Tag Archives: behavioural economics

All public statues should be removed

There is no benefit to spending taxpayer money on creating or sustaining personality cults. The same goes for all public art – the current (local) government should not decide on which people to popularise. No significant market failure exists in physical art objects. The government thus does not need to intervene in the market for statues (copying digital art is another matter). Private individuals can put almost any statues and art on their own property as part of free speech.

The materials of which the statues are made could be used for something beneficial instead, like public housing for the poorest members of society. Clearly the government’s goal in erecting statues is to provide circus to the public in order to get re-elected, not to benefit society.

If the influential people whom the statues depict were asked whether the person or the idea matters more, my guess is that almost all would emphasise the idea. Most would ask the resources to be spent on more reasonable things than statues of them.

If the goal of a statue is to signal the importance of the ideas of the person depicted, then there are more efficient ways for this signalling. For example, a scholarship, a charity or a public library in the name of the person.

Preventing overeating by advance cooking

A commitment device that prevents overeating is to only buy food that needs cooking (raw meat or fish, dry goods such as rice, flour, beans), and only buy drinks with zero calories. After each meal, measure out the ingredients for the next meal. The ingredients may be put into a pressure cooker, slow cooker, microwave or other gadget with a timer to cook, so the food is ready at the next mealtime, but not before. This procedure leaves no ready-to-eat food to snack on between mealtimes and no option to eat a larger portion than planned. The reason to portion out the next meal right after the previous meal is to do it while not hungry, thereby preventing oneself from increasing the portion size.

Sufficiently fast food delivery breaks the commitment, because it permits ordering a snack that arrives before the next mealtime. Such delivered food is typically processed and unhealthy. Vending machines, convenience stores, takeout restaurants or other sources of ready food in or near the building also weaken the commitment. Quarantine strengthens the commitment, reducing the temptation to go out seeking food.

Eating a balanced diet is more difficult when restricting food to only categories that need significant preparation time. Fruits and most vegetables can be eaten raw and juices give quick calories due to their high glycaemic index. Frozen fruits and vegetables are more difficult to snack on immediately, thus ease commitment without compromising health. Frozen fruit juice concentrate similarly delays gratification for at least a few minutes. Small berries thaw very quickly in water, so are a temptation.

Lifehacks to prevent overeating (from Youtube): eat in front of a mirror, avoid distractions like a computer, TV or smartphone while eating, use small dishes (Japanese style).

„People should have a choice” works both ways

Initiatives to counter unhealthy and destructive habits (smoking, gambling, junk food consumption) by taxing or restricting the addictive goods and services are often opposed with the argument that people should have a choice. One counterargument is that removing temptations from one’s future self is also a choice that people should have. For example, banning oneself from casinos. Similar registries could be instituted to ban oneself from buying alcohol or tobacco – the sales already require checking ID, so all that is needed is to compare the person’s identity against a database. For example, using a machine-readable ID which causes the machine to display “Do not sell” for people who have put themselves on the relevant list. Countries with universal machine-readable identification documents can use their existing systems for this. Examples are the European Union national identity cards.

Other ways to remove temptations from one’s way are restrictions on advertising, eliminating vending machines from a building, liquor stores near schools, alcohol and tobacco from the more visible areas of grocery shops. Just like people should have a choice to block spam emails, calls, web browser ads, they should have a choice to ban street advertising (of addictive goods or anything else) in their residential or work areas. Removing a public ad restricts some people’s right to see it, but empirically most people do not want to see more marketing in public spaces or elsewhere. Symmetrically, displaying a public ad restricts people’s right to avoid seeing it, so the question is how many people’s rights are restricted by banning vs allowing advertising.

The problem of annoying public advertisements may be resolved by smart glasses like Google Glass if these can detect advertisements appearing in the field of view and block these or replace with other images before the user sees these, similarly to how adblock software in browsers works.

Claims that tickets are running out

Both for paid and free events, the organisers often advertise that only a few tickets or places remain. The ad sometimes explicitly tells the viewer to register or buy now. Such advertising is costly, so there should be a benefit to the organiser. If the tickets have already sold out, then the benefit is zero, or at least smaller than if the event is not fully booked. The positive benefit from advertising a sold-out event is to build reputation for the future as an organiser of popular events, similarly to real estate agents putting a „Sold” sign in front of a house on which they closed the deal.

Given that the benefit of costly advertising is smaller when no tickets remain, some sellers should decide to advertise if and only if the event has not sold out. More generally, the probability of advertising should increase in the number of tickets remaining. In this case, rational buyers should treat advertisements saying that limited spaces remain as signals of the opposite – frequent ads show a desperate seller facing low demand. If most buyers think this way, then such advertising is counterproductive, because buyers want to delay their purchases when the probability of being able to buy in the future is large enough. The option value of waiting comes from the possibility that the buyer’s preferences change – a better event may become available, or some emergency may prevent the buyer from attending. Getting a refund for a ticket already bought is at least a hassle and may even be impossible.

The widespread claims of limited space remaining suggest that these ads boost purchases. One reason may be buyer attention – ads make them notice the opportunity to buy, which some of them wish to take advantage of. However, any ads draw attention to the event, so raising awareness cannot be the reason for the specific claim that tickets are running out.

For most events, buyers do not want to coordinate with the largest possible crowd, only with their friends, so do not prefer a fully booked event to a half-full one. Thus claims that the event is almost sold out are difficult to explain by the seller trying to coordinate buyer actions.

Some irrationality of buyers or the seller seems necessary to explain messages that demand is low. Either the buyers take the claim literally instead of using Bayes’ rule to infer the opposite, or the seller advertises despite ads decreasing demand.

It is an empirical question whether the target audience of ads saying that space is running out interprets these as signalling high or low demand, and whether these messages make people delay their purchase or speed it up.

Fund management fee paid explicitly to nudge consumers to choose better funds

Mutual funds with lower management fees have higher future before-fee returns (Gil-Bazo and Ruiz-Verdu 2009). Nonetheless, the high-fee funds have not gone out of business, so there must exist a sizable number of silly customers who accept low returns without switching to competitors. When asked explicitly, all fund investors prefer more money to less. Their hourly wage is not large enough to explain their non-switching with the time and hassle costs of comparing fund returns and choosing a new one. Similarly, many Estonians keep their retirement savings in badly performing high-fee pension funds despite the availability of dominating options (Tuleva and LHV index tracking funds). This is costing the customers over one percent of their retirement wealth per year.

By contrast, people with chronic or expensive diseases in the US often pick the health insurance plan that maximises their wealth (coverage minus premiums). This dynamic optimisation involves switching to a different plan when their illness changes. People without costly medical conditions tend not to switch their insurance even when cheaper plans with higher coverage are available.

Both the pension and the insurance plan decisions are complex, but matter greatly for wealth. Why do people pay attention to the financial consequences of their insurance choice when sick, but ignore better options among pension funds (and when healthy, also among insurance plans)? One possibility is that insurance is more salient to the sick, and the greater attention leads to better decisions. Specifically, the premiums and out of pocket payments for medical procedures frequently remind patients of the financial consequences of their insurance, but the missing returns on one’s retirement assets are not observed without explicit comparison to the stock market or competing funds. Most people do not compare their pension plan to the market, so even in retirement may not know what their (counterfactual) wealth would have been had they chosen a better fund .

If it is lack of attention that causes the bad choice of mutual and pension funds, then one solution (proposed by my friend Hongyu Zhang) is to make the management fees more salient by requiring their explicit payment. For example, every month the customer has to transfer the amount of the management fee from their bank account to the fund. Financially, this is equivalent to the fee being deducted from the retirement assets like now (assuming these assets are eventually taxed the same as income, otherwise the transferred fee can be adjusted to make it financially equivalent to the deduction). The attention required is however greater for an explicit payment than for doing nothing following a lack of capital gains. Similarly, requiring customers to pay the difference between the return of their fund and the market return into the fund every two weeks would nudge them towards greater attention to their retirement account.

In practice, such a nudge is unfortunately politically infeasible. Not only would the fund industry lobby against it, but voters would irrationally perceive the required explicit payments as increased taxes. This would make the transition to transferring fees to funds from customers’ bank accounts very unpopular. If people understood the equivalence between low returns on their assets and explicit payments required of them, then they would be financially literate enough to choose low-fee, high-return index funds in the first place. Thus the problem of low-performing pension funds would be absent. To sum up, the fool and his money are soon separated, and it is difficult to protect people from their own bad decisions.