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.

Book Review - Predictably Irrational

Predictably Irrational is a fantastic name for a book about behavioural economics. If you are looking for an easy read that will introduce you to many behavioural concepts using quirky yet illuminating stories, then this is the book for you. Dan Ariely takes us through all his research in a gripping tour of the wacky world of behavioural economics, finishing with an insightful take on the credit crunch. If nothing else, Predictably Irrational will convince you of the need for behavioural economics.

Predictably Irrational will not, however, give you a solid academic overview of the subject. The author's approach is to take us through his own wide-ranging research, but this means that genuinely ground-breaking stuff from other authors is sometimes omitted. For example, his chapter on anchors is well-written but illustrate matters with a flawed experiment (incentives were purely hypothetical - see Incentives - Ante Up). (Daniel Kahneman did not have this problem with his book.)

Ariely also includes the single most stupid experiment I've ever seen: it turn out that men, when sexually aroused, are less rational... well, DUH!

Another issue is one of his pieces of advice: hang around with a friend that is slightly less attractive than you in order to make yourself look more attractive (and whatever you do don't tell them, because that ends badly according to one of his readers). While this probably works, it is manipulative. I would not advise following all of the advice in Predictably Irrational. I do not advocate people using and manipulating their friends (or anyone)!

I will, however, end on a positive note. The chapters on cheating and honesty were genuinely new to me. Ariely's research showing that people cheat less shortly after being asked to recall the 10 commandments (or similar) is both credible and important.

Thus Predictably Irrational, while being occasionally frustrating, is well-written, easily accessible, often amusing and incredibly interesting. It is a good read, but it could be better.

Genre: Behavioural Economics
Accessibility: 9/10
Accuracy: 6/10
Readability: 9/10
Usefulness: 6/10
Verdict: A Good Read

PS Ariely has a blog, too: danariely.com

Psychology Deception - Acceptable In The 80s

Apparently some 30-50% of psychology experiments published in top journals use deception (Hertwig and Ortmann, 2001). Why?

One reason for deceiving subjects is that it enables experimenters to create interesting situations. For example, we might want to see how people react in an emergency. Another reason is that it allows experimenters to hide the real purpose of the experiment from subjects. For example, we might want to stop people just giving the politically correct answers instead of what they really think (Nick Wilkinson, 2008).

However, the use of deception is frowned upon by economists.

The main problem is that people aren't stupid. Word gets round. Only the naive would enter a psychology experiment without the expectation of deception on the part of the experimenter. This has knock-on effects on behaviour. If you suspect you're being deceived you may just behave differently thus defeating the whole point of the experiment in the first place.

Thus there are few examples of deception in the world of experimental economics. This should mean that our results stay reliable, even if in the short term we are more limited in what we can do. In an ideal world deception would never ever be used in any experiment, but sadly there is little incentive for everyone to act for the greater good (cf. the free-rider problem).

Fully aware of the irony, I am going to end this post by saying that guruhogg has never knowingly used deception.

Recommended listening:
Acceptable In The 80s by Calvin Harris

Diamond Greed - Sweet Caroline

The recent Libor fixing scandal in the City of London just claimed its largest victim yet; the Barclays' CEO Bob Diamond. The scandal raises a wider question about the morality of greed...

The BBC coverage quoted two contrasting emails from members of the public:

C Abbott in Leeds emails: "It's a disgrace how the media and politicians are persecuting Bob Diamond and Marcus Agius for doing their jobs. We all live in a capitalist society where CEOs and chairmen are employed to make profits for their shareholders. If these regulations allow the rate fixing then the heads of Barclays and the other 20 banks under investigation are not to blame. The FSA and the politicians who set the rules and regulations should be held accountable. Instead of this self-righteous drivel that Cameron and Miliband are delivering to the public."

Neil Mcintosh in Worthing emails: "The right decision and about time. Too much mud has now stuck and all under his watch to allow him to stay and maintain the confidence of the market, shareholders and customers. Greed is not good and now it is being dealt with as it should have been since 2007. Now we need successful prosecutions with long prison terms and deterrent penalties such as seizure of profits made from such activities or all of this will have been for nothing. That in my view is the only acceptable course of action."

In other words:

Anything that legally makes profits for shareholders is justified.

or

Greed is not good.

How do you view greed? Is there such a thing as responsible capitalism? Is greed a virtue? If you were a banker, would you have fixed Libor? If you had the power, would you regulate in order to restrict human greed?

Recommended listening:
Sweet Caroline by Neil Diamond

Experimental Dishonesty - Love The Way You Lie

I recently partook in a really interesting experiment at the CeDEx lab at the University of Nottingham and thought I would briefly describe it...

If you would like to, please feel free to skip to the punchline at the end for some interesting thoughts on dishonesty...

There were 16 participants: 8 "buyers" and 8 "sellers". We were told that we were trading a notional good which started in the seller's possession. There were 8 periods for trades. In each period I, a buyer, would be paired with a different seller. We would meet in a room and were allowed 3 minutes of conversation, during which we could talk about anything. We would both then go back to our original rooms and write down our buying/selling price. These would then be collected by the experimenters.

If the stated buying price was lower than than the stated selling price no trade was done. If the buying price equalled the selling price, it was the final trading price. If the buying price was higher than the selling price then the final trading price was halfway between them.

So far, so straightforward.

The interesting bit was that before each period each buyers was told what "value" the notional good was worth to them that period. Buyers either valued the good at £3 or £9. Also before each period the sellers were told what it "cost" them to provide the good; either £1 or £7. The buyers' value and sellers' cost were both decided by drawing a ball out of a hat. Each value (£3 or £9) had an equal chance of being picked (50%), and each cost (£1 or £7) had an equal chance of being picked (50%).

So I, as buyer, always knew my valuation of the good (which was decided by the hat before each period). BUT I was not informed of the sellers' cost, and neither were the sellers ever informed of my valuation.

I kept the difference between the final trading price and my value as "profit". The sellers kept the difference between the final price and their cost a profit too. Thus everyone could benefit from a trade most of the time. But that does not guarantee that the profit would be shared equally (I could get very little profit and the seller could get lots, and vice versa).

By now you should be starting to grasp the the essence of the experiment. The following scenarios are possible:

Value: £9 Cost: £7 - Potential deal, somewhere in the region of £7-£9
Value: £3 Cost: £7 - NO DEAL
Value: £3 Cost: £1 - Potential deal, somewhere in the region of £1-£3
Value: £9 Cost: £1 - Potential deal, somewhere in the region of £1-£9

However, there is an incentive to be dishonest in your 3 minute conversation with the other party. If I had the value of £9, I could gain more by persuading the seller that I actually had the value of £3, because then the price would be lower.

If the seller has the cost £1 they have an incentive to persuade me that their cost is £7, because then the price would be higher.

But remember, if the buying price is below the selling price then no trade is done and no-one benefits.

--------------------------------------------------------PUNCHLINE-------------------------------------------------------------

In this experiment, dishonesty pays.

Would you be dishonest? (remember this is real money...)

I completed the experiment without telling a lie (I did, however, use negotiating tactics to get a better deal). Over the 8 periods I earned £17.20 (about average, I suspect). Some sellers were honest to me about their cost, but most were not (a seller's final trading price can be revealing about their true cost). I ended the experiment with less faith in humanity!

However, in real life people tend to interact more than once. If someone is dishonest I will not trade with them again. Thus the experiment does not necessarily translate to real life.

I'll finish with an interesting question...

Why do humans value honesty? Why, deep down, do we know that we are doing "wrong" when we are dishonest? Survival of the fittest would surely favour dishonest behaviour...

Recommended listening:
Love The Way You Lie by Eminem, Rihanna