The behavioural aspects of the collapse of the Croke Park Extension

10.10.11This is a expanded version of a column published in the Irish Examiner 20 April 2013. In the christian bible the First Book of Kings  has a wonderful vignette of how not to win friends and influence people. King Rehoboham is discussing policy with his advisors, having recently taken the throne from Solomon. The advisors suggest a lightening of the burden. Rehoboham, retorts

And now whereas my father did lade you with a heavy yoke, I will add to your yoke: my father hath chastised you with whips, but I will chastise you with scorpions.

It doesn end well. Nor will the outcome of Croke Park 2. One of the amazing things about the croke park extension that was voted down was how on earth it was ever really expected to be accepted.  The evidence from this debacle is that the government seems to have very little collective or institutional insight into how people act when faced with decision making under uncertainty. And that’s inexcusable; the greatest growth in economics and finance over the last while has been in that very area. In the UK the Cabinet Office has a strong well-regarded team of people dedicated to applying the latest research to government decisions. We get Brian Hayes. The hysterical shrieking of Brendan Howlin that “he would run out of money” and the cold rowing back by Alan Shatter on promised garda recruitment was an added bonus in this stew of psychological insight. It was also indicative that these two ministers either don’t know that we have 33b in cash sitting on deposit right now or chose to elide budget allocations with cash. We wont run out of cash. We are flush with cash.

Lets leave aside the worries we might have that government are supposed to govern, not to abrogate these decisions to others. We elected them to run the place not to run from hard decisions.  Lets, for the moment, leave aside the economic issues. We are running a deficit and that needs to be filled.

Lets concentrate instead on the behavioral aspects of this. What was being asked was the following : please take a pay cut, because if you don’t then we will cut your pay (by an unspecified but perhaps larger amount) and perhaps those of others. What was being appealed to was a trifecta : that people were able to judge the relative uncertainties (the certainty of whips today versus the possibility of scorpions tomorrow?), that they would be altruistic enough to override any qualms on this issue and think of the lower paid and that they would then be able to make a cold decision on same.

People are generally not that receptive to altruistic arguments in the abstract. Simply saying “take a hit so others cant” might sound good but it may not, did not, get the desired response.  If we want to get them to do things that are not in their immediate self interest, such as pay tax or change behavior, there is a vast body of research on how to get this done. In general we can consider 6 factors that influence decision-making, and in every one of these the goverements argument and argumentation failed. Its astounding to sit back now and see how badly handled the argument was. Public sector workers are, despite the rhetoric from the right, responsible and mature citizens and probably know better than most how bunched the state is. They are 350,000 citizens and voters and no, they dont all vote Labour. And they were treated like naughty children being asked to choose going to bed without supper or a smack on the bum. Lets look at the 6 items in some more detail.

Reciprocation People feel obligated to return favours. But not only was nothing being offered, the evidence is that offers made by unions of reciprocation were rebuffed.

Authority People look to experts to show the way but unlike in the overall macroeconomic environment it is rare that experts will emerge stressing the vital importance of saving 2% of the overall salary and pension bill. The stakes are paradoxically too small.

Consistency People want to act consistently with their values and there is a genuine perception that all sectors have taken enough pain

Scarcity People place higher values on resources that are limited and ones wages are now more limited than before.

Social Consensus  People look to others to guide their behavior and  there was no consensus here that this was needed nor did the government create one, instead adopting a hectoring and bullying tone.

Liking People are supportive to ideas or actions they like, and who likes wage cuts?

Beyond that we find that there is a whole host of further issues with which we might be concerned. One behavioral bias that is known to be seriously damaging to investment decision-making is anchoring.

This is where, for example, a vendor of a house is fixated on the price of the most recent sale or on their own purchase price, and loses sight of any fundamental value concept. We see this in the croke park debate; 300m has become a totemic shibboleth, a number for whom the government died in the trenches.  The anchoring ran right into what behavioral analysts call loss aversion – some of the debate rang on the lines “well, the public sector took the rise in income in the boom and now should take the fall with the same grace. This is not how people deal with losses, they are disproportionally felt compared to a rise. This appears to be a fairly universal human behavior, and while private sector workers might quite fairly note that they have had to swallow pay cuts, the key issue is : would they have if they had been asked in similar fashion? Allied to this is the endowment effect : people tend to ask for more money to part with something than they would themselves pay to acquire it. Possession, of increments, flextime, etc, is inherently valuable over and above the monetary value of the thing owned.  Ally to that the status quo bias, not a preference for hairy rockers but a strong innate conservatism, and we see the task the government faced.

This task was doable. And some reduction in the overall pay bill is needed while we remain in massive deficit. But instead of considering the evidence on how to influence people, instead of reaching out to behavioral finance and economics specialists, they adopted a hectoring bullying tone that all but guaranteed their defeat. Willful ignoring of hard won knowledge has a price and its one we are all paying now.

What the government and in particular the Labour ministers, engaged in was hectoring. Hector came to a bad end, with his corpse despoiled and having to be ransomed from vindictive strangers. A more conciliatory, adult tone might yet save Labour from the fate of the Trojans.

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