A online debate about the merits and dangers of nudging – the ‘soft’ paternalism Richard Thaler and Cass Sunstein promoted in their 2008 book, ‘Nudge’, came to the brink of degeneration last week. The detractors criticised the insidiousness of the behavioural interventions. Nudgers, they suggested, use crafty psychological manipulation to rob people of their individual freedoms in the pursuit of questionable public policy goals
Economists continue to rail against the kind of libertarian or ‘soft’ paternalism pioneered by Richard Thaler and Cass Sunstein in their 2008 book, ‘Nudge’. A nudge is essentially a method of persuading people to act in a given way by modifying the way the information on which the decisions are to be made, or the alternatives, are presented. The nudgers justify the manipulation with appeals to the individual’s ‘best interests’ or to the ‘greater good’.
Wretched dishwasher: it stopped running just minutes before the end of the program, leaving the plates in a damp, cold mist. It is always a grim moment when one realises that a call to the repairman is unavoidable. While Siemens’ 24-hour hotline is a nice feature in cases like these, I couldn’t help but wonder what good it was when all it could offer was a repair appointment one week later.
International investors are fleeing former financial safe-havens in huge numbers this year. Compare this to 2012, when fears of a Greek departure from the eurozone prompted its well-heeled nationals shift their wealth into more economically-sound destinations within the zone, like, Germany, Austria and Finland or, better still, into non-eurozone countries like Switzerland and the UK.
Cost-cutting measures in one stressed investment bank have reached such an extreme that bankers will have to forego a coffee service during their meetings from now on. Admittedly, the saving is hardly likely to felt on the bank’s bottom line; like cancelling the newspaper subscriptions,
The train has long been my preferred choice for domestic travel. So, as there seem to be fidelity cards for practically everything these days, there is also one for frequent rail travellers like me. For every euro I spend I collect credits for use on tickets and other services provided by the railway operator.
I shop quite often at my local hard-discounter, Penny. It is not just because the store is literally round the corner, but because one can genuinely get good value for money. The recent bonus-points promotion has not escaped my attention either; the store is offering a variety of kitchen knives, not for the manufacturer’s recommended price of €33.99 or €39.99 each, but for just €2.99. Of course, one must bring a few bonus points to the sum – 45 to be exact – and these must first be collected at a rate of one for five euros spent in the store.
“You can learn a lot about saving money from millionaires,” my mother-in-law used to say as she headed off to Aldi on her shopping trips. I often indulged her food preferences, but when it came to wine I have never been convinced there are cheaper alternatives to Bordeaux that are just as good. I like to think I am not a wine snob, and I do not treat wine labels as status symbols, but quality is important for me. So the idea of being able to find an enjoyable bottle for less than five euros is something I struggle to imagine, especially when much of that price is composed of value-added tax, retail margins and glass.
How many Smarties can you get into a Smart? It is not the first line of a joke; it is a brainteaser of the kind recruiters are increasingly using to upend interview candidates, and to test their capacity for logical thinking. I recently came across another example of such a conundrum
“Turning back and climbing down is one of the most difficult decisions a mountain climber has to make. Perhaps, the most difficult.” The Tyrolean mountaineer, Hans Kammerlander, made the point very succinctly. It was only recently, though, that I got a glimpse of just how difficult the decision is to abandon an expedition and to turn back.
The public square at Frankfurt’s ‘Konstablerwache’ is given over every Thursday to a farmers’ market. Produce from across the region is on sale: fruit, vegetables, fresh fish, delicatessen, and dairy products. I have so gotten in the habit of going there after work that Thursday evening has become the unofficial sausage night for the family and me. Recently, I made the mistake of stowing my freshly-purchased lamb-filled ‘wurstchen’ in my bicycle basket while I went to pick up a few more things for the meal. I only turned my back for two minutes and the sausages were gone, pilfered, renditioned.
New York Fed Governor, William Dudley entertained his audience during a recent speech with an analogy about the US central bank’s aggressive monetary policy stance. The US economy, he mused, is like a car stuck in the mud: ‘You don’t stop pushing the moment the wheels start turning – you keep pushing until the car is rolling and is clearly free.’ The reasoning was undeniable. It is obvious that if you stop pushing the car will simply slip back into the mud.
The fund management industry gasped this spring when Scottish Widows Investment Partnership (SWIP) gutted its £58bn equity division in Edinburgh, sacking most of the managers and analysts, and switching to an essentially passive management structure. Although many observers bemoaned the decision, they could not fault the decision-making. SWIP had conceded shortcomings in its abilities, recognised new developments in the needs of its clients, and so acted consequently. Compare this behaviour to that of another large fund management firm, having encountered probably much the same challenges. It decided instead to so bizarrely incentivise its underperforming active management team that a passive management outcome was all that could possibly result.
A personal investment in a fund increases the fund managers’ psychological commitment to the investment decision. Commitment is not be confused with conviction. Unlike the latter, the former is rarely a good thing. Commitment can be thought of as the psychological glue that binds decision-makers to their decisions. When you hear someone described as being ‘married to their position’, what is being discussed is commitment.
If five winners share a lottery payout of two million, how much does each get? Although I arrived at the right answer – 400,000 – quite easily, this might not be the case in 30 or 40 years’ time. In one study, while more than half of subjects aged 53 were able to answer the question correctly, among the 90 year olds only 10 percent could. That physical and mental capacity declines with age is no secret. As it becomes increasingly burdensome to do mental arithmetic, judge probabilities, etc., so it becomes more difficult to understand the risks and consequences of one’s decisions. For this reason, seniors tend to reduce their exposure to risks and avoid making decisions.
As I write one final graduate program application, I imagine the pool of admissions officers at the university sieving through piles of paper. How does this group possibly determine who should have the opportunity to attend a program from hundreds of applicants, all of whom hold much the same qualifications? What sticks out from the stack that screams ‘accept me!’?
I took an unsettling call from lady at American Express the other day. Apparently because I had been a card member for such a long time, she wondered whether I would like to have a second card for my wife. It was only after I bluntly refused that she came to what I now suspect to have been the real reason for the call. She expressed how uncomfortable it was for her to broach this subject, but American Express had tasked her to propose insurance security specifically for life events that are neglected by other insurers because they are unable or unwilling to discuss sensitive issues. Her voice adopted a solemn, gravelly timbre: “No, Mr Goldberg,” she choked, “this is not a comfortable subject, but one that must be discussed.” I braced myself.
My friend has just switched jobs. She is a lawyer and decided to accept the offer of a former colleague to join him at his new firm. Things like that happen all the time in the law business. In this case, though, she was not the only one to have been lured away – many members of staff received an offer of a job at the new firm and all of them, like her, wanted to accept. Wary of the huge shock that at mass exodus would have on the firm’s boss and on the remaining staff, my friend wondered whether there was any way to mitigate the ‘damage’ so that good relationships wouldn’t be spoiled nor ill-feelings left behind.
Japan has been synonymous with technology for decades. More recently though, debt, deflation, and now demographics, have taken their toll on this image. According to the latest figures from the Ministry of the Interior, the Japanese population shrank by more than a quarter-million people last year – the third decline since 2005. The number of births, at 1.07 million, marked a record low, and this was even not the most striking figure in the data set.
Before the results of French elections were known much ink was used to speculate how the election of socialist Francois Hollande would lead to the shift in Franco- German axis on the issue of growth and austerity. Essentially Chancellor Merkel and President Sarkozy have invested a lot of political capital and time in the pro-austerity strategy with an aim of solving the crisis. So despite an increasing number of economic observers having now recognised that austerity in a static growth environment can only be recessionary, it has been difficult for political leaders them to change their stance.
I can easily understand why someone would buy a lottery ticket in the slim hope of getting rich in a single coup. Even though the expected return from this investment is negative, so no economically- rational person should do it, millions of people take the plunge every week. The reason is because the very low probability of hitting the jackpot is likely to be perceived as greater than it really is. In addition, the thing one buys with a lottery ticket, above all else, is the right to dream.
I have a particular weakness for oriental perfumes, especially the handmade varieties, even though they can be somewhat pricey. So when I stumbled across a Google ad by easyCOSMETIC offering the objects of my desire at an 18 percent discount to regular store prices, I was naturally drawn to it. In reality, there was probably nothing accidental about this ‘discovery’; Google undoubtedly put this ad under my nose in full knowledge that I like these things. Nonetheless, even after I had sought out the next best internet offer, the price was still nine percent cheaper. At least, this is what I thought at first.
I had to read in yesterday’s Guardian newspaper that my beloved gym, Fitness First, is in financial difficulty. The sports studio chain, the world’s largest, is in negotiations with its creditor banks to secure a reduction in the interest it pays on loans of over £600 million. Apparently, it is already struggling to meet the repayments. The report reminded me of the lifelong membership (access to all studios worldwide) that Fitness First offered in 2008 for the handsome fee of 4000 euros. Compared to the typical monthly subscription fee for established members of 80 euros, the figure seemed reasonable and, without taking foregone interest rates into consideration, subscribers would reach their breakeven after four or five years.
I know the feeling all too well – the sudden realisation that one’s keys are lost. The numbing sensation with each passing minute that one’s access has been denied to yet another place: home, office, locker, mailbox, and bike shed. So when I read my colleagues recent blog post about a friend robbed by a junkie, I was painfully reminded of an episode two years ago when my keys vanished.
Some consider the eurozone debt crisis to be the result of a fundamental design flaw. They may be right. But then, when in political history has any project been done completely right from the outset. Political and financial frameworks have always had to be modified or adjusted as a function of new events or opinions. What marks out this particular crisis is that the decision-makers seem unable to make a single meaningful step further. Two years and 15 summits into the crisis and we are still engaged in fire-fighting.
Choice fatigue has been a theme that we have regularly visited on this blog – especially in the context of the eurozone debt crisis. The predictions of the decision-making research have proved very prescient: when people are tired, stressed, or simply have too many options to choose from, they tend to opt for the default alternative. But what happens when each decision-maker goes to a summit not knowing what the default actually is?
Expectation management is a tough task when one is the president of the ECB. Mario Draghi yesterday had to admit to being “surprised by the implicit meaning” that was given to his comments in the European Parliament last week when he said the ECB could follow faster fiscal union with “other elements.” His admittedly vague references were widely interpreted as a sign that the Bank would embark on more aggressive sovereign bond purchases as soon as the EU leaders make a first step on the fiscal side. But this was not meant.
“Most of the people in this room have it in them to become a rogue trader.” This is how I challenged a large group of institutional investors at one of my recent behavioural finance seminars. The suggestion raised numerous titters, but there was not a single word of opposition. They understood that loss-aversion is a powerful human motive and, in addition, that the passage of time dulls a person’s perception of the enormity of the damage.
“No” seems to be the favoured expression of Bundesbank president, Jens Weidmann: no to ECB bond purchases; no to private sector involvement in the Greek bailout; no to employing Bundesbank gold as collateral for an IMF loan. He believes that changing the rules of the game, i.e., the legal provisions of monetary union, just because they don’t fit any longer, undermines trust. Hence, he subscribes to a particular brand of central bank purism. He is right in one respect. EU decision-making does look poorly thought out, inconsistent, even expedient.
This weekend I was invited over to a friend’s for dinner and, of course, the conversation came around to the European debt crisis. For once the topic was not a question of how to protect one’s own money or where the crisis will lead Germany. Rather, one fellow diner asked if the bailout orgy shouldn’t be stopped altogether, as it is becoming increasingly apparent that the aid package for struggling eurozone countries is growing out of all proportion.