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

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

Tesco Nappies

Own brand products are ubiquitous in supermarkets. Why are they there? How do the supermarkets convince us to buy them?

As I walked around Tesco earlier today I noticed the huge similarity between Tesco own brand goods and branded items (made by a separate supplier).

Let's take the example of nappies. Here Pampers (owned by Proctor and Gamble) is the leading brand. They occupied about 60% of the shelf space in the nappy category. Approximately 20% were Huggies and a further 20% were own brand; Tesco. (This is a rough guide of market share).

The first question is why were Tesco competing with P&G in the nappy market anyway?

The answer lies in the profit margin. By selling their own goods, supermarkets cut out the middleman. They make more money selling their own brand goods than branded ones. However, each individual product space, or 'facing', is at a premium. The rate of sale is important. This leads us onto the second question.

How does Tesco convince us to buy their own brand products?

When an own brand product is in direct competition with a branded one, like the nappies pictured, the supermarket will try to convince us that their (usually) cheaper product does "just as good a job". It uses tricks such as the following to promote similarity between the different products:

• Placement. Own brand goods are often placed right next to branded ones, and often in the best position ("eye-level is buy-level").
• Colour. The pictures of the nappies above are a textbook example of a supermarket copying the colour of the market leader. Colour is of huge importance in our brains, and colour schemes are nicked wholesale from the branded goods.
• Emotional intent. There is a picture of a smiling baby on every pack of nappies in the store (the one exception is a line of uber-cheap Tesco nappies, occupying a tiny section of the bottom shelf).
• General aspects of design. For example, the number of nappies is on the bottom right corner.
• Packaging. Both types of nappies come in similar plastic packaging, and are of similar size.

Thus supermarkets use psychology and behavioural economics in an attempt to persuade that their product is just as good.

Does that make us fools for buying own brand goods??

No. Well, not necessarily. The own brand stuff may genuinely be just as good, or even better. Remember, branded goods are constantly trying to keep you loyal. They do not like it when you try out the competitors - they might be better!

Conclusion?

Be rational.

Realistic conclusion?

At least try to be aware of what shops and suppliers are trying to make you feel, think and do.

How??

Know some behavioural economics!

Book Review - Thinking, Fast and Slow

 

Daniel Kahneman is a world-renowned psychologist who won the Nobel Prize for Economics in 2002 for his contribution to behavioural economics. Thinking, Fast and Slow is his summary of his lifetime's work into understanding the human brain - it is required reading for anyone who wishes to understand how we make decisions. Kahneman effortlessly keeps you gripped as he conducts his whistle-stop tour of your mind. Reading this will improve how you understand the decision-making process, and might just help you make better decisions in future. Leaders take note!

The title comes from the way psychologists separate brain functions: two systems are in operation, one is incredibly fast but prone to making errors, while the other is more accurate but slower and lazier. Kahneman reveals how the interaction of these systems results in systematic errors in our thinking and quirks in our decision-making.

For example, we have a fantastic tendency to fail to look beyond the obvious. Kahneman uses the phrase 'What you see is all there is' to describe our thinking so often he actually shortens it to WYSIATI. His expertise combined with a wonderful turn of phrase results in highly enjoyable quotes, such as:

"Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance."

However, just because Daniel Kahneman has written something doesn't make it true. There are alternative theories (certainly within behavioural economics) worthy of equal attention that don't make the book. Those interested in behavioural economics should not rely on Thinking, Fast and Slow alone. Although, a really nice touch is that the two main papers for which Kahneman received his Nobel Prize are reproduced at the back for those who are really interested.

Given the sheer quantity of material packed into the 400+ pages it may take a while to digest, but don't let that put you off - it's well-worth a read. I thoroughly recommend Thinking, Fast and Slow.

Genre: Psychology
Accessibility: 7/10
Accuracy: 8/10
Readability: 8/10
Usefulness: 10/10
Verdict: Required Reading

You've Been Framed! - American Idiot

• You are ill in hospital. The surgeon informs you that he could operate. If successful the operation will cure you completely. He tells you that 95% of patients survive the operation.

What do you decide?

• You are ill in hospital. The surgeon informs you that he could operate. If successful the operation will cure you completely. He tells you that 5% of patients do not survive the operation.

How about now?

Standard economics has always assumed that people's preferences are stable. Thus the way in which questions are worded should not have an impact on what we prefer. Psychologists beg to differ.

Now, you're probably telling yourself that you're unaffected by the way the question is 'framed'. However, evidence shows that people are highly susceptible to framing effects.

More worryingly, evidence shows that doctors are equally susceptible to framing when faced with similar problems to the one above!

We are all to some extent irrational when it comes to framing effects. But never fear, there is an easy way to improve your rationality - simply reframe the problem and see if it changes your preference...

If told:

• 30 people die out of every 10,000 that undergo an operation

remind yourself that

• 99.7% survive

Remembering this should help you improve your decision making... Simples!

Recommended listening:
American Idiot by Green Day

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

Behavioural Economics – What A Wonderful World

Welcome to the world of Behavioural Economics: where Economics meets Psychology and stays for nice little chat, taking a comfy seat by the warming fireside of experimental evidence, holding a hot mug of pure rationality. Hmmm... rationality. The oil that makes the world go round.

Or does it?

Behavioural Economics is the area of study devoted to the exploration of how economic agents (that you and me folks) think, act and react. Put simply: are we rational? Rationality is where people have consistent preferences, and that from any given range of options, people always chose the one they most prefer.

In 1971 two psychologists named Sarah Litchenstein and Paul Slovic stumbled upon a phenomenon that was to rock the economics world: preference reversal. Preference reversal challenges an assumption economists make every day: that economic agents (still talking about you and me) are consistent. If we are not then the cornerstone of microeconomics is compromised.

This is because the accuracy of economic models hinges on whether they are able to predict human behaviour. If we are systemically inconsistent, and thus irrational, economists need to be able to ‘model’ this behaviour. Traditionally, however, economists have circumvented this problem by, well, ignoring it.

Enter stage left, Litchenstein and Slovic. The subject of preference reversal will be my next blog, where we will discover that we are not as logical as we like to think. So for now all we shall note is that it got the attention of economists who, since then, have being trying to define our irrationality and incorporate it into their models.

But why does any of this actually matter?

Because economic models are highly influential. Interest rates, Government spending and taxation are all set according to economic models that are built on the assumption of rationality.

So it’s important, but why should you bother with it?

Because it affects the decisions you make every day: what you say you prefer, what you buy and how much effort you put in at work. Furthermore, companies are starting to wake up to Behavioural Economics and are attempting to use it to manipulate economic agents (still us) to buy their stuff.

You still may not be concerned by that. Which is fine. But then, are you sure you’re rational?

Recommended listening:

What A Wonderful World by Louis Armstrong