Common mistakes in daily decisions
The Old Theatre at the LSE was completely packed last evening for an entertaining and riveting lecture from Dan Ariely, the author of “Predictable Irrationality”. Dan Ariely has for many years used experimental methods to discover more about many of the biases apparent in our everyday behaviour. His lecture was rich in examples and encouraged us at all times to think counter-intuitively.
read more...»Tiger and his rivals
Does the presence of Tiger Woods in a professional golf tournament inhibit the standard of play of his rivals?
A fascinating paper by Jennifer Brown from Berkeley and given at a conference titled “Tournaments, Contests and Relative Performance Evaluation” earlier on this month suggests that he might do just that. Download the full paper here ... of great interest to golf loving behavioural economists! Rather like the jockeys who ease down their mounts in races where they have no chance of catching the leader, perhaps some of the cohort of professional players do not play to their maximum in tournaments where Tiger is pretty much expected to win? The paper looks at how performance of golf players changes at different stages of the tournament.
read more...»Social learning and blockbuster movies
When was the last time you saw a great movie and just wanted to tell your friends about it and perhaps go with them second time around? Or perhaps you have just sat through two hours of unbelieveable tedium (wake up those of you who watched Brokeback Mountain) and cannot wait to fire off a poor review at IMDB!
Why is it that some films with huge marketing budgets can end up being total flops whilst other films with meagre backing from distributors turn out to be box office hits (or perhaps DVD hits when released onto that market?) Part of the answer must lie in the social interactions between movie goers and their friends. The positive or negative feedback that we hear about a film can often play a big part in our own decision about whether or not to go see it. The same is true for hotels, restaurants, plays and other live events. Over at the Undercover Economist blog today, Tim Harford flags up some new research from Enrico Moretti from the Department of Economics at the University of California, Berkeley. His new working paper has the intriguing title “Social Learning and Peer Effects in Consumption: Evidence from Movie Sales” and can be downloaded as a pdf file here
Moretti finds that
“Overall, social learning appears to be an important determinant of sales in the movie industry, accounting for 38% of sales for the typical movie with positive surprise. This implies the existence of a large “social multiplier’’ such that the elasticity of aggregate demand to movie quality is larger than the elasticity of individual demand to movie quality.”
Moretti defines social learning as a situation where consumers in week t update their prior based on feedback from others who have seen the movie in previous weeks. Much depends on whether the perceived quality of the movie is higher or lower than our expectations when we take our seat in the theatre.
Can you add any more films to my list of great films for economists?
Dan Ariely in London on the 17th
Thanks to Arthur Ma for pointing out that Dan Ariely, the author of “Predictably Irrational” is in London next Monday to talk about his book. Details below.
Behavioural Economics: Common Mistakes in Daily Decisions
Date: Monday 17 March 2008
Time: 6.30-8pm
Venue: Old Theatre, Old Building, LSE
Speaker: Professor Dan Ariely
Chair: Professor Lawrence Phillips
Why do smart people make irrational decisions every day? Why do we repeatedly make the same mistakes when we make our selections? How do our expectations influence our actual opinions and decisions? The answers, as revealed by behavioural economist Professor Dan Ariely of MIT, will surprise you.
Placebo, price and pain relief
The medical profession has long debated the extent and value of the placebo effect - defined variously across a selection of web sites that I visited tonight as “the measurable, observable, or felt improvement in health or behavior not attributable to a medication or treatment that has been administered.” or “when a person is successfully treated by a dummy drug just because they believe it works.” Can enthusiastic doctors actively promoting dummy drugs have a greater effect on their patients purely on account of their passion and support for the drug? And what happens if patients are told something prior to taking a treatment about the price of a particular medicine?
read more...»Clicking on an open door - rational students
Lots of my students have been trying the door game available on Dan Ariely’s web site. One student wrote in with this review of how he saw the game - pretty smart for a 16 year old.
“In the first game switching effectively loses you around 50 points (roughly the average) since it doesn’t give you any points to switch. Since the ranges are between 100-0 (or 70 - 30 in my experience) only in the case of a 100 point scoring door would switching help. The fact that doors are dissappearing doesn’t take anything away from the switching. There is a one in three chance that the door picked would be the door with the high point numbers and in this case one shouldn’t switch. In the case that one gets the door with the low numbers one should switch but only once and in the case of a middle value one shouldn’t because there is an equally likely case of one wasting 50 points on the door with the low set of values. However the ranges are so close that to switch and lose a potential 50 points or so would not actually be worth the ‘profit’ made from switching. Therefore in both games, as a general rule, one musn’t switch.”
Freeconomics
Mark Boyle is no ordinary man. He is a self-styled ‘community pilgrim’ and he hit the news over the weekend after setting out to walk from Bristol to India - without using money.
“Most of the problems in the world such as greed, fear and insecurity, manifest themselves in money,” he is says, “so I’m going out and instead putting my trust in the universe.”
read more...»The Door Game and the pain of not letting go
Dan Ariely’s new book is now out and it is proving to be a great page-turner - brilliant for students who want to broaden their understanding of behavioural economics. The accompanying web site has a superb interactive game for people to try involving clicking on one of three doors to earn credits. In the game you are limited to fifty (50) clicks in total and the aim is to amass the highest total score. In one version, the size of the unclicked doors shrinks every time they are ignored. In the other, the size of the doors remains constant but you must still engage in a search to ascertain which doors carry the highest value from each click - the distribution of clicks varies by door.
I can imagine this becoming hugely popular in schools and collegese when we are teaching behavioural economics - so have a go. And also have a look at the other resources available on the Predictably Irrational web site!
Background to the game available from the Tierney Labs page on the New York Times web site - which is here (Free registration and login may be required)
Housing Bubbles and Irrationality
Robert Schiller, the economist who has penned two books on the existence “irrational exuberance” writes about the US housing bubble and bust in today’s New York Times. In doing so he introduces us to another aspect of behavioural economics - the impact of information cascades which shape the decision making of people who are seeking to act entirely rationally when making a call about the investment value of putting money into property. The cascade effect kicks in when people have incomplete information and tend to rely on the experiences and judgements of others.
Schiller writes that
“The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world. If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks…... The efficient-markets view holds that the market is wiser than any individual: in aggregate, the market will come to the correct decision. But the theory is flawed because it does not recognize that people must rely on the judgments of others.”
‘How a Bubble Stayed Under the Radar’ can be read here (free registration and login to the NYT site is required)
Free riding at breakfast
The lobby of the Novotel at Euston Square is a most inviting place for someone wanting to enjoy a relaxing coffee and a read of the morning papers. I got there just after 7am on Friday ahead of the ICT Conference at the British Library and ordered a coffee before checking through some emails. Little more than twenty minutes later, the team from Tutor2u were assembling for a healthy breakfast and I joined the queue with them fully expecting to be asked for my room number or perhaps checking in for a paid breakfast. Nothing happened .... I unwittingly became a free rider and happily raided the buffet for some fresh fruit, cold meats and an expresso.
Free riders are spongers who enjoy the fruit without paying a price. We were discussing this in our AS micro the other day. From using someone else’s Wi-Fi network to enjoying the environmental spillovers from another country reducing their CO2 emissions. The free-rider problem can be a cause of market failure for if too many people can get away without paying, the market may struggle to make a profit from the goods and services it supplies.
read more...»Penalty shoot outs and economic decisions
Sometimes doing nothing makes really good sense!
The penalty shoot out is fertile territory for students of behavioural economics. The risks and rewards are enormous - one missed kick can cost millions of euros or a place in the Premiership. Liverpool fans rarely need reminding of the miraculous comeback against Milan in 2005 topped off by the antics of Jerzy Dudek in the Liverpool goal in foiling three of the Milan spot kicks and taking the Champions league trophy home for the third time.
When should a keeper dive and when should he stay put? Making a penalty save is pretty difficult, the stats tell us that 80 percent of all penalty kicks score.
read more...»Dining Rights
An interesting economic enigma that came my way today. Why are so many thousands of people willing to pay in advance for services such as a minimum12 month mobile phone contract or a gym membership? Yet they are not prepared to pay say £1000 or more for the right to dine for free at the their favourite restaurant for a year? Tyler Cowen over at Marginal Revolution also raises this issue.
I suspect the size of the financial commitment that people are prepared to make does make a difference and also the expected utility or benefit from having the freedom to eat your way through a year’s worth of dining rights! Diminishing returns would very likely set in pretty quickly and, for most of us, we would be unlikely to achieve good value for money.
My annual subscription to the local gym is about £50 per month - I might go 3 or 4 times and week - in busier times, less frequently even though it is only a short walk away. In contrast, a 12 month magazine subscription paid in advance can cost very little but I have rarely shown any inclination to buy magazines in advance - although they make a welcome birthday or Christmas gift!.
What else are people asked or prepared to pay for in advance over a lengthy time period? Does it affect the quality of service if the customer is captured for a minimum time?
Attack of the Clones
What might link early generations of insect suicide bombers, nuns allocating tasks in a convent, delegates at a crucial climate change conference and Meer Cats on late night sentinel duty?
read more...»Signals in the housing market
In a story in the Guardian today, it emerges that mortgage lenders are making borrowing less attractive in a reverse of the ‘easy, cheap’ credit terms offered in recent years.
In the height of the credit boom, I must have received something like 5 or 6 letters per week asking me to take out another personal loan or credit card. My postman seems happier now because there has been a steady drying up of these letters over the last year or so. My shredder has also seen less action in recent months!
read more...»A Market for Human Organs
One of my students James Snowden writes about whether there should be a legal market in trade in human organs
read more...»Markets and the year of trouble
The choice isn’t yours
Here is Tim Harford’s review of ‘Predictably Irrational’ the new book at David Ariely. It is one that I am greatly looking forward to reading. The Economist isn’t so sure of the validity of Ariely’s policy prescriptions. That said, the Economist likes Tim’s new book ‘The Logic of Life’ one of my favourite page-turners of 2008.
Predictably irrational web site
Wages for Housework
Before going any further, it’s probably wise to take gender out of the question. I was surprised to see the BBC and others refer to housework as the job of a ‘housewife’. That point aside, what does the poll of 4,000 housewives for networking website alljoinon.com tell us?
read more...»The Fairer Sex
It’s been a great week for economics with plenty of macro issues in the news. Half term has also given me lots of time to think about the microeconomics of everyday life, inspired in part by reading Tim Harford’s The Logic of Life.
On Friday I rushed, fashionably late, into Rhyme Time at my local library. My daughter and I quickly joined in a rousing chorus of ‘The wheels on the bus’ and after a few lines I realised that my voice stood out, and not just because I am appalingly tone deaf; its defining characteristic was that it was probably at least two octaves lower than anyone else’s in the room. Of the thirty plus parents there, I was the only dad!
read more...»Modelling the Economics of Love
Valentine’s Day came and went and I have to admit that the day passed by without a great deal of activity! So much so that I ended up going for three jogs in one day .... something I haven’t done for several years! The phenomenal growth of demand for and supply of speed dating services is generating plenty of interest among economists who now have some rather interesting data to observe about people’s preference and behaviour on speed dates. Tim Harford wrote a super piece on this last year and some of his findings also make their way into The Logic of Life. Over at Marginal Revolution, Tyler Cowen wrote about the economics of dating last year - his new book ‘Discover your Inner Economist’ is well worth catching hold of.
But perhaps the most brazen attempt to model the economics of love and turn it all into a full cost-benefit analysis can be found here at Solve Dating!
Horizon on Human Decision-Making
Horizon (BBC 2 Tonight 9pm) dishes up an interesting edition tonight on the rationale behind humans decision making process. Can we boil down human behaviour to a mathematical equation?
read more...»Carrots and Sticks
Half-term brings a time for reflection and on the train heading north with the family, to visit family, I maintained my fix of economics via The Economist. I particularly enjoyed an article on StickK.com, a website allowing users to set and monitor contracts to achieve personal goals. The founders, graduate economics students Dean Karlan and John Romalis, got the idea when they used contracts to create sufficient incentives to both lose weight. If one failed to meet their weight loss target, they were to pay the other $10,000. It worked (unsurprisingly?) and now the site apparently has 50,000 users who have pledged either serious sums of money (to charity) or public humiliation (via the website) to provide sufficient incentives to succeed in giving up smoking, losing weight, taking more exercise or generally just becoming a better person.
read more...»Craving Risk - Neuroeconomics and the Rogue Trader
” The brain images of drug addicts who are about to take another hit are indistinguishable from those of traders who are making money and about to place another trade.” This quote comes from Jason Zweig author of “The Intelligent Investor” and one of several economists quoted in a terrific article on neuroeconomics in yesterday’s New York Times. On the day that Societe Generale rogue trader Jerome Kerviel has been jailed while the $7bn bank fraud is being investigated, this article looks at whether ideas drawn from neuroeconomics can help us to understand the trading behaviour of people in the world’s licensed betting shops ..... sorry…. financial markets. Wikipedia tells us that ‘neuroeconomics combines neuroscience, economics, and psychology to study how we make choices. It looks at the role of the brain when we evaluate decisions, categorize risks and rewards, and interact with each other.’ For students with a keen eye to current market turbulence this is an excellent article to read.
The Power to Move
In our AS micro lessons this week we have been discussing how authorities can use advertising to change behaviour for example in reducing the incidence of drink driving and speeding, in encouraging people to recycle or in trying to get people to practice safe sex. I asked my students for some striking examples of such adverts from You Tube and here is a small selection of the ones they suggested. I am particularly struck by the power of the adverts made to dissuade speeding drivers in Australia and I love the safe sex advert - enough to put you off having children for life!
read more...»Tim Harford @ Google
Tim Harford talked to Google employees at the Googleplex on Tuesday 28th January.
read more...»Lessons from the Grand Masters
Are there useful lessons for people wanting to be successful in business from mastering the skills of chess? This is a question I like to ask of students who come for an interview in Economics for our sixth form. One doesn’t have to be a great expert in the game to come up with some relevant ideas and it usually elicits some interesting responses. Students are pretty good at pinpointing for example the importance of having a strategy; being flexible to respond to previous moves, knowing the rules of the game and how best to value the moves that each piece can make, exploiting the lessons that can accumulate with experience and also in weighing up the risks and the advantages of a particular move.
read more...»Logic of Life reviews and book forum
There is a very positive review of Tim Harford’s new book ‘The Logic of Life’ in today’s New York Times.
‘Mr. Harford has a knack for explaining economic principles and problems in plain language and, even better, for making them fun. He loves to overturn conventional thinking on matters as small as playing a poker hand and as large as the reasons behind the Industrial Revolution, which have nothing to do, he maintains, with a so-called entrepreneurial culture in Protestant Northern Europe. It all boiled down, he writes, to “a calculated and deliberate response to high British wages and cheap British coal,” which led inevitably to steam power and labor-saving technology.’
The rest of the review can be read here
David Smith interviews Tim Harford in the Sunday Times. The interview is available on David’s blog
Tyler Cowen at Marginal Revolution has started an online discussion forum chewing over aspects of the book - it is already full of lively comment. You can find it here.
Discussion of Chapter 2 on Game Theory at Marginal Revolution is now underway! *Monday 28th January)
Rogue Traders and the Principle Agent Problem
Jérôme Kerviel, the rogue trader at France’s Société Générale is likely to become as infamous as Nick Leeson in the annals of rogue traders who have upset the financial applecart over the years. Kerviel is estimated to have cost Societe Generale just under Euro 5 billion with this disastrous deals and one of France’s leading banks is now counting the cost and watching nervously over its shoulder for a possible takeover bid as the vultures hover.
It was fascinating listening to Nick Leeson giving his reaction to the latest rogue trading scandal in an interview on BBC news 24. The ten minute interview is well worth using with Economics students not simply because everyone likes a juicy scandal but because Leeson makes some very pertinent and important observations. one of them relates to a variant of the principal-agent problem. This occurs when managers cannot observe directly and with sufficient control the activities of the people they are supposed to be managing. In the case of Leeson who famously brought down the venerable Baring’s bank in 1995, his heavy losses trading NIMEX futures were hidden by fraudulent use of specially created accounts. Something very similar is likely to have happened with Société Générale - it is a classic case of the backroom operations not knowing what the front-end guys (i.e. the traders) are up to. The FT leader today sums up the problem
“When Nick Leeson brought down Barings in 1995 risk management became a more serious business. Banks installed sophisticated blackbox technology to prevent a repeat disaster. While lacking Mr Leeson’s star status, the backroom boy turned “vanilla” futures trader who lost €4.9bn for SocGen shows just how easy it is to dupe these sophisticated systems.”
There are strong hints that the rogue trading scandal was a major factor behind the financial turmoil and collapsing share values in international equity markets earlier on this week. The Independent reports that:
“The relatively junior bank employee, who earned less than €100,000 a year, managed to evade supposedly fraud-proof safeguards to stake an estimated €50bn – which is more than the GDP of Slovenia, Uganda or Cuba – on the future direction of European stock markets. France’s second largest bank had to scramble desperately to abandon his concealed trades on Monday and Tuesday, against the calamitous background of sharply falling European stock exchanges.”
Time for me to dust off my copy of Rogue Trader (starring Ewan McGregor) and take it into lessons next week - this is a film that A level economics students love. You can access the movie trailer here:
Predictably Irrational
Predictably Irrational
Tim Harford's excellent blog highlights a forthcoming book by Dan Ariely titled Predictably Irrational - the hidden forces that shape our decisions. This is a book I shall look forward to reading in the new year, another contribution to a growing armoury of texts on behavioural economics.
More here: http://www.predictablyirrational.com/ariely_MIT_dot_edu.html
