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Behavioural Economics Answers

The questions posted in the previous blog were designed to highlight the two systems of thought (the intuitive and the rational) that operate in our brain (see references for confirmation of this outlandish statement!) The degree to which an individual monitors their intuitive thoughts with their rational mind is a profound indicator of other significant personal characteristics.

Question one asked: A bat and a base-ball cost $1.10 together. The bat costs $1.00 more than the base-ball. How much do the bat and the base-ball cost individually? (Did you give it a go?)

Almost everyone who is asked this question reports that the answer that immediately comes to mind is that the bat costs $1.00 and the base-ball costs $0.10. However, if you ‘think’ about the question for more than a moment it becomes clear that this cannot be right as it would result in the bat costing $0.90 more than the base-ball.

Academic Shane Fredericks (2005) found that many intelligent people yield to their first impression and give the wrong result to this question. In one study of Princeton University students 50 per cent gave the wrong answer and in another study of University of Michigan students 56 per cent!

The correct answer is that the bat costs $1.05 and the base-ball costs $0.05.

This question highlights how lax we can be in our conscious monitoring, and how easily we trust a plausible judgement that comes quickly to mind. Generally these intuitive ‘answers’ are based on implicit assumptions. The wide-spread lack of mental monitoring is kinda scary when we move away from questions of base-ball prices and address questions of racism, sexism and the many areas of life where our decisions are guided by implicit assumptions.

The next two questions were in the same theme.

Question two asked: If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets?

The answer is 5 minutes, but many people respond by saying 100 minutes. It seems right at an intuitive level.

Question three asked: There is a lake suffering from a blue-green algae bloom. Every day the size of the bloom doubles. If it takes 48 days for the bloom to cover the entire lake, how long would it take for the patch to cover half the lake?

The intuitive answer tends to be 24 days. It is wrong.

The correct answer is 47 days.

Fredericks also found that people’s answers to these questions were highly correlated with certain behavioural traits. For instance, people who answered all three questions right tended to be more patient and more willing to wait to be rewarded. Fredericks’ subjects were asked another question: would you rather $3,400 this month or $3,800 next month?

The students who got all three questions wrong then 65 per cent went for the $3,400 this month. In contrast, of those who got all three answers right, 60 per cent decided to wait a month and take $3,800. The two different amounts equate to an implied discount rate (the interest rate a bank would have to pay you on $3,400 to make it worth $3,800 in a month) of 280 per cent!

How did you go with these simple questions? Should I lend you some money for the month? (You wouldn’t happen to have $3,400 sitting around would you?)

References:

Frederick, S., 2005, Cognitive reflection and decision making, Journal of Economic Perspectives, Volume 19, Number 4.

Epstein, S., 1994, Integration of the cognitive and psychodynamic unconscious, American Psychologist, 49, 709-724.

Chaiken, S., and Trope, Y., (Eds) 1999, Dual-process theories in social psychology, New York: Guilford Press.

Kahneman, D., 8 December 2002, Maps of bounded rationality: A perspective on intuitive judgement and choice, Noble Prize Lecture.

Behavioural Economics Questions

The following simple questions will provide an indication as to how your decision making can be influenced through implicit assumptions. Taking a few minutes to complete the questions as it will provide you with very powerful insights into how easily conscious thinking can be influenced.

1. A bat and a base-ball cost $1.10 together. The bat costs $1.00 more than the base ball. How much do the bat and the base-ball cost individually?

Bat costs:_____________ Base Ball costs: ___________

2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? (A widget is an economic euphemism for ‘product’ or ‘thingie’ – there is a reason that economists are not engineers)

How long?____________

3. There is a lake suffering from a blue-green algae bloom. Every day the size of the bloom doubles. If it takes 48 days for the bloom to cover the entire lake, how long would it take for the patch to cover half the lake?

How many days? ________________

Looking Up And Seeing Stars

Just over a week ago Dianne Odell, at the age of 61, died because of a power failure to her home in Jackson, Tennessee. While family members frantically tried to start an emergency generator, her father said, “We did everything we could do but we couldn’t keep her breathing. Dianne had gotten a lot weaker over the past several months and she just didn’t have the strength to keep going.”

Dianne Odell had spent the previous 58 years with a two meter machine completely enveloping her body to keep her alive. This machine, a 340-kilogram iron lung, was a cylindrical chamber with a seal at the neck that completely enveloped her body with only her head exposed. At the age of three, Dianne was struck down with the debilitating disease polio. Her life was dependent on a machine developed in 1928 that produced positive and negative pressure on her lungs to induce breathing. Because of a spinal deformity from the polio that made it impossible for Odell to wear a more modern, portable, breathing apparatus she had to use the older machine.

Her unique deformity meant that she had to spend her life lying on her back, looking up at the ceiling. She was believed to be one of the last, if not the last, survivor of polio to live with the support of an iron lung. She lived with the support and care of her family, with her mother and father, who were over eighty years old, refusing to have her institutionalised.

In many ways Dianne Odell was unlucky. Just three years after she contracted polio a vaccine was developed that effectively wiped out the crippling disease. She was also unlucky because a spinal deformity arising from the polio made it impossible for Odell to wear more modern, portable breathing apparatus that generally replaced the iron lungs in the 1950s. She was also unlucky because so few people suffered from her condition that little attention was paid to alleviating it.

In one crucial way, however, Dianne Odell was very lucky. Dianne did not have the distractions and clutter perspective that occlude my and many others understanding of the world. Nor did she have any illusions as to her circumstances. She was in a stark position and confronted with conditions that many of us, and most definitely I, would find intolerable.

Dianne Odell was lucky because her life was stripped back to a simple decision, how to respond to her circumstances and create the most meaningful life possible. The life she made is one worthy of respect.

The ability to take challenging circumstances and transform them into positive life experiences is a unique one. However, almost every day you and I are confronted with decisions and situations where we can choose to react or respond creatively and consciously. The Naked Ape is dedicated to exploring and celebrating our collective achievements despite our very, very human limitations.

Dianne Odell was one of the unique individuals who, despite tremendous challenges, was determined to rise above them and live a full-life. Dr. Walton Harrison, Odell’s paediatrician just after she was diagnosed with polio, said that she had beaten the odds to live as long as she had. “I didn’t think she would last through puberty because her lung capacity was so limited,” he said. She earned a diploma from Jackson High School and an honorary degree from Freed-Hardeman College.

Dianne loved to talk with people and had a mirror installed so that she could make eye contact with visitors who entered her room. She loved having visitors, and particularly enjoyed encouraging younger children with disabilities to go for their dreams. In a 2001 interview with the Associated Press, she said she wanted to show children, especially those with physical disabilities, that they should never give up. “It’s amazing what you can accomplish if you see someone do the same thing,” she said.

She also wrote a book, the work of years. In an interview with the STAR Centre, Dianne said, “I have had two dreams in my life. The ability to “write without the help of others” and “to write my own letters and perhaps books.” She continues, “My dream of writing a book without help has come true. I had started a children’s book over 12 years ago. The computer I had then gave me nothing but frustration. It must have been three years before I realized that the method of voice recognition that I was using would never work for my voice. It broke my heart to think of all the wasted money people had contributed for my benefit.”

It would not be until another decade before Dianne could purchase a voice activated computer of suitable quality to write her children’s book, “Blinky Less Light”. The story goes:

“Not so long ago, in a distant corner of the heavens, there was a tiny, almost invisible star. His name was Blinky. His parents loved him very much, although they knew Blinky was different. He was very small and gave off only a dim light, almost like that of a firefly,”

Eventually, the small star manages to become a wishing star, despite tremendous obstacles, and eventually grants a wish that saves a young child’s life.

For her 60th birthday a celebratory gala was held to raise funds for her healthcare. More than 1,100 people attended, including the actor David Keith and former Vice President Al Gore. Odell was rolled onto an ambulance for her ride to the gala wearing a sequined gown designed by a local seamstress with a tiara adorning her head. When she was wheeled into the room, with an American flag draped over the machine, she received a standing ovation. Some of the people who attended knew her well, but others had heard about her determination and spirit and wanted to meet her.

As Francis Bacon remarked, quoting from a speech by the Stoic philosopher Seneca, “The good things which belong to prosperity are to be wished, but the good things that belong to adversity are to be admired.”

On hearing of Dianne’s response to life’s adversity, it is impossible not to admire her spirit and character and marvel at the love she gave and received.

References

Csikszentmihalyi, M., 1991, “Flow: The psychology of optimal experience”, page 200.
Photographs used in this post are from http://66.78.165.185/index.php?option=com_content&task=view&id=63&Itemid=108

More valuable links:
http://www.onlineathens.com/stories/022002/hea_0220020028.shtml
http://orig.jacksonsun.com/photogallery/20070217odellbday/pages/A-DianneOdellSociety-km.htm
http://66.78.165.185/index.php?option=com_content&task=view&id=63&Itemid=108

How Not To Use Behavioural Economics

Behavioural economics can provide you with powerful insight into how people make decisions and, by implication, how you can influence their decisions. You don’t need to be an economist to know this, it’s been done for centuries and it’s generally called politics or salesmanship.

Knowing how humans make decisions can be incredibly powerful. Then again, it is often said that a little knowledge is a dangerous thing!

Consider the case of Wollongong University Professor Brian Cambourne. He recently flooded the office of NSW Education Minister Verity Firth with a chain email. Professor Cambourne was unhappy that the NSW Minister is actually testing the results of his teaching theories. Perish the thought!

In his chain email, Professor Cambourne suggests using framing theory to link one of the methods of teaching literacy to “failed theory, practice, programs and metaphors/analogies which can be linked to ‘failure’ in the minister’s mind, at an almost subconscious level”.

We’ve discussed how the framing heuristic contributed to the global financial crisis.

Professor Cambourne seems to overestimate the ability of framing to influence decisions. “We rely on the cognitive science framing theory, to frame things the way you want the reader to understand them to be true – framing things that you’re passionate about in ways that reveal your passion.”

yes prime ministers

Unfortunately this statement does not do human decision making justice. When we are aware of the importance of a decision we tend to make pretty good ones.

In terms of influencing political decisions, using the framing heuristic is not particularly innovative. Sir Humphry Appleby would constantly use it whenever his minister was considering a ‘courageous’ decision. However, Sir Appleby understood human nature, and so could convince his Minister.

The key difference between the two attempts at influencing of Professor Cambourne’s and Sir Appleby was that the latter’s used framing subtly so not to alert the target’s conscious mind of what was going on. Professor Cambourne’s emails were anything but subtle. Consequentially, the NSW Minister for Education is primed to consciously focus on the chain emails and judge their content accurately.

What are the Chances: Of a Swine Infestation? Part 1

The time has come,” The Walrus said,

“To speak of many things…”

In particular, to talk about the probability that you or I may keel over tomorrow because of ‘the dreaded swine flu’.

miss-piggy-jason-wu

We, as a species, are absolutely appalling at estimating the probability of highly unlikely events (called ‘long-tailed events – because they occur at the extreme end of a probability distribution). A little time ago, as geologists measure time, humanity went through a choke point where only a few thousand of us were alive in the whole wide world (real estate would have been pretty cheap!). This is why humanity has so much in common, at a genetic level we have almost everything in common! It also explains why we can mate with any human on the planet and produce viable offspring.

Our brains have been programmed to survive by the mere fact that those that didn’t encourage survival didn’t survive. The philosophers probably tended to meet an untimely end. The ancient humans that sat and pontificated as to whether those plumes were an approaching fire or simply a mirage caused by the heat were not amongst our ancestors. Our forbearers, on seeing the hint of a fire off on the horizon, are the ones that immediately high‑tailed it out of there.

Consider this in light of the recent panic about swine flu. While governments and their citizenry across the world have panicked (my favourite reaction was Afghanistan quarantining its one pig), less than 200 people have died from it. In an average year, over 36,000 Americans alone lose their life to the everyday, ordinary type of flu.

There are two behavioural economic reasons for this disproportionate reaction.

The first is our biased estimation of the probability of extreme events. The more dramatic or unique the event, the easier it is to imagine, then the higher the probability we assign it. While these factors contribute to excellent survival strategies when the world was younger and there was lot more leg room, these days it is what we economists call ‘sub‑optimal’. A better word is ‘stupid’!

The other reason has to do with framing.

Reference:

When Humans Faced Extinction
Dr David Whitehouse 
http://www.freerepublic.com/focus/f-news/926315/posts

What are the Chances: Of a Swine Infestation? Part 2

The second reason the world reacted with extreme measures is that our sense of judgement was significantly altered by irrelevant and unrelated information that has absolutely no bearing on the decision at hand. A ‘context’ heuristic.

If I was to ask you a question that you didn’t know, like “how many quokka’s live on Rottnest Island?”, then you’d have to guess.

I could significantly influence your answer by mentioning an unrelated figure before I ask the question. If I were, for instance, to say to one group of test subjects, “there are 700,000 more people alive today than there were yesterday”, and another group of test subjects, “BHP has a market capitalisation of $50 billion,” and then ask the quokka question, there answers would be different.

The group subject to the higher meaningless figure will give a significantly higher estimate for quokka’s than the first group. Why? Because unconsciously our brain uses that figure as part of the estimation process – even though it has absolutely nothing to do with the issue at hand.

This bias can have a significant impact on meaningful things. Studies have found that customers will spend more at a café called ‘Café 190’ than they will at one called ‘Café 19.’ Even though it is the same café with only the name changed!

It certainly has had an influence in the “Great Swine Flu Panic of 09″.

When the new virulent strain of influenza influenced the World Health Organisation to raise the world alert to the disease, it was ‘put into context’ by discussing the Spanish Influenza outbreak that followed World War One. This pandemic has been estimated to have killed over 70 million people.

My work is done!

I’ve already influenced how risky the Swine Flu is. I’ve given you the ‘context’ in which to evaluate it. You cannot escape it.

You might reason, rightly, that we have made great strides in medicine since the 1920’s. You would be right. Our collective body of knowledge has gone from not even knowing what a virus is to, probably very soon, being able to map the genetic code of one. While you might counter reason that the world is far more integrated now, with great strides having been made in transportation, the reality is communications technology has come even further. So health organisations can respond even faster.

Irrespective of whether you give greater preference to the ‘preventative’ or the ‘contributing’ factors, I’ve established the context that a pandemic will kill 70 million people. You will either estimate a higher or lower figure, but it will be based around 70 million.

That alone is justification enough to panic!

What Are The Chances Of That Happening? Part 3

A great comment on how easily our judgements of risk are influenced:

“No passion so effectually robs the mind of all its powers of acting and reasoning as fear … To make anything very terrible, obscurity seems in general to be necessary. When we know the full extent of any danger, when we can accustom our eyes to it, a great deal of the apprehension vanishes. Every one will be sensible of this, who considers how greatly night adds to our dread, in all cases of danger, and how much the notions of ghosts and goblins, of which none can form clear ideas, affect minds which give credit to the popular tales concerning such sorts of beings.”

Edmund Burke

Fear is a key trigger of our smaller brain and this part of our brain is bad at making decisions. So, next time you are faces with a scary decision and your adrenalin is pumping, don’t make it. Take a break.

It can take up to 15 minutes for a strong emotion to dissipate. So go for a walk and come back and make that decision with a cool rational mind.

 

 

Everyone Is Voting YES

Because of the bandwagon effect (discussed in an upcoming blog) having the appearance of winning the debate is just as important as actually winning the debate in the public arena.

  • Studies in the US have found that people who have not yet made up their mind in an election were up to twice as likely to vote for the winner over the perceived follower.
  • It has also been found to influence peoples decisions on significant issues such as abortion and Quebec’s constitutional future by between five or seven per cent.

This may be due to the fact that there appears to be three types of people when it comes to engaging in social interactions, those that take, those that give and those that follow whichever of the preceding two dominate (called the Machiavellians). But this is a conversation for another day…

When it comes to changing the highly conservative culture of Perth, it is going to take everyone who cares moving this city forward. Specifically, tell everyone that everyone we know is also going to be voting Yes as well (even if it’s a lie for you, at worst it would be a venial sin not a mortal one).

While there may be only a slim margin in some of the polls, if we all push it, the impact on public opinion may be significant.

References:

Goidel, R. K., and Todd G., 1994, The Vanishing Marginals, the Bandwagon, and the Mass Media:
http://www.jstor.org/pss/2132194

The Irrationality of Mothers

mothersday

With Mothers Day fast approaching, you may be interested in some highly counter-intuitive behavioural economics advice (courtesy of the Atlantic on what kind of gift to buy her.)

If you’re planning to give your Mother a voucher then you should probably rethink the time frame of your gift. Research has found that a voucher with a highly limited timeframe is much more likely to be used than one with a longer one.

So, buy your Mum a day spa treatment that is valid for only this month rather than one that’s valid for a whole year. She’ll be more likely to use it then.

It is part of ensuring that she ‘commits’ to using the gift. Oddly, humans are both very poor and very good at delaying gratification. We’ll not only put off doing a hard task, but a pleasurable one as well! We’ll constantly find we are ‘too busy’ or ‘don’t have time’ to use the voucher and, since it lasts a whole year, we hypothesise that a mythical time in the future will develop when we can use it.

It’s the same principle that helps explain why a tourist is more likely to visit local attractions than the local. The local never develops a sense of urgency about seeing the site and so never does.

When it comes to your mum this Mothers Day, using a shorter timeframe to pressure her into actually using your gift will help ensure she enjoys it – and that you haven’t effectively flushed your money down the toilet!

The Joys Of Specialisation – Part 1

When people complain about international trade stealing jobs from Australia it really frustrates me.

Hands up, gentle readers, those of you who are subsistence farmers. I’d be surprised if anyone who survived purely by the work of their hands would ever have the spare capacity at the end of the day to read a blog like this one. Not to mention being unable to afford an internet connection or a computer in the first place!

We all gain enormously by developing skills in one activity and trading them with each other to supply what we need from life. Much of the improvements in life that you and I enjoy over our forbears are because of the far greater level of specialisation that can occur in a modern economy. In fact, to know anything useful about almost any field of endeavour requires significant amounts of effort and energy.

Heck, if we took away all the support of other people’s specialisations – from electricians to farmers to engineers – I know I’d have a hard time surviving and I suspect you would too. Even subsistence farmers are specialists of a limited sort.

While it seems pretty damned obvious to me that we gain from trade, some may still argue that it steals jobs from Australians.

Despite the protests over the off-shoring of Bonds’ workers, they are still wrong. Australia does not lose jobs to overseas. It loses some jobs, often high profile ones, but gains others. The gains are often not clear at all.

chestybonds

Sure, international trade may result in certain jobs being lost to Australia. But even domestic trade ‘costs’ jobs. Consider the trivial case of an expert builder working to plans drawn up by a professional engineer who uses equipment built by a third (or fourth, or fifth) party. They can build a house at a much faster pace than a hoard of ignorant peasants using nothing but their bare hands.

Our standard of living would be much lower if we did not engage in international trade. Far more jobs would be lost than a small textile factory in Sydney or Melbourne if we had to build and produce everything in Australia.

So buy undies made in Indo-China. The Australian workers who would have made them will soon be redeployed to other parts of the Australian economy. The real role of Government is not to stop Bonds off-shoring its workforce, but to help retrain those that lose their jobs.