Dan Ariely on irrational decision making

From Dan Ariely’s “Dan Ariely asks, Are we in control of our own decisions?” (TED: 24 June 2009):

I’ll give you a couple of more examples on irrational decision making. Imagine I give you a choice. Do you want to go for a weekend to Rome? All expenses paid, hotel, transportation, food, breakfast, a continental breakfast, everything. Or a weekend in Paris? Now, a weekend in Paris, a weekend in Rome, these are different things. They have different food, different culture, different art. Now imagine I added a choice to the set that nobody wanted. Imagine I said, “A weekend in Rome, a weekend in Paris, or having your car stolen?” It’s a funny idea. Because why would having your car stolen, in this set, influence anything? But what if the option to have your car stolen was not exactly like this. What if it was a trip to Rome, all expenses paid, transportation, breakfast. But doesn’t include coffee in the morning. If you want coffee you have to pay for it yourself. It’s two euros 50. Now in some ways, given that you can have Rome with coffee, why would you possibly want Rome without coffee? It’s like having your car stolen. It’s an inferior option. But guess what happened. The moment you add Rome without coffee, Rome with coffee becomes more popular. And people choose it. The fact that you have Rome without coffee makes Rome with coffee look superior. And not just to Rome without coffee, even superior to Paris.

Here are two examples of this principle. This was an ad from The Economist a few years ago that gave us three choices. An online subscription for 59 dollars. A print subscription for 125. Or you could get both for 125. Now I looked at this and I called up The Economist. And I tried to figure out what were they thinking. And they passed me from one person to another to another. Until eventually I got to a person who was in charge of the website. And I called them up. And they went to check what was going on. The next thing I know, the ad is gone. And no explanation.

So I decided to do the experiment that I would have loved The Economist to do with me. I took this and I gave it to 100 MIT students. I said, “What would you choose?” These are the market share. Most people wanted the combo deal. Thankfully nobody wanted the dominated option. That means our students can read. But now if you have an option that nobody wants you can take it off. Right? So I printed another version of this. Where I eliminated the middle option. I gave it to another 100 students. Here is what happens. Now the most popular option became the least popular. And the least popular became the most popular.

What was happening was the option that was useless, in the middle, was useless in the sense that nobody wanted it. But it wasn’t useless in the sense that it helped people figure out what they wanted. In fact, relative to the option in the middle, which was get only the print for 125, the print and web for 125 looked like a fantastic deal. And as a consequence, people chose it. The general idea here, by the way, is that we actually don’t know our preferences that well. And because we don’t know our preferences that well we’re susceptible to all of these influences from the external forces. The defaults, the particular options that are presented to us. And so on.

One more example of this. People believe that when we deal with physical attraction, we see somebody, and we know immediately whether we like them or not. Attracted or not. Which is why we have these four-minute dates. So I decided to do this experiment with people. I’ll show you graphic images of people — not real people. The experiment was with people. I showed some people a picture of Tom, and a picture of Jerry. I said “Who do you want to date? Tom or Jerry?” But for half the people I added an ugly version of Jerry. I took Photoshop and I made Jerry slightly less attractive. (Laughter) The other people, I added an ugly version of Tom. And the question was, will ugly Jerry and ugly Tom help their respective, more attractive brothers? The answer was absolutely yes. When ugly Jerry was around, Jerry was popular. When ugly Tom was around, Tom was popular.

A summary of Galbraith’s The Affluent Society

From a summary of John Kenneth Galbraith’s The Affluent Society (Abridge Me: 1 June 2010):

The Concept of the Conventional Wisdom

The paradigms on which society’s perception of reality are based are highly conservative. People invest heavily in these ideas, and so are heavily resistant to changing them. They are only finally overturned by new ideas when new events occur which make the conventional wisdom appear so absurd as to be impalpable. Then the conventional wisdom quietly dies with its most staunch proponents, to be replaced with a new conventional wisdom. …

Economic Security

… Economics professors argue that the threat of unemployment is necessary to maintain incentives to high productivity, and simultaneously that established professors require life tenure in order to do their best work. …

The Paramount Position of Production

… Another irrationality persists (more in America than elsewhere?): the prestigious usefulness of private-sector output, compared to the burdensome annoyance of public expenditure. Somehow public expenditure can never quite be viewed as a productive and enriching element of national output; it is forever something to be avoided, at best a necessary encumbrance. Cars are important, roads are not. An expansion in telephone services improves the general well-being, cuts in postal services are a necessary economy. Vacuum cleaners to ensure clean houses boast our standard of living, street cleaners are an unfortunate expense. Thus we end up with clean houses and filthy streets. …

[W]e have wants at the margin only so far as they are synthesised. We do not manufacture wants for goods we do not produce. …

The Dependence Effect

… Modern consumer demand, at the margin, does not originate from within the individual, but is a consequence of production. It has two origins:

  1. Emulation: the desire to keep abreast of, or ahead of one’s peer group — demand originating from this motivation is created indirectly by production. Every effort to increase production to satiate want brings with it a general raising of the level of consumption, which itself increases want.
  2. Advertising: the direct influence of advertising and salesmanship create new wants which the consumer did not previously possess. Any student of business has by now come to view marketing as fundamental a business activity as production. Any want that can be significantly moulded by advertising cannot possibly have been strongly felt in the absence of that advertising — advertising is powerless to persuade a man that he is or is not hungry.


… In 1942 a grateful and very anxious citizenry rewarded its soldiers, sailors, and airmen with a substantial increase in pay. In the teeming city of Honolulu, in prompt response to this advance in wage income, the prostitutes raised the prices of their services. This was at a time when, if anything, increased volume was causing a reduction in their average unit costs. However, in this instance the high military authorities, deeply angered by what they deemed improper, immoral, and indecent profiteering, ordered a return to the previous scale. …

The Theory of Social Balance

The final problem of the affluent society is the balance of goods it produces. Private goods: TVs, cars, cigarettes, drugs and alcohol are overproduced; public goods: education, healthcare, police services, park provision, mass transport and refuse disposal are underproduced. The consequences are extremely severe for the wellbeing of society. The balance between private and public consumption will be referred to as ‘the social balance’. The main reason for this imbalance is relatively straightforward. The forces we have identified which increase consumer demand as production rises (advertising and emulation) act almost entirely on the private sector. …

It is arguable that emulation acts on public services to an extent: a new school in one district may encourage neighbouring districts to ‘keep up’, but the effect is relatively miniscule.

Thus, private demand is artificially inflated and public demand is not, and the voter-consumer decides how to split his income between the two at the ballot box: inevitably public expenditure is grossly underrepresented. …

What it takes to get people to comply with security policies

From Bruce Schneier’s “Second SHB Workshop Liveblogging (5)” (Schneier on Security: 11 June 2009):

Angela Sasse, University College London …, has been working on usable security for over a dozen years. As part of a project called “Trust Economics,” she looked at whether people comply with security policies and why they either do or do not. She found that there is a limit to the amount of effort people will make to comply — this is less actual cost and more perceived cost. Strict and simple policies will be complied with more than permissive but complex policies. Compliance detection, and reward or punishment, also affect compliance. People justify noncompliance by “frequently made excuses.”

Criminal goods & service sold on the black market

From Ellen Messmer’s “Symantec takes cybercrime snapshot with ‘Underground Economy’ report” (Network World: 24 November 2008):

The “Underground Economy” report [from Symantec] contains a snapshot of online criminal activity observed from July 2007 to June 2008 by a Symantec team monitoring activities in Internet Relay Chat (IRC) and Web-based forums where stolen goods are advertised. Symantec estimates the total value of the goods advertised on what it calls “underground servers” was about $276 million, with credit-card information accounting for 59% of the total.

If that purloined information were successfully exploited, it probably would bring the buyers about $5 billion, according to the report — just a drop in the bucket, points out David Cowings, senior manager of operations at Symantec Security Response.

“Ninety-eight percent of the underground-economy servers have life spans of less than 6 months,” Cowings says. “The smallest IRC server we saw had five channels and 40 users. The largest IRC server network had 28,000 channels and 90,000 users.”

In the one year covered by the report, Symantec’s team observed more than 69,000 distinct advertisers and 44 million total messages online selling illicit credit-card and financial data, but the 10 most active advertisers appeared to account for 11% of the total messages posted and $575,000 in sales.

According to the report, a bank-account credential was selling for $10 to $1,000, depending on the balance and location of the account. Sellers also hawked specific financial sites’ vulnerabilities for an average price of $740, though prices did go as high as $2,999.

In other spots, the average price for a keystroke logger — malware used to capture a victim’s information — was an affordable $23. Attack tools, such as botnets, sold for an average of $225. “For $10, you could host a phishing site on someone’s server or compromised Web site,” Cowings says.

Desktop computer games appeared to be the most-pirated software, accounting for 49% of all file instances that Symantec observed. The second-highest category was utility applications; third-highest was multimedia productivity applications, such as photograph or HTML editors.

Many layers of cloud computing, or just one?

From Nicholas Carr’s “Further musings on the network effect and the cloud” (Rough Type: 27 October 2008):

I think O’Reilly did a nice job of identifying the different layers of the cloud computing business – infrastructure, development platform, applications – and I think he’s right that they’ll have different economic and competitive characteristics. One thing we don’t know yet, though, is whether those layers will in the long run exist as separate industry sectors or whether they’ll collapse into a single supply model. In other words, will the infrastructure suppliers also come to dominate the supply of apps? Google and Microsoft are obviously trying to play across all three layers, while Amazon so far seems content to focus on the infrastructure business and Salesforce is expanding from the apps layer to the development platform layer. The degree to which the layers remain, or don’t remain, discrete business sectors will play a huge role in determining the ultimate shape, economics, and degree of consolidation in cloud computing.

Let me end on a speculative note: There’s one layer in the cloud that O’Reilly failed to mention, and that layer is actually on top of the application layer. It’s what I’ll call the device layer – encompassing all the various appliances people will use to tap the cloud – and it may ultimately come to be the most interesting layer. A hundred years ago, when Tesla, Westinghouse, Insull, and others were building the cloud of that time – the electric grid – companies viewed the effort in terms of the inputs to their business: in particular, the power they needed to run the machines that produced the goods they sold. But the real revolutionary aspect of the electric grid was not the way it changed business inputs – though that was indeed dramatic – but the way it changed business outputs. After the grid was built, we saw an avalanche of new products outfitted with electric cords, many of which were inconceivable before the grid’s arrival. The real fortunes were made by those companies that thought most creatively about the devices that consumers would plug into the grid. Today, we’re already seeing hints of the device layer – of the cloud as output rather than input. Look at the way, for instance, that the little old iPod has shaped the digital music cloud.

Bruce Schneier on security & crime economics

From Stephen J. Dubner’s interview with Bruce Schneier in “Bruce Schneier Blazes Through Your Questions” (The New York Times: 4 December 2007):

Basically, you’re asking if crime pays. Most of the time, it doesn’t, and the problem is the different risk characteristics. If I make a computer security mistake — in a book, for a consulting client, at BT — it’s a mistake. It might be expensive, but I learn from it and move on. As a criminal, a mistake likely means jail time — time I can’t spend earning my criminal living. For this reason, it’s hard to improve as a criminal. And this is why there are more criminal masterminds in the movies than in real life.

Crime has been part of our society since our species invented society, and it’s not going away anytime soon. The real question is, “Why is there so much crime and hacking on the Internet, and why isn’t anyone doing anything about it?”

The answer is in the economics of Internet vulnerabilities and attacks: the organizations that are in the position to mitigate the risks aren’t responsible for the risks. This is an externality, and if you want to fix the problem you need to address it. In this essay (more here), I recommend liabilities; companies need to be liable for the effects of their software flaws. A related problem is that the Internet security market is a lemon’s market (discussed here), but there are strategies for dealing with that, too.

CopyBot copies all sorts of items in Second Life

From Glyn Moody’s “The duplicitous inhabitants of Second Life” (The Guardian: 23 November 2006):

What would happen to business and society if you could easily make a copy of anything – not just MP3s and DVDs, but clothes, chairs and even houses? That may not be a problem most of us will have to confront for a while yet, but the 1.5m residents of the virtual world Second Life are already grappling with this issue.

A new program called CopyBot allows Second Life users to duplicate repeatedly certain elements of any object in the vicinity – and sometimes all of it. That’s awkward in a world where such virtual goods can be sold for real money. When CopyBot first appeared, some retailers in Second Life shut up shop, convinced that their virtual goods were about to be endlessly copied and rendered worthless. Others protested, and suggested that in the absence of scarcity, Second Life’s economy would collapse.

Instead of sending a flow of pictures of the virtual world to the user as a series of pixels – something that would be impractical to calculate – the information would be transmitted as a list of basic shapes that were re-created on the user’s PC. For example, a virtual house might be a cuboid with rectangles representing windows and doors, cylinders for the chimney stacks etc.

This meant the local world could be sent in great detail very compactly, but also that the software on the user’s machine had all the information for making a copy of any nearby object. It’s like the web: in order to display a page, the browser receives not an image of the page, but all the underlying HTML code to generate that page, which also means that the HTML of any web page can be copied perfectly. Thus CopyBot – written by a group called libsecondlife as part of an open-source project to create Second Life applications – or something like it was bound to appear one day.

Liberating the economy has led to a boom in creativity, just as Rosedale hoped. It is in constant expansion as people buy virtual land, and every day more than $500,000 (£263,000) is spent buying virtual objects. But the downside is that unwanted copying is potentially a threat to the substantial businesses selling virtual goods that have been built up, and a concern for the real-life companies such as IBM, Adidas and Nissan which are beginning to enter Second Life.

Just as it is probably not feasible to stop “grey goo” – the Second Life equivalent of spam, which takes the form of self- replicating objects malicious “griefers” use to gum up the main servers – so it is probably technically impossible to stop copying. Fortunately, not all aspects of an object can be duplicated. To create complex items – such as a virtual car that can be driven – you use a special programming language to code their realistic behaviour. CopyBot cannot duplicate these programs because they are never passed to the user, but run on the Linden Lab’s computers.

As for the elements that you can copy, such as shape and texture, Rosedale explains: “What we’re going to do is add a lot of attribution. You’ll be able to easily see when an object or texture was first created,” – and hence if something is a later copy.

Asheron’s Call had no mechanism for secure trade between players

From Timothy Burke’s “The Cookie Monster Economy and ‘Guild Socialism’” (Terra Nova: 2 May 2008):

Mechanisms of exchange have evolved in graphical, commercial virtual worlds from some remarkably crude beginnings. Veterans of the early days of the first Asheron’s Call may remember that at one point, there was no mechanic for secure trade between players. You could hand someone else an item, and then wait and hope for payment in kind. Players responded to that certainty by trying to improvise a reputational culture, including players who built reputations as a trustworthy mobile escrow (both players in a trade would hand their items to the escrow player)., who would then verify that the trade met both of their expectations and distribute the items to their new owners.

A collective action problem: why the cops can’t talk to firemen

From Bruce Schneier’s “First Responders” (Crypto-Gram: 15 September 2007):

In 2004, the U.S. Conference of Mayors issued a report on communications interoperability. In 25% of the 192 cities surveyed, the police couldn’t communicate with the fire department. In 80% of cities, municipal authorities couldn’t communicate with the FBI, FEMA, and other federal agencies.

The source of the problem is a basic economic one, called the “collective action problem.” A collective action is one that needs the coordinated effort of several entities in order to succeed. The problem arises when each individual entity’s needs diverge from the collective needs, and there is no mechanism to ensure that those individual needs are sacrificed in favor of the collective need.

China’s increasing control over American dollars

From James Fallows’ “The $1.4 Trillion Question” (The Atlantic: January/February 2008):

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

When the dollar is strong, the following (good) things happen: the price of food, fuel, imports, manufactured goods, and just about everything else (vacations in Europe!) goes down. The value of the stock market, real estate, and just about all other American assets goes up. Interest rates go down—for mortgage loans, credit-card debt, and commercial borrowing. Tax rates can be lower, since foreign lenders hold down the cost of financing the national debt. The only problem is that American-made goods become more expensive for foreigners, so the country’s exports are hurt.

When the dollar is weak, the following (bad) things happen: the price of food, fuel, imports, and so on (no more vacations in Europe) goes up. The value of the stock market, real estate, and just about all other American assets goes down. Interest rates are higher. Tax rates can be higher, to cover the increased cost of financing the national debt. The only benefit is that American-made goods become cheaper for foreigners, which helps create new jobs and can raise the value of export-oriented American firms (winemakers in California, producers of medical devices in New England).

Americans sometimes debate (though not often) whether in principle it is good to rely so heavily on money controlled by a foreign government. The debate has never been more relevant, because America has never before been so deeply in debt to one country. Meanwhile, the Chinese are having a debate of their own—about whether the deal makes sense for them. Certainly China’s officials are aware that their stock purchases prop up 401(k) values, their money-market holdings keep down American interest rates, and their bond purchases do the same thing—plus allow our government to spend money without raising taxes.

Modern piracy on the high seas

From Charles Glass’ “The New Piracy: Charles Glass on the High Seas” (London Review of Books: 18 December 2003):

Ninety-five per cent of the world’s cargo travels by sea. Without the merchant marine, the free market would collapse and take Wall Street’s dream of a global economy with it. Yet no one, apart from ship owners, their crews and insurers, appears to notice that pirates are assaulting ships at a rate unprecedented since the glorious days when pirates were ‘privateers’ protected by their national governments. The 18th and 19th-century sponsors of piracy included England, Holland, France, Spain and the United States. In comparison, the famed Barbary corsairs of North Africa were an irritant. Raiding rivals’ merchant vessels went out of fashion after the Napoleonic Wars, and piracy was outlawed in the 1856 Declaration of Paris (never signed by the US). Since the end of the Cold War, it has been making a comeback. Various estimates are given of its cost to international trade. The figure quoted most often is the Asia Foundation’s $16 billion per annum lost in cargo, ships and rising insurance premiums.

The International Maritime Bureau (IMB), which collects statistics on piracy for ship owners, reports that five years ago pirates attacked 106 ships. Last year they attacked 370. This year looks worse still.

In waters where piracy flourished in the past, the tradition embodied in figures such as Captain Kidd has persisted: off the Ganges delta in Bangladesh, in the Java and South China Seas, off the Horn of Africa and in the Caribbean. Three conditions appear necessary: a tradition of piracy; political instability; and rich targets – Spanish galleons for Drake, oil tankers for his descendants. A fourth helps to explain the ease with which it happens: ‘The maritime environment,’ Gunaratna said, ‘is the least policed in the world today.’

The IMB has not been able to persuade the international community or the more powerful maritime states to take serious action. The Bureau’s director, Captain Pottengal Mukundan, believes there is nothing crews can do to protect themselves. National maritime laws are not enforced beyond national boundaries – which is to say, over more than half the earth’s surface. Beyond territorial waters, there are no laws, no police and no jurisdiction. Many countries lack the will or the resources to police even their own waters. The IMB advises all ships against putting in anywhere near states like Somalia, for instance, where there is a near certainty of attack. … Piracy is a high-profit, low-risk activity.

The IMB urges crews to take more precautions, but owners can’t afford every recommended improvement: satellite-tracking devices, closed circuit cameras, electric fencing and security officers on every ship. Owners and trade unions discourage the arming of merchant ships in the belief that firearms will put crews’ lives at greater risk. Only the Russians and the Israelis are known to keep weapons aboard. Competition in the shipping business forces owners to minimise expenditure on crews as on everything else. A commission of inquiry into the 1989 Exxon Valdez spill that nearly destroyed the Alaskan coast reported that ‘tankers in the 1950s carried a crew of 40 to 42 to manage about 6.3 million gallons of oil . . . the Exxon Valdez carried a crew of 19 to transport 53 million gallons of oil.’ [Quoted in Dangerous Waters: Modern Piracy and Terror on the High Seas by John Burnett] With the automation of many shipboard tasks, vessels today carry even fewer seamen than they did when the Exxon Valdez ran aground. That means fewer eyes to monitor the horizon and the decks for intruders.

Air and land transport routes have come under tighter scrutiny since 11 September 2001, but improvements to maritime security are few. An oil tanker can carry a load that is far, far more explosive than any civil aircraft. And most piracy, including the seizure of oil tankers, takes place near countries with powerful Islamist movements – Indonesia, Malaysia, the Philippines, Yemen and Somalia. Lloyd’s List reported on 4 November that Indonesia is ‘the global black spot’ with 87 attacks in the first nine months of this year – ‘the number of attacks in the Malacca Straits leaped from 11 in 2002 to 24 this year.’ Indonesia, which consists of two thousand islands, is the world’s most populous Muslim country. It has experienced decades of repression by a kleptocratic military, communal violence and the degradation of a once vibrant economy. Radical Islamists have made it the focus of their activity and recruitment in Asia.

Scarcities and the music, movie, and publishing businesses

In Clay Shirky’s response to R.U. Sirius’ “Is The Net Good For Writers?” (10 Zen Monkeys: 5 October 2007), he takes on the persona of someone talking about what new changes are coming with the Gutenberg movable type press. At one point, he says, “Such a change would also create enormous economic hardship for anyone whose living was tied to earlier scarcities.”

It’s not just writing and writers and publishers that now face that change. Scarcities drove the music and movie businesses, and those scarcities are disappearing. When music is no longer tightly controlled in terms of creation, availability, manufacture, and distribution, when it’s possible to download or listen to anything at any time, those businesses face rapid, discombobulating change.

Is it the government’s – or society’s – duty, however, to put those scarcities back into place, either through technologies or law?

The tyranny of HOAs

From Ross Guberman’s “Home Is Where the Heart Is” (Legal Affairs: November/December 2004):

ABOUT 50 MILLION AMERICANS BELONG TO HOMEOWNER ASSOCIATIONS, also known as HOAs or common-interest developments, which are composed of single-family homes, condominiums, or co-ops. Four out of five new homes, ranging from starter homes to high-rise apartments to gated mansions, are in one of the nation’s 250,000 HOAs. However they look or whomever they cater to, HOAs impose the same obligations: If you want to buy a property in an HOA development, you must join the HOA, allow a board you help elect to manage shared grounds and other public spaces, pay regular dues and any “special assessments” for upkeep or other costs, and obey a host of quality-of-life rules, even if they’re added after you move in.

In return, the HOA keeps the welcome sign painted, the sidewalk cracks filled, and the flower beds fresh. It may also provide streets, parks, playgrounds, security, snow removal, and utilities that were once the province of local government. But the HOA does more than beautify the neighborhood and preserve property values. It is often the sole driving force behind the Halloween parades and holiday parties that are increasingly rare in an age of bowling alone.

Although structured as nonprofit corporations, HOAs operate as private governments. An HOA can impose fines on those who flout its quality-of-life policies, just as a municipality can penalize those who violate its zoning, antismoking, or noise-control laws. An HOA also levies dues and assessments that are as obligatory as taxes and sometimes less predictable. In exerting these quasi-political powers, HOAs represent one of the most significant privatizations of local government functions in history. …

About half the states allow “non-judicial foreclosures” if owners lapse on their dues. Typically, the HOA’s collection attorney places a lien on the property and announces its new legal status in a local newspaper. The home is then auctioned. Homeowners get none of the due-process protections they could use to ward off other creditors—no right to a hearing and no right to confront their HOA board.

Even in states that require court approval for an HOA foreclosure, the HOA nearly always wins. Under current law, any unpaid dues, no matter how small, can be grounds for foreclosure, particularly once the amount of the delinquency is swelled with interest and fines.

… According to a 2001 study of foreclosures in California by Sentinel Fair Housing, a homeowner advocacy group, when HOAs foreclose, the typical homeowner is $2,557 in arrears. When banks or municipal governments foreclose, by contrast, the typical homeowner owes $190,000 in delinquent payments or back taxes.