Cognitive biases and Election 2016

news-voter-issuesThe electoral dust has finally settled, and from the wreckage of the coalition we can expect no further survivors. It was a case study in how to lose an election, a mixture of arrogance and tin-eared disconnect combined with a lurking bruised populace (or “whingers” as the Taoiseach would have us known) unwilling to believe that the recovery existed, never mind be kept going.

Behavioural economics has a fair degree of traction now as the driving paradigm of how we shoud interrogate the economy. It has perhaps not yet reached the point where it is the mainstream but it nonetheless has some very useful findings which shed light on the results. A year ago I wrote on the warnings from behavioral economics for the coalition. These warnings have come to pass. 

Perhaps the main precept of behavioural economics is that around what is known as prospect theory. This, for which a nobel prize was awarded, tells us how people (“whingers”) feel about losses and gains.  Put simply, we don’t treat them the same  – we feel our losses more keenly than we appreciate our gains. It is this that lies at the heart of the problem for the coalition. Capital formation and personal consumption took a massive hammering in the deflation of the bubble. Since then they have risen pallidly if at all. Since 2011 , over the nearly 20 quarters, personal consumption has risen by just over 9%. That is in effect flat. It remains below the peak. People do not feel the recovery there. As a consequence, they feel at best indifferent to and at worse feel that there has been deterioration in their positon. The scars of the deflating of the bubble, fading though they be, are still hurting more than the sickly rise in personal spending. Whether this is fair or not to the coalition it is where they were.

This is reinforced by the Central Bank data on household wealth. Much of the rise in household net worth over the last few years has been on the basis of increases in pension pots or on the basis of house prices. Neither of these feed into immediate consumption or utility. The fall in household net worth, from about 800b to about 600b over the  2007-12 period hurts a lot more than the rise back to about 750b now. The 200b loss greatly outweighs the 150b gain. Again, this may be unfair to the coalition but there it is.  Talk about macroeconomic aggregates doesn’t cut it with people who still bear the scars of the crash.

A further element that is clear form behavioral economics is that fairness is something that matters.  Fairness and trust are really important element of economic exchange. There is increasing evidence that people are not, contrary to the precepts of traditional economics, self interested only. Most people, in most cases, show a mixture of self and other –regarding preferences. Put simply, while we greatly value our own utilty we also gain utility from the utility of others. Even simple, economics has discovered that which Thatcher denied existed, society.  An important element is that people converge to some degree of fairness in society.  In simple games of giving and receiving we find people willing to exchange fairly substantial portions of wealth. This is borne out by the findings of the Exit polls, which showed much greater concern for fairness issues – health in particular  -than for tax cuts. Homeless was seen as more important than tax cuts. People wanted fairness and competency and there was scant evidence of either from Fine Gael in particular. Fine Gael, in my view, have squandered decades of perception of being a competent economic managerial crew. They have continued this with the shenanigans around Irish Water.  They and Renua exemplify the words of Keynes

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”

Reaching back to the tax cutting tropes of the heirs of Arthur Laffer, and the neo-thatcherite self interested economic man, they missed the recent revolution in how people think and ran into the revolution of 2016.

As I wrote in 2015 they were in danger of becoming overconfident. This overconfidence is a killer in finance, resulting in people taking more risks than is optimal and churning trades. The political analogy is to stake all on one approach (focus group led arial bombardment of a fatuous message) and to flip-flop. Fianna Fail would want to take heed also – they display all the signs of biased self attribution, where the failure in the 2007 government was nothing to do with them (as now constituted) but the fault of Bertie and Brian. Michael Martin, who spent several millenia in cabinet, he had nothing to do with it.

The coalition suffered from base rate neglect – they ignored general trends (that GDP was flat, that there was increasing evidence of concern about housing and health) and they focused on small items (jobs announcements here there and yon, often the same jobs sequentialy, particular export related successes). Confusing the particular – tax increases from god knows where – with the general – that people must perforce be doing well- they fell flat. The unexplained and perhaps inexplicable increase in corporate tax revenue can be thought of as “house money”. House money is “free”, when you gamble and win you tend to take more risks with the total sum (your initial stake plus winnings from the house) than you would with that sum as a stake. While a gambler might go “all on number 7” Fine Gale went “all on cutting USC”. Fine Gale also exhibited hyperbolic discounting – overweighting near and underweighting far distant events, squandering a carefully crafted mythos of economic pragmatism for a “party hearty” attitude.

Equally damning perhaps is the focus by the government, over the last while,  as the Greens did in 2007-11, on trivia. We see this again now with the debate on how exactly we shall pay for water. In the election Parkinson’s Law of Triviality emerged in spades. Rather than focus on the complex and perhaps politically dangerous task of reforming the state we had a government that obsessed about the smaller (but no less valuable of course) elements of PR. A damning report from the EU lays this bare. The only substantive reforms of administration took place in the Troika era, and even then such inveterate irreformables as the bewigged ones remained staunch.

Labour perhaps fell victim to a halo effect. In listening to the defeated Labour candidates one could not but be struck by a common theme – “we made major social change via the same sex marriage amendment”. This is of course true, but the puzzlement of the defeated as to why this enormous achievement was not rewarded was palpable. A halo effect is when we take one desirable attribute and infer desirability of a whole from that part. Seeking this Labour gambled, it seems, that the glow, the halo, from their superb championing of the SSM amendment would wash over them and gloss over the reality of homeless kids.

There are many more cognitive biases that economics and finance have brought into their standard models. Its past time for some hard thoughts and harder words in how politics operates in this country.

 

A longer version of a column published in the Irish Examiner 5 March 2016

 

 

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One thought on “Cognitive biases and Election 2016

  1. Noel Kinahan

    Excellent article and most excellent quote, whereas practical men depend on the advice from many quarters to qualify their decisions, maybe it’s time to look closer to home and re-investigate an academic scribbler who was a practical man.
    Part  3  Q  40:  “But,  whether  though  a  scheme  be  never  so  evidently  practicable  and  useful  to  the  public,  yet,  if  conceived  to  interfere  with  a  private  interest,  it  be  not  forthwith  in  danger  of  appearing  doubtful,  difficult,  and  impracticable?”  
    George Berkeley, TCD, “The Querist”, 1735

    Reply

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