Britain’s Got Talent and Behavioural Economics
We are studying behavioural economics in school this week and Tom Aedy one of my AS students thinks he may have spotted some possible asymmetric dominance in the voting for the final of Britain’s Got Talent! Here is his letter to Dan Ariely author of Predictably Irrational.
Introducing Ideas in Behavioural Economics
As our AS students return to school after their exams, I will be giving my own students a broad introduction to aspects of behavioural economics and nudging them towards seeing how this rapidly expanding branch of the subject can be applied to micro and macro policy issues. A streamed version of one of my presentations can be found below
read more...»Dan Ariely on BBC Worldwide
Spotted this tonight - a BBC international radio interview from a few days ago in which Dan Ariely explains the essence of behavioural economics. Dan Ariely has done a string of experiments to show how people actually behave.He finds that they don’t behave like the economically rational person that economic theory assumes. Hear the interview here.
Are economic recessions inevitable?
““We believed there was a possibility of institutional failure in the banking and financial system so we did all sorts of exercises, stimulation exercises. But what we didn’t see, and nobody saw, was the possibility of complete market failure, that markets seized up across the world.”
Gordon Brown, speaking on Friday on the day when the UK officially fell into a recession
The title for the 2009 Royal Economic Society’s essay prize for young economists provides entrants with a wonderful opportunity to explore the dynamics of economic cycles and external shocks, the challenges facing policy-makers when events turn nasty and the consequences of years of financial euphoria and excess. The question can be approached in many different ways but every student will have to stay firmly within the 2,000 word limit. This is an essay competition that rewards a neat turn of phrase, a confident handling of economic ideas and an ability to build and sustain and argument with clarity, precision together with a strong awareness of recent events.
read more...»Inconspicuous Discounting
I was browsing in a well-known North East department store this week when I spotted a winter coat that I have had my eye on for some time. Having decided to splash the cash, I was surprised to find a 20 per cent discount applied at the till - a welcome surprise! But there were none of the usual “sale” signs obvious within a store that was busy without being buzzing.
I took the discount without blinking but an article in the Financial Times today reminded me that the inconspicuous sales are becoming more frequent especially among niche retailers towards the higher-end of the retail market. Luxury shops are making greater use of private invitation-only evenings where valued customers can be wined and nudged gently into pre-ordering new products or persuaded to buy up some of the excess stock.
Here is the link to Sarah O’Connor’s piece on discreet discounts.
Just a few months ago sales of luxury products were thought to be immune from the ravages of the credit crunch. But the collapse of investment banks, a steep decline in city bonuses and thousands of job losses in financial services have contributed to a sharp fall in demand for high-value luxuries. The income elasticity of demand for such goods ought to be strongly linked to the economic cycle - we are seeing growing evidence of this now.
But for retailers selling top-end brands who have rarely had to use deep price discounting to shift modest amounts of stock, these are unchartered waters. The danger is that if they cut prices too far their customers may begin to anchor downwards the prices that they regard as a fair reflection of the quality of the products they are buying, and perhaps devaluing the excitement of buying a specific brand?
Price anchoring is an important feature of the behavioural patterns of consumers - I wrote about it in June with a blog about the pricing of the iPhone. - for products such as jewellry, designer clothing, the best seats for the theatre, perfumery and bespoke furniture (there are many other examples) the first price you experience for a product when you enter the market can act as an anchor for what you might be prepared to spend the next time around. The luxury retailers will want to avoid a situation where an eventual economic recovery might start with consumers having lowered significantly their price expectations for discretionary purchases.
Perhaps that is one reason for the invitation-only events for regular customers. The luxury shops are happy in the current climate to offer a generous discount but they want to keep it under wraps reserved for people who they know will return when demand and prices are back to normal levels.
Barriers to Entry
In business there are often important barriers to entry which act to limit the ability of businesses to break into new markets. The Bottom Line on Radio 4 this week considered the existence of these barriers. Leading the discussion was Will King, the founder and CEO of KMI King of Shaves, the innovative UK-based personal grooming business that has successfully broken into the shaving product markets and whose new four bladed razor is now number three in handle sales to Gillette. King mentioned that there were over 20,000 patents in the razor and personal grooming industry including mechanical hinges on the construction of razors which requires new entrants to design their way around the patents.
The panelists on the programme discussed a number of other entry barriers - among them:
1. Intellectual patents and ownership of technology - but patents are needed to provide an incentive to invest
2. Expertise and reputation of the incumbent - intangibles
3. Licences are important such as professional qualifications
4. Inherent suspicion among consumers about new ideas - behavioural economics tells us that many people are quite happy with their default choices - it may take a while for any change in preferences to occur.
5. Regulations and legislation involving employing people - a major barrier for fast-growing smaller businesses many of whom are highly innovative
The Bottom Line is always worth a listen - the podcast is available for free from iTunes. And this weeks programme also considered which kinds of sectors will weather the storm and do well in a recession? The different nature of a recession this time around may well give us a clue to the likely winners from the downturn especially with credit so hard to find.
It was thought that successful businesses during the current downturn would tend to be:
1. Agile and entrepreneurial, customer centric
2. Businesses with low debts and those who are cash rich - cash flow management is becoming critical - cash flow forecasts will come under increasing scrutiny.
3. High energy businesses that swim against the tide
4. Knowledge building companies
The Bottom Line
Arming the Donkeys
Dan Ariely has a weekly podcast available on iTunes “Arming the Donkeys” in which he interviews a prominent scientist and talks to them about how their work links in with his own research interests in behavioural economics. This week’s podcast was on bottled water - better for you or just a fabulous marketing achievement?
Will price discounting help restaurants survive the crunch?
If eating in is the new going out, life is going to get really tough for hundreds of mid-market restaurants in the months ahead.
Hard-pressed consumers hit by a potent combination of falling property and share prices, declining real incomes, a slump in confidence and fears of huge job losses, are cutting back on non-essential items in their monthly budgets. They are eating out less or perhaps switching to lower-priced chains that – on the plate at least – seem to offer better value for money.
How can restaurants respond to the threat posed by a fall in discretionary spending?
Will sales of lottery tickets fall during the recession?
A loyal blog reader asked me an innocuous question the other day - will sales of National Lottery tickets fall during the recession?
The reader herself has not bought a ticket for at least three years and I cannot even remember the last time I entered the main draw, it was probably at least a decade ago.
Indeed the whole issue of why people continue to fork out large sums on lottery tickets when the odds of winning are so low will always be of interest to behavioural economists keen to understand more of the weaknesses that people have when assessing probability and risk.
The odds on winning the Lotto jackpot are 13,983,815 to one; there is a 51 to one chance of winning any of the prizes.
As Henry Fielding said in 1792 “"A lottery is a Taxation Upon all the Fools in creation”
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A Drunkard’s Walk - Winning Streaks and Randomness
Statistical significance, random errors, laws of sample space, hot hand fallacies, bell curves, regressions towards the mean and the Baye’s theorem about conditional probability - hardly the stuff to get the pulse racing during a relaxing summer break. But when the risks of having a life-threatening disease when your test comes back positive turn out to be much lower than you thought. When your local sports club has been on a losing streak for seven or eight games against evenly matched opposition and you cannot understand why. Or when the local paper goes overboard about the existence of cancer hotspots / clusters or an abnormal rate of suicides in certain towns - that is when a good grounding in the laws of probability come in handy in appreciating what might lie behind what are intuitively unlikely occurrences.
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