econlife - What Soccer Can Teach Us About Investing by Elaine Schwartz

After France won the World Cup, the world was sadder. No, certainly not because of the French victory. The reason relates to some emotional math from two economists.

Where are we going? From a soccer win to investing and how we respond to loss.

This is the story…

Winning the World Cup

In a recent study economists monitored the happiness of thousands of fans during years of British soccer matches. Controlling for variables like the time of day and location, they observed happiness fluctuations before, after, and during the games. On the scale they used, fans were 3.9 points “happier than usual” with a win for their team and 7.8 points sadder if their team lost.

And it gets worse. Because the losers’ sadness lasts longer than others’ happiness, those down feelings are four times any upside that winning created.

Below, you can see that people felt the pain of loss more acutely than the joy of winning:

Investing

University of Chicago economist John List suggests that investors ignore stock market fluctuations because they too feel loss more intensely than winning. People who are down $1000 experience the drop more so than if they had been up by the same amount. The result? Most of us sell when stock prices plummet…precisely when we should be patient. Or, we hold on too long because we want to avoid the reality of a loss. Either way, the pain of loss makes us sell at the wrong time.

Our Bottom Line: Loss Aversion

Called loss aversion by behavioral economists like Nobel economics laureate Daniel Kahneman, our desire to avoid a loss affects how we feel and act. For many of us, the dismay over losing a $10 bill exceeds the happiness we feel when we find one.

I suspect though that this picture provides the perfect definition:

And returns us to why there was more sadness in the world after the World Cup.

My sources and more: Thanks to the Washington Post Wonkblog for alerting me to the new soccer happiness study. A perfect summary, the Post article then linked to more detail in this paper on “football” happiness. It also took me to the behavioral side of investing in this NY Times column and to this paper. Finally, this New Yorker Magazine discussion even shows us how politicians can benefit from telling voters what they have lost.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Those Subscriptions That We Love to Buy (and Barely Use) by Elaine Schwartz

MoviePass subscribers can see up to one movie a day. They just go to a theater and use an app that sets up the ticket payment. While a subscription used to be $50 a month, now you pay a jaw dropping $6.95 for 30 movies. The catch? You have to pay for a whole year upfront and add a $6.55 processing fee.

This is the story and then some economic insight…

The MoviePass Subscription

Soon after you sign up for MoviePass, a debit-like card will arrive in the mail. Then, you use their app to select a film and to check-in. At that point, they transfer the price of the ticket to your card so you can use it to pay as you enter.

This person used his app to see Dunkirk. “Success” meant the money had been transferred to his card:






The Numbers

MoviePass is very aware that the average moviegoer goes to a theater just 4.5 times a year. If their subscribers went daily, the firm would be paying an average of $8.97 a ticket or maybe $270 a month per person (unless it had a special deal with the theater). And if we are in a big city like New York or San Francisco, the ticket price soars to $16.50. But MoviePass does not have that problem. A whopping 88% of its subscribers underuse their MoviePasses.

And that takes us to behavioral economics.

Our Bottom Line: Mental Accounting

Nobel Laureate Richard Thaler explained seemingly irrational consumer behavior through mental accounting.  The following example is somewhat comparable to the MoviePass people who underuse their subscription. It is about Thaler’s friend at a department store quilt sale:

“The spreads came in three sizes: double, queen and king. The usual prices for these quilts were $200, $250 and $300 respectively, but during the sale they were all priced at only $150. My friend bought the king-size quilt and was quite pleased with her purchase, though the quilt did hang a bit over the sides of her double bed.”

As Thaler described, assigned to specific “mental account,” a purchase gets a reference that lets you know if it is cheap or expensive. Not only did the (mental) account for the quilt benefit but also the woman enjoyed an elevated transactional utility from the cheap purchase. Similarly, once MoviePass lowered the monthly subscription rate below $10.00, people’s “mental account” or imaginary bucket for entertainment got a bargain. And like the king-size quilt, the transactional utility of the purchase created a pleasure that far outweighed the reality of using it.

At this point we might even throw in the optimism bias from another economics Nobel Laureate, Daniel Kahneman. Defined as the difference between an expectation and its outcome, I wonder if the optimism bias (typically applied to risk taking), also explains why MoviePass buyers thought they would attend far more performances than they realistically would be able to fit into their lives.

So, returning to where we began, we have a lower MoviePass price that appeals to our mental accounting and takes advantage of our expectations bias.

My sources and more: This NY Times article on MoviePass started me thinking about the concept. From there, my investigation led me to The Hollywood Reporter  and BusinessInsider. and the perfect complement, Richard Thaler’s mental accounting paper.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - What Not To Tell During a Job Interview by Elaine Schwartz

Assume that a new employee in a similar position will be earning more than you. Your attempt to get a raise does not work so you look for a new job. In most states, you could have a problem.

Only California, Delaware, and NYC have implemented a salary question ban that covers all public and private employees:

 

Why?

During a job interview, it is tough to dodge the salary question. If someone asks what you earned in a previous job, you could answer with a targeted salary range. But the dialogue could get uncomfortable, especially with unfair pay.

And that takes us to women and the gender pay gap. The media tell us that women earn 79 cents for every dollar that men are paid. Although the real gap is much more complicated, for today, let’s stick with that number.

At a new job, you could narrow the gap by starting on a higher rung of the wage ladder. However, your previous salary could diminish a pay offer. To eliminate the influence of your wage history, laws are multiplying that prohibit the salary question during job interviews.

You can see below where laws banning the salary question have been passed and proposed. Since the graphic was created, Delaware and Oregon passed legislation. The Delaware law kicked in last month while Oregon’s will not be in effect until January, 2019.

 

Our Bottom Line: The Anchoring Effect

In Thinking Fast and Slow, Nobel laureate Daniel Kahneman discusses a supermarket sign that limited soup purchases to 12 cans. When the sign was up, shoppers bought more soup than when there was no cap. Similarly, when asked how long Mahatma Gandhi lived, the question made a difference. Respondents offered a higher answer when they were asked, “Was Gandhi 144 years old when he died?”

The anchoring effect links soup purchases and Gandhi’s life span. As a number that influences our subsequent behavior, the anchoring effect can justify the salary history ban. When told a lower number, a prospective employer might offer less.

My sources and more: Thanks to NPR for alerting me to the dreaded interview question. BusinessInsider was also a handy source through their states overview. But for some insight, do look at the XXfactor at Slate.

Ideal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife -The Upside of Texas Price Gouging by Elaine Schwartz

During the Hurricane Katrina clean-up, a man from Kentucky loaded 19 generators onto his rented U-Haul. Driving 600 miles to an area of Mississippi with no power, he tried to sell them. His price was double what he had paid.

The man never sold his generators. He was called a price gouger and wound up in jail for four days. Disagreeing, an economist would say he was solving a shortage problem.

Price Gouging

The Texas Attorney General’s office has received complaints about $3.50 a gallon gasoline and a $99.00 case of water. Because the Governor of Texas declared Harvey a disaster, those excessive prices for necessities are illegal in Texas.

As of 2012, more than 30 states had regulations that prohibited “excessive” price hikes during a disaster. (I could find no evidence that any of those states eliminated the regulation since then.):

When Hurricane Sandy struck my neighborhood in 2012, I learned firsthand about anti-price gouging regulation. New Jersey says that any retailer charging prices that rise more than 10% above their normal level during a state of emergency is violating the law.

During the NJ emergency, my local gas station resembled the following picture. Where they could find an open station, people waited on gas lines for as long as 3 hours:

Our Bottom Line: The Price Gouging Debate

If you oppose disaster price hikes, you are in good company. Nobel economics prize winner Daniel Kahneman said that businesses need to be known as fair in “Fairness as a Constraint on Profit.” Referring to economists who favor “gouging,” one of his co-authors, Richard Thaler recently added, “They are misunderstanding that if you piss people off, you pay a price…”

However, anti-gouging laws create a tradeoff.

On the supply side, higher prices encourage producers to sell more gas. They work a little harder to find extra, they extend their hours, and they buy generators in areas that tend to lose power. Meanwhile, higher prices encourage consumers to buy less. As a result, those of us at the back of the line have a chance of getting gas.

It can be win-win. Price increases during an emergency encourage the supply side to provide more and the demand side to conserve.

By contrast, the price ceiling that a price gouging law establishes creates a shortage:

So maybe $3.50 gas and $100 water in Houston are okay?

My sources and more: This excellent HBR article on price gouging gave some good background for assessing Texas policy as did this Mises Insitute discussion. More broadly, this econtalk podcast on a just price made one of my morning walks fascinating. But for the up-to-date news and regulation, you might just want to look at Business Insider and the Texas Attorney General’s office. And finally, here is the Kahneman fairness paper.

Please note that parts of this post were previously published at econlife.

Ideal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

Starbucks Moments by Jim Triplett

The other day I found myself automatically going to a Starbucks in the local mall.  The coffee shop was not on my list of places to visit; rather, I entered the store by habit.  In other words, this was a decision I made without thinking.  While the outcome of this decision has little overall impact on me, other than the opportunity cost of time I could have been doing something else and the economic cost of about $5 for the drink, I’m reminded of the number of decisions we make daily with little or no active thinking.

Reflection and asking questions of oneself reduces the likelihood one uses limited or zero active thinking.  Mental shortcuts - called heuristics - are quick ways of thinking that may work in routine and predictable settings with little negative impact, but may lead to problems when they don’t match the situation.  Individuals develop these heuristics to manage the number of decisions faced each day.  These mental shortcuts are developed over time based on experiences, cultural and religious influences, socioeconomic status, etc.  They become a filter - a bias - that leads people to make decisions automatically, often without even being aware of the decision.

Research in the field of judgment and decision-making by such notable persons as Herbert Simon, Amos Tversky and Daniel Kahneman, suggests that much of one’s thinking is really automatic decision-making that is performed without much thought (like driving and having a conversation with someone in the front seat - try to remember every driving decision you have made from point A to B).

Behavioral economist Dan Ariely (2008) suggested that when it comes to the effects of marketing, for instance, "We are pawns in a game whose forces we largely fail to comprehend ... just as we can't help being fooled by visual illusions, we fall for the '’decision illusions' our mind show us" (p. 243).  This research suggests because so many decisions are made on autopilot, people fail to make truly informed decisions until they actively think about how these decisions are made.  Ariely used the example of standing in line at Starbucks I noted above to illustrate.  At some point, one first encounters Starbucks and, lacking experience with the store, goes in to try it.  If the experience (and coffee) is pleasant, one may go back again.  Over time, one may find him/herself standing in line at Starbucks without even thinking about this (my wife almost always stops at Starbucks, even without thinking about it).  Ariely suggests the reader periodically ask themselves, "Why am I standing I line at Starbucks?"  If you are good with the decision, keep standing in line; otherwise, maybe it’s time to go to Dunkin' Donuts or even just go back to work.  Automatic decisions made every day will not change until you actively thinks about them.

So, next time you find yourself standing in line at Starbucks - or other moments or decisions that, upon examination you find are made with little or zero active thinking, consider how you might improve your awareness of them so you can make better decisions.

Ariely, D. (2008).  Predictably irrational: The hidden forces that shape our decisions.  New York, NY: Harper.

Jim Triplett is an author, instructional designer, and instructor in the areas of finance, economics, ethics, and critical thinking. Jim holds Masters Degrees in Finance, Organizational Leadership, and Instructional Design Technology, is ABD / PhD in Organization and Management, and is currently completing a doctoral degree, Ed.D, in Educational Leadership with a focus on Educational Technology.