Is £5 a lot of money?

I know it's an odd sort of question but it's one that has, from time to time exercised my mind. I think it helps to show how our understanding of value is shaped by perceptions and circumstance.

The story starts back in, I think, 1990 or 1991 when John Hinchcliffe and I has a heated debate about this very question - "is £5 a lot of money". Now at the time we were the account planning and research boffins at a leading direct marketing agency - the issue had arisen during a 'meeting' (I use the word loosely here) to talk about a savings product we promoted with the line 'only £9 per month'.

So, given that we had the skills and resources available we conducted some research. Not the most scientific piece of research but rather better than much of the rubbish that masquerades as public policy research these days. And our findings were significant - some people though £5 was a lot of money and some people didn't. However, we'd expected those answering 'yes' to the question would be the less well-paid employees of the agency (and any clients we stumbled across in the couple of days we were paying attention to our vital study).

What we found (you'll have to trust me on this because we didn't keep the results) was more interesting - the only factor that appeared to correlate to thinking £5 a lot of money was age. The older people were the more they thought £5 a significant lump of cash. The 55 year-old agency director saw £5 a more valuable that the 17 year-old receptionist. We concluded - before moving on to more important things (that we were actually paid to do) - that this might have something to do with inflation.

So for all those clever behavioural economists and such here's the question again:

"Is £5 a lot of money?"

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What public health can learn from Reader's Digest

Over 25 years ago I stumbled – more or less accidentally – into the world of direct marketing. And many of things I’ve learned from practicing that craft can be applied elsewhere. So it is with “nudge” and the practical application of what the clever folk chose to call “behavioural economics”. You know, the bit that starts with Steven Landsburg’s famous quote:

“Most of economics can be summarized in four words: “People respond to incentives.” The rest is commentary.”

And then continues to the Thaler & Sunstein idea of “nudge”:

“The trick is to promote actual freedom – not just by giving people lots of choices (though that can help) but also by putting people in a good position to choose what would be best.”

The thing is that mail order people and direct marketers had being doing this stuff for 50 years before all the trendy policy wonks picked it up. We’d been carefully learning a whole load of things about human behaviour. And many of those techniques came from the fertile and creative mind of Walter Weintz – someone who the typical academic behavioural economist should have heard of but probably hasn’t. He said:

Once the basic principles and techniques of mail-order promotion are understood, they can be applied in the most unlikely places, and for unexpected products. Although my own initial mail-order experience happened to do with magazines and books, the same rules would have applied had I been working on a correspondence course in accounting, the mail-order sale of Christmas hams or Chesapeake crabmeat, securing leads for Ford cars, or, indeed, getting political candidates elected or fund raising for a political organization...

And of course social policy and public health!

The name may be new to you but his biggest success – the brand that he made famous – is very familiar: Reader’s Digest. And this great man set out the story – as every in his slightly folksy style – in a book: The SolidGold Mailbox. The essence of this direct marketing – of the strategies that Weintz pioneered - lies in two things – incentives and testing.

So when someone arrives with a seemingly wonderful idea – that we can use things other than price or availability to incentivise behaviour – they are merely generalising the specific thing that direct marketers learned from Weintz and others. Things like:

·         The power of words – as Rush Limbaugh famously said: “words mean things”. Words like “free”, “new”, “exclusive”, “limited”, “bestseller” – these are real magic words that trip positive behaviour in people. I know this because it’s been tested and proven by direct marketers hundreds and hundreds of times.

·         The impact of reward - do this and you’ll get (or win or ‘qualify for’)something. It may be a free gift or an “exclusive” discount. Perhaps it’s an entry into a draw or a qualification for a “prize”. Our choice is rewarded – subscribe to the magazine and you are showered with wonders! Choose not to subscribe and these things will be torn from your very grasp.

·         How we love our name. Do you look up, even in a crowded room, when your name is mentioned? You do – that’s why even the clunky personalisation used in Reader’s Digest mailings worked. And because we love our name – think of the silly Starbucks thing about writing your name on the cup – we love to hear others use it. Even when it mispronounced or misspelled! There’s more too – because we like to hear our names, we like to use names too. So asking you to call Ethel or Steve on 0800 123456 works better that call us at that number. It’s a real person!

The point here is to remind us that the idea of “nudge” isn’t about price or regulations but is about language, about the order in which things are written and the way in which the choice is placed before us.  And direct marketers have been playing games with language, with the presentation of offers and incentives, for decades. We can tell you that long letters are more responsive than short letters, that past behaviour (such as buying mail order) is always a good guide to future behaviour and that people don’t read letters the way you think they do. Oh, and if you don’t ask for a response you won’t get one!

All of these things – these little games with words, with design and with non-financial incentives – can be applied to public policy whether it’s getting people to recycle, register to vote, stop smoking or visit the local clinic. Just one simple example will suffice – if you put a map of the clinic location on appointment letters for medical check-ups people are more likely to attend. Even when you know that they know exactly where the clinic is located because they’ve been there dozens of times.

This is “nudge”. Minimum pricing isn’t “nudge”, banning advertising isn’t “nudge”, passing regulations about packaging isn’t “nudge”. Look back at that Cass & Sunstein quote – the bit about promoting “actual freedom”. It’s about the words used and the choices offered – rather than saying “smoking is bad don’t do it” we should argue for point-of-sale-displays setting out the rewards of not smoking not for scary pictures or hiding the product away.

I’m not sure whether “The Solid Gold Mail Box” is still in print but it would be a great boon to effective – and genuinely liberal – social policy and public health campaigns if those creating them read the book. But then I recall a Director of Public Health who rejected a direct marketing approach to a campaign (on HIV/AIDS) because it involved another little thing that Weintz – and every other direct marketing – knows works: targeting those most interested in what you offer. Or, in the case at issue, those most at risk.

Public health hasn’t moved on. It still prefers the general to the targeted – introducing minimum prices that affect everyone rather than targeting campaigns to those most at risk. And they still prefer to say “you mustn’t do that” or “stop that” rather than “wouldn’t it be better if you did this instead?” 

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Dr Evan Harris is wrong about price competition - without it we'll have worse and more expensive healthcare

Source: Professor Mark J. Perry's Blog for Economics and Finance

Dear old Dr Evan Harris, former Liberal Democrat MP believes that competition in the provision of NHS services is fine just so long as it isn’t price competition:

The government seems to be unclear as to whether there will be price competition (an invention of the Labour government, it should be noted). It has said it will amend the bill to remove the word "maximum" before the word "tariff" that will be set by Monitor, the regulator of the new system-cum-market (a maximum implying the tariffs can be undercut). But the head of Monitor says he expects to see such competition as an essential part of the market. That is why I am calling on our conference to completely rule out price competition in the NHS, so that providers compete only on quality.

Now I’m pretty sure that Dr Harris is a clever bloke – after all he’s always banging on about decisions being “evidence-based” and linked to sound theory. The problem is that his grasp of some essential economic theory and evidence is sadly missing. So I thought I’d help him out a little – firstly by pointing out that cheap doesn’t mean low quality and that, without price competition, suppliers have no incentive to be efficient or for that matter to address issues of quality.

And Dr Harris there’s evidence too!

“The results indicated that while competition reduced price significantly, quality of service was maintained or even enhanced. The effect of competition turned out to be greater on prices than on quality, and the influence of ownership appeared to be negligible on both.” Domberger, Hall & Lee, The Economic Journal, 1995

Or:

Theory is clear that competition increases quality and improves consumer welfare when prices are regulated (for prices above marginal cost), although the impacts on social welfare are ambiguous. When firms set both price and quality, both the positive and normative impacts of competition are ambiguous. The body of empirical work in this area is growing rapidly. At present it consists entirely of work on hospital markets. The bulk of the empirical evidence for Medicare patients shows that quality is higher in more competitive markets. The empirical results for privately insured patients are mixed across studies. Gaynor, NBER, 2006

And there’s:

The paper has two important findings: First, higher managed care penetration increases the quality, when inappropriate utilization, wound infections and adverse/iatrogenic complications are used as quality indicators. For other complication categories, coefficient estimates are statistically insignificant. These findings do not support the straightforward view that increases in managed care penetration are associated with decreases in quality. Second, both higher hospital market share and market concentration are associated with lower quality of care. Hospital mergers have undesirable quality consequences.  Sari, Health Economics, 2002

There is nothing at all suggesting that intensive price competition reduces the quality of care – there are some valid questions about regulation of pricing but these should apply to the internal costing of procedures as much as they do to the external commissioning of services. In a piece – very critical of the US system – Michael Porter and Elizabeth Olmsted Teisberg said this:

In healthy competition, relentless improvements in processes and methods drive down costs. Product and service quality rise steadily. Innovation leads to new and better approaches, which diffuse widely and rapidly. Uncompetitive providers and restructured or go out of business. Value-adjusted prices fall, and the market expands. This is a trajectory common to all well-functioning industries – computers, mobile communications, banking, and many others.

Health care could not be more different. Costs are high and rising, despite efforts to reduce them, and these rising costs cannot be explained by improvements in quality. Quite the opposite: medical services are restricted or rationed, many patients receive care that lags currently accepted procedures or standards, and high rates of preventable medical error persist. There are wide and inexplicable differences in costs and quality among providers and across geographic areas.

Now we might take issue with banking as a well-functioning industry these days but the point made is valid – it is a failure of competition that creates the problems in our healthcare systems. And, as Porter & Teisberg point out, costs (and prices) are essential drivers of efficiency, innovation and quality. To remove “price competition” as Dr Harris wants is, in effect, to say that medical procedures can never get cheaper, that there are no benefits to wider society from being able, say, to conduct hernia operations to the same standard at half the price?

Dr Harris wants a system without an effective price mechanism – and the result of this will be that medicine (unlike most other technology-driven aspects of our life - as you can see from the image at the top of the page) will get ever more expensive resulting in more rationing, richer doctors and further frustration at the system's bureaucratic inability to respond to customer needs.

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Are you wasting your life with work? Remember you work so you can consume!

After a lousy day, a trip to the hospital and a decent (exceptionally decent) pie at The Grouse, I returned home to read an article from the delightful, charming and usually right, James Delingpole.

Just as a 12th-century knight’s son would have been considered next to useless if he couldn’t joust and shoot an arrow and wield a sword, so, I believe, a modern young male of the professional classes ought to be able, by 25, to do at least three quarters of the following things on a level where he does not look like a total spaz: scuba dive; windsurf; surf; ski; water-ski; skateboard; snowboard; golf; tennis; squash; darts; piano or guitar; mix records on a set of decks; ride a motorbike; sail; drive a speed boat; shoot; ride; Scottish dance.

Absolutely – even though I don’t wholly agree with James’ list, I get the sentiment. And the great man asks further questions of us – pointing what it’s all about:

This is what I like about surfing. And hunting. And badminton, tennis, bridge, wild swimming, Carcassonne, Settlers of Catan, walking, reading, Matterhorn, and all those other things I’d much, much rather be doing right now than writing this sodding piece which is taking far longer than it should because my mind’s still in its post-August fug. All the things in the world that make me most happy — all of them, damn it — are the things that have nothing whatsoever to do with work. Yet work is the thing I have to do for at least 46 weeks every year. While not-work is the thing I do only for a measly six.

Yes, yes, yes, yes, YES. We do not live to work. Work is a means to an end. We live to consume (and, to be blunt, we also consume to live). Our entire life – to be fulfilled – should be focused on the moments when we indulge. Our hedonistic, epicurean blow-outs. Drink, food, sex, games of cards, great art, wonderful music – consumption.

So why do so many righteous, self-important (mostly left-wing) folk rail against consumption? Are they so wrapped up in Marxist angst that they cannot see that we live to consumer – that consumption is everything? That we produce so others can consume not for the sake of producing? Even the subsistence farmer works to consume – he has (he sees) no choice but to carry on with back-breaking, painful, dispiriting labour. Why? Because he must consume to live.

We are lucky. Our creativity, success and the efforts of past generations have bought us free time. Time to consume – to fly kites, to watch crap movies on the telly, to smoke big fat Cuban cigars and to drink malt whisky. And that’s why we work. There is no other reason or purpose to work whatever the protestant moralists may tell you about work’s value. Our production (the effort of our work) allows us to consume. We promote exports so the choice in our consumption is extended.

In the final analysis, it is our desire to consume that drives the economy not the organisation of production. James Delingpole gets it right when he concludes his advice to his son by saying don’t be like your Dad. If you can consume without effort take that opportunity and enjoy it.

Hedonism rocks!

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Profit-taking and the NHS - inevitable or avoidable?

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The inspiring and sceptical legal blogger Jack of Kent asks whether part of the problem with the NHS relates to ‘profiteering’:

Huge profits are made by pharma and PFI contractors under NHS model. Surely we should not have such a profit-based approach to healthcare?

Now this rather begs the question since in addition to Jack’s examples we could identify thousands of other ‘for-profit’ businesses – large and small – making good money from providing goods and services to the NHS. It is not a matter of the NHS being wholly isolated from the private sector. A moment’s thought would show that (assuming we are not in the process of establishing a soviet system in the UK) you cannot insulate the NHS from private, for-profit enterprises. It would be unreasonable to expect the NHS to manufacture its own toilet tissue, sew all the operating theatre gowns, make the scalpels, produce the swabs and provide all the equipment required to operate a modern healthcare system.

What Jack is really asking is whether the profits taken by suppliers (however defined) to the NHS are excessive? And, if this is the case, whether the system itself is in some way to blame for such ‘monopoly’ profit? Finally, we need to ask whether such profit-taking is an acceptable price for maintaining a free, national service?

Are profits for NHS suppliers ‘excessive’? I’m not in a position to answer that question with anything other than an anecdote – after all to answer the question would require a definition of ‘excessive’ and an assessment of the profitability for all suppliers or contractors! However, some years ago I undertook a substantial piece of consultancy for a specialist NHS supplier. My conclusions were that the NHS was (and is) a cash rich organisation and that procurement decisions were determined by budgets, past costs and bureaucratic trip wires (e.g. ISO9001, IIP) rather than by understanding the costs of producing supplies or the sustainability of the supplying industry. The net impact of this was that suppliers – especially in specialised areas of production like that of my client – were able to take higher margins than they could in sectors driven by market forces rather that procurement regulations.

So we can see that the system is, almost certainly, contributing to ‘excess’ profits for (some) suppliers. Jack mentions PFI (private finance initiative) contractors which represent a special case in that public sector risks were retained so as to allow an accelerated programme of development. We got more hospitals, more quickly than would be the case under a more regular construction model – but at a considerable cost in the form of excess rents. The most obvious alternative to this approach – allowing hospital trusts to leave the NHS and self-fund development – was rejected because of the political risk and the perception of threat to the founding principles of the service.

Which brings us to the “price” of a service free at the point of need – and whether this cost is set right or indeed whether we can accept that part of the cost is in the form of private profit. Plainly this is a value judgment rather than a matter of economic rationality. However, ‘private’ systems such as that in the USA get a pretty bad press since they exclude too many (mostly poor) people. But the idea of a single national service – however tidy and attractive – was always something of a pipedream. We reflect on bureaucratic incompetence and bemoan the profits of ‘Big Pharma’ but fail to realise that the model we adopted promoted monopoly supply (over the short-run which is all that matters) and built in inevitable procurement inefficiencies that could be exploited by suppliers.

Finally, we should recognise that in producer-oriented systems such as the NHS, there is a hidden profit-taking in the form of higher wages, larger establishments and perks or privileges. British doctors – while less well paid that those in the USA – are well-paid (the popularity of medicine as a degree course reflects the economic truth that graduates in the discipline have the highest average income prospects) and complemented by a large establishment of support. We regard this as being ‘inefficiency’ and wail about ‘too many managers’ but it is what would be ‘profit’ in a private organisation.

None of this is intended to suggest an alternative – there are many different models – but to suggest that providing a universal service has costs beyond those we would expect from a free market system. But those costs appear inevitable if we are to deliver healthcare to those not able to pay for it – and part of that additional cost will, as night follows day, end up either in the pockets of healthcare employees or else in the profit columns of healthcare suppliers.

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Nudge, nudge, wink, wink - behavioural economics as a tool of social control

The matter of behavioural economics came to the front of my mind with reading this excellent blog post – in a roundabout way a review of “Nudge. Now the term “behavioural economics” has always seemed to me an oddly oxymoronic description since, if it is concerned with anything, economics is concerned with individual behaviour.

So let’s start at the beginning:

“The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security.” (‘Smith, An Enquiry into the Causes of the Wealth of Nations)

The core premise on which all economics is based rests on the view that – taken in the round – each individual seeks “to better his condition”. And this has been taken to mean that decisions taken by individuals are ‘rational’ – hence the idea of ‘economic man’. Yet Smith – nor the other classical economists – never said that every decision taken by an individual is rational given full information and knowledge. We need to consider that, in aggregate, the decisions of individuals tend to be rational (i.e. directed to the betterment of that individual’s condition) or have a rational intent.

Now, since classical economic models allow for the effect of decision-making in circumstances where an individual has incomplete information, we would be disposing of the child as well as the dirty water simply to dismiss classical models (or for that matter neo-classical models) because of bounded rationality, incomplete self-control and (alleged) lack of self-interest. What we need to appreciate is that our issue relates less to information than to perceptions of incentive. Hence ‘nudge’.

Which brings us to advertising – after all the persistence and success of advertising is living proof of the bounded nature of human decision-making. Advertising does not limit itself to putting across information about the product, where you can buy it and its price. The marketer seeks to appeal to heuristics, to create short-cuts and to reduce the decision-making process to a sub-pavlovian reflex when presented with a brand message.

All this is true but for one sneaking little problem – the advertiser has to live up to his brand promise. It really is that simple – businesses that do not do what they say in their advertising (and I’m talking about brand here not deliberate mis-selling) do not develop good brands. McDonalds presents an image of good fun, tasty food and good value – all things to which people aspire and the availability of which they consider betterment. And (for many people) the company lives up to its brand promise. A promise that does not extend to nutritional value, not being fat or even saving the planet.

We (says he trying to put himself into the mind of the health nudgers) want to believe that the McDonalds consumer is some kind of victim. And here the behavioural economists step away from the snug amoral world of economics and into moral judgment:

“Incomplete self-control refers to the tendency of economic agents to make decisions that are in conflict with their long-term interest. Self-control problems may lead to addictive behaviour, undersaving or procrastination. As opposed to the neo-classical view, restricting the choice set can be beneficial for an agent with bounded willpower.”(from Diamond & Vartianen, ‘Behavioural Economics & its applications’)

It is too short a step from noticing that some folk make stupid decisions to intervening to direct their decision-making in some way (i.e. altering the ‘choice architecture’). This is a moral judgement since in the aggregate (as ever ceteris paribus) the typical human decision is rational – it responds to incentives and is directed to betterment. It is as daft to run a model based on a pre-judged moral position as it is to say that every human makes a rational decision every time.

The problem – as our behavioural economists have found – is that those pesky humans just won’t co-operate. They carry on drinking, smoking, scoffing fatty, salt-laden goodies and indulging in a whole panoply of high risk activities. And the only response is – as we have seen, for example, with smoking and begin to seen with booze and food – ever more insistent ‘nudges’. And some of these nudges aren’t even that they’re outright bans, huge financial blunt weapons and armies of enforcers of the behaviouralists’ moral assumptions.

All economics is about behaviour but the economics that says behaviour can or should be controlled or directed is immoral, inconsistent, judgemental and wrong. We may wish to understand human behaviour better – that is a proper course of human enquiry. But only if this is done for reasons of understanding – sadly the behavioural economics we see too often is designed solely with the intention of control. We have returned to an age before the enlightenment that Locke, Hume, Smith and other brought. Back to the brutal, controlling leviathan and the moral control of the puritan.

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Shallowness is good....

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I have decided that we're all just a little shallow - preferring the slightly witty and the terminally inane to deeply considered and thoughtful commentary on the human condition. Except you, of course, dear reader. You are a paragon of thoughtful consideration, accurate analysis and don't mind my meanderings round the less savoury realities of economics.

But this shallowness of others (it's a bit like those who, despite being wholly unaffected by advertising, call for controls because the poor uneducated proles will be taken in and made to buy bad stuff like pop, crisps and fast cars) is really rather important. Not because there's a school of economic thinking ('behavioural economics' these folk like to call it) that likes to argue that, far from being rational and incentive-driven beasts, humans are emotion-driven and irrational. As ever with hypothesis-derived, evidence-light economics our dear old friends at the New Economics Foundation are there with the behaviour stuff - anything to have a dig at incentives I guess (even when there's a paucity of solid evidence supporting the jolly hypothesis that we aren't all selfish, greedy bastards after all).

But I digress - shallowness is everything and shallowness is good. Not, of course for us dear reader, even though we don't read the Guardian and know everything about everything as a result. What shallowness is about is a realisation of the utter cosmic futility of what we each do with our lives - an idea that eludes Guardian-reading statists (perhaps the only thing they share with Zaphod Beeblebrox). And if it's futile, why shouldn't we pass our time with idle pursuits - watching silly games on the telly, laughing at crap jokes, shortening our lives by drinking, smoking and scoffing luscious fat-laden goodies and generally not being in the slightest bit serious about it all.

So if I'd rather sit in the shed, bottle of whisky in one hand, Romeo y Juliet in the other and watch re-runs of Benny Hill on the little portable telly that's my business and, as importantly, is as significant an act as the activist's endless mobilising and organising, the political hack's leaflet distribution or the lefty academic's discussion about how they would organise it so much better than the uncontrolled actions of individuals would ever achieve (if only you'd give them the chance).

Just because "people-who-know-better-than-us" say we're shallow, selfish and will die young doesn't make our actions irrational. In truth our selfish behaviour is rational and, when we engage in communal or collective activity, that's rational too. Those who deny rationality to argue that decision-making is somehow tripped by emotional triggers are the same people who believed "The Hidden Persuaders" and that the medium is the message.

And the word for such people is....wrong.

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