Matt Nolan

Susan Boyle: Revealing institutional settings

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Like pretty much everyone I enjoyed the performance of Susan Boyle on Britain’s got talent.  I love Les Miserables and she did a great performance of an incredibly difficult song from the show.

However, what stirred me up the most was the behaviour of the crowd and judges.  Both were very dismissive to start with – undoubtably a product of the format of the social situation they were in.  Unlike many commentators, I do not believe that the crowd and judges were strictly representative of “most” of reality.

We could argue that this type of social situation represented an extremely concentrated version of reality – so that the implicit biases and signals used in society were amplified, and therefore easier to spot.  If this is the case, the dismissive nature of the crowd illustrates something quite uncomfortable about all of us.

But I disgress – following the judgments, once Miss Boyle illustrated her talent the behaviour of the crowd changed, and changed remarkably.

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jamesz

Carrying cash is good for your wallet

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I was surprised to read that are willing to pay more when they pay by credit card. Apparently they actually have a higher willingness-to-pay if a credit card is used, relative to a cash payment. Freakonomics reports an instance where a beggar made more money than ever by just holding a sign which solicited credit card donations online!

I’m baffled as to why people would pay more by credit than by cash. Does spending just feel more tangible when you have to hand over a wad of cash? If so, I wonder if EFTPOS encourages more spending than cash!?

jamesz

Why does that sounds familiar?

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Matt asks me to elaborate on an email exchange we had about the incentives that face economists. In particular, how could we explain smart macroeconomists parroting the value-laden, overtly political rhetoric of Krugman or Mankiw during the current crisis. Sure, Mankiw and Krugman have a stellar publication record and can afford to rest on their laurels, but that’s not the case for most. So why don’t they take this opportunity to show their chops and give us some macro insight into what’s going on? Read more

jamesz

Polls vs prediction markets

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With the advent of iPredict, New Zealand has jumped on the prediction market bandwagon. But now a paper suggests that, for election results at least, polling data is more accurate than at least one popular trading market:

The market price is superior to a naïve reading of the polls. For instance, if the
incumbent leads 60-40 in the polls in May while the market says the incumbent will win with
55 percent, the market price is likely to be closer to the Election Day vote division. But this is
not the appropriate test.
…
We could ask … what an analysis of polling history would show to be the odds of the incumbent winning in November given a 60-40 lead in May, and whether this prediction based on polls offers greater certainty than the May … price.
…
Based on our analysis, an investor with a modest knowledge of how … polls translate into Election Day outcomes would reap handsome profits from the … presidential market. The implication is that where candidate market prices depart from where the polls project that they should be, these deviations contain more noise than signal.

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Matt Nolan

Average vs Marginal: The most common mistake in economics

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Something I have noticed over time is that there is always a mass of confusion surrounding average vs marginal costs (or benefits) in economics.

Although there is some confusion with fixed vs variable costs as well (an issue that I believe is closely related) the issue of average vs marginal costs appears ohh so often.

Greg Mankiw mentions a case from the paper recently here.  I remember a case where it was important that was blogged about here.

Now, the difference is important as it is “marginal” costs and benefits that determine decisions (implicitly) not average costs and benefits.  However, if people are often confused between the two is it not possible that many people do make decisions based on the average?  There are a lot of interesting questions implicit here – something we should discuss over the next week 😉 – eg do people choose marginal when describing average?  does this confusion serve some “evolutionary” purpose?

Matt Nolan

Do those who pay with cash subsidise credit card users?

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At the Freakonomics blog Steve Levitt mentions how high credit card fees are for retailers.

Now as consumers when we make our purchases we only make a decision on whether to use a credit card or cash/eftpos based on the relative cost to us and the whether the option of different types of payment are avaliable. In fact, since I get charged to use an eftpos card I prefer to use my credit card when I’m in a shop. The information about which you can see more at their website

For some reason firms do not charge a different price based on payment method – and as a result when setting prices they will treat credit card fees as part of the cost of production.

In order to figure out if this translates into higher prices than in the case of price discrimination (and ignoring entry and exit) we need to ask – are the credit card fees seen as a fixed cost, or a variable cost. Assuming for fun that firms believe that some proportion of total sales will involve credit cards, the credit card fee becomes a variable cost – and as a result the price charged will be higher.

This makes me wonder – why do firms not charge me extra for using a credit card? If it is a framing issue why don’t they provide a cash/eftpos discount?

Experts from 53.com (https://www.53.com/content/fifth-third/en/personal-banking/bank/credit-cards/secured-card.html ) can provides full information about credit card usage and the difference between secured and unsecured cards.

Update A reader says it is because credit cards are a two-sided market. So credit card companies effectively “subsidise” consumers so that they can charge retailers more. When this is combined with Grant’s statement that it is a contractual obligation that firms cannot price discriminate based on payment method this all makes sense.