When did it become compulsory to wear technical leggings to go for a jog?

I can barely remember the last time I saw a jogger’s legs. Just about anyone who goes jogging has fancy leggings made of “technical material.”

runners

They can cost as much as a flight to Sydney:

Skins

People are prepared to pay a giant amount for goods and services related to sports. Willingness to pay for compression leggings is enormous – never mind that the marathoners at the Olympics don’t wear them, and neither do the 100 metre runners.

The business model of companies like Skins (or Lululemon, Nike, Lorna Jane) is to align yourself with something that is or could be cheap, but which people find highly enjoyable or important.

People can run in cheap clothes, but they love running so much that if expensive and specific clothes seem to be required, the expense is minor compared to the overall enjoyment.

Hanging out with your friends can also be cheap or free. But if a cultural expectation develops that it’s only appropriate to hang out in a bar or a restaurant – not in a park or on a street corner – then people don’t blink to pay.

Businesses that sell expensive bicycles profit because they leverage both these trends. If you want to do that exercise properly, and hang out with your cycling friends, you need to have a bike that won’t embarrass you or leave you lagging behind the bunch. Or so they say.

The business model is this. Find something people love to do. Something that offers them a strong benefit at a relatively low price, and great “consumer surplus.”

cs

Then position your product as an indispensable tool to doing that. It doesn’t matter if your product is truly important – you can capture some of that consumer surplus if you can convince people it is. It might be as simple as making the stitching on your leggings high-contrast to create the impression of science.

This will work best if the activity is undertaken in public. When it comes to public consumption goods like shoes and cars, we tend to be driven by what others are doing, while we may make our own judgments about buying goods consumed privately like electricity providers and detergent. (This terrific paper ranks goods by their conspicuousness, which runs from cigarettes and clothing, down to home insurance and underwear.)

My last example for the post is popcorn. If I was to watch a movie sitting on my own couch, I would not plan to eat popcorn. But if I am invited to someone’s home to watch a film, the odds of me buying popcorn rise dramatically. Why do popcorn and movies go together?  It’s a social construct – and  a way to capture my willingness to pay. (1)

Are there other examples that grate on you? Leave a comment below!

How frugal can you be? And is it worth it?

What is harder – making money or saving money? Judging by the amount of time my facebook friends seem to spend relaxing in exotic locations, the latter is substantially more tricky.

How much could a person save, if they wanted to live a normal life in a decent part of the city, showing up for work dressed appropriately, heating their house, eating nourishing food?

Let’s assume a budget of $180 a week for rent, which gets you a flat near trams and trains, 10km from the city. Assume a full-fare yearly Myki for $1430 and a diet short on smoked salmon.

Holidays? No. Dinner out? No. A car? No. Soy flat white to take away? Uh-uh.

Expenses

Total annual expenses would run to $21,948. Would it be worth it?

Savings curve

Before I made this graph, if you told me it was mathematically possible to save $20,000 a year on a pre-tax income of $50,000 I would have called you crazy. The graph above does not account for any government transfers or the low income tax offset (worth $230/year at income of $50k), either. 

GOODBYE LUXURIES?

Savings advice seems to always centre around giving up takeaway coffee (1, 2, 3). I don’t drink a huge amount of take-away coffee, but when I do, I really enjoy it. And really, five cups a week at $4 each is only $20 a week.

The pie chart above shows there’s more to be gained by trimming down the big recurring expenses. Finding a place that rents out for $20 a week less locks in the saving of $20 a week, without constantly exercising self-control over caffeine urges. Self-control is like a muscle – it tires as you use it. So if you avoid buying coffee in the morning, you are more likely to splurge on pizza on the way home. Any saving plan should rely on locking in low recurrent expenses.

Behavioural economics suggests that humans have “present biases” that prevent them from meeting their own stated preferences about saving. That’s why we have compulsory superannuation. But there are tricks that make people respect their own preferences.

“Soman & Cheema (2011) evaluate an interesting variant of a commitment savings technology in a field experiment targeted at unbanked construction laborers in rural India who are paid cash wages. Individuals earmarked a certain amount of their weekly wages as savings that was then set aside in either one (nonpartitioned) or two (partitioned) sealed envelopes. Realized savings was 39–216% higher for workers whose savings were partitioned into two envelopes rather than put all into one envelope. The authors hypothesize that opening a savings envelope, or violating the partition, induces guilt. Having multiple accounts, or partitions, increases the psychological cost of spending money set aside for a specific purpose and consequently increased the amount saved.” 

Even if they could, most people would not live like monks just to save up pennies in their bank account. But the structure of our tax system mean they will do it to pay for a home.

If you take out the rent expense of over $9000, pre-tax income of $50,000 leaves $28,000 spare a year. That’s enough to pay off a $400,000 mortgage.

max mortgage

I hesitated to even publish this graph, because it makes my non-house purchasing ways seem immoderate and wasteful. But there it is, in all its horrible glory. You can – if you set your mind to it -base a life of grim abstinence in a house of grand proportions.

Saving a bit is important to make you happy.

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” – Micawber, Dickens.

The kind of lifestyle I graphed above would be easy to maintain for a fortnight, possible to maintain for six months and hard to do for two years. After five years it’d be hard to do anything else, because your social life would have withered and died. Dickens, remember, also wrote about Ebenezer Scrooge. Like all things, saving is best in moderation.

Behavioural economics “nudges” and policy in Australia

In a comprehensive new paper disseminated by the US National Bureau of Economics Research, Harvard professor Brigitte Madrian discusses the latest thinking on using behavioural economics to optimise policy design.

There are a few items in there with direct relevance to Australia that are worth a bit of attention:

1. Orwellian language works. Madrian praises the re-branding of the UK’s dole as a “job-seeker allowance” and criticises the use of the term”work for the dole” in Australia. The evidence for the power of framing in the allocation of transfer payments is more significant than I had realised.

“Kooreman (2000) finds that the marginal propensity to consume children’s clothing is 10 times larger out of income designated as a “child benefit” than out of other income sources; in contrast, the marginal propensity to consume adult clothing is highly significant for other income sources but is negligible for income from designated child benefits. The labeling of income as a “child benefit” apparently creates in parents a moral obligation to actually spend that money on their children. Similarly, Benhassine et al. (2013) evaluate the impact on school enrollment of a labeled cash transfer program in Morocco that designated the funds for children’s education, although the funds could be used for other purposes. They find a sizeable increase in elementary school attendance by children in families who received the labeled cash transfer relative to children in control households who received nothing. They also find that a labeled cash transfer is as effective, indeed for some measures is more effective, at promoting school attendance than is a conditional cash transfer in which payments are made only if a child does in fact attend school (and is significantly less expensive to administer than a conditional cash transfer program).”

2. There’s a reason the ATO prefers to over-collect tax and deliver tax refunds each year, and it has to do with both loss aversion, and the way human minds frame problems with reference to arbitrary points.

“A natural reference point for taxpayers at the time of tax filing is whether they owe additional tax (relative to what has already been collected) or expect a refund. Engström et al. (2013) find that in Sweden, taxpayers are more aggressive about claiming deductions when they owe additional tax at the time of filing than when they expect a refund, consistent with the predictions of prospect theory. An obvious policy implication is that a tax collection strategy that relies on overwithholding followed by refunds at the time of tax filing may increase tax compliance and total taxes paid.”

3. Madrian is an economist, so she’s au fait with the merits of financial incentives. But the paper emphasises that public finances are in short supply, so it is important to look for policy tweaks that would work as well as a financial incentive.

“Levitt et al. (2012) examine the effectiveness of several different incentive schemes to motivate student performance on standardized exams. They find that giving students a trophy for meeting performance targets, at a cost of about $3 per student, has roughly the same impact on test scores as a direct financial incentive of either $10 or $20, and in some cases is more effective.”

Thinking about whether there is a behavioural economics solution that would substitute for a subsidy may also provide insight to the real reasons for a policy. For example, the government’s proposed Paid Parental Leave scheme – a subsidy for staying at home and looking after a child.

The PPL scheme is expensive, offering up to $50,000 dollars in wage matching over six months. What behavioural tweaks could make it cheaper?

The question is actually hard to answer. Is PPL designed to lift the birthrate? To keep women at home in the first 6 months of life? To return women to the workforce thereafter? To reduce demand for childcare? To support incomes? The fact that whatever the policy problem is can only be solved by this expensive PPL hints that it is in fact a policy in search of a solution.

 

Why beautiful Dutch Ladies Bikes should come with a health warning

A bicycle is an experience good. A lot like a bottle of wine or a book, it’s hard to determine the quality of it before you consume it, so you can easily fall into the trap of buying the wrong one.

It is an easy mistake to make for anyone, but I’d like to focus on women tempted into buying “Dutch bikes.”

Stylish?
Source: Cyclestyle.com.au

I’ve ridden the men’s version of the above, and it was a pig of a thing. 0/10, would not ride again.

People buy Dutch bikes because in the shop, the sitting position seems very important – you seem to be choosing between “hunched over the handlebars” or “sitting up comfortably,” between “sporty” and “relaxed.” 

I once went with my mum to buy a bike. She bought a heavy, upright bike and it is almost never used. She still rides though – it is just more likely to be on an old mountain bike.

In the real world, the discomfort of bicycling is – for a healthy person – much less about your body position, and far more about the effort expended. 

This is extra relevant if you imagine doing some cycling for transport, not just leisure.

If you are sitting up comfortably on a 20kg bike, you will be going more slowly in almost all circumstances. If riding to work will take 5 minutes longer than the train, it’s unlikely to be your go-to choice when you are stressed in the morning.

You are also exerting yourself for longer. You will be exposed to a higher chance of getting caught in the rain, more tired and more likely to be drenched in sweat when you arrive.

Exertion and time are the real costs of cycling and the real reason bikes get left in the shed while their owners drive. Yet people who imagine themselves as “not sporty” are the most likely to buy heavy, hard-to-ride bikes!

Dutch bikes are slower because of extra weight (this “lifestyle transport bike for ladies” weighs 21.4kg), and the upright sitting position.

The unfit will be likely to be in the steep and tricky part of this graph at moderate power wattages
The unfit could be in the steep and tricky part of this graph at quite moderate wattages

Extra weight becomes important on an uphill. Up a 7 per cent gradient, an extra 2.5kg will mean travelling about 2.5 per cent slower. Alternatively, trying to keep up requires more power output, and power output becomes exponentially harder to maintain (see graph).

The effect of sitting up straight is to create drag. Drag increases with speed, so a more aerodynamic position is more important when you would like to go fast. Not so important when idling along the shops or a busy off-road bikepath, but relevant on a long straight road, or when other cyclists are going fast.

Melbourne is not Amsterdam. It is undulating, in places downright hilly, and the other cyclists are not meandering along. If you find yourself pushing your bike uphill and getting overtaken, of course you will give up riding it.

I know women who cycle a lot for transport, and they have this in common – no Dutch bikes. Even this enthusiast sold hers after complaining about the weight.

If we observe actual women cycling, in the wild, we see what kind of bikes actually get used

DSC_0094 actual women cycling

What we (mainly) see is this: flat bars, baskets and aluminium tubing. Bikes that weigh perhaps 12kg, not 20kg. Bikes that won’t make it into a shop’s window display but should be celebrated and promoted.

Other experience goods often have independent quality ratings that provide some sort of indication of what you’re getting. You might look for a Booker Prize shortlisted book, or a wine that has won a lot of medals.

So I’d like to contribute an endorsement for light and practical women’s bikes. What Dutch bikes need is an equal but opposite thing. A big red sticker on them that says: “Warning. Will gather dust.”

How small is too small for an apartment?

A law against little homes? 

The Victorian Government is considering a new rule that would mean apartments have to be bigger than 37 square metres, or bigger than 50 square metres if they have a separate bedroom.

Why would we do it, especially when tiny homes are in huge demand?

I went to look at this little flat in East Melbourne a while ago. A bedsit in a nice location, in a beautiful building, with about 35 square metres of floorspace.

east melbourne flat

It turned out to be mouldy and squalid, and then sold for $370,00. But I would have happily lived in that much space if properly appointed (although not at that price!).

Is there inherently anything undignified about having one room that operates as bedroom, kitchen and lounge room? It is doubtless less comfortable, but I suspect that it is also true of driving a Barina rather than a Range Rover.

In fact, housing should probably be less regulated than cars. You can’t crash a house into someone else. 

These brand new places in Fitzroy look like they clock in very small indeed, and they’re apparently selling, starting at around $300k.

fontaine

The fact of the matter is that small homes may suit many people best, for any number of reasons.

People might feel cosier and more secure in a small house. People physically unable or mentally indisposed to do housework may love them. Environmentalists may choose them because they require less energy to light and heat. 

Certainly the single-person household is on the rise in a major way – up to 24 per cent of households from less than 20 per cent 15 years ago. So why would we regulate against small homes?

Part of the reason might be the psychology of decision makers.

People who make laws tend to live in large and charming detached houses. They wouldn’t want to live in a tiny little home. So they imagine they are helping the unfortunate by making sure homes are not small.

Politicians do not tend to live in the following: caravans, boarding houses, cars or under bridges. Lawmakers may struggle to empathise with those people, for whom a real home is a lifelong ambition they may never achieve because it is too expensive.

Very small studio apartments help make housing more affordable in two ways.

Not only do they cost less than a one bedroom house – which could be significant on its own – but they also allow for developers to put more homes on the same space, which increases the potential housing supply.

The worst thing you can say about a “too small” apartment is that they will be hard to sell. That the market for them will be small. That is equally true of a 20 bedroom mansion, and the same logic will apply – drop the price. 

If in ten years they prove unpopular, that will actually provide relatively cheap homes near the city, for a small group of people who would otherwise be shut out. I could only support such a policy.

Inflation has gone up: that is bad news, and I don’t just mean because prices are higher.

Prices rose by 3 per cent on average in the last year, their highest rate of change for several years.

Inflation

The RBA wants inflation to be between 2 per cent and 3 per cent. If inflation gets above 3 per cent, it will generally lift the official cash interest rate to keep inflation down. [for a nice simple explainer on how and why the RBA does what it does, follow this link.]

Inflation and interest rates

Higher interest rates make it harder to do business. If the RBA lifts interest rates now, while unemployment is at its highest level in years, the improvement in the labour market might slow down.

unemployment

Basically, the RBA is in a pickle. It is an “inflation-targeting” bank. Our entire economy hinges on the idea that lower interest rates create both growth and inflation. If they only create inflation, then we are stuffed.

It nervously awaits the next release of inflation data (in 3 months time) and the next release of unemployment data (on August 7th). We should all be on the edge of our seats.

n.b. the fact that the red line is below the blue line in the graph above means we have negative real official interest rates! The fact that money is losing value should be enough to get people spending it.

 

 

Israel’s response could be so much better

There is a lot to be disappointed about in the current conflagration between Israel and Palestine.

The world is getting more peaceful every year, but that little area around the Dead Sea remains a hotbed of conflict and violence. Since long before I was born, there has been conflict there. Is there any way to make it stop?

I’m not a foreign policy expert, I’m not theist in any way, and I’ve never been to the middle east.

But I am trained as an economist and I’ve done a lot of reading on Game Theory. And it suggests to me the response of Israel to Hamas rockets is probably far from optimal.

Rocket attacks are not a brilliant strategic move by Hamas. They are motivated by anger. And the more Israel looks like a bully that willingly kills civilians, the angrier Gazans will get.

Equally, military force deployed by Israel is disproportionate, strategically unsound and seemingly driven by anger.

The killing of children kicked off this escalation. Strategic thinking has evidently played little part so far. But it will be required to end the violence.

When the death toll in a “war” stands at over 500 to 20 (Reuters, 21 July), it is clear one side is doing more than the other. It might be imagined that the higher the willingness of Israel to be really aggressive, the faster Hamas learns to stop firing rockets. But that’s not what the theory says.

TIT-FOR-TAT

Time and again, proportional responses have been shown to be winning strategies in game theory situations. Pitted against many highly computationally complex theories, a strategy of tit-for-tat developed by Robert Axelrod has proven to be a winner in producing cooperation.   

In this instance, each rocket attack could be defined as the move of a player, and met with proportional responses, rather than much larger missile attacks and a ground offensive.

The downside from Israeli government’s perspective is that it would be perceived as the government valuing Palestinian lives as much as their own.

Tit-for-tat has its critics. An undeniable problem with tit-for-tat in the real world is distinguishing and agreeing on whose “turn” it is, although such a problem may be soluble by a formal announcement that reciprocity in any 24 hour period depends on the outcomes in the preceding 24 hour period.

GRIT

Another approach backed by Game Theory, is called Graduated Reciprocation in Tension Reduction. It was developed in the 1960s as a way to address the Cold War and is optimised for breaking a stalemate. It involves one side announcing it will make a unilateral move to reduce tension, and then inviting the other side to respond.

“GRIT may have a greater effect on changing the “enemy images” that fuel conflict since it uses unsolicited gestures to signal a willingness to pursue common interests to an adversary who has heretofore seen the conflict in zero-sum terms. Nevertheless, GRIT also has shortcomings that need to be taken into account. In particular, the work of Lee Ross on “reactive devaluation” strongly suggests that the mere act of offering a concession decreases its perceived value in the eyes of the recipient (Ross, 1995; Ross & Ward, 1995).” source

De-escalation by one side is the only way for the conflict to return from boiling to simmering. I place the responsibility for making the first move to stop this “war” at the feet of Israel.

Some might argue that is unfair. But with the kind of moves Israel has made, Hamas lacks the capacity to play tit-for-tat. How could it mount a ground invasion? While Israel is a nuclear armed power, Gaza is not even a state, Hamas fighters are not real soldiers, and who knows how effective the chain of command is. The side that has an international reputation is Israel.

— 

CODA / COUNTER-POINT

Israel may be investing in its reputation for being hard, rather than being irrational.

If a change in global polarity is coming, driven by the rise of China, Israel may perceive a need to be ready.

The US, may have a rival within decades. If China rises and forms an alliance with the oil-producing states that lie a short pipe-line away from its western border, the strategic imperatives for the US of supporting Israel may diminish.

Perhaps, in recognition of that, Israel has decided it will need to form a lasting peace within decades. If so it may be currently investing in a reputation of being mad and dangerous, in order to maximise concessions in that peace.