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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.

What Are The Chances Of That Happening? Part 1

We take insurance for granted, yet it is actually quite a modern concept. It is also one that is particularly influenced by our decision making heuristics.

The French mathematician Blaise Pascal attributed the development of a key concept underpinning insurance to a monk at Port‑Royal who said, “fear of harm ought to be proportional not merely to the gravity of the harm, but also to the probability of the event”. This idea underpinned Pascal’s concept of probability theory, published in his Ars Cogitandi in the seventeenth century.

Probability theory allowed the fledgling insurance industry to develop reasonable prices for insurance.

Unfortunately it does not apply particularly well to human beings who suffer from the availability heuristic. While the unnamed monk’s statement makes intuitive sense, what we actually do is assess the likelihood of a risk occurring by how easily similar examples come to mind.

The result is that our probability estimates are biased by two factors – how recently an event has occurred and how dramatic it has been.

Something that has been in the news recently, a flood or fire, will be considered more likely to happen again than something that hasn’t occurred recently.

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Further, something that has happened to us personally will be considered much more likely to happen again. So if you’ve ever experienced a bush fire you are more likely to believe it will probably happen again than if you haven’t.

Finally, vivid and easily imagined events (like burning in a bush fire) are often thought to be more likely than less vivid causes of death (like death by asthma attack) even though the reverse is true.

These cognitive faults explain why, for instance, if floods haven’t occurred lately then people living on a flood plain are less likely to buy insurance. After a flood, insurance policies increase sharply and then decline as memories fade. What is more, if you know someone who’s had a bad experience in a flood then you are more likely to buy insurance against it, even if you face no flood risks yourself.

What Are The Chances Of That Happening? Part 2

If the availability heuristic only impacted on insurance decisions then it would be annoying but no big deal.

Alas, it has a serious impact on what people want governments to do and how they assess their performance.

For instance, people see violent acts of terrorism that fundamentally shake up their perception of safety and expect the government to take precautions. This is natural and reasonable. However, the response that is expected is disproportionate to the probability of death through violent terrorist actions.

Rest assured, you and I are far more likely to die of numerous mundane causes than because of terrorist attack! (I hope that makes you feel good.)

If a proportion of the resources that have been devoted to combating terrorism were devoted to something else, say preventative health care measures, our society as a whole would be better off. By that I mean fewer people would die.

That’s not to say the government shouldn’t fund anti-terrorist activity. It’s an important activity the government can undertake. It is to say that many of the measures meant to diminish terrorism don’t seriously impact it (think of airport security and the fact that kids can carry on armed weapons – despite all the money spent on trying to beef up security) and are a complete waste of money, relative to what that money could be doing spent elsewhere.

Sure, you say, why not do both? Answer: resources are limited! There is only so much to go around. While we are far wealthier than at any time in Australia’s history, there is still less resources than there are ways to spend it!

We can hope that as the memory of terrorist atrocities fade, we as a society can have a more rational approach to our collective security.

At least Australia did not participate in torture.

The Bliss of Ignorance – Part 2

Charles Darwin said in 1871 that “ignorance more frequently begets confidence than does knowledge.”

The world has been treated to an extraordinary proof of that statement recently in the form of George W. Bush.

Like a slow motion car crash that horrifies but ensnares you so you cannot look away, the presidency of George W. Bush was absorbing until the last moment. (Please note the impact of my opinion on my interpretation of the following facts

Consider for a moment the following litany of infamy:

  • a failure to heed intelligence advice that leads to the most deadly attack on US soil;
  • a further failure of intelligence results in the US invading a country in search of ‘weapons of mass destruction’ that never existed;
  • an invasion designed to stymie Al-Qaeda occurs in a nation where they have absolutely no presence – until after the invasion – which has created the perfect recruitment drive;
  • the war in Iraq is declared ‘Mission Accomplished’ – before the nation descends into bloody anarchy and years before stability is achieved;
  • the supervisor of the Federal Government’s response to hurricane Katrina is described as performing ‘one heck of a job’ (while the death toll from rises and it becomes one of the greatest natural disasters in American history); and
  • the assessment that the economy is doing well, just weeks before the largest whole‑sale nationalization of the financial sector ever seen in the US.

This is merely a precursory list, and fails to capture the extreme levels of incompetence displayed by the 43rd President (space limits me). Perhaps the most appalling element of this litany of woe has been the inability of ‘W’ to appreciate the magnitude of his errors – or to ever acknowledge them at all. Perhaps we now know why

A promising contrast is provided by the response of Barack Obama when, in response to an important supporter and high ranking appointee was found to have evaded taxes, he stated:

“I screwed up.”

There is hope that the 44th President is competent enough to appreciate his incompetence. Particularly as the global victims of the last one’s ignorance try to extract themselves from Bush’s ‘bliss.’

 

 

The Bliss of Ignorance – Part 1

The Bliss of Ignorance is…

…never knowing that you are ignorant! There is a widely reported phenomenon that we all, as humans, tend to overestimate our abilities and how good we are compared with others.

A study into people’s abilities at self assessment turned up some interesting results that have powerful implications. It is also a widespread phenomenon with research suggesting that socially incompetent teenage boys have been found to be largely unaware of their lack of social graces, and the same holds true of college students.

Psychologists Justin Kruger and David Dunning put this well known tendency to the test and found some interesting conclusions. In their study, participants were required to complete a series of tests and then rate how well they performed and also how well they performed relative to others undertaking the same test. The worse someone did in an area, the greater the disparity between how well they believed they performed and how well they believed they performed relative to other people.

Interestingly, Kruger and Dunning found that people who were good at a task underestimated their relative performance. That is, they tended to think that everyone performed the task as well as they did. This study suggests is that we are not particularly clear of either our strengths or our weaknesses.

Think of the awkward uncle you ran into at the family Christmas gathering. He insists on being loud and obnoxious every year, persisting in the mistaken impression that he is quite debonair and charming! The skills that would transform your uncle into someone you’d talk to outside of public holidays are the same ones that would allow him to realize that he’s quite the bore. However, your uncle may be highly accomplished at tasks unrelated to entertaining relatives, but he probably is not aware that he’s much better than other people at such tasks.

References

Kruger, J. and Dunning, D., 1999, ‘Unskilled and Unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments’, Journal of Personality and Social Psychology, Volume 77, Number 6, pages 1121-1134.

The Difference Between Your CV And Your Termination Letter

Our two systems of thought define the limits of what we are capable of achieving. At one extreme we have the highly positive, proactive and engaged part of our personality – our big brain. At the other end of the spectrum we have our reactive, highly emotive and survival focused part of our personality – our very little brain.

donaldtump

When we describe ourselves on our CV we are really describing our proactive persona.

Very few people write in their CV that they have a fear of strangers and react extremely to perceived emotional threats. Hardly! People describe themselves at their very best – at least mine certainly does! Also, our proactive side is capable of changing and adjusting to new circumstances. It is us at our very best.

In contrast, if you are ever unlucky enough to be fired, it will be because of the reactive part of your brain. Because of its limited computational capacity, and its unswerving focus on personal survival, this part of our brain has little capacity to grow and change. It is unable to evaluate: at its most basic, everything becomes a matter of survival, and so there are strong emotional drives associated with cognitive evaluations. It is unable to forgive: someone who hated you (and proved it by hurting you in some way) is bound to continue to do so. Therefore, never forgive and never forget.

You might say you marry someone’s proactive brain and divorce their reactive brain.

A tragic example of what happens when your reactive brain controls your decisions occurred when, as the prosecutor told the court, Christopher Debroy Summers “allowed his anger and his upset to drive (his) car.” Christopher Summers got into his car in a state of extreme anger, having just had a fight with his wife. With his car traveling at over 130 kms, the policeman stood on the road to slow the car down. Apparently Christopher Summers did not even take his foot off the accelerator. He let his emotional, reactive brain drive him. As a consequence he ploughed into and killed a policeman.

Capital Punishment

capital punishment debate has an interesting wrinkle. Politicians are frequently cited as saying, “There is no evidence that the death penalty has a deterrent effect.”

hang

This is a furphy. There is no deterrent effect in enacting a death penalty but there is one for enforcing the death penalty.

Economic journals have been publishing evidence that there are large deterrent effects – in the order of anywhere between eight to twenty-four murders prevented by each execution – when death penalties are enforced. (The same is true for all crime – if people know it has high costs they are less likely to do it.)

This would seem to suggest that capital punishment is a highly effective policy for reducing the level of murder. It is.

What this argument misses is that the deterrent effect occurs regardless of whether the right person is executed or not! The link is between enforcing the death penalty rather than in justly enforcing the death penalty. Therefore, if your objective is to maximise the deterrent effect of capital punishment, focus on getting convictions as opposed to getting the right person convicted.

If taken to its logical conclusion, this approach would ensure that someone is convicted and severely punished every time there is an infraction of the rules. Irrespective of whether they are guilty or not!

References

http://www.cjlf.org/deathpenalty/DPDeterrence.htm

Dezhbakhsh, H., Rubin, P. H., and Shepherd, J. M., 2003, Does Capital Punishment Have a Deterrent Effect? New Evidence from Postmoratorium Panel Data, American Law and Economics Review, Volume 5, Number 2, pages 344-376.

Like Me? Like You! – Part 3

Lets try it ourselves. While the capital punishment issue in Australia is nowhere near as contentious as it is in America, it can still raise hackles. What is your opinion on the issue of capital punishment?

Here are two tongue-in-cheek views on the issue. Which is more reasonable?

Pro-Capital Punishment: The position of right-wing nuts who believe that an ‘eye for an eye’ represents appropriate social justice:

  • Capital punishment is the only effective way to deal with violent criminals;
  • These scum are going to be a drain on public finances for their entire lives;
  • The violent offenders will only go on to commit more crime – unless they are executed;
  • It acts as a discouragement for further violent crime;
  • Capital punishment provides a measure of justice for the victim; and
  • Banjo music is ‘OK’ but best enjoyed with your cousins and a fiddle as well.

Anti-Capital Punishment: The position of latte-sipping elitists, who wouldn’t know a hard day’s work unless it hit them in the face with a shovel, is:

  • Capital punishment does not actually have an impact on the level of violent crime;
  • The justice system is frequently wrong which would result in innocent people being executed;
  • Violence does not solve problems, it only perpetuates them;
  • Resources should be spent on rehabilitating people rather than executing them;
  • Individuals should not be consigned to the social scrap heap because of one action, there is possibility for redemption and change when given the right opportunity; and
  • Can I have my chia tea with goat’s milk?

The idea that we evaluate issues from our pre conceived biases adds new weight to the old adage:

“A man convinced against his will is a man of the same opinion still.”

(Personally, I think that all the banjo playing red-necks who advocate capital punishment should be rounded up and shot!)

Like Me? Like You! – Part 2

Not only is our judgment subtly altered when we share a common bond with someone, our assessments of arguments and opinions are influenced by the degree to which they agree with our own!

Lord, Ross and Lepper (1979) sorted a group of students into two teams, based on their opinions about capital punishment. These two teams, composed entirely of members who were either for or against capital punishment, were asked to objectively evaluate different opinions about the topic.

The students in each team found that the evidence, on balance, favored their pre-existing position! That is, rather than objectively evaluate our positions, we all have a tendency to give preference to arguments that already support their position and to discount those that don’t!

“Sure,” you might say, “of course we evaluate ideas based on our own biases. That is common sense.” Common sense it may be, but it is far from widely accepted. After all, the basis of our democratic pluralistic society is that the public engages in a ‘vigorous debate’ about important issues and the best ideas are the ones with the widest support.

The reality seems to be our opinions, or at least the opinions of the vast majority of people, are already set. We are ‘convinced’ by the person who thinks like we do.

References

Lord, C.G., Ross, L., & Lepper, M. R., 1979, Biased assimilation and attitude polarization: The effects of prior theories on subsequently considered evidence. Journal of Personality and Social Psychology, 37, 2098 2109.