Magic asterisks

27/03/2014 § 3 Comments

I’ve been fighting magic asterisks lately.

Unfortunately, I’ve been doing it secretly — anonymous reviewer, confidential client work — so I can’t share the details. I can’t even show you the costume. But I can rant a bit.

The original Magic Asterisk (TM) was a Reagan-era budget device from David Stockman. To make the net budget come out right, he resorted to adding asterisks that indicated unspecified spending cuts. The cuts didn’t happen, of course, but the budgets balanced. The books might not have, but the budgets did.

I am starting a collection of terms that people use in economics as magic asterisks. These are devices — rhetorical, mainly — to get them from what they can prove to what they wish to be true. They are little bridges from reality to ideology.

Here is the start of my collection, and why [note heavy use of sarcasm]:

  • Lock-in, path dependence — sure, the decision you face looks straightforward, but the unspecified opportunities that you are destroying in the fractal future are amazingly valuable! If you make the wrong choice, you will be forever condemned to a life of regret and penury.
  • Non-linear — oh, man, it’s gonna go boom! Don’t you see, it’s non-linear. Just a little push, and you’ll be smiling it’s all over! Like, y’know, compounding interest and discount rates and the parabolic effect of gravity on a tossed ball.
  • Uncertainty — you don’t really know, do you? The future is uncertain. Anything could happen. Oh, and maybe some evil demon is just dreaming all this.
  • Chaos theory — classical mechanics doesn’t really understand cause and effect. Butterfly wings and hurricanes, that’s all I’m saying. It may look unimportant, but it could have really big consequences.
  • Bounded rationality — you can’t know everything! and people make mistakes! That means you don’t really know anything and you’re probably even wrong about that.

Don’t misunderstand me. All these terms have meanings. Actual, y’know, defined meanings that can help us understand economics better. Take bounded rationality. As Simon developed the idea, it focused on using rules of thumb in structured environments to achieve a ‘good enough’ outcome without optimising. Some people think it just means not optimising. Some people think it means optimising subject to cognitive constraints. It was something different — it was about the method that people used. Powerfully, it shows how using rules of thumb is useful in predictable circumstances but possibly catastrophic in others.

Feel free to add your own.

Paying just enough attention

05/03/2012 Comments Off on Paying just enough attention

This morning’s news tells us about Magnus O’Neill’s smartphone use while on holiday in the Cook Islands:

The online checks would have cost him about $4 in New Zealand. Instead he now faces a bill from Telecom for $2000.

His roaming consumed a modest 70 megabytes of mobile data. But what O’Neill did not realise was that he was being charged $30 a megabyte.

I was overseas over the summer holidays and I have no sympathy for Mr O’Neill. It’s very clear from the information you get before you leave and the texts you get in each new place that roaming is expensive.

However, his experience is instructive for the economics of consumption.

Research on perceptions and the brain show that we don’t notice everything around us. This weekend, I watched an episode of the National Geographic show Test Your Brain, called ‘Pay attention!’ It showed a number of tests and tricks that demonstrate how much we filter the visual stimuli around us. We miss a lot.

H.A. Simon discussed this in his work starting in the 1950s. He theorised that we learn about regularities in the world around us, and then rely on those regularities to allocate our attention. Attention is a scarce resource, so we learn to use it efficiently.

One problem arises when the context changes and we don’t react. For example, we go overseas and don’t think to change our smartphone habits. We might end up paying more for the data than it was worth to us.

Consumers approach markets with many assumptions. They have to allocate their scarce attention to test their assumptions. Which assumptions to test? The ones that make the most difference. How do they know which ones make the most difference? Well, they have to make some assumptions about their assumptions and the market. It’s turtles all the way down.

These lapses in full attention create profit opportunities, but it’s an open question whether the opportunities are economically efficient. Let me put it this way: underarm bowling. At the time of the famous incident, underarm bowling was clearly within the rules. The fact that it created such a furore showed that it contravened expectations of behaviour, of what was cricket. It also sealed the win. It was profitable.

Entrepreneurs can make profits by understanding where there are expectations that create lapses in attention. But these are short-term profits until consumers learn to pay attention. At that point, consumers work harder to understand what’s on offer. And they are possibly a bit poorer for it.

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