What’s the difference between a banker and a GP?

This week the Financial Services Authority issued a “wake-up call” to the financial services market to re-think the way staff are rewarded. Consumer trust in financial services providers is in tatters. The market has been hit by a spate of mis-selling scandals including investment schemes and payment protection insurance.  The FSA has becoming increasingly concerned that many of those who advise customers on the best product are on bonus-based incentive schemes that are “rotten to the core”. The result is that those selling or giving advice are perceived to be motivated mainly by the rewards on offer to them – and the consumer loses out.

Meanwhile, in another sector, the function of advice and financial management is arguably becoming more and more linked: a key reason for the recent health care reforms is to bring responsibility for healthcare expenditure closer to GPs – thereby ensuring that commissioning decisions provide value for money.

Conflicts of interest in the NHS are not new: the growth in the use of financial incentives in healthcare has been around for years. This week, even before the current reforms take full effect, the BMA claimed that the NHS is offering GP practices money in return for sending fewer patients to hospital – money that can be used either on improving services or on boosting GPs’ own salaries.  The Department of Health responded by saying that it will stop such contracts.

But by bringing financial decisions and the provision of medical advice ever closer together, the current reforms are, if anything, likely to entrench these types of conflict of interest. And pressures to save money are hardly going to go away in the near future as the NHS battles to save up to £20billion by 2014-15.

In financial markets, mixing financial incentives and the provision of advice has undermined professional standards, resulting in scandal after scandal, and consumers ending up with products they don’t want or need. At the moment, trust in GPs is high. But healthcare markets should heed the warnings of the financial sector. Badly structured incentives can damage relationships with patients and weaken trust in the whole market. Let’s not forget that once upon a time, bankers were seen as sound and trustworthy too.

This post was first published on the SMF Market Square.

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Don’t tell me ’cause it hurts

English: Uncooked bulgur wheat

Bulgur wheat: tasty, calorific or both?

It is often taken for granted that more information – or at least more well-designed, easily understandable information – will always be welcome. So in the UK, traffic light diagrams representing nasty sugars and fats is increasingly plastered across food products. But do most people want to know?

In a very preliminary first draft of a paper* on what they call “Strategic Self-Ignorance”, researchers Linda Thunstrom, Jonas Nordstrom, Jason Shogren, and Mariah Ehmke describe an experiment to find out. They offer some lucky participants a choice of lunchtime meals: chicken and bulgur or roast beef and glass noodles. Before choosing a meal, participants had to pick one of two folded sheets of paper: one of which contained calorie information. The idea was to make it costless to access information about the meal before making a choice. Basically, if you were a lucky lunchtime diner, you might as well pick up the paper containing calorie information, even if you weren’t interested in it.

[In case you’re wondering, the roast beef and noodles had 490 calories, compared to 900 in the chicken and bulgur. Who knew? I thought chicken and bulgur sounded like the healthy option.]

According to this preliminary draft, the majority of lucky lunchtime diners picked up the piece of paper containing no calorie information – preferring not to know. As you might expect, people were more likely to ignore information if they expected the meal to be tasty.

We already know that information needs to be easily accessible and digestible for people to be able to use it to make decisions. But here’s another problem: giving people the option of more information may not work – particularly where there is a conflict between short-term gratification (tasty chicken) and long-term health (heart attacks et al.). It’s almost as if the conflict is so painful that some people would prefer to avoid it: and not knowing for sure that there is a conflict at all is a good way of doing just that.

The preliminary draft of “Strategic Self-Ignorance” is here.

*On the front of the paper, it says “PLEASE DO NOT QUOTE!”. I am strategically ignoring this because the study is just too interesting. Sorry. I hope my insertion of the words “preliminary” and “draft” across the post makes up for this.

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Paying for psychic pigs


It hath been decreed that the biggest football tournaments must be accompanied by a psychic animal – be it octopus, fish or pig. Someone really ought to start to blog about football and behavioural economics, because this popular sport of kicking balls across fields throws up case-study after case-study: Ronaldo’s magic wrist-bands, over-optimism fuelled an inability to learn from past performance (in the case of England fans), and a desperate wish to believe in ESP. I can’t imagine what explains this link.

It is timely that economists Nattavudh Powdthavee (London School of Economics) and Yohanes Riyanto (Nanyang Technological University) have published a new discussion paper outlining the results of their experiment to see whether people would pay for useless advice that apparently predicted the results of a fair coin flip.

This is how it worked: people had to place bets on the outcomes of five coin flips: heads or tails each time. Each participant was also given five envelopes containing a “prediction” – they could look inside the envelopes before making a bet, but it would cost them some money. After the first coin flip, everyone got the chance to look in their envelope for free. The experimenters found that when the “prediction” in the first envelope was correct, people were more likely to buy a prediction to help them bet on the subsequent rounds – even though it was a fair coin toss. And the more predictions turned out to be right, the more likely people were to buy a prediction in following rounds. Could people have been doing it for fun? It would seem that some, at least, were taking the predictions pretty seriously – people who bought predictions in the last few rounds were more confident in their bets. They placed bets around 30-40% higher than non-buyers.

There could be some cultural factors at play here: the research was conducted with students in Thailand and Singapore – and Thai students tended to be more susceptible to these effects. But, remember this is a fair coin toss, with people well-educated enough to get into university.

Imagine how much harder it would be to know whether it is worth paying a fund manager for financial advice. A fund manager might have a bit more expertise, but many studies suggest that they don’t perform much better than random guesses. Similarly in sports, it’s extremely difficult to tell whether it’s reasonable to think that a pig might have some interesting insights into who is going to win.

The full paper, “Why do people pay for useless advice?” is available here.

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Policy for the poor

“Poor Economics”, by Abhijit Banerjee and Esther Duflo, is a book about the economics of poverty. The tagline, at least on the paperback version, is the enticing “Barefoot Hedge-fund Managers, DIY Doctors and the Surprising Truth about Life on Less Than $1 a Day”.

I may as well tell you now that this book doesn’t actually feature barefoot hedge-fund managers in the commonly used sense of the term “hedge-fund manager”. I say this not from a malicious desire to spoil the surprise, but from a kind-hearted wish to save you from crushing disappointment. No doubt, there are some among you who were hoping for a tale of arrogant riches to rags. Even I was guiltily preparing myself for a delicious bout of Schadenfreude, washed down by a nice cup of tea. But if you want to read about financiers being taken down a few pegs, this isn’t the book for you.

“Barefoot hedge-fund managers” turn out to be a description of many of the very poor – whom the author argues live with huge amounts of risk – having to raise all the capital for their businesses, and being liable for 100% of the losses. 

And some of the businesses are fascinating – like the women in Bombay who collect wet sand from the beach, lay it out on the roads and collect it once it is dry for sale to local families for washing dishes. But the real lesson in “Poor Economics” is that all the factors that make it hard for people in rich developed countries to make good decisions are magnified for the poor: this is where behavioural and development economics meet.

For instance, the poor are more likely to be unaware of basic information about immunisation. At the same time, as the book points out, the richer you are, the more the “right” decisions are made for you: the poor don’t have retirement plans or already purified water.

Many policies fail because they are flawed in their design, such as health workers who are given job descriptions that are unachievable in practice. But this also means that relatively small changes and ideas can have a large effect, even in societies where lack of trust and corruption seem impossible to overcome. For example, one study in Uganda found that 13% of funds allocated to school by central government actually made it to those schools. The resulting uproar when the results of the study were released prompted headmasters to issue formal complaints, and by 2001 schools were getting 80% of what they were entitled to.

“Poor Economics” may be about the economics of poverty, but it is actually application of a much broader revolution in economics in the last few years. Understanding and testing different individuals’ motives, aspirations and needs is fundamental to good policy-making. You can’t achieve macro-economic outcomes without understanding what’s going on at the micro-level. It’s starting to feel like a cliche, but it really is all about policy design.

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Hey, big risk taker

Correlations are fun, aren’t they? What would the newspapers be without them? With an empty Health and Science section, that’s what.

According to a paper by Olaf Hubler at the Institute of Empirical Economic Research, there is a correlation between being tall and a willingness to take risks. “Tall people responsible for financial crisis!”might be a headline some newspapers may wish to consider.

You are probably a little unconvinced. And so you should be. As the paper goes on to point out, once you take into account certain personality traits, parents’ behaviour, an individual’s abilities, and environmental effects, the apparent relationship between height and risk-taking disappears. But it does turn out that height is a good proxy for some of these factors.

There are common factors that might “cause” both height and higher levels of risk taking. For example: good health in childhood increases height, and healthy people are more willing than others to take risks.  From this, you couldn’t conclude that height causes risk taking.

But there is also a correlation between height and self-confidence, and between self-confidence and risk taking. Could height encourage the development of certain personality traits that encourage a greater willingness to take risks? The author suggests: ”

Tall adolescents tend to think of themselves as leaders, and their peers tend to agree. As a result, they are obliged to make difficult decisions — that is, to deal with risk — earlier than their peers of average or below-average height. Consequently, risk appeals to them; self-confident, they tend to downplay the negative aspects of risk-taking, instead of being chiefly concerned with maintaining their status quo.”

Potentially plausible? You might also, however, want to take into account the rather low correlation coefficients between risk and height: 0.059 for men and 0.062 for women.

The full paper, “Are tall people less risk averse than others?” is here.

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I can see through you (or can I?)

Career coaches (actually, no, everyone) says that you need to act confident to get to what you want. Think positively. Tell yourself you’re great. Believe in yourself. Being confident signals to others that you are high ability.

But what about when Toto rips open the curtain and reveals an ordinary person behind the booming apparently all-powerful voice? Does being overconfident in your abilities pay off in the long-term? It seems pretty obvious that if it becomes clear that you’re not as good as first impressions might suggest, then people are going to revise their views of you.

Researchers Jessica Kennedy, Cameron Anderson and Don Moore from the University of California set up three studies to find out how people treat overconfident team members – both before and after their true abilities are revealed. Firstly, the unsurprising result: overconfident people are assumed to be high-ability by their peers and accorded more status and influence. Secondly, the surprising result: even when overconfident people are unmasked – when their true scores in a task are read out, they are still accorded high status and influence. Why? It isn’t entirely clear, but it may be that overconfident people are also seen as having good social skills – although it isn’t obvious why this would help in some of the tasks that teams were asked to carry out in the studies, such as estimating weights and answering general knowledge questions. 

Would this surprising result carry through into the real world? The studies were limited in terms of the number of activities team could undertake. It is possible that over a longer period of time, with more and more evidence building up on team members’ actual abilities, people would revise their views of overconfident team members. But set against this is the fact that in the real world, you rarely get unambiguous feedback on the performance of others. Which tends to suggest that there are real benefits to being overconfident, even if your abilities don’t quite match.

The full paper, “Social Reactions to Overconfidence: Do the Costs of Overconfidence Outweigh the Benefits?” is available here.

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Budget 2012: It’s the way you communicate it

Gladstone's Red Box

Gladstone's Red Box (Photo credit: Wikipedia)

This week’s Budget announced by the UK Government included proposals for an annual personal tax statement. Each year, taxpayers will receive details of the tax they have paid and how their tax contributes to public spending. It’s all under the banner of increasing transparency. And transparency of course is, must be, a very good thing.

This measure has been brewing under the surface for a while. Earlier this year, the Government’s Behavioural Insights Team released a report on ways of reducing fraud and late payment of taxes. According to the report:

“…individuals tend to think beyond the impact of dishonesty. One study demonstrated that people are much less likely to lie to someone else for personal financial gain if the impact on other participants is high. Because individuals committing fraud against public bodies are unlikely to understand the impact that these actions might have on others, HMRC [the UK’s tax collection agency] is investigating whether framing tax debts as a loss to particular public services might increase compliance. At a local level this might be done by highlighting the impact of unpaid council tax bills on street cleaning services, for example.”

The annual personal tax statement could be a way of guilting people into paying their taxes by showing them what public services their taxes are used to fund.

So what might the annual tax statements show? The Treasury’s statistics on public expenditure show that in 2010/11, 35% of public spending was on social protection. 18% was on health. In other words, if you paid, say £5,000 in taxes in a year, £1,750 would go towards social protection – such as welfare benefits, and £900 would go towards health services. These are the two largest areas of spending – the rest of the money would go towards a variety of other things such as education, culture, debt payments, transport, and so on.

The interesting thing is what people will make of these, and whether it will change their views on Government policy. Seeing £900 of your money going on health might convince you that health reforms to make health services more efficient are needed after all – something that the Government has had trouble convincing the public is really necessary. But it depends on how high you thought spending on health was in the first place – and therefore whether your statement comes as a pleasant or horrific surprise.

Does spending 35% of your taxes on welfare sound like rather a lot? What if it’s broken down further so that it’s clear that quite a lot of that is on old age pensions and social services, rather than work-shy layabouts? Clearly, the level of detail provided and the way the figures are presented could influence people one way or another.

In fact, people’s views on how much tax they should pay and how the taxes they pay should be used to help others depends on how the question is asked. If you ask people how much tax different people should pay, they tend to say that people should contribute an equal amount. But if you instead focus on people’s after-tax income, they will tend to be in favour of a more progressive tax system that leaves after-tax income more equal.

Perhaps we shouldn’t be too worried about Government’s ability to spin information in specific ways to drum up support. This week, the UK’s Chancellor George Osborne tried to placate angry pensioners by saying they would be just as well off in cash terms after measures in the Budget to change the way pensions are taxed. Given that everyone over the age of 60 has a story of how they were once able to buy milk for a tuppence and a detached home for under £10,000, I somehow doubt that this group of people is unaware of the existence of inflation.

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How the Joneses change with age, or how I use my quantum physics book to show off

An example of simulated data modelled for the ...

I was recently reading an article about Higgs Boson, and irritated by the fact that I wasn’t sure I entirely understood what was going on, decided that I needed to purchase a book about quantum physics. I’ve been reading it on the train on the way into work.

Reading such a book in public has pros and cons. One pro is that it makes me feel pretty good when I get my book out of my bag and open it up. Yep, I’m reading about really complicated things. Anyone who catches sight of a page will know it’s pretty complex stuff because there are diagrams of waves and electrons and chapter headings like “the structure of atoms”. No, I don’t need a fancy Kindle to hide what I’m reading. Check. Me Out. One con is that understanding it all really requires my full attention, and with half my brain silently crowing at everyone else on the train, that isn’t really happening. One might say that the cloud of smug surrounding me is obscuring my reading ability.

Some people have a similar issue with cars: having a nice car is OK, having a nicer car than everyone else is great. With me, having a good book is OK, having a book that paints me as an intellectually superior being to my fellow-passengers is intoxicating. And intoxicated, as I say, is not a great state to be in to understand quantum physics, although it’s not a bad state for managing to convince yourself that you’ve understood it.

There is a fairly large body of work all pointing to the fact that people really care about how well they’re doing compared to other people. Whether they’re earning more money, got a bigger car, or a nicer house, or more exciting holidays. Some studies suggest that people would actually prefer a situation where they had less income, as long as it meant that they had more than anyone else. No one wants to be at the bottom of the rankings. But does this attitude change over the course of people’s lives?

Economists Alpaslan Akay and Peter Martinsson looked at data on subjective well-being from regular surveys conducted in Germany and Britain, as well as designing their own study with Swedish adults. They found that attitudes appear to change over people’s lives.

You might think that age brings perspective about what matters most for the happiness of the soul, and a greater ambivalence towards material goods. In fact, according to this study, people become more concerned about their relative income and consumption as they get older. Is this something to do with the process of ageing or is it that different generations have different attitudes to life depending on when they were brought up? It isn’t entirely clear, but this study seems to suggest that it could be a bit of both.

But there is one reason why young people might be less concerned about relative income, and that’s if they see the higher incomes of some people as something that they can aspire to and one day achieve.  By contrast, after a long while languishing halfway up the career ladder, perhaps some dreams start to look less realistic.

Clearly it also depends on what your reference group is, i.e. who you tend to compare yourself to. On a train of sleepy commuters reading free newspapers (more pretty pictures than text!), my quantum physics book gives me a head start.

The full paper is here.

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Clock and awe

The last time I felt a sense of real awe was in Iceland, hearing the rumble of the Gullfoss waterfall, and then catching my first glimpse of it. It’s a waterfall that in summertime throws an average of 140 cubic metres per second over a three-step precipice that gradually reveals itself as you walk towards it. It was a rather sustained period of awe as well, lasting all the way from climbing down the rickety steps to the main viewing platform to returning to the bus stop, jaw still somewhat loosely open. This was with my glasses misted up from the spray too. Who knows what the sight might have done to my brain had I actually been able to see clearly.  

According to the Oxford English Dictionary, awe is a feeling of reverential respect mixed with fear or wonder. Mixed up in that feeling, is there also a sense of timelessness, a blotting out of all the worries about not having enough time to do everything we need to?

Researchers Melanie Rudd, Kathleen Vohs and Jennifer Aaker from Stanford Unievrsity and the University of Minnesota ran some tests to find out how a feeling of awe affects people’s perception of time. They found that a feeling of awe is associated with a feeling of being less rushed, and having more time available. For example, showing people pictures or telling people a story that made them feel a sense of awe made them more likely to agree to volunteering their time to help others. It also made them feel more satisfied with life.

Luckily I didn’t completely lose track of time at Gullfoss. Otherwise I would have missed the bus.

The full paper is here.

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Don’t believe this blog – economists lie!

An old economics “joke” goes along the lines of an interviewer asking a mathematician what two plus two equals. The mathematician replies “four”. The interviewer asks an economist the same question. The economist gets up, locks the door, sits down next to the interviewer and says “What do you want it to equal?”

Are economists, shall we say, a little playful with the truth? Economists Raul Lopez-Perez and Eli Spiegelman decided to find out. They devised an experiment to run with graduates from different subjects: Business & Economics, Humanities, Science, Law, Engineering and Psychology. Participants had to decide whether to lie about the colour of a circle that flashed up on their computer. There was a monetary incentive to lie, because reporting that the circle was green would earn the participant more money.

They found that gender and religious beliefs had no effect. But subject area did: law and humanities students chose the honest strategy over 50% of the time. But Business and Economics students only chose the honest strategy 22-23% of the time. Engineering students weren’t far behind in the ranks of the dishonest, choosing the honest strategy only 25% of the time.

So does studying Business and Economics make you less honest, or do people who feel less strongly about morals find themselves more attracted to those subjects? By using a technique called instrumental variables, and looking at the correlation between political beliefs and subject choice, the authors argue that studying Business and Economics teaches people to think like the theoretical “Homo Economicus”, the rational economic man who thinks about how best to maximise his utility (broadly, happiness) in world of scarcity – and who, depending on his preferences,  might be more likely to trade off some moral discomfort for more money.

For those now concerned about the accuracy of posts on this blog, consider that Homo Economicus would hardly spend his weekdays complaining about work and spend his weekend blogging for free.

The full paper is here.

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