Say no to free stuff

I just turned down free stuff. Free stuff that I want. It was a free subscription to LoveFilm for month. Just think how many films I could watch for free? All those blockbusters... All those shoot-em-ups...

So why turn it down?

 

So here's the rub. I know I have finite cognitive power (gasp). I tend to forget things. In this case, I'm fairly likely to forget to cancel the LoveFilm subscription at the end of the month. And the penalty for doing so would be the LoveFilm subscription fee for the next month leaving my bank account.

If I was rational and had an infinitely powerful brain I would get the free month's worth of films, then cancel the subscription. But if I was cognitively limited I would get the free month and then forget to cancel it, and thus have to pay for something I think is good but overpriced.

As it happens, I acted in a rational way to counteract my inherent stupidity: I ignored the deal altogether.

So there you go, a prime example of how seemingly irrational behaviour can be explained by people being aware of their limitations.

Promotions: The Effect of ‘Labelling’ on Customer Behaviour

I've just had the great pleasure of writing a guest blog for The Marketing Directors (the marketing consultancy) and here it is: Promotions: The Effect of ‘Labelling’ on Customer Behaviour

How not to play Poker

Demonstrating that behavioural economists are no more rational than anyone else I committed the same mistake playing poker that I did about a year ago...

I acted irrationally by seeing different colour chips as qualitatively different as well as quantitatively different. Despite the fact that one black chip was worth five white chips, I preferred betting five white chips than one black chip because I saw the higher value black chips as in some way better. This led me to be more risk averse when I had lost my white chips and had only black chips to bet.

Because I saw equivalent amounts of money as different I acted in a non-fungible manner. I'm not blaming this violation of fungibility for my poor performance (I lost, badly) but I am surprised to see myself commit the exact same mistake that I even wrote a blog about before. Some people never learn...

Little Jimmy

The 4G auction in the UK used a highly complex mechanism called the combinatorial clock auction. Here is  a simple example of how an combinatorial auction works (using the the Vickrey-Clarke-Groves rule).

Little Jimmy has two chickens to sell. His friends are little Dave, little Fred and big Phil. Little Dave wants one chicken and is prepared to pay £5 for it. Little Fred wants one chicken and is prepared to pay £3 for it. Big Phil wants both chickens for a total of £7, but it not prepared to buy just one on its own.

How do we decide who gets the chickens? How do we create an auction where Dave, Fred and Phil have an incentive to bid their maximum valuation?

Answer: Maximise the value of the bids and make the winners pay the opportunity cost of winning. (Price = total bids of all winning bids if winner didn't bid - total bids of all other winning bids)...

We maximise the sum of the bids by having little Dave and little Fred winning one chicken each. But how much do they pay?

 

Dave: Fred is the other winner with utility £3. If Dave was removed Phil would win both with £7. (7-3=4)

Fred: Dave is the other winner with utility £5. If Fred was removed Phil would win both with £7. (7-5=2)

Therefore...

Little Dave wins one chicken and pays £4

Little Fred wins one chicken and pays £2

Big Phil wins nothing. Big Phil is sad. Big Phil is slightly less big now.