Category Archives: Behavioural economics

Remember, we can “overlabel”

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Following the unfortunate death of a woman from drinking far too much Coke, there have been calls to label Coke.  I’m all for information, and that often makes me pro-labeling, but in this case I’m not … it is important to recognise that we are targeting providing information, and so we can “overlabel”.

A label gives information as an abstract concept, but it is costly to interpret and so the existence of a label is often taken as a signal, and used as a rule of thumb.  As a result, too much labeling of things could reduce the true information content – leading to people making more poorly informed decisions.

The solution?  There is a trade-off for the amount we label a given piece of food etc – and we need to accept that.  However, we can also make more detailed information and standards a necessary requirement to be on some sort of central website – so people who do want to take into account greater information can do so at a low cost.  I would also note that people that design easier to interpret labels which don’t sacrifice information are “shifting out the information curve” – this is a real productivity improvement, and these people are cool as a result.

The overall goal of the regulation is to “maximise information” so that people can take costs and benefits into account when they do something.  That should be the guiding principal – not saying people should have one thing or another.

Note:  Look, no need for me to go on about personal responsibility, or insult the woman about her life choice to get this result – which I’ve seen a bunch of.  We don’t know her life, preferences, or situation – so we shouldn’t suddenly decide that since it is a choice we wouldn’t make we should either ban the product or attack the choice.  I’ve noticed a lot of both, and its generally a bit disrespectful, which is also why I delayed this post until people stopped being rude.

Cigarette prices and subjective well-being

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We’ve written a lot previously about cigarette taxes as a precommitment device that can increase welfare. However, while those models fit the stylised facts, it’s hard to know for sure if people are better off. For that you’d need to make a prediction about their increase in subjective wellbeing and test it. Now a couple of European researchers have done just that and the results are ‘mixed’. By which I mean that the evidence contradicts the theory!

They conclude:

…we find that smoking bans, on average, neither increase nor decrease people’s subjective well-being to a sizable and statistically significant degree. Higher cigarette prices are related to overall lower reported levels of satisfaction with life, ceteris paribus. The partial correlation is, however, measured with a large standard error. Still, the effect is economically meaningful (and corroborated by our differential analysis for people with different smoking propensities). For a fifty percent price increase, we estimate a reduction in average life satisfaction of 0.02 points (on a four point scale). This is about one tenth of the effect of being unemployed rather than employed or equivalent to the effect of a 2.4 percentage points higher rate of unemployment on the population at large. This finding does not lend support to the effectiveness of cigarette taxes as an internalization strategy. Higher cigarette prices at least have overall negative short-term effects.
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Additionally, smoking bans turn out to be beneficial to smokers who would like to stop smoking (or not start again). For those smokers who are most likely to find themselves in a situation where they have recently tried to give up smoking but have relapsed, life satisfaction increases between 0.03 to 0.08 points with smoking bans (depending on the specification). This is evidence that supports the idea that smoking bans can serve as a self-control device. Interestingly, the same group of people does not benefit from higher cigarette prices. Rather to the contrary, these people seem to suffer to the same extend as other smokers do who have not recently tried to stop in response to higher prices. The negative effect of higher cigarette prices on smokers, particularly those who are likely to have self-control problems, runs counter to the prominent finding by Gruber and Mullainathan (2005) for the United States where positive effects of higher cigarette taxes on the well-being of smokers are identified.

Update: Eric comments.

Externalities and the changing nature of the internet

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Cory Doctorow has written a thoughtful and interesting article for the Guardian, which argues that pricing externalities will inhibit the creation of public value.

…the infectious idea of internalising externalities turns its victims into grasping, would-be rentiers. You translate a document because you need it in two languages. I come along and use those translations to teach a computer something about context. You tell me I owe you a slice of all the revenue my software generates. That’s just crazy. It’s like saying that someone who figures out how to recycle the rubbish you set out at the kerb should give you a piece of their earnings.
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If every shred needs to be accounted for and paid for, then the harvest won’t happen. Paying for every link you make, or every link you count, or every document you analyse is a losing game. Forget payment: the process of figuring out who to pay and how much is owed would totally swamp the expected return from whatever it is you’re planning on making out of all those unloved scraps.

It would be easy to nitpick at the way Doctorow uses concepts like externality rather freely, but that would miss the point of the essay. Underneath those semantics I think there’s a big idea he’s trying to get at, which isn’t really about externalities at all: it is the complaint that things previously available for free are now priced. It is about the intrusion of money into a creative community.

Think back to Dan Ariely’s discussion of social and market norms. The idea is that we act differently in situations where we perceive as market situations, relative to social situations. In particular, we are less generous towards others and less likely to feel guilty about our breaches of social etiquette when we’re in a market situation. Importantly, once a market norm is introduced into a situation it can destroy the social norms very quickly. Social norms are all about trust and once people feel taken advantage of that trust breaks down and turns into a feeling of betrayal. For example, people may enjoy sharing on Facebook but, once they feel that Facebook is trying to take advantage of their personal information for monetary gain, they feel betrayed and no longer trust it. Social and market norms don’t mix well.*

What Doctorow has identified is a social norm of generosity without expectations that previously pervaded web communities. There are companies, such as Instagram, who took advantage of that to build up a large stock of specific investment and then attempted to monetize it. Whereas we expect our bank to try taking advantage of us (market norm), we feel personally offended if Instagram attempts it (social norm). Consequently, there was a huge outcry about Instagram’s attempted change in their ToS, and that loss of trust could damage the firm permanently.

As attempts to monetize online activities continue it is likely that these conflicts between profit motives and social norms will become more common. Companies recognise how valuable it can be to create social norms in their interaction with users. However, that generates tensions with their quest for profits, which can ultimately end up destroying the social goodwill that is the backbone of their success.

* It occurs to me that this may not hold for economists who are trained to think of everything as a market. Perhaps they will just have to believe the experimental work on the matter rather than looking to their intuition!

Precommitment without external help

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In an interesting post Bill Kaye-Blake discusses how we might overcome internalities through autonomous precommitment. As we’ve discussed previously, commitment mechanisms tend to involve external contracts: agreements with friends, or monetary contracts are common. But might we be able to commit our future self without external mechanisms?

I wonder if selecting identities is a way that people overcome the problem of time-inconsistent preferences.

By deciding ‘I am a vegetarian’ (or ‘I am a non-smoker’ or ‘I am a saver’), you construct the immediate consumption problem differently. The impact of the burger or cigarette isn’t on your heart or lungs but on your identity. The marginal impact on your physical health may be nearly zero, but the impact on your identity is binary. You are no longer that which you have decided to be.

Selecting an identity allows you to make a portfolio of decisions all at once. You commit to the identity. Then, to preserve the identity you have to do the behaviour in the future and in the now. Identity becomes a strategy for pre-commitment.

Eric points to this paper by Sunstein and Ullman-Margalit, which says much the same thing

The difficulty with observing skill

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Skill vs luck:

“There’s a part of our brain that’s called the interpreter,” he says. “It’s designed to make sense of what we’ve seen, to give it a narrative. And we always see causes; so if Person A succeeds where Person B fails, we assume that Person A had some skill that Person B didn’t.

“Even when we know it’s random, we can’t help but see the workings of skill.”
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This hyperactive pattern-detector is likely to be an evolutionary adaptation, says Kahneman: a false positive will generally be less harmful than a false negative, an imagined lion less of a problem than an unnoticed one.

The whole article is interesting, particularly if you’re a sports fan.

A problem with “advertising bans”

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Over at Offsetting, Eric mentions that there is a view that we need to start banning fast food advertisements.  Personally I think this is a dumb idea, but when it’s people’s job to make up arbitrary interventions to “save the world” they will.

More importantly, it reminds me of one of the first posts I wrote on the blog:

So food with a McDonalds wrapper does taste better. Now I’m sure many people will take this as a sign that advertising is evil, as it can lead to children being overweight, however I think it is an awesome service provided by McDonalds. You see McDonalds advertising makes food taste better, they increase the value of the product to an individual by advertising it, and getting all your senses excited. Although two otherwise identical products might seem homogeneous to you, the fact that the McDonalds wrapper is on one and not the other implies that one has the value associated with advertising while one doesn’t. As all McDonalds is doing is increasing the value of their product, thereby increasing demand I don’t have a problem with it.

Advertising creates value.  Also, I haven’t mentioned here that advertising provides information.  There may be a case to regulate advertising given perceived misinformation, or we could even stretch this to a concern about children (as long as we are honest that this belief is based on targeting “bad parents”).  However, even when we head this far an advertising ban is overkill.

Remember, the goal of policy is to “maximise happiness”, where what gives people subjective happiness may differ from what we believe or assume – not to make people do the things we want, and target things we don’t like.  This involves using mechanisms that allow people to reveal preferences (markets for example), and avoid bans and direct regulation as a last resort.