Bigoted? No, just overconfident and bad at statistics

There are different shades of discrimination. There is active dislike of a particular group of people, and then there is the tendency to make generalisations about individuals based on the (perceived) characteristics of the group you associate them with e.g. of the “you’re a woman and therefore probably a bad driver” type. Both, of course can be damaging and impede different individuals’ ability to achieve their full potential in society. The former is especially frowned upon and is pretty much socially unacceptable. In principle, the latter is becoming so too – but can we stop ourselves making generalisations that influence our decision-making?
 

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A recent study by behavioural economics academics Konstanze Albrecht, Emma von Essen, Juliane Parys and Nora Szech suggests an interesting division between the behaviour of men and women assessing the likely performance of individuals in tasks that men are traditionally good at – in this particular study, mental rotation tasks. They find that women tend to be over-influenced by the average performance of a group of people rather than the specific attributes of an individual. So, for example, women assessing other women for a role that men tend to perform better at focus too much on the average performance of most women, rather than the actual performance of the woman they are assessing. But this effect is not specifically about gender discrimination in favour of men. The study shows that even in an entirely neutral context, where you have two groups of people, divided on some other arbitrary lines, women will tend to be over-influenced by average performance when assessing an individual: even if it is entirely clear how good the individual is, so that any information about the group they belong to is entirely irrelevant.
 
For men, the tendency to take into account irrelevant information about group performance is there, although it is stronger when groups are divided along gender lines. Interestingly, the most self-confident men tend to overvalue male performers specifically – perhaps because they tend to project their own self-confidence onto other men.
 
Conclusion: If you’re a woman applying for a job in a male dominated sector, you want to be interviewed by a man with low confidence.

The paper, Updating, Self-Confidence and Discrimination is here.

An economist’s guide to keeping your New Year resolutions

Got some New Year resolutions? Wondering how you’re going to keep them? Think you could benefit from some behavioural economics and psychology tips (who doesn’t?!).

1) Make your resolution public. If you care about what people think of you, you probably won’t want them to see you fail. So, tell your friends and family what you’re aiming to do. See psychology expert Robert Cialdini’s work on public commitments for more details, or take a look at his book, “Influence” for a summary. 

2) Make it costly to fail. If it will cost you money to fail, you may be persuaded to try harder. But beware: paying up-front for, say, a gym membership might not work as well as you think. Economists Stefano DellaVigna and Ulrike Malmendier looked at gym members at US health clubs and found that people overestimated how much they would use the gym, and were therefore paying for expensive gym contracts that they weren’t using. Instead, try making a commitment to paying out a certain amount contingent on not achieving your chosen goal. For example, make a bet with a friend that you’ll achieve your goal (unless your resolution is to gamble less in 2012). Or commit to giving a certain amount of money to charity if you fail on your goal.  Websites like StickK allow you to make these types of commitments.

3) Remember it gets easier once you get into the habit. Behavioural economics experts like Daniel Kahneman, Richard Thaler and Cass Sunstein all use “System 1″ or the “automatic system” to describe the type of human thought that happens automatically or instinctively – for example, quickly withdrawing your hand from a hot surface. If you can manage to get into a routine, gradually your preferred behaviour will turn into a habit – it starts to become a bit more like a System 1 process. For example: the habit of getting off one station early and walking home from work. After a while of concerted effort, you’ll (hopefully) find yourself doing it without thinking much about it.

Good luck!

Got any other tips? Post them below.

Fairytale economics

 Are you sitting comfortably? It’s time for a Five Minute Economist Christmas special: in an unusual fit of whimsy not unconnected to the festive season, economists discuss their take on a selection of fairytales. Enjoy, and see you in the New Year, for Five Minute Economist’s guide to keeping New Year resolutions.

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Jack and the beanstalk
Jack is sent off to market to sell a cow. On the way, he meets a man who convinces him to swap the cow for magic beans. Jack’s mum is unimpressed and throws the beans out of the window. Overnight, a beanstalk grows in the garden. Jack climbs the beanstalk, meets a giant. Fee fi fo fum etc. Jack steals gold and various other items of value from the giant, and cuts the beanstalk to stop the giant climbing down after him.

Mr In Fo: A big problem here is information asymmetry between Jack and the man who sells him the beans. Jack has no idea whether the beans are magic or not, and naively does not even consider that the seller has an incentive to exaggerate the magic quality of the beans. Luckily for Naive Jack in this instance the seller is on the wrong end of the asymmetry, not realising how valuable the magic beans really are.

Ms Yoosta Bea Banker: You haven’t thought about the ex-ante risk. I suggest that the seller knew all about the power of the magic beans, but when taking into account the high cost and risk of failure, decided they were only worth as much as the cow. God knows what Jack was thinking at the time. This is risk-seeking behaviour, of the like I’ve never seen since the Lehmans Brothers 2006 Christmas party.

Dr Roolo Flaw: This story does not have a fairytale ending. What I see here is the complete disregard for the enforcement of property rights. Where is the incentive for giants to engage in productive behaviour if idiot bean swappers are allowed to come along and steal hard-earned profits? “Jack and the Beanstalk” is anti-capitalist propaganda, and it’s shocking that we’ve been feeding our kids this nonsense for so long.

Cinderella
Poor Cinderella lives with ugly stepsisters and an evil stepmother. Her fairy godmother takes pity on her and says Cinderella will go to the Ball. The fairy godmother ingeniously makes a carriage out of a pumpkin, and turns Cinderella’s rags into a beautiful gown and glass slippers. The catch is that Cinderella must get back before midnight, when the magic wears off. Cinderella meets the prince, but has to rush off, leaving her slipper behind. The prince uses the glass slipper to find his Cinderella among all the ladies of the land. 

Mr Ogre Nised: Cinderella has a classic overconfidence problem, thinking that she had enough time to speak to the Prince, get a proposal in the bag, and leave before midnight.  Luckily for her all turned out well, although after much costly fuss which could have been avoided if she had planned enough time to have a proper conversation with the Prince about who she was. But then studies have shown that we’re all over-confident, apart from people who are clinically depressed. So that’s something for Cinderella to be pleased about.

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Rumpelstiltskin
A miller tries to impress the King by telling him his daughter can spin straw into gold. King shuts miller’s daughter in room and demands she spins straw into gold. Rumpelstiltskin appears and offers to help in return for the girl’s first-born child. King is happy and marries girl. The new queen gets out of her promise to Rumpelstiltskin by guessing his name.

Ms D’Emmo Crassey: What is so surprising about this case study is that the media and public have never been particularly interested in the amoral behaviour of the father. This type of lobbying behaviour has clear parallels to our current problems, when we have powerful companies promising Governments all sorts of things in return for special treatment. The King was right to try to test out this lobbyist’s claims: too many politicians today accept all sorts of unevidenced assertions from companies at face-value.  

Mr Sent Ralbank: That is slightly surprising. But not as surprising as the fact that, having discovered a technology for turning straw into gold, the King did nothing about it. I would have expected him to attempt to drastically raise gold production. Of course, in a country where gold was the basis of currency, this would have simply increased the money supply and inflation without actually increasing economic growth. But it would have been a way for an unscrupulous King to pay his debts. This King shows remarkable self-restraint and infinite wisdom for this period in history. It’s possible he may have been an early economist.

Want more economics posts with a Chrsitmassy feel? Check out Five Minute Economist’s Guide to a utility maximising Christmas

Does money makes things worse?

Image by katerha via Flickr

Want to encourage people to do something? Give them a monetary incentive: pay them to do it, or fine them if they don’t. This is the traditional economic answer. But over the years, various studies have shown that it isn’t so simple.

A recent paper by Samuel Bowles and Sandra Polania-Reyes at the University of Siena is a great attempt to bring together the results of different studies in the area and try to draw out some implications for Government policy. In doing so, they summarise some particularly interesting examples:

Haifa day centres: Imposing fines on parents who arrived late to pick up their children from day centres in Haifa, Israel, entirely backfired. The number of late pickups doubled after the fines were introduced.

Irish bag tax: A small tax on plastic bags had the desired effect, resulting in a 94% drop in plastic bag use in two weeks.

Swiss voting: When authorities removed fines for people who didn’t vote, voting turnout fell, as you might expect. However, monetary incentives might not be the only thing at play here, because reducing the cost of voting by allowing postal votes had no effect  on turnout.

The authors of the paper argue that it isn’t so much the fine itself that is important, but what the imposition of a fine says about the different parties involved. They say that: “Fines deployed either to exploit or to control the target (or that give this appearance or that have this effect) are likely to be less effective… and may even be counterproductive. The reason, we think, is that they activate the target’s desire to constitute himself or herself as a dignified and autonomous individual who is treated fairly by others.”

They also recommend that monetary incentives are accompanied by explanations that emphasise how people’s actions will be socially beneficial, so that people are more likely to endorse the purpose of the policy, rather than be offended by it, or think it is unjust. For example, the Irish plastic bag tax was preceded by a publicity campaign, which emphasised the social obligation to use plastic bags wisely. In contrast, no explanation was given to parents for the Haifa day centre fines.

I think the simple message here is that people just like to be treated like grown-ups.

The paper, “Economic incentives and social preferences: substitutes or complements?” is here. The paper also contains references for the Haifa day centre, Irish bag tax and Swiss voting studies summarised above.

What’s the meaning of happiness?

Satisfaction? Contentment? Excitement? Peace? All of the above?

Earlier this week, the UK’s Office for National Statistics (ONS) published findings from its initial investigation into the UK’s subjective well-being. It tested out various types of questions, asking people about their satisfaction with life, whether they felt that the things they do in their lives are worthwhile, and whether they felt happy on the previous day and whether they felt anxious on the previous day. The answers to these questions were related, but there wasn’t an exact correlation, for example, in general, people tended to be more likely to give higher scores when asked about how worthwhile their lives were rather than how satisfied they were. 

The ONS also showed that you would get different results depending on whether you ask people if they were happy rather than joyful, and even if you asked them if they were calm rather than relaxed or peaceful.

Is there one definition of happiness or do we all experience happiness in different ways? Previous studies have shown that what people think of as happiness varies across culture and age. For example a study by Cassie Mogilner, Assistant Professor of Marketing, suggested that the meaning of happiness steadily shifts over the course of life from excited-happiness when one is young to peaceful-happiness as one gets older.

In a more recent paper, researchers Cassie Mogilner , Jennifer Aaker and Sepandar Kamvar explore the idea that the reason why the meaning of happiness appears to change with age is because young people are more focused on the future – and therefore equate excitement with happiness, whereas older people are more focused on the present – and therefore equate calm with happiness. Now, I don’t know about you, but this doesn’t seem immediately obvious to me.

Does this excite you?

But they do in fact show that getting younger people to focus on the present leads them to equate calm with happiness, and getting older people to focus on the future leads them to equate excitement with happiness. And what people think happiness means influences what they think will make them happy, and therefore can change their buying habits. For example, young people were more likely to choose a “calm” herbal tea (Sweet Dreams, a relaxing blend of chamomile and mint) , when they were primed to focus on the present – rather than the more “exciting” option (Peppermint, a refreshing peppermint blend). I don’t tend to think of any types of herbal tea as “exciting”, but maybe that’s just me.

All these different meanings of well-being and happiness mean that there are lots of questions we need to answer if well-being is to become more useful in helping Governments make better policy. Luckily it’s something advertisers are interested in too. There’s nothing like commercial incentives to advance human knowledge.

The full paper, “How Happiness Impacts Choice” is available here: http://gsbapps.stanford.edu/researchpapers/library/RP2084-1.pdf

The ONS study is here: http://www.ons.gov.uk/ons/dcp171776_244488.pdf

High Pay Commission’s transparency blind spot

Could we be going back to this?! Image via Wikipedia

“By 2035 the top 0.1% will take home 14% of the national income. Equivalent to that seen in Victorian England.” So proclaims the final report of the High Pay Commission, which was set up to look at the inequality in pay in the UK and what to do about it. They had to do a bit of extrapolating at both ends to come up with this conclusion, as they only had data from 1913 to 2007, and the Victorian era ended in 1901. But subsequent eras such as the Edwardian era and World War 1 have less of a whiff of the workhouse and Oliver Twist about them, so you can see why the Commission were keen to stretch the data out a bit.

The pedant in me is slightly annoyed by this example of engineering, the lack of clarity on whether they have taken tax into account or not, and the mis-spelling of “Dan Ariely” as “Dan Ariel”. But these are, perhaps, relatively minor quibbles. There is plenty of other data out there which points to the fact that those at the top are seeing their pay grow at a faster rate than those lower down. And anyway, the Commission’s data engineering allowed me to start my blog post with a gratifyingly dramatic quote, so I won’t complain too much.

The report contains some very interesting ideas and possible solutions, including placing employees on remuneration committees, shareholder voting on remuneration arrangements for up to three years ahead, and publicly advertising non-executive positions. But the report provides less credible justification for some measures, which I put down to two reasons. Firstly, it does not contain a thorough enough analysis of why there is a growing gap in pay, what has or hasn’t worked in past, and what this means for what needs to be done, including a proper discussion of different options. For example, there is no discussion of the idea that middle-skill jobs are becoming less important with improvements in technology, and all the ramifications this has for the salary that people lower down in organisations can demand. Secondly, as with so many policy thinkers, there is a tendency to idolise transparency, without considering what type of transparency is needed and why.

This perhaps partly explains how the commission have ended up with the recommendation to “publish the top ten executive pay packages outside the boardroom”. Clearly, there is an apparent contradiction here with one of the report’s explanation for rises in executive pay, the ratchet effect, whereby benchmarking of executive salaries leads companies to continually attempt to pay above average. How do we know that publishing the top ten executive pay packages outside the boardroom won’t lead to the same result, but with a slightly larger group at the top heading off into the stratosphere instead? The report does not provide any reasoning to explain why its other recommendations might outweigh this effect.

What would happen, I wonder, if there was increased transparency all the way down an organisation? At specific skill levels, this might reduce discrepancies in pay, perhaps with some ratcheting up in the short-term for those who were previously under-paid. But the ratcheting could not continue over the long-term, at all skill levels, without seriously affecting the competitiveness of a firm. No doubt, there would be upward pressure on pay in some areas, but these would tend to be areas where there is high demand for certain types of skills, relative to supply. These areas wouldn’t necessarily be at executive board level:  they could be for researchers with specialist knowledge, economists maybe (I think hopefully).

Only being a five minute economist, I don’t have the time to fully research this question. But please do let me know if you have seen any interesting research on the effects of different types of pay transparency measures in firms. 

Occupy London should demand greater competition

The Occupy London protests are still going strong with the protesters having seized an empty building belonging to UBS to create an “Ideas Bank”. Nice idea. The Occupy protests do have an important message, so it is unfortunate that so far, its main victim has been accidental – the Church of England, which descended into confusion over whether any of the protesters had valid points to make, and if so, did it justify the fact that they were making it difficult to get to the St Paul’s Cathedral gift and coffee shop?

 It hasn’t helped that the protesters’ aims have been slightly vague so far. According to their website, they are “in agreement that the current system is undemocratic and unjust.” More specific grievances are listed under their “initial statement”, and among other things include:

“We refuse to pay for the banks’ crisis.
We want regulators to be genuinely independent of the industries they regulate.”
 
Worry about lobbying is a valid concern. It is difficult to know for certain how much lobbying goes on by different interest groups, and how effective they are. Theoretically, there is nothing intrinsically wrong with different interest groups (including firms) talking to politicians and regulators about their views on different policies. But it is a concern if different members of society are better able to access and influence compared to others. And it is a fairly safe assumption that some groups (particularly large companies) have a lot of resources to throw at talking to politicians and regulators, even going as far as funding Government special advisers, as was apparently the case in the Adam Werrity affair. 
 
How do you solve the lobbying problem? One option is to go down the regulatory rules route, for example, having register of lobbying organisations and making sure that there is transparency around meetings that go on between politicians and lobbyists. But it’s pretty difficult to go round policing who’s meeting who and what people say all the time – what do you do about informal meetings between people who know each other in a social context? News of the World had a go at policing what people say (albeit for slightly different reasons), and look where it got them.

So what about turning to that amazing process by which private firms are turned into enterprises that work for the social good: competition.
 
Ah the magical alchemy of competition, whereby firms compete for consumers by providing good, value-for-money products and services. (Caveat: like all magical spells, competition has the potential to go wrong if there are other problems in the market. The classic example is firms competing to reduce prices by skimping on health and safety, or environmental protection. The answer, of course, is not to get rid of competition altogether, but to have health and safety requirements, and ensure there are incentives not to pollute, like pollution taxes. Competition, like magic in the hands of an untrained wizard, doesn’t always deliver what you expect if you don’t properly understand the market and different firms’ incentives. I’m rather warming to this competition/magic spell metaphor. It may warrant a future blog post.)
 
But, I hear you cry, you are simply an economist who has ignored the politics of the whole thing. You’ve blabbed on about free markets (I didn’t actually) and competition until we thought you were Alan Greenspan, and completely ignored the fact that you were trying to solve the problem of lobbying by big corporations.
 
Patience. I was just getting to that. (Am I sounding too smug? The competition/magic metaphor may be going to my head. I must remember that being an economist does not actually make me a wise old sorcerer).  In a competitive market, with many different firms, it is far more difficult for firms to coordinate – this makes it trickier to lobby as one large industry body. It also makes it more difficult to lobby when firms don’t have huge resources to throw at it.

A recent research paper shows that the level of competition in a country’s financial sector has a significant impact on politicians’ ability to force reforms related to financial regulation through. The paper, by Susie Lee and Ingmar Schumacher, shows that financial instability tends to be followed, as one might expect, by more regulation: but significantly, this increase in regulation is less likely to happen in countries with low levels of competition and strong lobbying.  

Now, of course, big firms will probably lobby against competition reforms. That’s where Occupy London could come in with some additional public pressure to get reforms through more quickly. It’s a concrete idea to campaign on, it could contribute to solving the problem, and crucially, just like any good lobbyist, it speaks in the same language of government and regulators in the UK, surely none of whom could possibly argue that more competition is a bad thing – especially in the wake of reports such as the Independent Commission on Banking, which concluded that there are long-standing competition issues in UK retail banking, with high levels of market concentration, made worse by events since the financial crisis, such as bank mergers. Helpfully, the report also sets out ways of increasing competition, including divestiture of assets and making increasing transparency and switching.

Occupy London: what more could you want?
 
The paper by Susie Lee and Ingmar Schumacher , “When does financial sector (in)stability induce financial reforms?”, is here.

You give nudges a bad name

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Last week, I read the following newspaper headline: “MPs deride Lansley’s ‘nudging’ deal with food and drink firms“. The story was based on a report by a committee of UK MPs on the effectiveness of UK Government health policy, and in particular its “Responsibility Deal” with food and drink companies, which came in for a fair bit of criticism.

Somehow, in the public consciousness of the UK, “nudging” has become synonymous with some form of self-regulation, where Government takes a step back and relies on the private sector to do what’s best. So, for example, under the Responsibility Deal, various food and drink companies have signed up to “pledges” in the form of various actions designed to have a positive impact on the nation’s health. A very large proportion of these include providing more information to consumers, or donating money to health charities and programmes.

Most of these pledges are not really nudges at all. The occasional one is perhaps, at best, an elbow twitch, quickly suppressed as the firm concerned (unsurprisingly) remembers that it’s there to make a profit. For example, there is Heineken offering to distribute glasses that display information and alcohol units – and that are branded with the Heineken logo.

Creating a good nudge requires understanding what influences people when they make decisions and tweaking the setting in which they make choices to guide them to the better outcomes. For example, putting the healthy food at eye level in shops. It is more libertarian than banning things, in that it does not restrict people’s choices. But actually, it can require some quite interventionist Government policy, whereby Government tells firms how to market and sell products. And every good nudger knows that just providing information to consumers, which forms the basis of many of the Responsibility Deal pledges, is, unless carefully designed and managed, doomed to fail.  

Nudge fans: I fear that unless something is done to salvage its good name, nudging is headed for public relations failure.

Tall and handsome

By now, we know that because of some biological reason or other, being tall gives you an advantage, especially if you’re a man. In fact if you’re a short man, you no doubt deal with “humourous” comments every day – that is, unless you’ve snapped and already succumbed to short angry man syndrome. Although even then, they’re probably making “short” jokes when you’re not listening.

Consistent with other research, a new working paper by Italian economists Vincenzo Carrieri and Maria De Paola finds that there is a positive correlation between height and economic and health conditions, which means that taller people tend to be happier. One reason for this positive correlation may be that height is an indicator of good nourishment and health early on in life, which also drives cognitive ability and good health in later life. Other reasons include the possibility that taller people have an advantage in the job market as they are perceived as being successful and good at what they do, and the advantage (particularly for men) in the marriage market.

These effects have all been looked at before, but what is particularly interesting about this paper is that the authors look at specifically look at different age groups. They find that for young Italian men, height has a positive effect on happiness, even after controlling for health and economic status. By contrast, for other age groups, once health and economic status has been taken into account, there is no remaining effect of height on happiness.

They say:

“We speculate that the beneficial effect of height on young males’ well-being may be related to the fact that in some countries, such as Italy, and especially for men, height is considered as a proxy for handsomeness.”

Image via Wikipedia

Perhaps for young men who have yet to achieve their career potential and life aspirations, height and handsomeness is especially important for social status.

But if you are a short man living in Italy, take heart from the fact that Berlusconi isn’t, as far as I can tell, especially tall or economically competent. Yet, even the Eurozone crisis can’t seem to stop him grinning.

The paper is here.

Economists are hedonists!

Hey, all economists are hedonists! Yeah, that man in the dull tie over there. And that dismal scientist too. And that one staring at her spreadsheets on a flickering screen. Oh yes, hedonists.
 
Obviously, I do not mean we’re all whipping off our suits and partying on Ibiza like it’s 1999. Firstly, current economic conditions are different in several ways from those in 1999. Secondly, we’re not THAT ker-rrazy!
 
What I do mean is that the economics undergraduates learn today, involving using algebra to maximise utility functions subject to budget constraints (see Five Minute Economist’s Guide to a Utility Maximising Christmas for an idea of how this works) borrows much from the philosophy of Hedonists, as I have now learnt from Tomas Sedlacek’s “Economics of Good and Evil”. According to the Hedonist school of thought, nothing is intrinsically good or evil: the utility or pleasure that an act or good brings is what matters. Therefore the key to a good life is to maximise utility. This is in contrast to the Stoic school of thought, which holds that the morality or goodness of an act has nothing to do with the utility it brings: thus it does not matter if good deeds are unrewarded. What should matter to the individual is that he or she did a “good” deed.

Tomas Sedlacek’s book is not your run-of-the-mill economics book. For one thing, Adam Smith’s works don’t even turn up until over halfway through the book: the first half takes in myths from Gilgamesh, Ancient Greek philosophers, Hebrew thought and Christianity, in each case showing how the different philosophies have influenced society’s thinking, and what this meant for how people thought about economic problems. So the book explains different societies’ view of progress: the Epic of Gilgamesh suggests that people viewed progress and knowledge as a means to civilisation, the natural and good state for Man, whereas the Old Testament suggests that in Hebrew thought, moving away from nature was often accompanied by sin (for example, God regularly appears to be wiping out cities). 
 
If anything, “Economics of Good and Evil” might be what economics books would look like today if Adam Smith had never written “The Wealth of Nations”, and was known only for his earlier work, “The Theory of Moral Sentiments”, which discussed how ethics and morality are the building blocks of society, and interestingly suggests that Adam Smith was strongly influenced by the Stoical – not Hedonist – school of thought.
 
The key message of the book is that since the Wealth of Nations, we have lost the ethical dimension to economic questions, pretending that in economics “good” and “bad” don’t exist, when they so obviously do, and that consumption is the way to maximising happiness. In common with some of the new research on happiness economics, Tomas Sedlacek argues that we don’t know what is good for us, or what makes us happy, and happiness might not be best achieved by making it an explicit goal, but that it instead is a by-product of other actions.
 
Perhaps it’s time for me to get some pre “Wealth of Nations” reading material on my list.
 
More information about the book is here.