Rising xenophobia – a tragedy of the commons?

There have been a number of reports documenting the recent rise of xenophobia in our liberal democracies. In this short thought experiment I look at whether a tragedy of the commons type argument could be applied to this phenomenon, and if so, how its solutions could be adopted. The issue is massively complex, and this short piece isn’t going to do justice to it. This post is nothing more than a simple analogy that I thought up whilst ‘enjoying’ my early morning run in refreshing 7 degrees below zero. Read more of this post

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Attitudes towards low and high-skilled immigration: the myth of rationality

A post-Brexit survey showed that the overwhelming majority of people would support the inflow of skilled workforce, but they would strictly limit low-skilled immigration. Unsurprisingly politicians now echo this argument. But allowing only skilled people in the country will increase competition and push down wages for the attractive jobs and lessen competition and increase wages for undesirable, low-skilled jobs. These arrangements would suggest a long term equilibrium, where high-skilled jobs are more likely to be done by migrants and low-skilled jobs by the indigenous workforce.

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The weight of Brexit: Areas with high obesity rates more likely to vote Leave

I saw a presentation today that had an obesity map of the UK on one of its slides. Someone made a flippant remark about how much the map resembled to map of EU referendum results. And indeed, looking at the data confirmed that areas with high obesity levels were much more likely to vote Leave even when controlling for income, health, education, economic activity, and age. It would be naive to think that body-weight itself is a driver of voting preferences. However, it is a measurable characteristic that could help us understand the determinants of voting behaviour.

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How Adam Smith predicted the success of Facebook, Instagram, and the ‘likes’

I may not be the first one to connect Adam Smith to social media so this is just a short point on how one of the key ideas of the Theory of Moral Sentiments has been a driving force behind the success of social media. Chapter II of Part 3 of the Theory of Moral Sentiments (titled: “Of the love of Praise, and of that of Praise-worthiness; and of the dread of Blame, and of that of Blame-worthiness”) starts with the often-cited line: “Man naturally desires, not only to be loved, but to be lovely; or to be that thing which is the natural and proper object of love.Read more of this post

Behavioural biases in regulation

Something has puzzled me for a long time. Why are regulators so willing to apply achievements in behavioural economics to public policy in such a one-sided way? In the UK, there is a Behavioural Insights Team, whose mission statement is “to apply insights from academic research in behavioural economics and psychology to public policy and services”. Yet, to my best efforts (although I may not have looked thoroughly enough) I could not find anything else than how consumers are behavioural agents, which has to be taken into account when designing policies. Nowhere was there any discussion that regulators may also be characterised by the same behavioural biases. Read more of this post

Complex prices – confused consumers?

This morning (20-06-13) Which? published its report on the UK mortgage market finding that 99.5% of homeowners and home-buyers struggle to identify the total cost of a mortgage deal and that only 0.5% of the surveyed homeowners ranked mortgage deals in the correct order.

This is important because with such complex prices consumers are more likely to make purchasing errors if they are unable to tell the real price difference between two products. As a result, this jeopardises the functioning of markets and the informative role prices play in them. There have been many theoretical works that showed the adverse effect of complex pricing. For example the model by Chiovenanu and Zhou (2011) show that these behavioural biases can lead to rather perverse results, for example with complex prices the increase in the number of firms will increase industry profits and harm consumers (while standard theory would assume that new entrants reduce industry profits and benefit consumers). The experimental studies conducted by London Economics for the OFT on the other hand found that complex pricing does not lead to consumers making significantly more purchasing errors. I have never been very happy with this finding and the Which? study seems to confirm my suspicion, which is based purely on some logical reasoning and play with various probabilities of errors. The bottomline is: it is rather likely that consumers make a purchasing error when faced with complex prices. This is even true when consumers are assumed to be unrealistically savvy. Read more of this post

How sluggish are house asking prices?

House prices have been reportedly dropping for a while now, with prices in April 2012 being 0.9 per cent below the prices of the same time in 2011 (Halifax reported). This figure however only contains information on those houses that were eventually sold (therefore the drop is in the price of sold houses). This is a selected sample and may not fully represent tendencies in the housing market. Rightmove publishes an interesting index on the asking price of houses on the market, which provides a handy tool for the economist to discuss how demand and supply works in the housing market and could maybe even reveal some information on the stickiness of house prices.

A price index of sold houses (e.g. the Halifax house price index) can be thought of as the demand side price, and the price index used by Rightmove as the supply price. The gap between the two shows how far away the market is from the market clearing equilibrium. The intuition is simple, if the asking price is higher than what the demand side is willing to pay, there is insufficient demand and some houses get stuck on the market until prices are reduced.

It does not of course mean that any asking price is too high; even at high price there is some demand (i.e. people with high reservation prices). Similarly, some asking prices may be outright small enough for there to be immediate demand for. What the comparison of Rightmove and Halifax indices shows is that there is a large proportion of houses with asking prices higher than what the demand side is willing to pay for (in May 2012 the UK average asking price was £243,759, and the Halifax average UK sold house price for the same period was 161,785). This rather large gap seems to imply that dominantly the cheaper properties are sold, therefore the sold price index is based on a selected sample of these cheaper properties.

What is more interesting is how the gap has been changing over time. Using data from Rightmove and Lloyds, the figure below plots the gap between asking and sold price and the trendline shows that for the last two years this gap has been increasing. The question is: does the increase in this gap mean an increasing proportion of unsold houses?

To help answer this question, another piece of information is borrowed from Rightmove: the average time houses spend on the market before they are sold). This is also plotted on the figure above, which reveals that for the last two years, the average time is around 90 days with some seasonal fluctuations (high in December, low in the Spring), but overall remaining around the mean. This suggests that the gap between the asking and the selling price may not have an impact on how long it takes to sell houses, implying that sellers are quicker in adjusting their asking price as the gap increases (i.e. they may have a quick shot at asking for more but if they fail to sell they become quicker in adjusting their prices and so they manage to keep the 3 month average selling time).

The bottom line is: house prices are sticky downward (we already knew this) but their stickiness is not constant. This may be a new piece of finding as it suggests that the sluggishness of consumer behaviour changes over time. This is probably driven by the fact that there is a seller-side expectation that houses have to be sold within around 3 months from entering the market. Sticking to this 3-month rule seems more important than sticking to a higher asking price.

Long term memory vs Internet

I recently finished reading the book ‘Why don’t students like school?’ by Daniel T. Willingham, which is a cognitive scientist’s explanation of how learning works. It is a great read and easily accessible to people without much background in psychology. One of the underlying pillars of the book is a simplified system of the mind, the trichotomy of environment, working memory, and long term memory. The book argues that we need to have ‘data’ in our long term memory in order to be able to recall them into the working memory when we want to use them, and that storing knowledge in our long term memory is not as automatic and self-evident as one would have thought.

There is one thing though which I am still wondering about: how much of this is true for the so called Internet generation of the youth? Read more of this post

The higher education dilemma

One thing that has puzzled me since I was a student: what is the single most important objective of higher education? I always believed that when a curriculum was put together or when exams were designed, they all followed one ultimate underlying objective. When searching the Internet for the objective of higher education, I stumbled upon an interesting blog post by Steven Schwartz. He uses an old quote from Henry Cleveland: “The outsiders want the students trained for their first job out of university, and the academics inside the system want the student educated for 50 years of self-fulfilment.” Is higher education therefore a conflict of short and long-term objectives? But then how is the balance set between these two objectives? Can long and short term objectives be distinguished at all? Read more of this post

Is it really the Government stopping us calling each other fat?

The Government’s recent call for GP’s to address overweight or obese patients as fat may upset many but it has implications that reach far beyond the populist debate on political correctness. What actually makes this announcement interesting for me is the expected effect of such an initiative.  Read more of this post