Growth, happiness and misbehaving

I’m enjoying reading Richard Thaler’s  At about the half way stage, there hasn’t been anything startlingly new in terms of the economic content, as the book is addressing general readers rather than economists who have already read widely on the subject. It is very well written and also interesting to hear from Thaler what it felt like to be one of the pioneers in this field.

[amazon_image id=”B00SSKM714″ link=”true” target=”_blank” size=”medium” ]Misbehaving: The Making of Behavioural Economics[/amazon_image]

There are also some very interesting new (to me) insights. For instance, I’d never really thought before about the importance of changes from the reference point in prospect theory. Thaler writes: “Kahneman and Tversky recognized that we had to change our focus from levels of wealth to changes in wealth. This may sound like a subtle tweak, but switching the focus to changes as opposed to levels is a radical move….. Changes are the way humans experience life.”

This is the consequence – obvious when you think about it – of the hedonic treadmill, of acclimatising to a situation. Over in the well-being literature, this is often taken as helping explain the Easterlin paradox, the implication being that “we”/policy should help push people off the hedonic treadmill above high-enough income levels, by demoting or even somehow halting growth. But it seems to me to imply the contrary, that it makes growth very important for well-being. Just as some of the empirical work indicates.

I’ll review the book when I’ve finished – which will be at the weekend as I need something smaller to pack in my bag for the train tomorrow.

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Sympathy, empathy and scarce attention

Last night I attended a fascinating lecture by Sendil Mullainathan on his book with Eldar Shafir, . I haven’t read it yet but will certainly do so now.

[amazon_image id=”0141049197″ link=”true” target=”_blank” size=”medium” ]Scarcity: The True Cost of Not Having Enough[/amazon_image]

The book has been widely reviewed so the main argument is probably well known: people who do not have enough money have their attention focused on immediate problems, to the detriment of thinking about the consequences of short-term actions. The future in general is outside the tunnel of what they have the capacity to pay attention to. “Cognitive bandwidth is a fixed resource.” A lot gets used up by attending to urgent, day-to-day financial problems and needs – about which, slightly paradoxically, the people in this situation are ultra-rational, and very focused on the most cost-efficient decision.

The scale of the effect of this attentional tunneling on the quality of other decisions is large – almost as big as not having slept at all at night. All the time. And the decisions adversely affected cover all aspects of life, not just financial choices like whether or not to take out that pay day loan: how to parent, whether to keep up a course of medicine, and so on.

There are other kinds of scarcity that create the same kind of tunnel vision – including time scarcity. Prof Mullainathan drew this analogy, saying he’d tried it on hedge fund managers to see if it helped them understand the psychology of poverty. Someone with no money opting for a payday loan is like someone with no time not having time to do a piece of paperwork and ending up spending more time sorting out the resulting hassle. However, he added: “Different forms of scarcity have different optionality. Poverty is relentless. I can’t decide to change my poverty-life balance.”

The next question of course is what conclusions to draw from the insight about scarcity (of money) gobbling up people’s cognitive bandwidth. One conclusion is that expecting people on low incomes to fill out long forms to get benefits – or do anything – is a regressive attentional tax. Just as the cockpit of a plane is designed and engineered to be as fault-tolerant as possible, we should do the same with any engagement between people and government (or businesses, or school…..). Another that occurs to me is whether it’s possible to design some simple financial planning aids or reminders.

Interestingly, Prof Mullainathan said: “People who care about poverty tend to feel sympathy. But sympathy is a distancing emotion. We need to feel empathy.” It reminded me of Julia Unwin’s excellent book , which is exactly about the emotional reaction we have to poverty and why that actually makes it harder for well-meaning policy people to do anything about it.

[amazon_image id=”B00I124BLS” link=”true” target=”_blank” size=”medium” ]Why Fight Poverty? (Perspectives)[/amazon_image]

 

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Nanny state or government Mad Men?

 by Julian Le Grand and Bill New has landed on my desk and it looks a very interesting assessment of the trade-off between good ‘outcomes’ from nudge policies and the infantilization of individual choice – a useful counterbalance to the series of books from Cass Sunstein advocating nudging. (Gilles St Paul has a counter-nudge book too, .)

Although recognising the power of the argument that governments (and others) can’t avoid ‘nudging’ because the status quo is a choice architecture anyway, I lean towards being very uneasy about the enthusiasm for policymakers using behavioural techniques (familiar to ad men and Mad Men) to manipulate behaviour. So I’m looking forward to this new book.

[amazon_image id=”0691164371″ link=”true” target=”_blank” size=”medium” ]Government Paternalism: Nanny State or Helpful Friend?[/amazon_image]

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Oh so happy….

Maybe the universe is trying to send me a message. Last week I read a self-help book (about how to solve problems) that I’d been sent,  by David Niven. This past couple of days I’ve read Paul Dolan’s . Although somewhat sceptical about happiness economics, I’d heard him talk about his work and thought it sounded interesting. Well, the first half of the book is indeed interesting – more below – but the second half is a self-help manual. Who knows what it says about me, but I’m just not interested. As far as I can tell, not having read many of them, it seems thoroughly sensible.

[amazon_image id=”0141977531″ link=”true” target=”_blank” size=”medium” ]Happiness by Design: Finding Pleasure and Purpose in Everyday Life[/amazon_image]

Back to the first half of the book. There are several things about Dolan’s approach that make it far more plausible than the conventional approach to happiness. One is that he defines ‘happiness’ as the combination of pleasure and a sense of purpose, and not just the first of these as is standard. This must surely be right; and he argues that the evidence indicates people need a mix of both. You then have to read the rest of the book remembering that ‘happiness’ is not just ‘pleasure’.

Another is that he distinguishes people’s retrospective evaluation of their ‘happiness’ from their experience through time, and argues – again, I think convincingly – that the latter is more reliable for empirical research. He therefore prefers the data collected from the day reconstruction method as coming closer to experienced ‘happiness’ rather than the surveys that ask people to evaluate their state: “overall, would you say on a scale of one to six that ….” The evidence suggests that: “The circumstances of your life (income, marital status, age etc) matter much more to your evaluating self, and what you do matters more to your experiencing self.” So for example, unemployment clearly leads to lower evaluations of happiness but makes little difference to people’s DRM responses because mostly being at work is not a pleasurable experience (although it does give people a sense of purpose).

The third point he makes is that: “Your happiness is determined by how you allocate your attention.” Attention is a scarce resource. In place of the conventional approach which seeks to relate inputs (income, health, sunshine, marriage) to the final output, happiness, Dolan sees these inputs as stimuli in competition for your attention, with attention determining how they affect your ‘happiness’. The same inputs (income, health, sunshine, marriage) can lead to a different output depending on your attentional ‘production function’. He suggests that you can change your production function by directing your attention differently (and in the second half offers advice about how to do it). As he notes: “There are surprisingly few researchers who think about happiness in terms of your time use.” But time is the ultimate scarce resource.

This seems plausible, although I don’t know enough of the psychology literature – dating back to  – to really evaluate it. It strikes a chord with me though since attending a couple of years ago a fascinating workshop in Toulouse on the attention question, when it was clear from the way the cognitive scientists and psychologists talked that a standard economics model of competition subject to a budget constraint (brain energy) could offer real insight into thinking about attention.

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Fast and slow thoughts about extended warranties

Dozing through the early business news this morning, I heard that extended warranties are back in the frame for offering consumers a bad deal (I’ll add the link when the programme is up on the iPlayer). It brought back memories. More than ten years ago (in 2002-3), I was a member of a Competition Commission inquiry into the UK extended warranties market.

For the great majority of consumers, these service or insurance contracts on domestic electrical goods are never a good deal. Appliances are well covered against malfunction by manufacturers’ warranties and UK consumer law, and often against accidental damage by normal domestic insurance policies too; and are anyway not all that prone to breaking down these days. The expected cost of repair bills or replacement is sufficiently low that most people are better off self-insuring (i.e. using their savings). A small number of cash-constrained (i.e. poor) people will benefit from paying for an extended warranty when they have the money upfront, but that’s about it.

At the time on the Competition Commission, we debated whether or not we should ban the sale of the warranties in-store. It was a close call – we decided instead to insist that stores display the warranty price alongside the price of the item so customers had a bit of time to think about it rather than (as was then the norm) being pressed to buy one when paying at the till.

With hindsight, I think we should have banned their sale in stores. Knowing what we now do about behavioural insights – especially how bad people are at assessing probabilities and expected values – would have tipped the decision, I think. The OFT looked at the market again in 2011, and the ombudsman is still saying the market isn’t working well for consumers. Oxera has a nice report about behavioural insights for these products. The right behavioural remedy it alludes to in the conclusion is probably to stop people having to decide under any pressure at all whether or not to buy one – they should do so at home, at leisure, and stores could always send them home with a form or email them a link. Maybe a copy of Kahneman’s  as well?

[amazon_image id=”0141033576″ link=”true” target=”_blank” size=”medium” ]Thinking, Fast and Slow[/amazon_image]

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