, boxes of nuts, bolts, bits of wire and plugs, offcuts of wood or other items of detritus that populate lofts, cellars and garden sheds are tangible evidence of this phenomenon. We often rationalize holding on to all this stuff by claiming that “it might come in handy one day”. Sometimes we can even prove that we once located just the right screw for some odd job among the jumble. But the real reason we keep it all is simply that we already possess it.

Imagine how little you’d be willing to pay for a box containing someone else’s random collection of old odds and ends.  And imagine how much you would require to agree to throw out your own box of bits and pieces. This difference between Willingness to Pay and Willingness to Accept is a way of quantifying the endowment effect.

A mugs’ game

One of many experiments demonstrating this is described in a classic paper by Daniel Kahneman, Jack Knetsch and Richard Thaler. They gave half of the students in a Cornell university lecture room a mug which was sold for $6 in the local store, and then established how much those who received one would sell it for, and how much those who didn’t get a mug would pay for one. The median asking price was $5.25, while the median offer price varied between $4.25 and $4.75 over four rounds.

We typically see the endowment effect play out for physical objects. But it also applies to the realm of the intangible as I experienced – and not for the first time. My computer’s drive is full of old files which I keep “just in case”, much like miscellaneous bits of hardware. I’d sooner upgrade to a larger drive than to have to weed out my ancient documents and folders. They’re mine!

Perhaps even more striking is the situation with recorded TV programmes. I have dozens of them on the TiVo recorder, and on stacks of DVDs and indeed old VHS tapes. Would I record these programmes if they were broadcast today? For many of them, most likely not. And yet, I strongly resist throwing away these old tapes and DVDs, or deleting the unwatched programmes that have been taking up space on the TiVo (permanently 95% full) for two years and more. Somehow, the mere fact that I recorded these programmes has given them value – so much value that I cannot let them go.

Ownership not required

It turns out we don’t even need to technically own something to value it more. Canadian researchers Charan Bagga, Neil Bendle and June Cotte investigated how people perceive objects they rented or borrowed, or that are not in their possession. One of their studies took place at an ice skating trail, where most visitors brought their own skates, but every day 20-30 people still rented them from the establishment for $6 (payable in advance). Over a period of 10 days, they divided skaters who came without their own equipment into three conditions. In the rental condition, skaters paid for the use of the skates as normal, while in the borrowing condition, skaters were told the establishment ran a special promotion, and they could borrow the skates free of charge. In both conditions, when the skaters came to return the skates, they were asked how much they’d be prepared to pay for them. In the final condition, non-possession, skaters were asked how much they’d be prepared to pay for the skates after they had chosen them, but before they paid for the rental.

skates

Bought, rented, or borrowed? (photo: guvo59)

The researchers found that people who had rented the skates were willing to pay significantly more for them (nearly $39) than people who had borrowed them ($26.60) or those in the non-possession condition (just over $30). The difference between the latter two conditions was not significant. Subsequent studies, using tea mugs, pens and beer mugs in similar conditions explored this further, confirming that renting objects activates the endowment effect, while borrowing doesn’t.

It is not surprising that such a powerful and common effect can be observed widely – and not just in bulging email inboxes, lofts and garden sheds, or computer drives. We overvalue what we own, and that may cause investors to hang on to stocks even if they are inappropriate or no longer profitable. House sellers demand too high a price compared to what the market will bear, and take much longer to complete a sale. Car salespeople invite prospective customers to sit in the vehicle in the showroom and ask them to imagine where they’d drive to – or indeed insist that they take it for a test drive, perhaps even a whole weekend – to increase the chance of a sale. We are offered free trials, or the chance to return items if we don’t like them.

But we can also use it to make better choices. Say you’re booking a holiday, and you’re offered an upgrade to a flat with a sea view for £100 extra. Is that a good bargain? Is two weeks of looking out over the sea rather than the car park worth that amount of money? That may be hard to establish. In that case, imagine you already have paid for it, and they’re offering you a downgrade: pay £100 less if you don’t want a sea view. If the endowment effect is strong enough, you won’t regret paying £100 for the view, and if you’d happily downgrade, keep the standard room.

A final thought. Could it be that the endowment effect, that so strongly illustrates our attachment to things we possess explain why private property is such an important cornerstone of most societies in the world – and perhaps why societies based on collective ownership tend to have so much difficulty in establishing themselves and persisting?

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