macauley on behavioural economics

I obliquely mention behavioural economics from time to time, for example when drawing from Nassim Nicholas Taleb’s Black Swan which is full of references drawn from BE to back up his own observations.

This is a summary of You can see a lot by just looking: Understanding Judgment in Financial Decision Making by  Ian MacAuley published by the Centre for Policy Development provided by Fiona Guthrie

Main points

The discipline known as behavioural economics has strengthened our knowledge of consumer decision-making. It explains why we make certain, consistent departures from what is generally described as “rational” decision-making. These departures result from our use of short-cuts (“heuristics”) in situations where more deliberation would result in more beneficial decisions, from short-sightedness, and from innate concerns for fairness in transactions.

financial planners v charlatans

Nasim Nicholas Taleb is a money market guy with a talent for telling a story. He knows a lot about risk and a lot about our decision making biases. If we accept just a couple of propositions he puts forward, then one can see that a charlatan and a financial planner have many things in common – but they’re not the same.

Experts v consumers

In resisting naive policy approaches that think that all consumer problems can be solved by simply providing more information, there is sometimes a temptation not to look for non-obvious soutions that do rely on information provision. The massive drop in premiums in term life insurance flowed, according to Levitt and Dubner’s Freakonomics (p 60), entirely form the fact that the Internet was able to arm consumers with price information that had formerly been only readily available to the experts (that is sellers of term life). Consumers saved US$1 billion they say.

On the other hand this points to the scale of potential consumer losses where experts have information consumers don’t. Both fairness and efficient markets demand interventions that even up the scales, provided of course they don’t impose costs which outweight the benefits to consumers.

The Freakonomists also point to the massive information asymmetry underlying the corporate scandals of the 2000 (Enron, WorldCom, Martha Stewart etc).

Though extraordinarily diverse, these crimes all have a common trait: they were sins of information. Most of them involved an expert or a gang of experts, promoting false informatoin or hiding true information; in each case the experts were trying to keep the information asymmetry as asymmetrical as possible.

But this is also what non crooked business do often as not: bundling products or services together (phone + 24 month network access contract, loyalty points) and confusing hard to compare pricing structures are designed, often by the market leader, to make product comparison impossible: my favourite party trick is to ask an audience whether anyone present is sure they have the best mobile phone deal for their needs. No one ever is.

And experts use another trick (relying on what behavrioual economists call salience); as the F team explain:

Armed with information, experts can exert a gigantic, if unspoken leverage: fear. Fear that your children will find you dead on the bathrrom floor from a heart attack if you don’t have angioplasty survery. Fear that a cheap casket will expose your grandmother to a terrible underground fate. Fear that a $25,000 car will crumple like a toy in an accident, whereas a $50,000 car will wrap your loved ones in a cocoon of impregnable steel. The fear created by commercial experts may not quite rival the fear created by terrorists like the Ku Klux Klan, but the principle is the same.

On why copyright is not good for artists (no. 1)

Artists often believe that strong copyright law and DRM are the only way to go so they can make a living. It seems to me that there are as many minuses as pluses for both artists and society. It seems that Warner let an EBTG track be used in an ad they didn’t approve of – from their site:

After a year of wrangling with Warner Music UK over the usage of our 1992 recording of ‘Love Is Strange’ in a US TV ad for Hummer cars,” say Ben and Tracey today, “we finally received an apology recently and a concession to consult us on similar licenses in future, whether or not we have a right to an artist veto. The negotiations were conducted drily and laboriously by their business affairs department. We were also finally informed of the fee received for the usage. While we cannot have the advert withdrawn, we have donated the Everything But The Girl portion of the fee to five leading charities – Oxfam, Greenpeace, Friends Of The Earth, Amnesty International and Unicef.