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Retailers beware, the online shopping revolution isn’t going anywhere

Retailers beware, the online shopping revolution isn’t going anywhere

Another week, another retailer biting the dust. The baked potato specialist Spudulike has closed all 37 of its branches, with a loss of nearly 300 jobs.

Shopping centres are undergoing a sudden and dramatic squeeze, with many retailers only able to stay in business if granted a dramatic rent reduction.

Last week, Intu Properties, owners of the prestigious Lakeside and Trafford centres, announced a loss of £840m pre-tax. Net rental income fell by 18 per cent in the first half of this year.

Local authorities have become big owners of shopping centres to try to revive their town centres. But in most cases, the council taxpayer is taking a big hit. Shropshire Council, for example, bought three shopping centres in Shrewsbury early last year.

Their value has since fallen by over 20 per cent. The main reason is well known: more and more consumers are switching to the internet.

The latest estimates from the Office for National Statistics show that online sales now account for 18 per cent of all retail sales – and this is rising rapidly. In the year to October 2018, online sales grew 12.6 per cent. The only sector resisting the internet revolution is food, where the growth in online was only 1.8 per cent. The internet itself has been around long enough for a whole generation to have grown up unable to imagine life without it.

What is new is the surge in retail online activity in the past few years. The potential has been there for some time, but it is only now having a real impact. Why should this be?

Some 50 years ago, a larger-than-life Texan business school academic, Frank Bass, offered an explanation. He formulated a simple differential equation – and in differential equation terms it certainly is simple – which describes how new products get adopted in a population.

Bass made millions from his discovery, and it is still widely used in marketing circles today.

The basic idea is that people adopting a new product – in this case, shopping on the internet – can be classified into two groups. A fairly small set are innovators, those who are willing to experiment with something new. Most people are imitators, who wait and see how the innovators get on.

The speed of adoption, if it happens at all, of any new product is determined by the interactions between the two types of consumer and the degree to which they are willing to innovate or imitate.

Remarkably, given its simplicity, the model gives a very good account of the growth of a whole range of products.

In the early stages of a new product, growth is always slow. Almost all those buying are innovators. Then, suddenly, a critical point is reached. The imitators start to swarm in and growth becomes rapid.

Modern network theory offers a more sophisticated approach, but it is still essentially based on the motivations described by Bass.

Either way, the future for both retail and shopping centres looks bleak, unless they themselves find some dramatic way to innovate and alter their offer.

As published in City AM Wednesday 7th August 2019
Image: Empty High Street via Geograph licensed under CC BY-SA 2.0
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Citizens’ assemblies would hand power to establishment experts

Citizens’ assemblies would hand power to establishment experts

Citizens’ assemblies have become the height of fashion.

The London borough of Camden is currently holding one on how to reduce carbon emissions in the area.

Last month, Nicola Sturgeon announced plans to set one up to consider constitutional issues in Scotland.

The Irish government’s one on abortion featured in the 2018 referendum on the matter.

The basic idea is that a small number of citizens, reflecting the socio-demographic characteristics of the population, are selected at random.

The assembly considers a particular topic. Members get the chance to discuss the matter in much more depth than they would usually do. At the close, recommendations are made to the political authority which set the assembly up.

It all sounds plausible. But economic theory gives us good reasons to be very suspicious of the concept.

One feature of the assemblies is that they are addressed by “experts”, who can be questioned by members. This is intended to raise the level of both debate and understanding among the ordinary people who make up the assembly.

Imagine, however, that a citizens’ assembly had been used in 2016 instead of the Brexit referendum to decide the UK’s position in Europe.

The overwhelming majority of UK economists were opposed to Brexit. The so-called experts would have spoken on the Treasury’s economic forecasts in Project Fear. The hapless assembly members would have been assured that a deep and immediate recession would follow any decision to leave the EU.

Of course, after the event, everyone now knows that this expertise was misplaced.

But an important concept in behavioural economics, supported by a lot of empirical evidence, is that of “authority bias”. People in authoritative positions tend to be trusted. It would have been very difficult for assembly members to go against the expert advice in a Brexit assembly.

A famous experiment by Stanley Milgram in 1963 showed that many people were willing to administer painful electric shocks to others when instructed by a doctor. The shocks, of course, were imaginary, but the participants supposedly administering them to an unseen stranger did not know this. The findings have been repeated many times.

Experts in the social sciences increasingly share a set of metropolitan liberal values. It is these experts who will be presented to assemblies.

Economic theory is in essence about how agents – people, firms, governments – decide to allocate scarce resources. An assembly would simply not be properly equipped to consider many policy issues without first of all being given a thorough understanding of the fundamental principles of economics.

One in particular, namely opportunity cost, is essential. When an option is chosen, this is the “cost” incurred by not enjoying the benefit associated with the best alternative choice. The concept would have to play a major role in any discussion of climate change, for example.

Strange as it may seem, this idea never seems to be put forward by advocates of the assemblies.

Representative democracy, for all its faults, remains a much better way of making decisions than handing yet more power to so-called experts.

As published in City AM Wednesday 24h July 2019
Image: School Children Protesting by Goran H via Pixabay licensed under CC0 1.0
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You can’t take the economics out of football

You can’t take the economics out of football
The appearance of Liverpool and Spurs in the Champions League final and Arsenal and Chelsea in the Europa Cup one has generated massive interest. But the official ticket prices for the games are surprisingly reasonable.
Liverpool and Spurs have been offered 16,613 tickets each. Five per cent of these are expensive, at £513 each. A further 21 per cent are available at £385. But the bulk – 54 per cent – cost only £154, and there are even 20 per cent which can be bought for just £60.
These compare favourably with other major cultural events, such as a performance at Covent Garden with top opera stars.
Uefa organises the competitions and sets the prices of the tickets. The demand is of course very much greater than the supply. This will be reflected in the prices charged on the unofficial market in tickets.
Why does Uefa not bag this revenue for itself? Even if it doubled the official prices, the events would still sell out.
The NFL in America follows a similar policy for the Superbowl.
Top behavioural economist and Nobel laureate Richard Thaler quotes a top NFL executive in his book Misbehaving.
The NFL “takes a long-term strategic view” towards ticket pricing at the Super Bowl, keeping them reasonable despite huge demand in order to foster its “ongoing relationship with fans and business associates”. The point is that both Uefa and the NFL have repeated dealings with clubs and fans. They judge that it would be counterproductive in the longer term to exploit their monopoly of major events.
In contrast, the hotels which the English soccer fans are now desperately seeking to book will probably never see the individuals who stay there again. It’s a one-off transaction, and so they are free to raise their prices so as to maximise their immediate profits.
Air fares are also going through the roof, particularly for the exotic location of Baku where Chelsea and Arsenal will play. There are far fewer travel options than there are to Madrid, where the Champions League game will be held.
Although the algorithms used by airlines will set these sky-high prices, some of these companies will be used repeatedly by quite a number of fans. They therefore do run the risk of creating a bad image which damages their business in the longer term.
The fact that the two finals are an all-English affair is raising concerns in other major European soccer nations. The standard of play in Spain’s La Liga or Italy’s Serie A is certainly comparable to that in the Premier League.
But the Premier League dominates in terms of the monies it receives from television rights – more than twice La Liga, for example.
This means more money for clubs, which can then buy more top players. This phenomenon is observed throughout modern popular culture. Success itself breeds success, and unto him that hath, more shall be given.
It is a totally different world to when the maximum wage for players was fixed at £20 a week, and they wore Brylcreem and smoked Woodbines. But economics is always present.
As published in City AM Wednesday 15th May 2019
Image: Bazu Olympic Stadium via Wikimedia is licensed under CC BY-SA  4.0
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The economics of tourist overload

The economics of tourist overload

I am in Edinburgh for a few days at the Festival, where even Jeremy Corbyn has appeared. Disappointingly, he was not playing the role of Carmela Soprano, the mafia don’s wife who is always present but never involved.

Previously, I had been on Skye. Last month, I attended a conference in Venice. Edinburgh, Skye, Venice, all these locations bring home directly the problem of tourist overload.

This tendency of tourists to flock to certain places, whilst neglecting most others, raises questions for the economic theory of rational consumer choice.

Skye is very attractive, but so are other Scottish islands. The Piazza San Marco is stunning, but so are the cathedral squares in other Italian cities. From a rational choice perspective, it seems hard to account for the fact that visitor numbers here are so much greater than in their competitors.

The theory does help explain why Skye as a whole is much more popular than, say, Mull. It has a bridge, whereas the other islands have ferries. So less time and effort are required to get there.

But this framework appears to struggle with the massive concentrations of tourist numbers at particular locations on the island itself.

To escape the crowds, I suggested to my wife that we drive down Glen Brittle, an austere and bleak glen which finishes at a dead end.

I was astonished. A few miles along, the single-track road was virtually blocked by hundreds of vehicles, both on the road and balanced precariously on the boggy verges. The attraction was the Fairy Pools, a series of small pools and waterfalls in one of the many streams which flow down from the hills.

Now, there are literally hundreds of such waterfalls in the Highlands, many of which are more dramatic. From a rational perspective, there seems to be no basis for the massive popularity of the Fairy Pools.

But Sushil Bikhchandani and colleagues from the University of California published a paper in the top ranked Journal of Political Economy way back in 1992. It has become very well known in economics.

The specific purpose was to account for “herding” behaviour within the framework of rational choice. Or, as the authors put it, to identify when it is optimal for an individual to follow the behaviour of others without regard to his or her own information.

In their model, an individual has both private and public information and assigns weights to the two when making a choice. A new piece of information arrives, and the weights are updated.

When you read on the internet that the Fairy Pools are fantastic, you increase the weight on the public information which you have. It is easy to see how, in such circumstance, certain things can become incredibly popular. They are not necessarily popular on account of their inherent characteristics. They become more popular simply because they are already popular.

It was consoling, as we pondered how to escape the massive traffic jam in remote Glen Brittle, that rational choice theory is indeed able to explain the phenomenon.

Paul Ormerod 

As published in City AM Wednesday 22nd August 2018

Image: Edinburgh Fringe by Wikipedia is licensed under CC BY-SA 3.0

 

 

 

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The intellectual imperialism of economics

The intellectual imperialism of economics

At this time of year, most people are focused on leisure. The holiday you have just had, the one you are on now, or the one you are just about to go on.

With exquisite timing, the 1 August issue of the top Journal of Economic Perspectives has a symposium of papers about work.

The opening sentences in the summary of the first of these reinforces the impression that economists can sometimes be rather unworldly. This is despite the fact that the author, Edward Lazear, occupies a chair at Stanford Business School and replaced Ben Bernanke as Chairman of the Council of Economic Advisors in 2006.

“Labor is supplied”, the summary proclaims, “because most of us must work to live. Indeed, it is called “work” in part because without compensation, the overwhelming majority of workers would not otherwise perform the tasks”.

It is an excellent illustration of the technique outlined by the 1950s British satirical writer Stephen Potter about how to gain the upper hand in a conversation about business. In his book One-Upmanship, he describes his ‘Economics B’ technique as the ‘Approach of Utter Obviousness’.

To be fair, the paper itself has real content. Lazear points out that economics as a science has made good progress in specifying how compensation and the forms in which it comes influences worker effort.

The results are sometimes surprising. For example, Bengt Holmström, the 2016 Nobel Laureate, concluded his Prize lecture with the statement that “one of the main lessons from working on incentive problems for 25 years is that, within firms, high-powered financial incentives can be very dysfunctional and attempts to bring the market inside the firm are generally misguided”.

The other two papers are much less about conventional economics. They focus on the psychology and meaning of work.

Greg Kaplan at Chicago and San Schulhofer-Wohl of the Chicago Federal Reserve examine how changes in the distribution of occupations since 1950 have affected the aggregate non-monetary costs and benefits of working.

The physical effort of work has obviously declined a lot over the decades, so that is a benefit. But the authors find that the emotional impacts of the changing occupation distribution vary substantially across demographic groups.

Compared to 70 years ago, work has become happier and more meaningful for women, but more stressful and less meaningful for men. And most of these changes are concentrated on workers with lower educational qualifications.

The final paper, by Lea Cassar of Cologne and Stephan Meier of Columbia is even further removed from the traditional areas studied by economists. They tackle the massive topic of work as a source of meaning in people’s lives.

The authors develop an initial theoretical model which incorporates the three psychological needs at the basis of self-determination theory: autonomy, competence, and relatedness. Intriguingly, they suggest that the concept of meaning at work can be examined using existing tools in economics such as labour supply theory and principal-agent analysis.

Economics has a strong streak of confident imperialism. Increasingly, it intrudes into a wide range of other social sciences.

As published in City AM Wednesday 15th August 2018

Image: Holiday by Pxhere is licensed under CC0 1.0 Universal
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Economics is doing just fine, thank you, without adopting psychology’s blunders

Economics is doing just fine, thank you, without adopting psychology’s blunders

Criticisms of economics have abounded since the financial crisis.

Even Nobel Prize winners like George Akerlof of Berkeley have got in on the act. A key demand is for economics to adopt a more recognisably human portrait of behaviour in its theories than the rational calculating machine of the textbooks.

Psychology rather than pure economic theory is needed, apparently.

The simple fact is that economics has moved on a great deal in recent years. Much of the success of behavioural economics is based upon incorporating insights from psychology. But economists have done this in their own way.

As top behavioural economist and Nobel laureate Richard Thaler notes in his book Misbehaving: “behavioural economics has turned out to be primarily a field in which economists read the work of psychologists and then go about their business of doing research independently”.

It turns out that this approach seems to have been a very sensible one. Famous psychological experiments have recently been shown to be without foundation.

The most glaring example is the 1971 Stanford Prison experiment, one of the most influential psychology studies of all time.

Students were randomly assigned to be either guards or prisoners within a mock prison. The objective was to observe the interaction within and between the two groups.

The results proved shocking, with the abuse handed out to the prisoners by the guards so brutal that the study had to be terminated after just six days.

There were already doubts about the results. Other psychologists had found them difficult to replicate. But it has emerged this month, from analysis of previously unpublished records and interviews with some of the participants, that results were simply faked.

Another famous study, the so-called marshmallow test, has also been debunked.

In the original research in the 1960s and 1970s, children aged between three and five were given a marshmallow that they could eat immediately, but told that if they resisted eating it for 10 minutes, they would be rewarded with two marshmallows. More than a decade later, in their late teens, it was claimed that the children who had resisted exhibited advanced traits of intelligence and behaviour far above those who caved in to temptation.

But by the straightforward expedient of taking into account the economic and family backgrounds of the children, almost all the differences claimed for the ability to delay gratification disappear.

Ironically, it is economists themselves who have shown that western societies as a whole, not just particular groups, have great difficulty in deferring gratification.

The Chicago economist David Laibson established the idea back in 1997 in a famous paper with the rather gnomic title of “Golden Eggs and Hyperbolic Discounting”. The obscure phrase “hyperbolic discounting” means that people assign a great deal of weight to costs and benefits incurred in the present and very near future, and very little weight to anything beyond that.

Economics may have its faults, but much of psychology seems to be built on sand. Perhaps it is psychology that can learn from economics.

As published in City AM Wednesday 20th June 2018

Image: Experimental Psychology by Interactive Archive Book Images is licensed under CC0.0
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