Wednesday, 30 September 2015

The behavioural economics of choosing a flag

I've been mostly steering clear of the flag debate (I've got better things to do with my study leave time). However, Will Hayward (from the Psychology Department at the University of Auckland) wrote a really interesting article in the New Zealand Herald a couple of weeks ago that piqued (no, not a reference to red peak) my interest. Hayward wrote:
But psychologists know that our preferences are affected by lots of things that have nothing to do with our "taste."
For example, we like things more if we think they cost more; I can make you love the red wine I'm serving by telling you it cost $100 a bottle (you'll like it more than the same wine in a $10 bottle).
And it is not just how much they cost - it is also who owns them.
You like things you own more than things you don't own (as you know if you've ever sold a house; you can't believe people don't want to offer fair value on your great place, but then you can't believe how greedy people are when you visit an open home).
Finally, things become more appealing as they become more familiar.
Despite love representing the match of two soul-mates, a really good predictor of a successful match is how far two people live from each other.
Neither cost nor ownership nor familiarity represent inherent values or preferences; instead, they show that our minds continually change their interpretation of what we like as an object changes its relationship to us...
My guess is that whichever one of the tea towels is chosen, we'll rally around the original flag, some people because they always liked it and some people because they prefer Red Peak or another alternative.
What Hayward was talking could also be interpreted as the behavioural economics of choosing a flag, so I thought it would be worthwhile to follow up by more explicitly making the links between choosing a flag and behavioural economics. In particular, I want to focus on status quo bias and loss aversion.

First, status quo bias: If we change flag, then that entails both a loss (the current flag) and a gain (the new flag). On the surface that might seem like a straight swap, one flag for another, so whichever flag we like more should take preference, even if we like it only a little more than the others. As an example, let's say the current flag provides you with 10 units of utility (a measure of satisfaction, or happiness), and one of the other flags (which I'll refer to as the "alternative flag", so I don't have to single out one of them) provides you with 15 units of utility. You'd choose the alternative flag, right?

It's not that simple. Due to loss aversion, we value losses much more than equivalent gains (in other words, we like to avoid losses much more than we like to capture equivalent gains). According to Nobel prize-winner Daniel Kahneman, and Amos Tversky, we value losses twice as much as we value gains (this is one of the insights of what they call prospect theory). So, in the example above, choosing the alternative flag would entail a gain of 15 units of utility, but a loss of 20 units of utility (from giving up the current flag). This would make you worse off, so you would choose to stick with the current flag (even though the alternative flag is 'better').

It is this unwillingness to give up what we already have (even when something else would be slightly better), that gives rise to status quo bias. We tend to stick to what we already have, unless the alternative is much better. As Dan Ariely points out in Predictably Irrational, status quo bias keeps us in bad relationships, keeps us in jobs we dislike, and keeps us investing in failing projects. It's also closely related to the endowment effect.

What this all means is that it's highly likely that, at the end of the referendum process, we'll be left with the current flag. That's because it appears that for most people none of the alternative flags are substantially better than the current flag. Sticking with the current flag is what the polls are suggesting, including one poll by Waikato PhD student Alex Kravchenko (which you can still contribute to here).

So unless one of the other flag options suddenly starts to capture our interest, enough to overcome our loss aversion, then at the end of March next year we'll still be flying this:

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