Overtaking On The Tube - Baker Street

Every time I use the London Underground the same thought occurs to me - on the escalators, why do people always overtake on the left?

Why does everyone follow the same rule? How did this rule come into being? On British roads overtaking is done to the right, so why it is different on the Tube?

Rules like this are often called social conventions, or norms. Economists have long been interested in how they come about and what sustains them. Hopefully this will shed some light on the matter.

On escalators there are three possible social conventions. Firstly, overtaking is done to the left. Secondly, overtaking is done to the right. Thirdly, people can stand wherever they wish; overtakers have to weave their way through.

Clearly the third option is inefficient; slowing down the people in a rush. Thus there is a clear advantage to the first two options. However, they are equally efficient; there is no particular advantage to choosing one over the other. So why is the first one in operation?

Once a convention is in place it is easy to see how it will be self-sustaining: one does not benefit by deviating from the rule. But how did the rule come to be chosen in the first place?

It's important to remember that social conventions are not created by everyone sitting down and having a good old chin-wag about what would be most efficient. Rather, they're formed by many individuals doing that which they think (or guess) will benefit them the most in any given context.

The economist Robert Sugden points out that social conventions are often borrowed from other contexts. When it comes to guessing what one should do in a particular situation, we may follow a rule that we've seen working in a different situation. Thus the ease of transferability of a convention is important. But it is not obvious why overtaking on the left is more easily transferred from other contexts.

So I did some detective work...

According to Wikipedia, people were originally told to overtake on the left because the original escalator design made it marginally faster to be on the left hand side: if you were in a rush the left was the place to be. If I'm honest, I can't understand how one side could get you to there faster, but then I'm just a simple economist.

Devastatingly, Wikipedia implies that the overtake on the left rule was introduced by the authorities. If so, it is less of a social convention and more of a top-down law. Luckily, it's only Wikipedia.

Anyway, I hope this thought experiment has been interesting. Please do suggest any alternative explanations for why we overtake on the left...

Recommended listening:
Baker Street by Gerry Rafferty

Incentives - Ante Up

In a recent blog I outlined a common experiment called the Ultimatum Game and asked people what they would do. Much thanks to one reader who hit on a big issue in behavioural economics, that of incentivisation.

She pointed out that the money was purely theoretical (sadly guruhogg has no real money to offer). Therefore, how can we be sure that the behaviour we observe is what would really happen? Individuals may say they will do one thing, but if the decision had real consequences they might act differently.

Real economics experiments are very careful to make sure that subjects have an incentive to answer honestly. This is done by making real money ride on the decisions people make. In the Ultimatum Game example there would be an incentive because of the £10 riding on it.

Experiments which do not involve adequate incentivisation tend not to be taken seriously in the academic world. However, there is a debate over what constitutes an adequate incentive. Some economists believe that experiments which offer only ten or twenty pounds aren't a good proxy for behaviour in real life, where important decisions can involve thousands of pounds. In response, it's argued that the few economists that have somehow found enough money to offer huge incentives tend not to find systematically different behaviour.

Anyway, I readily admit that the experiments on guruhogg do not offer adequate incentivisation, but that doesn't matter as I'm not collecting results. Incentives will have to wait until guruhogg has found some way of making money!

Recommended listening:
Ante Up by M.O.P.

Mattress Money - Hakuna Matata?

A recent BBC article highlighted the growing trend among Greeks to withdraw their money from banks and, presumably, put it under their mattresses. With confidence in their currency fading fast one can understand why the Greek populous are voting with their money, so to speak. This is an example of risk averse behaviour.

We all have different attitudes towards risk. Some are risk preferring, some risk neutral and some risk averse.

If you had the following choice, which of the two options would you choose?

• A 50% chance of getting £100
• A 100% chance of getting £40

I would hope it would be obvious that the first option has a higher expected value (0.5 times 100 is 50). Despite this, many of us (me included) would choose the certain £40. This is called risk averse behaviour. In our minds the 50% risk of getting nothing is not worth taking.

The Greeks who are withdrawing their cash from banks are exhibiting risk averse behaviour. They would clearly prefer to forgo any interest they could earn from their savings, instead making sure that whatever happens at least they have some money.

It's commonly accepted among economists that people are often relatively risk-averse, and thus good economic models account for this type of behaviour. Risk aversion is not bad, indeed, we could do with bankers taking fewer risks at the moment! The level of risk aversion will depend upon the exact situation. For example, if I had already given you £500 before giving you the above choice, you may have been more likely to take the risk (any economists out there will recognise this as the income effect).

In conclusion, mattress money is a prime example of risk aversion. I wonder, if you were Greek right now, would you be happier sleeping on your life savings or entrusting it all to the banks?

Recommended listening:
Hakuna Matata

The Ultimatum Game - Black and Gold

The Ultimatum Game is probably the most famous economics experiment ever to have graced the face of this planet. First designed by Daniel Kahneman, Jack Knetsch and Richard Thaler in 1986, it has been replicated countless times.  It goes as follows...

You have been put into a pair with someone else, but neither of you will ever learn the identity of the other. You are told that there is £10 to share between you. You are the 'proposer', your partner is the 'responder'. You get to make an offer to your partner about how to split the £10. Thus you could choose to keep for yourself one of the following sums:

£1,  £2,  £3,  £4,  £5,  £6,  £7,  £8,  £9,  £10

The responder has two options: Accept (in which case the money in split as you proposed), and Reject (in which case neither of you gets any money).

As the proposer, how much money would you offer?

Traditional economic theory would suggest that no-one would ever reject a positive offer. There is no benefit to rejecting money, even if the offer seems unfair. Therefore, in the knowledge that people will not reject positive offers, proposers should propose that they keep £9. But study after study has shown that people do not behave in this way.

Typically, responders reject offers that give them less than £3, and proposers rarely offer less than £3 and often offer an even split. Why?

It would seem that fairness is important. People prefer everyone to have the same, even if that is nothing, rather than one person having 90%. It would also seem that when put in the position of proposer people regard fairness as important (or at least they know that the other person regards it as important).

The significance of the Ultimatum Game is that it offers evidence against the assumption that people only care about their own monetary benefit. Factors like fairness are very important.

Given your response above, how important is fairness to you?

And if fairness is important to you, why?


Recommended listening:
Black and Gold by Sam Sparro

Rules Of Thumb - Superstition

My parents recently went on a short trip to a Eurozone country (for those reading this in the future, the Euro was the currency which collapsed thus causing the Second Great Depression). My advice beforehand was to take Dollars or things you can easily barter (jewellery or livestock), but in the end they went with Euros rather than greenbacks, earings and chickens.

Upon their return I aksed my mum what the exchange rate was, only to hear the reply that she didn't know exactly, but she thought of it as "about £1 to €1". This is a rule of thumb. It is also clearly wrong (actually about £1 to €1.2, as of the 11th June 2012). However, people are constantly using similar (incorrect) rules of thumb in their everyday lives. So why do we do it?

http://cdn.theatlantic.com/static/mt/assets/steve_clemons/euro1.jpg

Well, while the diference between €1 and €1.2 per pound might be life or death for a currency trader, it is close enough for an ordinary person. It's a very easy way to remember a potentially complex ratio. And frankly my dad may well have been pleased this rule of thumb was in operation, as if anything the 'adverse' effect would only to have made things look more expensive than they really are, thus reducing purchases!

Two famous psychologists called Amos Tversky and Danny Kahneman famously coined the term 'heuristics' to describe rules of thumb, and show that they can occassionally lead us into serious errors. All of this is a challenge to traditional economic theory which assumes that we are rational beings that don't need to resort to crude rules of thumb to solve everyday problems. An important part of behavioural economics over the last 40 years has been the attempt to explain how exactly we use rules of thumb, and therefore how they need to be incorporated into our big important economic models.

Recommended listening:
Superstition by Stevie Wonder