Zombieconomics

I thought I'd end 2012 by starting to deal with the elephant in the room.

How would economics be affected by the inevitable zombie apocalypse?

1. Saving rates would plummet. This would adversely effect the demographic time-bomb.
2. In experiments we would see a greater degree of cooperation between humans as they fight for survival. However, the degree of cooperation between zombies remains an unknown.
3. Tax collection would become harder. Therefore the zombie apocalypse would cause greater tax evasion (c.f. Starbucks).
4. Responsibility for the enforcement of property rights would largely pass from the state to the individual. Sales of axes would increase.
5. Responsibility for personal health and safety would largely pass from the state to the individual. Sales of axes would increase.
6. The inevitable zombie apocalypse can only be good news for the axe manufacturing industry.

It is only by thoroughly considering the economic implications of the inevitable zombie apocalypse that we can prepare for it. Zombies or no zombies, the world needs economists.

Sham Statistics

You can prove anything with statistics. I know that is not strictly behavioural economics, but it is true. Sometimes, however, attempts to prove 'anything' are a tad blatant.

As I sat through the cinema adverts before The Hobbit started last night, one advert caught my attention. It was for a men's perfume that claimed to be better than the rest (I can't remember the brand). In order to back up this claim it had a statistic along the lines of "Most men prefer our perfume!"

In small print at the bottom of the screen was displayed the following sentence:

88% of 32 men agree

Argghhh!

That is a mind-bogglingly small (and thus unreliable) sample! Leaving aside the fact that we do not know how they conducted the survey or how the selected the 32 men (for all we know they could have been employees...), a sample size of 32 is not large enough to be conclusive.

Conclusion: You can prove anything with statistics, especially if you are unscrupulous.

When The Chips Are Down...

Last night I played poker. Not for money, just pride. I actually did quite well (cue comments about behavioural economists being able to read people - not actually true; I just got lucky!)

But I was, sadly, irrational.

When I bet my chips, I preferred to bet the smaller chips in larger quantities than the larger chips. For example, I'd bet two 500 chips rather than one 1000 chip. Not only this, but I felt more carefree when I had lots of smaller chips. I would bet on things that I definitely wouldn't have done had I had to get change from a large chip.

I sometimes refused to make bets because it would mean sacrificing a sacred 1000 chip, whereas if I had ten 100 chips I would have bet. Irrational. 

In other words, I changed my behaviour based on trivial things. Trivial things that economists assume we pay no heed of.

The Golden Rule

I heard a presentation by an economist this week about an experiment he had run which attempted to measure whether people abided by the Golden Rule in their economic interactions:

"Do to others as you would have them do to you." 

- Luke 6:31

This is a very interesting question and it would be fascinating to know the extent to which people treat others as they wish to be treated themselves. Sadly, however, the paper in question did not live up to expectations and was flawed. Empirically measuring motivation is hard!

But it did get me thinking... 

Why do I care about someone else's motivation? Surely if I am the coldly rational man that neoclassical economics assumes me to be, then I shouldn't worry about motivation; I should just care about their actions that effect me. But experimental evidence shows that people do care about motivation. They act differently if they think someone is trying to be nice or trying to screw them over (even if the action they observe is the same). Indeed, experiments show that people don't always act in the way that a coldly rational economist might expect them to.

It would seem that there is something inherent in us that does care about motivation. That does pay heed to things beyond monetary payoff. That does give a damn about morality. 

Potentially heretical thoughts for an economist, I know.

 

Minimum Price for Alcohol

The UK government laid out proposals today to raise the price of alcohol, or rather, set a minimum price per unit. This minimum price will be 45p. Meanwhile the Scottish parliament is trying to introduce a minimum price of 50p per unit. Will it make any difference?

The responsiveness of demand to changes in price is called 'elasticity' by economists, and there is much debate over how 'elastic' consumers' preferences are. If you respond to a small increase in the price of alcohol by drastically cutting back how much you consume, you are displaying highly elastic preferences for alcohol. If, on the hand, a small price rise wont impact what you consume at all, then you are displaying highly inelastic preferences for alcohol.

The government clearly thinks people's preferences over alcohol are elastic, or there would no point introducing the new minimum price. But the issue has other ramifications. I may consume less cheap supermarket lager but more in the local pub instead. Or I may even buy black market alcohol. In other words, the change in the price of alcohol will impact demand for other goods. Measuring the total impact of a price change gets very complicated very quickly.

How consumers react to the minimum price is crucial. Research by the University of Sheffield suggests people will buy 4.3% less alcohol (see BBC article), a small but not insignificant reduction. The government has decided that on the back of such research the best way to change behaviour is through prices. Only time will tell whether people will respond by drinking less...

Book Review - Prisoner's Dilemma

What links the H-bomb, playing chicken and the Cuban missile crisis to game theory?

The answer, according to William Poundstone, is the famous game called the prisoner's dilemma (see here for a fun example). His 1992 book Prisoner's Dilemma is not recent (I was a toddler back then) but is still both fascinating and relevant.

Poundstone's approach is to carefully weave together a biography of John von Neumann and a potted history of the nuclear arms race with examples of fun games. The end result is an utterly gripping read (between you and me I read it in lectures) that never fails to surprise (whether you be an economist or normal).

So as not to ruin the book I'll only share one example of H-bomb game theory...

First, read this fun example of a brilliant game to play with your friends.

Now, the 'Dollar Game' is special because it induces buyers regret. Those who bid inevitably wish they hadn't! There is a rapid escalation. Before we know it, both bidders are wishing they were back where they started. But they always have an incentive to go one higher. They do not want to be left in second place. This is not dissimilar to the nuclear arms race.

The analogy starts with America building the A-bomb at the end of WWII. Understandably, Russia could not contemplate being out gunned so they got one. So the USA understandably got more A-bombs. So did the USSR. So America built the H-bomb. So Russia did too. And so on. The starting position led to escalation and both states ended up in a worse position than at the start when neither had any nuclear bombs: They had spent a lot of money on no tactical advantage. If they had coordinated they could have stopped at some point (i.e. just having one A-bomb each). Sadly for both nations this was never likely to happen.

In fact, the more Poundstone delves into the cold war the more analogies crop up. Coincidently (or not) the people who originally created game theory, such as John von Neumann, also created the bomb.

I highly recommend you read Prisoner's Dilemma so that (if nothing else) you can start to see real life conundrums through game theory spectacles, and what spectacles!

Genre: Economics/Behavioural Economics
Accessibility: 10/10
Accuracy: 9/10
Readability: 9/10
Usefulness: 7/10
Verdict: Very, very interesting!

Fair Coffee?

As a Masters student I am frequent visitor to the Arts and Social Science Graduate Centre at the University of Nottingham. Possibly the best thing about the Grad Centre (other than the absence of pesky undergrads, obviously) is the coffee machine which offers all types of tea and coffee for 25p. This makes it a hot attraction compared to the other machines of campus which charge at least 90p and especially compared to Costa which charges anything over £2.50.

Apparently in the first five weeks of term the Grad Centre machine served 5000 drinks, making it the busiest machine on campus.

Then, this week, the price doubled to 50p. No warning. No apology. The cost of coffee just doubled overnight. Outrageous! So unfair!

My reaction was probably not dissimilar to many. But why is it unfair for the price to rise? I have happily paid £3 for a coffee elsewhere, and it's not like going without coffee will kill me (I'm not an Arts student). If the price had always been 50p I would have had no complaints. It's just supply and demand.

People's perception of fairness is a very interesting area of study within behavioural economics.

For example, is it unfair for a shop to put up the price of shovels when it snows? An economist would answer no and point to the laws of supply and demand. A consumer, however, might think it exploitation.

Behavioural economics has shed a lot of light on what people consider fair and what they do not, but for now I'll conclude by simply noting that my degree in economics was not enough to stop me thinking a rise in the price of coffee was fair.

Working Hard?

There are many ways in which employers use incentives to encourage employees to work hard. I recently heard of one company with a particuarly ineffective one.

The firm in question is an exam board based in the UK. Each summer they employ hundreds of people to perform relatively simple tasks such as counting exam papers and checking that examiners have added up the marks correctly. The work is highly repetitive and each worker may see thousands of papers in total. The employees are initially hired for several weeks, but the company then keeps on the workers it wants for some weeks afterwards. Obviously, the incentive for most workers is to be kept on for the additional weeks.

So how, you may be wondering, does the company use this potential extra work as an incentive to encourage high productivity?

Not very well, it turns out.

Their only mechanism for measuring productivity is simple: The number of mistakes each employee makes on exam papers. This is flawed. Take an example: two people who each make one mistake per 10 papers they process. Derek is highly motivated to get the extra work and processes 500 papers in a day, while Herbert is not motivated and only processes 100. According to the company's measure, Derek has made the most mistakes and is thus less productive. Thus Herbert should be kept on.

According to my secret whistle-blower there is another flaw in the system. The line managers who decide whom to keep on are largely motivated to keep fun, interesting people in the office (being surrounded by boring people for weeks on end is no fun at all). Who are they likely to think is fun and interesting? The people who stop working to have a nice chat with them on a regular basis. Thus those who are less productive because they are constantly seeking conversations with their bosses are more likely to be kept on than those working too hard to have a natter.

In conclusion, this is a clear case of tragically poor incentivisation that is unfair on those who work the hardest, not to mention bad for the company in question.

Food Shopping Survey Results

The results are back from the survey that I carried out last week (after analysis on Stata).

(For a more technical critique please see here)

Headline result:

• The more often people shop for food, the more likely they are to think that they buy items of food out of habit. I think the most likely explanation for this is that people who shop more often have more opportunity to create habits - the reinforcement mechanism is stronger if you buy food twice a week compared to fortnightly. However, it was only significant at the 10% level and so it is not conclusive evidence.

Other notable results:

• There is no connection between whether people consider themselves a 'creature of habit' and whether they think they buy items of food out of habit. I find this surprising. I suggest that this might be because creature of habit could be seen as a positive character trait, while buying food our of habit could be seen as lazy. Thus the result could be because people are trying to present themselves in a positive light (even if only to themselves).
• There is no connection between the extent to which people think they consider the price of food and whether they think they buy items of food out of habit. I find this surprising. I expected a negative relationship. At the very least I expected that asking people about whether they looked at prices might prompt them into saying they bought less out of habit, but no significant effect was found.
• There is no systematic difference between male and female respondents.

In conclusion, none of my hypothesised variables affected whether people think they buy items of food out of habit (apart from how often they go shopping). Obviously, I find this surprising.

Food Shooping Survey Critique

Let me start this critique with a disclaimer: If I read these survey results in an academic journal I would not treat them as highly robust. I am ok with this. It was not intended to be a highly robust investigation into consumer perceptions, rather I undertook the survey to get a flavour for consumer thinking and research. I have learnt a lot, both about consumers and about how to go about consumer research.

Reasons why my survey is not highly robust:

• There were no incentives for accurate answers.
• The sample size was small (72)
• The sample was found through facebook and GuruHogg and as such is not representative of the whole population (although it was never intended to be).
• Internet surveys are only ever going to sample those who use the internet.
• 10% significance is not enough. 5% significance is required. The result that increasing how often you go shopping by one shop a week increases perceptions of purchasing habit by 17% is not highly robust.

What I would do different for more robust results:

• Offer incentives.
• Recruit a larger sample.
• Recruit the sample from a more diverse section of society.
• Ask better worded questions: fewer dummy variables.
• Use an experiment rather than a survey!

Regarding my opening foray into consumer research:

SurveyMonkey is a great piece of kit, but has it's flaws too. Notably, if you only use their free service then it is time consuming to input the results into Excel. Also, you can only ask 10 questions using their free service which is highly restrictive. Stata, however, is a highly powerful and useful statistics software that was able to do everything I asked of it and more.

Irrational Coursemates

This is an experiment used by one of my lecturers (Prof Seidmann) last week on 100 MSc Economics students at the start of a lecture...

We were told the following:

Choose a whole number between 0 and 99 (inclusive).

He will calculate the average (mean) of the numbers chosen by everyone here and divide by 2.

The winner is the person that chooses the number closest to this (half the average).

What number would you pick?

I picked zero.

This is because it is the rational thing to do. If the average is 50 then half the average will be 25. But if half the average is 25 then everyone should choose 25. Then half the average will be 12.5. And so on... Eventually you end up at zero.

My calculation, however, was flawed. I had assumed that MSc Economics students are rational. Further, I had assumed that MSc Economics students think that MSc Economics students are rational.

One person sitting near me was irrational and put 50 (possibly they misunderstood the instructions). Already I knew that my guess of zero was not going to be exactly correct.

In the end the correct answer was about 13.

My first response was "Just how stupid are my coursemates?!"

But then I realised that many in the room would have suspected that others were irrational and so guessed a positive number. For example, the person sitting next to me put 7 although he knew the rational thing to put was zero.

Some people may have been trying to second guess what people thought people thought would do! And so on. Thus we cannot (yet) conclude that all my coursemates are stupid (as well as me).

In conclusion, even if you are rational, you may not always act as economists might expect because you might be expecting others to be irrational. Funny old world.

Survey

I have decided to collect some consumer data...

Please take the survey! It is only 10 questions and you will be contributing to behavioural economics:

http://www.surveymonkey.com/s/7HT99VR

I hope to post the results up here soon...

The Endowment Effect

I am very pleased to introduce a guest blog by Alex Silk. Alex is somewhat of an expert on the endowment effect and I have been bugging him for months to write this post: Enjoy!

The endowment effect is demonstrated in a really simple experiment that was conducted by an economist called Jack Knetsch back in 1989. The experiment had three separate treatments. In the first treatment each participant was given a (identical) mug, they were told that this was a gift. They were then each given the option of switching the mug for a bar of Swiss chocolate (which could be bought at the same price as the mug). The second treatment was the reverse of this; each participant was initially given the chocolate bar and was then asked whether or not they wanted to exchange it for the mug. Standard economic theory predicts that the proportion of subjects who end up leaving the experiment with a mug should be equal in both treatments (allowing for random error) – this appears to be a fairly reasonable assumption. So what do you think happened?

Well what Mr Knetsch found was that in both treatments 90% of people kept the item which they were originally given. Furthermore, in a third treatment where each participant was given a straight choice between the mug and the chocolate bar 56% of people chose the mug (where again economic theory predicts the proportions should be the same as in the first two treatments).

What the experiment demonstrates is something called the endowment effect: people value a good more highly when they are in possession of it. While this is a significant violation of some important economic theories (something that for your sake I hope you are not too concerned about!), on one level this may not seem that surprising to you: a child would value her favourite teddy bear more than an identical one sitting on a shelf in a shop. However, what may be surprising is the fact that other experiments have shown that virtually as soon as you take ownership of a good you value it more (unless you expect to sell it in the near future).

So the next time you buy a can of baked beans remember that, subconsciously at least, you value that can slightly more than each of the cans you left behind you in the shop. Isn’t that useful to know?

- Alex Silk

Book Review: The Power of Habit

The Power of Habit by Charles Duhigg is all about the psychology of habit formation and change. Why then, you may well ask, am I reviewing it here on a blog about behavioural economics? The answer is nudges. Behavioural economists are often interested in things that will change behaviour, and habits are a big part of behaviour. Three examples in the book...

Firstly, an American army major who wanted to stop regular riots in the small Iraqi city of Kufa. People would slowly gather over the course of a few hours in the central plazas and after a while violence would break out. The major had an idea of how to nudge a crowd into staying peaceful: Stop food vendors entering the plazas. The usual practice was for food sellers to enter the crowd, but by stopping them from doing so the crowd got hungry, and so started to dissipate. There were no riots after the food vendors were stopped from supplying food to angry crowds.

Secondly, McDonald's in their attempts to get people to buy their food out of habit. One of the key insights into habit formation is that each habit has a specific cue. McDonald's realised that they needed to keep the same cues across outlets. Thus each McDonald's looks the same, smells the same and sells exactly the same food. Whatever sparks your habit of buying McDonald's, the same cue will exist at all outlets. Thus your habit is mobile - you don't need to be near your local McDonald's to feed your Big Mac habit.

Thirdly, retailers in their highly successful bid to understand consumers better. Big shops have been collecting data on their customers for decades, but recently they've made a breakthrough: consumer habits (and thus purchasing patterns) change in predictable ways as people face major life events. Retailers realised that if a woman started to buy baby clothes and pregnancy drugs she was likely to be pregnant. Having a baby is a big life event (apparently). Having a baby considerably alters purchasing habits, meaning that marketing at this eventful time is likely to be more successful. The result: shops target (likely) new parents with adverts for products like nappies. They nudge people into buying their products.

My one complaint with The Power of Habit is that not all human behaviour can be called a 'habit'. You cannot explain everything through habits. Having said that, even the non-habits covered by Duhigg are incredibly interesting. In conclusion, I thoroughly recommend The Power of Habit (whether you be an addict or just interested in behavioural economics) but I do not necessarily buy into the book's central argument.

Genre: Psychology
Accessibility: 10/10
Accuracy: 6/10
Readability: 10/10
Usefulness: 8/10
Verdict: A Very Good Read

Book Review: Economyths

Economyths by David Orrell is an accessible critique of economics as we know it, summed up by the following statement:

"Neoclassical economics isn't a theory, it's an excuse."

Orrell attacks economics on ten fronts:

• The economy is more complicated than economics assumes
• The economy is more connected than economics assumes
• The invisible hand cannot explain booms and busts
• Economics cannot predict the future
• Humans are irrational (this chapter covers behavioural economics. While it is only one chapter Orrell successfully weaves it into a larger narrative of disenchantment with neoclassical economics)
• Economics bears all the flaws of a male-dominated discipline
• Economics condones gross inequality
• Economics ignores our dying planet
• Economics cares not for human happiness
• Economics is only sustained by vested interests

Orrell is perceptive when he reasons why Neoclassical economics has lasted so long:

"it tapped into something more enduring... it is based on ideas of unity, stability and symmetry that have characterised Western science since the time of the ancient Greeks." 

And what it promises:

"The neoclassical model for economic growth is unsustainable and unsatisfying, not just because it requires infinite resources and harms the environment, but also because it relies on an eternal desire for more, which can be definition never be satisfied. It offers, not happiness, but the eternal promise of happiness, if we can just work harder and upgrade our lifestyles to the next level before everyone else does."

Part of the solution, according to Orrell, is to open up economics to other disciplines. Let psychologists, philosophers, political scientists, engineers, ecologists, mathematicians and physicists all critique economics. Any economists out there are probably feeling a bit bullied by now, but rest assured the status quo is totally biased in your favour.

Orrell is clearly influenced by Nassim Taleb's The Black Swan (review to follow) - much of it is not original, but that does not stop it from being an engaging argument. I am unsure to what extent I agree with Economyths, but I recommend anyone interested in capitalism or economics read it. There is only a bit on behavioural economics, but it thoroughly reviews the wider context of the economic debate.

Genre: Economics
Accessibility: 8/10
Accuracy: 7/10
Readability: 7/10
Usefulness: 7/10
Verdict: A Good Read

Market Research

Ever wondered why you were called by a market research firm?

One explanation involves behavioural economics...

Apparently (according to the book Supercrunchers by Ian Ayres) credit companies have discovered that people are more likely to respond positively to their marketing if they were recently asked by a market research firm if they are planning any big purchases.

People are being prompted to think about big purchases they would like. Thus when credit cards come along later that week promising such items... Well, it's a no-brainer. People are being nudged.

And thus we conclude...

Companies: think about how you can indirectly encourage people to think positively about your product...

Consumers: be aware of this kind of thing when considering how best to spend your money!

(Oh, and don't let the picture of a red telephone influence your choice of insurer...)

Book review: The Economics of Good and Evil

The Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street by Tomas Sedlacek is quite possibly the most gripping book I have ever read. I found myself reading it late at night, on the toilet and even (gasp) in lectures.

I don't agree with everything Sedlacek writes, but boy has reading his work opened my mind. I could easily fill this review with things I disagree with, but that would miss the point. I don't recommend The Economics of Good and Evil because it is tells the truth, but because it will get you questioning: What is the truth? What is economics? Why do we conduct economics in the way that we do? Why do we persist with economics when it persistently fails to live up to its own expectations? Should economics include the ethics of good and evil? Why must the economy always grow?

What marvels me most about the book is that it deals with complex topics in such a fascinating way. Not once did it lose my interest. If you study, or plan to study, economics at any academic level you MUST read this book. As for the casual reader, I still recommend it, but do not be under any illusions - it does cover economics in-depth. It did take me a while to read (although as I say, I was gripped at every point).

The first half of the book takes a historical perspective of economics, mush of which was new to me (having always been taught that economics did not exist before Adam Smith). The second half of the book takes a more thematic approach (this is less brilliant, but still worth reading). Amongst other concepts, Sedlacek challenges utility, homo economicus, ceteris paribus, the need for growth, mathematics in economics, economics as religion and the invisible hand.

The one complaint with the book that I will mention is Sedlacek's attempt to be a theologian - he is not averse to taking biblical passages out of context - I do not advise using him as a guide to Christianity.

Having only just finished the book I am unsure how much I agree with, but this I do know: I am very glad to have read it and am definitely a better economist for doing so.

Genre: Economics/Meta economics
Accessibility: 6/10
Accuracy: 5/10
Readability: 7/10
Usefulness: 10/10
Verdict: Required Reading for Economists

Million Pound Drop

Last night I was absolutely enthralled by the game show Million Pound Drop Live. Game shows aren't usually my thing, but this was just so full of behavioural economics I could not help but be glued to it.

I could probably write  dozens of blogs about various aspects of the game, but today I'll focus on the contestants attitude towards risk.

The show design is simple: the pair of contestants start off with £1m and have to answer 8 questions correctly to win. The twist is that the contestants choose which of the potential answers they want to stake their money on. The incorrect answers are trapdoors - the money placed on these drop away. The correct answer does not drop - the money placed here is kept for the next round. Thus contestants can split their money between answers if they are not sure: they can spread the risk.

It was incredibly interesting watching yesterday's show as the contestants were highly risk averse. They always split their money, regardless of how sure they were of the answer. Even when the were certain they still put some of their money on other options. The end result was that if they'd put all the money on the answer they thought was correct (when they were certain) they would have come out with a lot more than their eventual prize of £150,000 (which is apparently relatively high compared to others).

There are few better examples of risk aversion than watching the contestants on Million Pound Drop, but perhaps why it was so obvious was that as we were playing along at home we never split our money between options. We were risk preferring because we were not playing with real money, I dare say that put me on the show and I would be as risk averse as anyone else. When it is our money it is harder to avoid risk.

PS A few of my sums for you:

If you were to always put 90% of your money on the correct answer you would end up winning £430,467

If you were to always put 75% of your money on the correct answer you would end up winning £100,113

If you were to always put 50% of your money on the correct answer you would end up winning £3,906

(these calculations ignore the fact that the money is bundled up into packets of £25k)

Boots

In a similar vein to Salt and Oats I noticed something in the local Boots pharmacy earlier today...

The seated waiting area is directly facing a shelf full of products. So, what products do you think Boots would place in pride of place for people to stare at while they waited? Chocolate bars? Soft drinks?

Oh no, it was actually pregnancy tests!

If you are going to buy a pregnancy test, surely you have decided before you arrive at the pharmacy. Is sitting opposite one going to make people buy them? Surely sitting opposite food and drink will create a better return?

But maybe I am wrong, maybe sitting opposite pregnancy tests will make women think "Oh golly, what if I'm pregnant? I'd better check just in case." Maybe I underestimate the power of suggestion. Perhaps Boots know exactly what they are doing...

Turn it up to 11

A problem for economists who think that people are rational is that we are sometimes influenced by things that we really shouldn't be. Much thanks to the friend who recently showed me this clip from the comedy Spinal Tap which parodies human irrationality:

Book Review - Priceless

I have a huge amount of affection for Priceless by William Poundstone because it was the book that first introduced me to behavioural economics. It prompted me to study all things behavioural at university, and I haven't looked back. For this reason I may be a little biased in favour of Priceless but the bias is, at root, caused by the book being brilliant.

William Poundstone expertly explores how shops constantly use behavioural economics to encourage you to buy their goods, while simultaneously telling the story of how behavioural economics came to be. It is an utterly gripping read, written by an accomplished journalist who knows how to keep you hooked. It will have you doing little experiments on your friends all the time (as my housemates at the time can testify).

Priceless lifts the lid on the art of pricing, advertising and marketing. You will finish it a wiser consumer, potentially less like a hapless wave; driven and tossed by the winds of capitalism.

My favourite example that he uses is of the free 72 ounce steak. Some American burger joints are famous for offering 72 ounce  steaks for $72 unless you can finish it in one sitting, in which case there is no charge. People travel miles to take the challenge, and when they do they are placed on a high table, with all their friends looking on from the rest of the restaurant. Poundstone reveals that the way these burger joints make their money is not from people failing the challenge (which is most of the time), but from their friends paying over the odds for a normal steak. Their friends' perception of value is anchored on the $72 steak, and so the $19.99 steak seems cheap, even though it might only be $9.99 elsewhere. The moral of the story is don't buy a normal steak at one of these places!

My one gripe with Priceless is that it focuses on the psychologists at the cost of behavioural economists. The two groups do not always agree and in some cases the story is rather one-sided. This, however, is a minor complaint; Priceless has so many outstanding features that make it just fantastic.

It is A Very Good Read. I can't remember what the price was, but I know how much it's worth; quite simply...

Priceless by William Poundstone
Genre: Psychology/Behavioural Economics
Accessibility: 10/10
Accuracy: 7/10
Readability: 10/10
Usefulness: 8/10
Verdict: A Very Good Read

Best Before End

Just a quick thought that occurred to me as I ate pudding earlier... Best Before End is brilliant wording.

It communicates the fact that the food in question will go mouldy and disgusting if left too long, but in a positive way. It will lose its taste. It will become horrible. It may go green. But what you're thinking about is that it will be Best, and for another 18 months at that. Will Go Mouldy After just doesn't quite have the same ring to it.

In conclusion, when it comes to packaging, a lot of thought has gone into even the smallest of details.

Blu-tack Signals

Picture the scene...

You are an inventor. You have just invented an amazing new type of blu-tack; twice as sticky as normal blu-tack. How do you communicate the awesome stickiness of this new blu-tack to consumers?

You could launch adverts with the slogan "twice as sticky". You could put "twice as sticky" on the packaging.

One of the most powerful ways to signal quality is price. If something is expensive it must be good. If it is cheap, well, you get what you pay for.

If I were the blu-tack inventor I would attempt to signal the greater stickiness by charging more.

This kind of thinking is contrary to the idea that lower prices increases demand. Why? Because consumers like you and me do not know the quality before purchase. We do not have perfect information. We respond to signals, even about blu-tack.

And the power of price doesn't end there. If we expect the blu-tack to be twice as good, we are more likely to think it is after using it, regardless of whether it actually is. Paradoxically, if we pay more for a product our enjoyment of said product may increase. Funny old world.

Beyond Own Brand

As we perused the soup section of my local Tesco recently, it was obvious to my friend and I that Tesco were pushing their own brand soup (Tesco Everyday Value). A lot of shelf space close to other cheap soups was dedicated to it. However, the vast majority of the soup category was taken up by Heinz - a brand known mainly for its quality rather than price. It would appear that Tesco was not directly competing with Heinz, especially as Tesco Everyday Value soup was not placed directly next to the Heinz soups.

We were wrong.

Upon closer inspection (and a little light research) we discovered that Crosse & Blackwell, a high end brand placed next to Heinz, is owned by Tesco.

So what?

Tesco is clearly wanting to gain market share in the world of quality soup (who wouldn't?). However, they've realised that consumers see Tesco Everyday Value as an inferior option to brands like Heinz. If you wanted a really nice soup, you would look at Heinz, Campells or Baxters. Not Tesco Everyday Value.

People are very good at creating rules of thumb; seeing Tesco on the packaging usually means low price, not high quality. Thus when we quickly (and we're always in a rush) scan shelf after shelf of similar looking soups, we narrow down the options using rules of thumb. (This isn't a criticism of consumer behaviour; rules of thumb are necessary to survive in this complicated world.) We quickly rule out Tesco own brand soup as inferior (correctly or not).

So what do Tesco do?

They create (or buy) a brand that consumers will not immediately write off as low quality. Crosse & Blackwell are the method Tesco are using to squeeze market share out of Heinz. Instead of fighting the rule of thumb and re-branding Tesco Everyday Value, they simply create a new brand. Simples.

Addictive Blogger Statistics

Despite being well-acquainted with behavioural economics I am not immune to being influenced by it. Google Blogger, through which GuruHogg exists, provides live updates on the number of people reading GuruHogg - it is addictive! I promise that if it weren't for the live statistics I wouldn't be too bothered how many people read GuruHogg, but with live stats it is a completely different matter...

12th September

You can see which are the most popular posts. You can even see which country readers are from:

This changed my behaviour. I quickly moved from being ambivalent about readership to being addicted to the stats. A simple 'nudge' made all the difference. By constantly giving me updates about how many people read GuruHogg I became interested in increasing that number. This is not necessarily a bad thing; I actually suspect that thinking about what people read the most may have improved the posts I put up here. But I am trying to be less interested by the stats because it is not a driving motivation behind GuruHogg.

Anyway, I ramble. In conclusion, no one is immune from being nudged into different behaviour. Not even GuruHogg!