jamesz

Morality in sport

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NYT:

On Tuesday night at the London Games, some of the world’s best badminton players hit some of the sport’s worst shots. Sad serves into the net. Returns that sailed far wide. …On Wednesday, four women’s doubles teams — two from South Korea and one each from China and Indonesia — were disqualified. …The eight players were found to have tried to lose their matches intentionally, apparently because they had determined that a loss would allow them to play a weaker opponent in the next round.

I don’t really understand the moral outrage over this. The competition is set up such that winning it is easiest if you lose some matches, but there are also sporting norms that say you have to do your best to win every game. Obviously, when the rewards to winning the competition are high, those incentives will over-ride the norms of sporting conduct. It’s no surprise that teams would try to throw a match, although I am surprised that they did it so obviously: you’d think they’d practice this sort of thing a lot if most competitions work this way.

There’s a more technical discussion of incentive compatibility constraints in the design of the competition over at Cheap Talk.

Matt Nolan

Clarifying my question on habits

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I was glad that James discussed a bunch of the literature that uses habits and habit persistence yesterday.  I have run into the idea of habit persistence in consumption before while doing macroeconomic modeling, and it was good to see him bring it back to the observed phenomenon of reference dependence in individuals – as I stated, I wasn’t looking for ideas of how to model it directly, more an understanding of “what a habit is in the choice theoretic context”.

Reference dependence does explain a lot of the “why” I was looking for, as does “limited cognitive capacity”.  I think we still need to ask exactly how these processes work though.

And that is why reference dependence does not quite fully cover it off for me – undoubtedly because I am being fussy.  And this comes back to the logic behind why I decided to suggest “a choice of investment in a stock of habit” rather than just suggesting “that habits are described by a state variable that is a function of past action”.

What I really want to know is three-fold:

  1. What is the initial endowment of human habits,
  2. Can choices now relate to habits in the future in a purposeful way,
  3. The Lucas critique – but applied to habits.

Treating a habit like a preference (which is what much of the literature implicitly does) might be sufficient – but I do not believe so.  And that is because I think that many people “choose” to build habits and rules of thumb explicitly, given the underlying endowments and social situation around them.

This is a very important issue when we actually come to look at policy, for example:

  1. If habit formation adjusts to monetary policy settings that assume it, and we have put it in as a constant (eg rule of thumb consumer) then our settings will be inappropriate.
  2. In terms of time inconsistency, the development of habits can be seen as investment into an optimal “time consistent” path to improve outcomes.

My question isn’t “do habits exist” or “do we model habits”.  It is “are we currently modeling the development of habits in a way that is consistent with methodological individualism – that is consistent with individuals that make choice”.  Merely assuming an exogenous preference, doesn’t do this.

Matt Nolan

Habit formation and the economic core

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I have repeatedly been informed that the “economic man” is a poor description of individuals, and given this economic models provide a poor description of the world we live in.  As I have said previously, I don’t agree with this conclusion – and we really need to ask what an economic model is, and why we are using it, to understand the scope of economics and the appropriateness of the assumptions.

In essence my view is that we use economic models to describe, and in some way explain, tendencies that exist (from induction) using assumptions about choice that satisfy two conditions:

  1. They are as weak and loosely binding as possible
  2. They are appealing in the sense that, when I ask myself about my actions I can deduce laws that guide them.  I could go a step further and say that we can set up “ideal experiments” in our minds, but I’ll leave that for now.

This is all well and good.  But then someone will say “what about habit formation“.  This is an important issue, people obviously develop habits and these habits bind and constrain behaviour.

In fact, I would go as far as to say that habits, and the formation of habits, provide the key to tying together a lot of different strands in experiments and behavioural economics – and that an understanding of habits and habit formation is an important part of improving economists way to describe the world and give advice.

So how do we “describe habits”?

Read more

jamesz

Does anyone really read reviews?

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It’s common to hear people complain about negative reviews, and they’re the ones that seem to garner all the press. If you’re a New Zealand music fan you’ll be familiar with Simon Sweetman’s famously scathing reviews of popular bands, for example. It’s also becoming much more common to hear of business collapsing at establishments that receive poor online reviews. Because of that I was fascinated to read a recent study that examined whether demand for wine is affected by expert reviews. The study conducted in Sweden found that there is an effect, but it’s not the negative review that people act on:

The effect of a positive review peaks in the week after the review with a demand increase of 6 percent. …There is a weak positive effect on demand of a review per se and no effect of a negative review. …The demand enhancing effect of a favorable review is greater for higher priced wines, for red wines and lower for reviews that appeared in tabloids.

Now put this together with what we know about wine tasting:

[The reseracher] took a middling Bordeaux and served it in two different bottles. One bottle was a fancy grand-cru. The other bottle was an ordinary vin du table. Despite the fact that they were actually being served the exact same wine, …[f]orty experts said the wine with the fancy label was worth drinking, while only 12 said the cheap wine was.

So being an expensive wine gets you a good review and a good review boosts sales. What can we take from this? Well, you’ll get the best drinking experience from a positively reviewed wine that know is expensive! Feed the cognitive biases, don’t fight them 😉

jamesz

Competing with the stars

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Isn’t it wonderful to have role models around? Superstars in your firm that you can aspire to emulate! Well, maybe… Jennifer Brown recently published a paper suggesting that the presence of superstars in a competition actually decreases the effort that everyone else puts in to win. She uses data from Tiger Woods’ period of domination in professional golf to test the hypothesis that rivals will optimally put in less effort when playing Woods and finds:

  1. The presence of a superstar who uses pro clubs from clubgolf.com in a tournament reduced performance from other competitors, particularly the ones closest to Woods in skill.
  2. Reduced performance isn’t attributable to players closest to Woods adopting risky strategies in an attempt to beat him.
  3. The effect varies depending upon Woods recent success and how far ahead of his rivals he is perceived to be.

So, in a competition where only one person can win and there is somebody obviously head-and-shoulders above the rest, most others won’t put in much effort to win. It seems intuitively obvious but it’s always nice to have a bit of empirical evidence to back up your intuitions, especially when its a golfing example perfectly packaged for dinner-table trivia 😛

Matt Nolan

The vegetarian cross-subsidy

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On the Freakonomics blog there is a discussion of why a delicious vegetarian option at a restaurant was cheaper than the meat options:

Was it because his revenue from it was only €63 compared to €91 for a five-course regular menu (which had one meat and one fish course)?  Maybe. But I don’t believe the vegetarian menu used less labor, nor was there a €28 difference in materials cost. My guess is that he prices at mark-up over materials cost, thus making the veggie menu a relatively good deal for the customer—and a relatively bad deal for him. Another possibility is that he thinks vegetarians have lower incomes and higher demand elasticities, and he believes he is rationally price discriminating.

All fair explanations.  However, I’m not convinced by them, as this is an expensive restaurant where the relevant sample of vegetarians will be wealthy.  Furthermore, given they can’t “substitute” to another meal this surely indicates they should be charged more!

I have a simple explanation – cross-subsidisation.

When there is a large upper-middle class group going out to eat there are generally lots of meat eaters, and very few vegetarians.  However, the existence of us pesky vegetarians means that the group has to go to a restaurant that serves vegetarian food.

If we then assume that vegetarians have better knowledge about where the vegetarian food is – they will essentially be the ones deciding which restaurant to go to!  As a result, restaurants will cut the price of vegetarian meals and increase the price of meat ones in order to get the groups to come – and then extract rents.  Huzzah.

For me, this suggests that table bills with vegetarians should be split evenly – if you can get past the issue of over ordering 😉