Knowing and Making

It seems that some people from outside behavioural economics are, like me, getting frustrated with the lack of progress within the field. Eric Falkenstein says here : I read Kahneman, Tversky and Slovic's Judgement under Uncertainty in the 80's (published 1982), which mainly discussed a series of papers published in the 1970s, and found it fascinating, but now it's now 30 year old stuff and pretty boring. There's a couple hundred academically based confirmed biases which are all kinda true, but not very profound This part of the posting is quite right. A commenter at the bottom sums up the problem with state-of-the-art behavioural "economics": Behavioral economics is not economics but psychology. It focuses on individuals instead of exchanges and markets. Economics makes assumptions about actors to make market predictions. BE makes predictions of actor choices just like psychologists. The question BE must address is how do biases create market conditions. ...

I celebrate the good news that  Bletchley Park has been saved  by my new friend @Dr_Black among others. It's a good story and you should read it if you aren't familiar with the background. However, is it wise to announce and frame the news in this way? The post suggests an optimistic transition: I mentioned "Saving Bletchley Park" as part of this conversation and Simon said "...hold on, Bletchley Park is saved, there is no way we are going to shut now with all the support that we have. What we need to talk about now is Building Bletchley Park for the future". I sat there with a big smile on my face... Bletchley Park is Saved - It is no longer about *Saving* Bletchley Park but about *Building* Bletchley Park. It sounds great. But surely it is much easier to raise money to "save Bletchley Park" from an impending emergency than to "build Bletchley Park" for an undetermined future? I predict that, unfortunately, donations will fall if the...

I read the following quote in an article about the near-crash of a 747 plane in San Francisco: "In the past months, we have had several operational incidents," airline jargon for close calls, W.J. Carter, chief of United's Honolulu-based pilots, wrote in a Feb. 23 internal memo to his flight crews. "Major accidents historically are preceded by a series of these seemingly unrelated incidents. This disturbing trend is cause for concern" I was immediately skeptical, because patterns like this are often not real. The " hot hand " effect - often seen in sports, especially basketball - is a kind of momentum effect, where a player who has scored lots of baskets in the last few minutes is thought to be more likely to score again. It intuitively makes sense that someone could be "on a streak" where they are playing at the peak of their ability - those times when every shot you attempt seems to go in. Equally there could be times when you just keep ...

Davis, Figgins, Hedengren and Klein have put together an interesting survey of American economics professors - asking about their favourite economists, alive and dead, and about the journals and blogs they read. I downloaded the data behind the paper in the vain hope that this blog might be among the long tail of responses not reported in the main paper (it wasn't). But the data does provide lots to think about. An intriguing point (from a survey design point of view, at least) is raised by one of the questions. The survey asked people to choose their most respected/admired economists from two groups: over 60 years old and under 60. I don't know about you, but I'm not sure I'd know the age of many of the economists I admire. I speculate that the respondents might have subconsciously chosen economists who are much older, or much younger, than 60 years of age, in order to answer these questions with greater certainty. Even if aware of this potential bias, I might ...

One of the arguments given against the Alternative Vote system is (as laid out in this good but rather long post ) that " Under AV the person who comes second can win. " Gowers points out in the linked article that this is not true - all it means is that the person who would have come second under FPTP can win . Of course, the whole point of the referendum is that a different person could win under AV than under FPTP. The reverse argument is equally true: the person who would have come second under AV might win under FPTP. But why does this argument have such appeal? Even AV defenders are trying to make a rational case for why it may be more democratic for "the person who came second" to win. Instead, one might expect them to challenge the premise. The reason seems to be that the status quo bias is very strong here. People who might think they don't suffer from status quo bias (in that they have no particular desire to keep the existing voting system) may...

The FSA is expected over the next few days to publish published yesterday its new rules on bank bonuses, broadly in line with the guidelines announced by CEBS, the pan-European committee of regulators. It's likely that, f From 1 January, banks will only be allowed to pay a third  40% of bonuses in cash, with the rest paid as deferred claims of one kind or another - debt, preference shares or equity - which can be drawn down over three to five years. This is meant to reduce the incentive for bankers to take risks: with a high proportion of their wealth tied up in the company they work for, they will want to ensure its survival. However, there are two questions it leaves open, as I just managed to squeeze in on Radio 5 this afternoon  before they decided the 6 o'clock news was more important. The first question is: do banks - and bankers - actually know whether their actions are risky? It certainly didn't seem that way in 2008. Investments in property that they thought...

I received the following emails today: What should I do? Are these two offers exactly equivalent? The John Lewis voucher somehow sounds better, because they sell better stuff. I could get (a fortieth of) a Macbook! Then again, I buy stuff in M&S more often, so the voucher is more likely to be used - and I could get a very nice dinner there for £25. If they'd offered to buy me dinner in return for my time, I'd probably be even better disposed towards them. And yet, if a client offered me £25 cash for 30 minutes work, I'd turn it down. Is it possible that I feel more positive towards B2B Marketing and Vocus than I do to my clients? Hardly. The only possible rational explanation is that I am less worried about establishing a reputation for cheap work in the eyes of a market research company than in the eyes of my customers. If this were happening, it would be a strange form of intuitive price discrimination. But this isn't really what is going on. It's...

Yesterday, the Tories won the first behavioural battle of the election campaign. Policy of the day is national insurance. Labour has committed to a rise of 1% in the employers' national insurance rate from April 2011 and the Conservatives have said they'll cancel this increase (for readers outside the UK, national insurance is our payroll tax, and the employers' component is the part paid by the company, as opposed to the part which is deducted from the employee's salary like income tax. Currently the rate is 12.8% and will rise to 13.8% under this policy). When the Tories announced this policy, around twenty chief executives of large companies wrote to the FT in their support. This was followed by another three on Tuesday and, yesterday, thirty more. So how does this play out behaviourally? I mentioned a couple of things yesterday which remain true: the Tories gain social proof  from the support of senior businesspeople, and the recency bias  means that the iss...

Imagine you have saved up £550 and you're ordering a new iPhone. The supplier is short of stock, so you'll have to wait a while. It is going to be despatched by post in 30 days and will arrive with you the next day: a 31 day delay. Then, at the checkout screen, the site offers you an express delivery option. For an extra £20, they can deliver it by courier so you'll get it on the 30th day. Would you pay £20 to have it one day earlier? Now imagine you're ordering it from a different store and they have plenty of stock. It's going to be dispatched this afternoon and will arrive tomorrow. You see the £20 courier option: Is it worth £20 for courier delivery to get it in your hands in one hour? Alternatively, if you could travel to the shop and pick it up right now (which will take an hour or two out of your afternoon), would you do it? I haven't done the experiment, but I'd bet you a lot more people would say yes in the second scenario than the first. Equiva...

This may be the first time I've linked to a story in The Sun , but it illustrates a striking economic puzzle, so here goes: "[Cheryl Cole] will not be fighting for a huge settlement. She just wants to get out fast so she can press on with life and move on. "The initial advice is that it speeds up the process if there is no claim for money"...Cheryl hopes to keep the couple's £6million home. So wait...this transaction will be more  liquid with lower  transaction costs if it takes place in property instead of cash? This goes against all standard microeconomic theory, which strongly implies that cash transactions should be more efficient than barter. Cash is a fungible asset, highly granular, and any transaction involving other assets will be an imperfect match for the agent's preferences, reducing the available consumer surplus. What could be the explanation for this? Cheryl could be rationally giving up a potential material gain simply to reduce likely ...

I'm on a deadline for a magazine article today so I'm not going to write much. But a heads up on some articles coming up in the near future. I plan to write a series of analyses of individual industries from a cognitive/behavioural point of view and would welcome suggestions on which sectors to pick. Current plans are: Market research PR Accounting & auditing All of these are industries which, in a neoclassical world of pure rational preferences and perfect information, would have no reason to exist. But because the world is not like that, they do. For each one I'll be exploring which aspects of bounded rationality give the industry a reason to exist, and what this means for practitioners in the field and the way they do business. Suggestions for other sectors or disciplines you'd like me to cover? Email me or post a comment here.

Intriguing and prescient article from January 2002 (nine months before Kahneman's Nobel Prize) describing everybody's favourite cognitive effects - with just a couple of mentions of a then-new buzzword: "behavioural economics". Dan Ariely, Amos Tversky and Daniel Kahneman are quoted as psychologists; Richard Thaler, George Loewenstein and Drazen Prelec all come up, along with pricing consultant Thomas Nagle and a couple of others. It's like the Brat Pack of irrationality. And in the same Google search I discovered Brain Biases , a site with a handy catalogue of cognitive biases, with a brief description, examples and proposed explanations for each. Talking of biases, Eric Barker discovers some research suggesting that showing anger makes a complaint more credible . Correct no doubt; but I hope that people don't act too quickly on this advice. If your goal is a successful resolution of your complaint, credibility is not the only factor. You also need to g...

Consumerology reports a study by David Hardisty, Eric Johnson and Elke Weber at Columbia which randomly offered participants various choices between different pricing options for airline tickets. The main distinction was between a surcharge described as a "carbon tax" and an identical charge described as a "carbon offset". The tax was unpopular - no real surprise. But when people were asked if they supported making the carbon offset mandatory - which is of course exactly equivalent - the response was highly favourable (around 2 points more positive on a scale from -3 to +3). Not only was the "mandatory offset" more popular, but it was regarded identically by Democrats and Republicans. The tax, on the other hand, was strongly disliked by Republicans while Democrats made no distinction between taxes and mandatory offsets. Thus the entire effect appears to be due to Republicans' attitudes to tax. This is an example of a well-known cognitive bias ca...

Experimentally, we know that the following phenomenon can be observed: Offer consumers two bottles of wine, priced at £5 and £9. A proportion will not buy at all; of those who do buy, a proportion (70% would be typical) will buy the £5 bottle and the rest (30%) will buy the £9. Repeat the experiment with three bottles on offer, priced at £5, £9 and £15. A similar proportion will still not buy; of those who do, the propensity to buy the £9 bottle is much higher than previously. It would not be surprising to see the proportions exactly reversed: 30% at £5 and 65% at £9. Barely anyone will buy the £15 bottle, but a majority of buyers are influenced by its presence. This experiment violates the assumptions that conventional consumer theory is based on. Rational agents "should" have an context-independent demand curve for each product: they are supposed to evaluate the utility of each option, apply a constant exchange rate between utility and cash, compare the result to the price ...

Robert Peston posts an odd blog today , which implies that he thinks all business decisions are either absolutely right or wrong, and not contingent on the situation or on business judgment. He cites £1.5-2bn of costs which Fred Goodwin did not take out of RBS - despite his reputation as a cost-cutter - and which Stephen Hester has now identified. Well, surely in today's business environment some costs are no longer appropriate which were nevertheless justified in 2007. The private plane which he cites may be the perfect example. When there is competition among investment banks to win new M&A instructions or IPOs, being able to pick up executive in a private plane for meetings in your office could be a good marketing investment. When there is no competition - or indeed no mergers - or when the executives become much more price-conscious, it may no longer be cost-effective. As we've discussed before, it's dangerous to assume that apparently-extravagant expenditure is rea...

This blog has two primary themes: behavioural economics the economics of knowledge I believe they are closely linked, because behaviour is derived from the knowledge that people have about the world (or more strictly their mental model of the world , which may not actually be accurate knowledge). Knowledge, in the economy, is influenced by many things. But at least one type of entity specialises in influencing it: the knowledge firm. Knowledge firms include professional services firms, consultancies, marketing and media companies. Their distinguishing characteristic is that their work is not about manipulating physical objects but influencing the minds of people. This is done by creating messages and communicating them. Therefore, knowledge firms are in the business of second-order influence of behaviour . Traditional firms offer products to which people respond based on their existing perceptions and preferences. Knowledge firms actively change the perceptions and preferences that peo...