Decision Paralysis

Firm’s perspectives on how ‘decision paralysis’ affects their business and decision-making, and how to address the issue.

Ever felt stumped by what to watch on YouTube or settled on some lousy food because you did not know what to choose? Well, you just faced decision paralysis, which is the complete inability to decide because of too many choices. In this short essay, we will be discussing the whats, whys and hows about this phenomenon that affects the businesses and the general economy. 

Consumers’ inability to choose because of choice overload will result in the consumers not purchasing any goods and thus producers are not able to maximise profit. Decision paralysis stems from the human brain’s lack of capacity to process so much information. Humans simply cannot form objective judgements of the value of the many different items and make a choice between them. When there are so many choices, we mere mortal beings are unable to make the most optimal choice that would maximise their consumer welfare. There is a combination of factors — the fear of making the wrong decision and the immediate need to make a choice this instant without being certain of the yield, that leads to consumers’ indecision. Producers provide a wide array of choices, believing that diversifying the consumer’s choices will increase their profits since there are more choices to suit their personal taste and preferences. However, this will actually result in a loss of profits due to decision paralysis. 

To illustrate this, we will look at one classic experiment that was run by psychologists Sheena Iyengar and Mark Lepper in a San Francisco supermarket in 1999. Customers were randomly asked to sample jam and the experiment would see who bought jam in the end. Half of the customers were allowed to sample 24 different jams while the other half were allowed to sample 6 different jams.

According to traditional economics, more variation and consumer choice would maximise utility and consumer welfare, hence offering 24 jams should lead to more jam purchases.

Surprisingly, the results observed were the exact opposite of this traditional theory. Only 3% of those who sampled 24 jams ended up buying jam, while a whopping 30% of those who sampled just six jams ended up buying. Hence, this shows that more choices leads to worsened decision paralysis and hence erodes profits. For supermarkets which are taken to be firms, this means that providing too many choices would lead to consumers not even making a purchase. Hence, demand for their goods decreases and profit decreases. If the cost of supplying these goods is more than the profit earned from selling the same goods, the supermarkets (firms) will experience a loss in total revenue.

As seen in Fig 1, for an oligopolistic or monopolistic firm that was making supernormal profits such as YouTube, when consumers are met with decision paralysis, demand falls as seen by the leftward shift of the demand curve from DD0 to DD1 and thus will lead to subnormal profits. 

Fig 1: Decrease in profits for firms such as YouTube due to decision paralysis

Here’s a brilliant example of decision paralysis being overcome — YouTube. The company earns through ad revenue which increases as the number of streams increases. For some context, YouTube generated $15 billion in 2019, $11 billion in 2018, and $8 billion in 2017 to Alphabet from their ad revenue. With the gargantuan amount  of videos on YouTube (500 hours of videos are uploaded each day), one might think that individuals will find it difficult to choose which one to watch, which potentially results in the decision to not watch anything at all. With no viewership, no ad revenue is generated and YouTube will be unable to earn. Thus, theoretically, decision paralysis leads to the loss of profits to producers like YouTube.

However, there are a few measures for producers to take in order to combat decision paralysis and prevent it from affecting their business. Two of these ways will be explored in further detail below. 

Firstly, through analysing consumer’s data and history, firms like Youtube will recommend videos that cater to consumers’ personal preferences, narrowing the choices of videos to watch and thus alleviating decision paralysis. A smaller pool of choices will result in higher ability to make decisions as the need for mental processing has been minimised. This is also a marketing strategy that encourages viewers to continue watching videos that are similar to their interests, so that they can stay on the app for as long as possible, and thus seeing as many ads as possible.

Secondly, companies can take advantage of human tendency to follow others by using algorithmic recommendations. When one sees what others are viewing, they are more inclined to check it out too. Thus, this will generate greater viewership for the firm and would also help consumers make a choice as the assumption made would be that more people viewing equates to the better choice. With increased viewership, the firm would be able to maximise profits. This can be seen through how YouTube and many other social media platforms curates a daily ‘Trending’ page, where they recommend the most popular videos to users. 

Decision paralysis is commonly experienced in our society, where consumerism is the way of life. Products are being shoved in our faces all the time and advertisements are telling us to buy things! How on earth do we decide what to buy?! In our essay, we hope to have enlightened you on this daily struggle of consumers and how this impacts businesses, as well as how businesses strategies to overcome this problem. 

by: Myra Koh Yujie (20-A6), Lim Kia Hsuen Sheryl (20-A3) and Laura Choo Suyin (20-E2)

BIBLIOGRAPHY

Decision-Paralysis: when it happens and why? – Brand Minds. (n.d.). Retrieved 16 February 2021, from https://brandminds.live/decision-paralysis-when-it-happens-and-why/

Frozen. (2016). Retrieved 16 February 2021, from https://www2.deloitte.com/us/en/insights/focus/behavioral-economics/overcoming-decision-making-paralysis.html

Confusopoly: Why companies are motivated to deliberately confuse. (2015). Retrieved 16 February 2021, from https://theconversation.com/confusopoly-why-companies-are-motivated-to-deliberately-confuse-39563

Nordstrom, D. (2015). Decision-Paralysis: Why It’s Prevalent And Three Ways To End It. Retrieved 16 February 2021, from https://www.forbes.com/sites/davidsturt/2015/06/11/decision-paralysis-why-its-prevalent-and-3-ways-to-end-it/?sh=354cf35535b2

Slonim, R., 2019. Inducing choice paralysis: how retailers bury customers in an avalanche of options. [online] The Conversation. Available at: https://theconversation.com/inducing-choice-paralysis-how-retailers-bury-customers-in-an-avalanche-of-options-116078 [Accessed 16 February 2021].

The Science of Analysis Paralysis & Why It Kills Productivity. (2015). Retrieved 16 February 2021, from https://blog.doist.com/analysis-paralysis-productivity/

The Economics in Roald Dahl’s Charlie and the Chocolate Factory

Introduction

A childhood classic, Roald Dahl’s critically-acclaimed novel Charlie and the Chocolate Factory is a familiar story to many of us. Its popularity is evident even in its adaptations into video games, musicals, plays and movies. However, within the chocolate-filled world of Willy Wonka, it is interesting to note the slight nods to Economics within the plot. In our bid to present Economics in a more appealing and simpler digestible way, this report thus seeks to examine the Economics in Roald Dahl’s Charlie and the Chocolate Factory, proving the ubiquity of Economics in the literature we ingest and by extension, our lives. Even in the fictional world of Willy Wonka, the omnipresence of economics guiding the rational decisions of economic agents is ostensible. Our economic analysis of the novel seeks to add on to the literary depictions of economic agents in the novel and ultimately help to create a greater understanding of the practical usage of Economics to all through using a fictional tale which many are acquainted with. Instead of carrying out this economic analysis through different and separate economic agents such as Wonka’s Chocolate Factory and Charlie himself, we will be deconstructing the novel in terms of different scenes that give rise to key economic concepts.

The Scarcity of the Golden Ticket

The opening of the movie starts off with the context of WIlly Wonka’s golden ticket fiasco. The availability of only five tickets for the whole world and the lack of resources that Charlie’s family had that puts Charlie at a starting disadvantage compared to the other kids is a clear portrayal of how the economic concept of scarcity affects the functioning of the society and the world at large. After all, the entire study of economics is fabricated on one simple concept – scarcity. Human wants are unlimited; the resources, however, are limited. See how Willy Wonka chose to merely have five golden tickets despite the umpteen number of chocolate bars being manufactured and sold. In the same way, observe the countless number of people who wish to get their hands on the few golden tickets. We see the idea of scarcity through the lens of the producer and consumers, which in the case of Charlie and the Chocolate Factory, are Willy Wonka and the people who desire the exclusive opportunity of entering the factory. While there was an unlimited demand for the tickets, the only limited supply of them thus leads to scarcity.

The limited number of the golden tickets benefited Willy Wonka, the producer, in more ways than one. By making chocolate bars come with a chance of an unimaginable tour around the chocolate factory and a lifetime supply of their eatables, consumers are inclined to purchase more chocolate bars to win the golden ticket. Hence, scarcity has increased consumers’ demand for the chocolate bars. Looking beyond the number of golden tickets, scarcity was also seen in the form of limited means of survival as witnessed by Charlie’s family, where they only had a very low amount of income to sustain an entire family of seven’s unlimited wants of household supplies, groceries and other items..

To put it in simple terms, scarcity involves limited resources, boundless human wants that cannot all be satisfied and alternative uses of these resources.

Charlie’s Opportunity Cost

Owing to the aforementioned problem of scarcity, there is a fluid link to the concept of opportunity cost. It is seen in the novel that Charlie’s father has recently lost his job, leaving the family all but destitute. Given the impoverished state of his family, chocolate bars in Charlie’s sense would be seen as a ‘luxury’ – something he cannot so freely purchase given the low household income his father rakes in and how one bar of chocolate takes up a larger proportion of their income as compared to other more affluent families. It is at this juncture that the concept of ‘opportunity cost’ is evidently seen.  In simple terms, opportunity cost is the loss of the benefit that could have been enjoyed if the best alternative choice was chosen instead. In Charlie’s case, his decision to use what little money he found on the pavement on a bar of chocolate would lead him to incur a great opportunity cost. In other words, he could have spent that money on items that are of ‘necessity’ such as household items like groceries that are far greater in nutrients and energy (vegetables, bread, fruits) instead of an item of ‘luxury’ like mere chocolate bars. 

Digging deeper and relating this notion to real life context, this also displays the income disparity and equity issues timely to our world today. We see children like Violet Beauregarde, who belong to the upper class income group, able to splurge on thousands of chocolate bars and thereby increasing her chances of getting a golden ticket, while Charlie merely played on his luck as he was only able to buy a mere one bar of chocolate. 

Figure 1: The stark difference between Violet Beauregarde’s polished house and Charlie Bucket’s crammed impoverished home. 

Demand and Supply of Chocolate Bars and Related Goods

In the world of Willy Wonka, many people gambled their chances of winning a visit to the factory by purchasing bars of chocolate. Veruca Salt was one of these people. Her wealthy father bought hundreds of thousands of chocolate bars in order to find one golden ticket. This therefore stimulated greater demand for Willy Wonka’s chocolates as people like Salt’s father  bought more and more chocolate bars to increase their chances of winning the golden ticket. To match this demand, supply on Willy Wonka’s end has to be ramped up. To increase production, there must first be an increase in what we call ‘factors of productions’. There are of course many different factors of production, but more potently in the movie we see the factor of ‘labor’ come into play. In the film, Willy Wonka had a large number of Oompa Loompas who served as labour in his factory that could increase the efficiency and ramp up his production of chocolate bars. With this, he was able to easily increase the amount of chocolate bars produced to match the increased demand. However, to employ all of these Oompa Loompas, they, like real-life workers, had to be paid ‘wages’ too, and theirs was in the form of cocoa beans. The increase in Oompa Loompas in production meant that the cost of production (the amount of cocoa beans Willy Wonka had to give to them) also had to increase. This higher cost of production is thus reflected in an increase in the price of chocolate bars, which was passed on to its buyers. Thus, we see that the overall impact on the market would not only be a higher quantity purchased, but also a higher price for the chocolate bars.

The market for chocolate bars is not the only one affected, as is all markets in the real world – they remain interconnected.  It is through this that we once again bring in the concept of ‘related goods’. As explained in the movie adaptation, “the upswing in candy sales had led to a rise in cavities which led to a rise in toothpaste sales”. In this, we can treat toothpaste as a ‘complementary good’ to chocolate bars since the consumption of the latter good will give reason for the use of the former. We can see here that an increase in demand for Willy Wonka’s chocolate bars led to a similar rise in derived demand for toothpaste. Other markets which could qualify as complementary goods that will face a similar impact are the markets for toothbrushes and dental services.

Figure 2: The production of toothpaste.

Willy Wonka’s Chocolate Factory – A Monopoly

Even with the fantastical Chocolate River and the Oompa-Loompas of the Chocolate Factory fiction verse, the business model in which Willy Wonka runs his firm continues to be greatly relevant to our study of Economics! Firms generally refer to any company that seeks to make a profit by manufacturing or selling products or services – or both – to consumers. In addition, they also share a relationship with the government where the government could either support or regulate such businesses through policies. Most of us would know that firms primarily seek to maximise profits, but how does Willy Wonka embark on this mission? 

To understand the business economics of the story first requires one to understand the market structure of the Chocolate industry Wonka operates within. Wonka was visibly a trailblazer in the sweet industry where he was the sole producer of sweets such as Everlasting Gobstoppers and Golden Chocolate Eggs laid by geese. With Wonka being the sole person with the knowledge of the secrets behind such novel and highly-desired products, the candy market has extremely high barriers to entry. In simple terms, barriers to entry are the cost and hindrances that make it difficult for new companies to enter a given market. Other firms, being unable to replicate Wonka’s products, are unable to enter such a market and leaves the Chocolate Factory to be a monopoly since it is the sole dominant firm within the industry. While such monopolies are difficult to find in real life, Wonka’s firms parallels other real-life firms such as Singapore Power (SP) – a monopoly over power generation in Singapore. As the sole power grid in the country, SP enjoys the same extremely high barriers to entry as Wonka due to the high costs of the industry and legal regulations.

Now that we have established the Chocolate Factory as a monopoly within the exotic candy market, what are some impacts of this market structure upon consumers and society? For one, the Chocolate Factory would abuse their monopoly power by imposing high prices given that they are the sole producer of their candies and there is missing competition. As a result of such high prices, usually above the marginal costs, there is also a decline in consumer surplus, an economic measurement of consumer’s ‘benefits’. The bigger the difference between the price that consumers pay and the price that they are willing to pay, the higher the consumer surplus. In this situation, as consumers are spending more on these more expensive candies,  their consumer surplus is greatly lessened.       Another impact of the Chocolate Factory being a monopoly would be x-inefficiency. This phenomenon often occurs when a firm lacks the incentive to actively reduce costs. This causes the average cost of production to be higher than necessary. To better illustrate this, Wonka’s factory is shown in the movie to be beautifully adorned with the likes of rivers and trees – that definitely costs a lot of money right? This money used to artificially adorn the factory would have been better used in other markets with more competition to embark on other business ventures like research and production.

Conclusion

While being fictional and undeniably delicious, Wonka’s Chocolate Factory is still grounded in many economic concepts that apply to firms of today. Take a look around you and see what other firms and markets perhaps fit into the concepts that were presented within the Chocolate Factory business!Truly, the study of Economics remains very relevant to our lives, and in this report, we see its presence in notable pieces of literature. It is with this that we posit that due to its increasing application to our everyday lives, the study of Economics should be approached fearlessly. This report is a testament that Economics as a subject can be fun and enjoyable, if we take the time to see it beyond just a subject.  

Bong Dick, Joel Koh, Marasigan Noleen Joy Bonita and Sandy Tan (20-E1)

References

Corbin, C. (2012). Deconstructing Willy Wonka’s Chocolate Factory: Race, Labor, and the Changing Depictions of the Oompa-Loompas. http://ourenvironment.berkeley.edu/wp-content/uploads/2012/07/UCB_McNair_Journal_2012_wc.pdf.

Economic Values as Seen in Charlie And The Chocolate Factory essays. (n.d.). https://www.megaessays.com/viewpaper/204237.html. 

Ecotalker. (2015, October 14). The moral of Charlie and the chocolate factory is: Economics! Arthashastra. https://ecotalker.wordpress.com/2015/10/14/the-moral-of-charlie-and-the-chocolate-factory-is-economics/.

NewsOrb360-Admin, & No-Admin. (2020, October 3). Economic View of Charlie and the Chocolate Factory – InfoTainment. NEWSORB360. https://newsorb360.com/economic-view-of-charlie-and-the-chocolate-factory/.

Vohra, S. (2020, July 27.). The Economics Behind the Charlie and the Chocolate Factory. Your Sites RSS. https://tidingsmedia.org/blog/the-economics-behind-the-charlie-and-the-chocolate-factory.   

 

Politics and Economics: Who is Speaking the Truth?

Introduction

Hello! Many of you may have stumbled upon this research piece, in light of the very intriguing title. So let’s dive straight in and find out who is speaking the truth when it comes to economic policies, looking from the legal and economic point of view. 

Minimum Wage

Let’s take a look at the minimum wage, which found its way back into the centre of the Singapore General Election 2020. Every Economics student can simply tell you that minimum wage refers to a legally established price floor for salaries. This means that employers will have to pay their employees a minimum amount of wages, and anything below is illegal. It was implemented in most countries, except notably Singapore and Scandinavian countries. 

The minimum wage which was suggested, as well as, contested in Parliament by Economist and MP Jamus Lim is universal. This means that everyone, regardless of which sector they belong in, will be entitled to this privilege. [1] [2] According to NTUC deputy secretary-general Koh Poh Koon, an estimated 32,000 full-time workers earn below this amount^[1], and it is believed that the minimum wage will drastically improve their standard of living. However, a commonly brought up limitation of the minimum wage is that it brings about unemployment, especially to workers whose professions are easily substitutable by machines and requires little training time (hence |PED|>1 and |PES|> 1 respectively). Thus labour-intensive and menial workers are more vulnerable to retrenchment. 

Isn’t this the opposite of what the government would want, where one of the macroeconomics goals is to achieve low unemployment? Instead of getting a low salary, people now have no source of income anymore! 

Not to fret, as many reports, including that done by research institute Integrity Florida, cited that an increase in the minimum wage does not lead to increased unemployment[3] [4]  ^[2], which ties in to Singapore, as the rise in salary for these workers will not necessarily lead to a loss in jobs.  As an increase in income leads to an increase in purchasing powers, thus the demand for goods and services will too increase, especially for normal (household items) and luxury goods (items sold by luxury brands), leading to an increase in derived demand for labour. So it should be safe to say that if Singapore does implement a minimum wage, not only will unemployment potentially decrease, but the standard of living will increase. 

But why then, does the PAP stand firmly against the minimum wage? 

Singapore is a nation that heavily values meritocracy, and rewards those who work hard accordingly. It is no wonder that we then choose to embrace the Progressive Wage Model (PWM) instead^[3]. Simply put, it is a ‘ladder’ for both employers and employees, whereby employees can improve their skills through workshops and classes, in turn for a higher salary and job stability. Employers benefit too as this increase in skill levels leads to higher productivity at work and an increase in total revenue earned, ‘climbing up’ the mentioned ladder, which is something profit-maximising companies strive for. The national movement SkillsFuture can be said to complement the PWM as it offers Singaporeans from all walks of life the opportunity to, as the name suggests, upgrade their skills for the future. For now, the PWM has been implemented in 3 sectors, namely the cleaning, security and landscape industries, and aims to be implemented in more sectors in years to come. Additionally, evidence has shown that the PWM has been successful, as an estimated 80,000 employees will benefit from the scheme, according to Minister Zaqy Mohamed^[4]. The Ministry of Manpower (MOM) has acknowledged that older citizens on the bottom levels of the ‘ladder’ earn little, and multiple schemes have been put in place to help them financially. Examples include the Special Employment Credit Scheme, which automatically pays these individuals more money based on their CPF payments. 

After considering both sides of the debate about the implementation of minimum wage in Singapore, the question remains. Did MP Jamus Lim suggest a populist idea to ‘warm the cockles of our hearts’? Or is there a real need for there to be a minimum wage to improve the societal welfare of our country and assist those who truly need it? 

Taxation

Now, let’s move on to a fairly simple economic policy that most countries across the globe have implemented: taxation. 

The two main objectives of the tax policy in Singapore, according to the IRAS, is to firstly, raise revenue for the government to fund policies or support infrastructure development in Singapore, in order to build a better environment with a more vibrant economy^[1], and secondly to promote economic and social goals, by influencing the behaviours of the citizens. This can be seen through the taxing of demerit goods like alcohol and cigarettes, in order to decrease demand and deter people from consuming them. Taxes can come in a variety of forms: GST, Income tax, Property Tax, Road Tax and more.

Another objective of the government taxing the people is to narrow the income inequality between citizens of different socio-economic status. According to the OECD report in 2012, income inequality after taxes and transfers decreased by about 25% as compared to before taxes and transfers^[2]. This is a key way in which we can tackle the issue of poverty within nations. Countries like the US employ progressive taxes, when income increases, so does their tax incidence. 

However, does the progressive tax really work? Does it really lead to income equality as most politicians promise? 

Well, a write-up done by several economists says otherwise^[3]. Instead, progressive taxes do not lead to income equality but rather the opposite. This seems rather counterintuitive, right? If you increase the taxes on the higher income citizens and lower the tax on the lower-income citizens, wouldn’t that lead to greater income equality? According to the write-up, the increase in purchasing power will lead to an increase in demand for goods and services, which are more often than not, provided by individuals who are already high-income earners. Thus, progressive taxes do not necessarily lead to less income inequality as most people would expect. This can be seen from the figure below that shows how progressive taxes do not perform as what one would expect in the US. (Note: the y-axis refers to the percentage of one’s income and the x-axis refers to the different income groups in America, with the most right as the billionaires): 

A better way to tax the rich (Vox, 2019)^[4]

A possible alternative that Senator Elizabeth Warren proposed in 2015 is the wealth tax. Instead of taxing citizens based on their income, the government can instead tax people based on the amount of wealth and assets they own. This includes properties, cars, companies, stocks and their individual income. This is believed to be a better representation of the amount of money one has, and it will be more logical to tax them based on their total wealth. There will be a 2% tax on fortune above $50 million, and a 3% tax on fortunes above $1 billion. In addition, Vox claimed that the government could have raised an estimated $200 million from it. This money would come in useful in building infrastructure and funding policies. 

However, as awesome as it may sound, there are several limitations. For example, how is one’s wealth to be calculated? Will everyone be willing to open up about all the purchases they have made? Would this not infringe on one’s privacy? Another question to ponder about is that if we so heavily tax the rich, are we then dissuading people from working hard to enjoy a luxurious life? Even though politicians have the charisma and persuasion to make policies sound great and life-changing, one should always take a step back to think about who is truly telling the truth. 

The link between politics and economics: 

Well, after looking at the aforementioned case studies, we have examined how economic policies are often found at the centre of politics. Every idea has its pros and cons, so does every system implemented in our society. There is no ‘right’ or ‘wrong’ answer to solving social issues using economics, as it’s all about which bears less harm than the other, which we have learnt about through the use of rational-decision making framework. And as to ’who’ is telling the truth, we have to take a step back to analyse the entire situation. Though politics may make certain economic decisions look rational and effective, there are always hidden constraints and trade-offs that have to be recognised.

Darshan S/O Ganesa Moorthy (20-O2)

References

Minimum Wage:

^[1] https://www.straitstimes.com/singapore/politics/32000-take-home-less-than-wps-proposed-1300-minimum-wage?xtor=CS3-20&utm_source=STiPad&utm_medium=share&utm_term=2020-11-24%2012%3A11%3A05

^[2] https://www.businessforafairminimumwage.org/news/00135/research-shows-minimum-wage-increases-do-not-cause-job-loss

^[3] More on the PWM can be found here https://www.mom.gov.sg/employment-practices/progressive-wage-model/what-is-pwm

^[4] https://www.todayonline.com/singapore/progressive-wage-model-be-extended-80000-retail-food-services-workers-2-3-years

Taxation:

^[1] https://www.iras.gov.sg/irashome/About-Us/Taxes-in-Singapore/The-Singapore-Tax-System/

^[2] http://www.oecd.org/economy/public-finance/49417295.pdf

^[3] https://www.stlouisfed.org/on-the-economy/2020/may/could-more-progressive-taxes-increase-income-inequality

^[4] https://youtu.be/kXCGbAv8YPw

How Priming Affects Consumer Behaviour

As modern consumers of the 21st century, we are often spoilt for choice with an endless variety of products from both physical stores and online shops, so much so that it has even created what is known as the ‘consumerist culture’. Burdened with a seemingly insatiable hunger for consumer goods, we are constantly on the hunt for the newest trends, choosing to buy the newest branded bags or drool over the latest phone models instead of saving or investing for the future. Although this culture is undoubtedly fueled by the trend-setting celebrities many of us idolise in today’s society, is that really the only reason why our material desires never seem to end? 

In 2012, Dunkin’ Doughnuts initiated an interesting marketing campaign where coffee scented fragrance would be released on buses while the Dunkin’ Doughnuts jingle played on the radio. During the few months when the experiment was carried out, there was an overall 29% increase in sales (Evergreen, 2012), but for what reason? Research suggests that  consumers’ behaviour was influenced by external stimuli to make purchasing decisions, disrupting the typical 6-step rational decision making process during this experiment (see in Annex). In other words, consumers felt more compelled to buy coffee from Dunkin’ Doughnuts after associating the coffee-scented fragrance on the buses with their own memories of drinking coffee. Sandeep Datta, M.D., Ph.D. and Assistant Professor at the Department of Neurobiology at Harvard Medical School states that there is an “incredibly direct connection” from the neurons that detect smells and the part of the brain that processes information and associates it with memory (Evergreen, 2012).This is known as priming – a psychological technique in which the introduction of visual, auditory, and olfactory stimuli influences people’s response to subsequent stimuli (Barney, 2019). 

For example, take a look at this sentence:

On a warm summer day, there’s nothing I love more than going for a ride.

Now, fill in the blank. Which word first comes to mind?

B _ _ E

Most likely, you would have thought of the word ‘bike’, rather than ‘bake’ or ‘blue’. The words bike and ride are associated with each other, and the scenery described best suits that association than the ones you have with bake or blue.

This is a simple example of priming (Rawlings, 2019). Priming works by using associations made in our subconscious (Barney, 2019), and is often used by businesses in marketing strategies, as they aim to shape consumers’ purchasing decisions by catering for consumers’ inherent preferences. 

There are different types of priming, but the general idea is that the introduction and exposure to a particular event will trigger or activate some associated concepts in the person’s mind, hence subconsciously affecting their subsequent actions (Rozendal, 2018). These types of priming are: 

1. Positive priming, which accounts for how exposure to an event can impact the speed of processing, memory retrieval and the likelihood of the person responding well to the same stimuli next time. In the case of positive priming, the presence of the initial stimuli helps enable certain associations or memory, such that when the second stimuli is introduced, less activation time is needed before taking action. For example, if we see the familiar yellow M of McDonalds’ logo when driving home or feeling lost in a new city, it stimulates images of McDonald’s trademark burgers or french fries in our brains. This may remind us of home, or make us crave the taste of fries. The association with good memories of Mcdonald’s food are likely to drive your decision to enter the drive-through (Rozendal, 2018), pun intended.

2. Semantic priming is carried out through the introduction of a stimulus that triggers the memory of other objects that share similar characteristics or properties such as its shape or colour, allowing people to respond more quickly to subsequent stimuli of similar features.
   
   In 1999, researchers conducted a study on the influence of in-store music on wine selections to reveal the effects of music on decision-making in a grocery store. For two weeks, stereotypically French and German music were played on alternating days and the amount of French wine versus German wine sold was measured. The numbers told an interesting story as they indicated that more French wine was sold on days when French music was playing and more German wine was sold on the days when German music was playing. (North, A. C., Hargreaves, D. J., & McKendrick, J. 1999). This example of semantic priming through auditory stimulus showed how even something as subtle as playing a particular genre of music could alter people’s preferences and suggest to their subconscious to consume a good related to that preference.  
   
3. Associative priming entails the use of two stimuli that are usually associated with each other. The related pair of words, objects or events will normally be linked together in memory. Hence, introducing one of them often will prime people to react more quickly when the other one is introduced. For example, Valentine’s Day is usually associated with the colour red which represents love, so businesses like bakeries or florists often sell red-themed cakes and red roses on Valentine’s Day to attract consumers’ attention to their products.
   
4. Repetition priming takes place when the repeated use of a stimulus is used to evoke the same response consistently. Over time, the use of a particular stimulus can be used to trigger specific actions and behaviour as people’s minds are primed to anticipate this stimulus, and thus respond the same way immediately. You might experience this if you set an alarm to wake up for school at the same time every day. At the set time, the familiar sound of the alarm will ring, waking you up. Eventually, you would find yourself waking up naturally at the same time on weekends, even without setting the same alarm.
   
   Aside from that, as a consumer, one might experience repetition priming when the same ads keep appearing on your screens, or on posters wherever you might go. For example, regular sales promotions and song advertisements for online shopping sites such as Shopee might create anticipation and a growing trend of online purchases, as consumers are gradually primed to purchase more goods after continuous exposure to the enticing ads. 

Through these methods of priming, certain memories are more easily recalled when a particular stimulus is being activated, leading to a more rapid response or action. When applied to businesses and their marketing strategies, priming methods are helpful in steering consumers towards having certain reactions or decisions, so as to influence consumer decisions and thus increase sales revenue. 

Furthermore, because priming usually has a subconscious influence on consumer behaviour, there is a grey area or risk of consumers getting manipulated in their decision-making process. Thus, there is a need to consider to what extent priming should be used, and where the line should be drawn for firms (Ford, 2013).

Nevertheless, when used with a comprehensive understanding of the needs, desires, and motivations of consumers, priming can be used as a powerful marketing tool for profit maximisation and improving brand recognition (Woo, 2018).

Gerin Lim Wen Ting, Sarah Yeo Hui En, and Yeo Hui Min Mandy (20-E1)

Tan Yi Xuan (20-A1)

References

Architects, T. B. (n.d.). The power of priming part one . https://www.marketingsociety.com/the-library/power-priming-part-one.

Barney, J. (n.d.). Priming in Marketing: An Advertising Psychology Tactic. Einstein Marketer. https://www.einsteinmarketer.com/priming-in-marketing/#What_is_Priming_in_Marketing.

Cherry , K. (2020, February 21). Priming and the Psychology of Memory. verywellmind. https://www.verywellmind.com/priming-and-the-psychology-of-memory-4173092#:~:text=In%20psychology%2C%20priming%20is%20a,stimulus%20or%20task%20is%20introduced.

Evergreen, I. (2012, July 24). Dunkin’ Donuts Sprays the Smell of Coffee Onto Buses to Increase Sales [Video]. Bostinno. https://www.bizjournals.com/boston/inno/stories/news/2012/07/24/dunkin-donuts-sprays-the-smell-of-coffee-onto.html.

Ford, M. (2013, July 1). What is Priming? A Psychological Look at Priming & Consumer Behavior. http://blog.motivemetrics.com/What-is-Priming-A-Psychological-Look-at-Priming-Consumer-Behavior.

Ganesh, S. (2019, September 23). Priming and the Science behind Onboarding. https://www.mindtheproduct.com/priming-and-the-science-behind-onboarding/.

Major Factors Influencing Consumer Behavior. Clootrack. (n.d.). https://clootrack.com/knowledge_base/major-factors-influencing-consumer-behavior/.

North, C., A., Hargreaves, J., D., & McKendrick, J. (n.d.). The influence of in-store music on wine selections. https://doi.apa.org/doiLanding?doi=10.1037%2F0021-9010.84.2.271.

Rawlings, R. (2019, July 12). A Guide on the Psychology of Priming. BetterMarketing. https://bettermarketing.pub/a-guide-on-the-psychology-of-priming-bbffc6f934d.

Rozendal, E. (2018, April 19). Priming: an invisible power tool for online marketing. https://neurofied.com/priming-power-tool-online-marketing/.Woo, H. (2018, September 28). How Priming Influences Consumer Behaviour. customerthink. https://customerthink.com/how-priming-influences-consumer-behaviour/#:~:text=Regardless%20of%20your%20industry%2C%20priming,used%20to%20influence%20consumers%27%20decisions.&text=When%20used%20correctly%2C%20i.e.%20with,sales%20growth%20and%20brand%20recognition.

Introduction to Behavioural Economics and the Health Industry

‘Standard economics assumes that we are rational… But, as the results presented in this book (and others) show, we are far less rational in our decision making… Our irrational behaviors are neither random nor senseless- they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains.’

Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions (2007)

Traditional economics assumes that we are rational, utility-maximising agents that consume by reason of self-interest. Whereas in reality, our decisions are not always practical and may be influenced by social or psychological factors that cause us to make choices that were otherwise unusual or groundless and may contradict the economic models we are taught in standard economics. As a result, by the late 1970s, the idea that human behaviour was not completely rational and was vulnerable to biases was popularised and became integrated into the economic thinking of today (Thaler & Ganser, 2015). ‘The behavioural revolution (in economics) imported ideas from behavioural psychology into finance, and replaced the rationality postulate with a more realistic alternative.’ (Shefrin, H., 2015) Hence, behavioural economics is the study of the human behaviour and the influencers that affect our choices, and is bridge between economics and psychology. By identifying common behaviours and habits, this area of study helps economists to better predict decision-making processes of the people.

This particularly applies to the healthcare industry as healthcare is not the “usual” good like food or clothes. For most commercial goods, reducing consumption leads to some lower quality of life or satisfaction, whereas for healthcare, reducing consumption may lead to worse health and even death (Low, D., 2012). Due to the presence of imperfect information, patients (the Principal) also largely rely on their doctors (the agent) to administer the medication, giving the healthcare firms the power to control the demand of medication and even administer more medication than needed, leading to the issue known as “supplier-induced demand” (Low, D., 2012).

Factoring in the irrationality of consumers in decision-making, the healthcare market is difficult to predict or direct. For instance, we are often reminded to care for our health in order to live a more comfortable and longer life. So the rational course of action would be to eat less junk food and more fresh fruit and vegetables, and even go jogging in the morning. Yet, many human inventions, such as the lift and escalator, cater to the human lethargy and rarely do we find time to actively exercise amidst our sedentary lifestyle in Singapore. Traditional economics assumes that we would calculate the effective cost and consequences regarding the maintenance of our health in the future, opting for the choice with the least opportunity loss but in reality, almost no one goes through this tedious cost-benefit analyses before committing to a decision (Low, D., 2012). Therefore, illogical behaviour leads to consumers straying from the ideal of an “economic consumer” and behavioural economics is needed to anticipate these abnormalities and create more accurate predictions of the consumer market.

So what is (private) insurance?

I believe that the concept of insurance is not foreign to most, but I will be giving a more in depth description of the insurance industry to set the context of this essay. By definition, insurance is a ‘technology of risk’ and ‘the practice of a type of rationality potentially capable of transforming the life of individuals and of that population’ (Ewold, F., 1991). This means that insurance breaks down and organises the possible risks in reality in an exact and calculative manner and through this tedious calculation, insurers are able to objectivise events and transpose impediments into possibilities (Ewold, F., 1991). Imperfect information also exists within this market as consumers very limited personal experience with these high-risk events while insurers are posed with ‘ambiguous risks and correlated losses pose insurability challenges’ (Kunreuther, H. C., et al., 2013). Ultimately, risk is a fundamental aspect of the purchase of insurance, where insurance comes with risk that softens the blow of anticipated unfortunate events that may happen based on an individual’s background or status.

Private health insurance are bought by individuals through the payment of premiums, where the premium rate of health insurance varies based on factors such as health conditions, age, possible inherited traits and environment. Insurance companies meticulously factor in these conditions to adapt an insurance contract specific to the individual in order to productively improve the consumer’s welfare. The objective of private health insurance is to ‘allow (consumers) to enjoy protection against risks of large bills without any of (them) having to save fully for them’ (Low, D., 2012).

There exists unequal spending on healthcare that varies with each individual as not everyone suffers from expensive treatments from illnesses like cancer or tragic accidents (Volpp K. G., et al., 2011). Insurance may indirectly help to redistribute the financial burden of the unfortunate individuals onto other consumers within the firm, making health treatment more affordable for them. This highlights the improvement of overall societal welfare when insurance is allocated and used fairly and effectively (Cremer & Roeder, 2017). However, this may not always be the case as the unequal cost of premiums may also lead to situations where those who truly need insurance are unable to pay for the high cost. Such an example would be that of the elderly where some firms may refuse coverage based on their age or health status, and even when offered, many of these elderly are unable to afford the coverage (Fang, Z., 2012). This results in loss in societal welfare and there is inequity when the insurance firm does not provide universal coverage for the society.

Behavioral economics in the market for insurance

Insurance and human behaviour, and thereby behavioural economics, are closely related as the transaction between the individual and the firm is based on human interaction and the transfer of private information (多尔夫曼, 1998). Many of us have reservations or biases towards the idea of insurance. Nonetheless, behavioural economists, Wright and Ginsburg suggest that the behaviour of consumers can be predicted and regulated by adjusting the way choices are framed for them, increasing their welfare based on their preferences (Wright, J. D., & Ginsburg, D. H., 2012). Behavioural economics aids in identifying these biases towards insurance, allowing insurers to better understand their audience and perform accordingly.

One of the most common biases would be overconfidence. Overconfidence is a bias that arises from misperceptions of probability distributions i.e. risk misperceptions (Astebro, T., et al., 2014), where consumers overestimate their extent of knowledge, underestimate risk and overstate their control over events (Wassenaar, J., 2016). This would be the case where the individual believes that there is no need to be insured due to their belief in their ability to stay healthy and safe, that insurance would be an unnecessary investment. An able-bodied young man, for instance, may not see the need to buy health insurance as they believe that they live in a safe environment, abide by the road safety rules and do not engage in violent activities. However, they may become involved in an accident, simply by the act of using his mobile phone while walking. Life is often unpredictable, even when we believe we are in control of our fate. Yet, this bias may also be seen as a strategy to obtain a cheaper premium rate. Therefore, insurers attempt to identify this bias by detailed monitoring of the consumer, reviewing if the consumer is overestimating himself before creating the contract (Wassenaar, J., 2016).

Another cognitive bias would be the anchoring bias, where people make estimations ‘skewed by irrelevant information that we happened to see, hear, or think about a moment ago’ (Tversky & Kahneman, 1974; Lieder, et al,. 2018). In layman terms, anchoring is the bias in which we are affected by preconceived thoughts or information subconsciously, causing our final decisions to deviate towards that piece of information. An example would be the estimation of premium rate by a consumer, based on their knowledge of the cost of insurance for a minor injury. This may cause them to imagine a higher than actual premium rate of a major injury. Zur Shapira and Itzhak Venezia also highlight that ‘self-generated anchors help simplify the complex cognitive process involved in making judgments’ (Shapira & Venezia, 2008), explaining that this bias occurs due to the person’s need to shorten thought processes and building on their prior knowledge. Hence, anchoring bias is also one that insurers look out for and attempt to debunk if any incorrect assumptions are created or exist.

Lastly, as of this essay, inertia is a bias in which is a persistent preference towards an original decision, despite the presence of new information, due to loss aversion and fear of regret (Muthukrishnan, A. V., 2015; Wassenaar, J., 2016). Johannes Spinnewijn also refers to inertia as ‘bounded rationality’ (Spinnewijn, J.,2012). A common example of this bias would be brand loyalty, where consumers are unwilling to change their mindset or attitude towards a brand despite changes in conditions of the product or their circumstances. For instance, when there is a change in pricing policies in a new insurance firm, such that the premium offered is more advantageous than that of the original contracted firm, the consumer may still be reluctant to change their provider. There exists distrust towards the new company which is not easily overcome once they have had a relationship with a company and they are unwilling to give up their personal information again.

Inertia is not to be confused with anchoring. Although they are both related to the decelerated or resistant process in rational decision making, anchoring is about subconscious linking of unrelated information such that the decision is affected while inertia occurs after a decision has been made and there is reluctance in changing that decision.

Summary

Behavioural economics helps to identify and explain the reasoning behind our not-so-rational decisions in real life, allowing us to predict the reactions of consumers and filling the gaps in traditional economics. It applies especially to the healthcare industry as healthcare is usually bought under random, urgent situations which leads to the vulnerability of the healthcare industry to the manipulation of providers if unregulated. The financial burden of critical healthcare procedures and costs is lowered by insurance that is bought in advance, but the purchase comes with risk (it is an investment after all). Hence, some behavioural biases of consumers behind insurance purchase have been given as overconfidence, anchoring and inertia, each of which deter us from buying insurance or cause us to mis-estimate our need for insurance.

Aretha Wan (18-I6)

The Everyday Applications of Nudge

The Law of Demand posits that the quantity demanded of a good or service has an inverse relationship with the price (i.e. the higher the price, the lower the quantity demanded). On the other hand, the Law of Supply teaches us that the price and quantity supplied share a direct, positive relationship. As Economics students, you might poke a hole in these two statements: I know, ‘ceteris paribus’. (For those who are not familiar with the subject, it is simply the assumption that all other factors are held constant.) Yet, even when so much precision and attention are paid to mastering theory, we often overlook its application and therefore relevance, or rather a lack thereof of it, in reality. The disparate between what is taught in our Economics lectures and its general lack of application in real life is well-accounted for by the discipline of Behavioural Economics. The study of Behavioural Economics challenges the foundational assumption of the Rational Choice Theory – individuals do not always choose what maximises their own satisfaction which their cognitive abilities (rationality) direct them to do, but are often governed by heuristics, cognitive biases, gut instinct or even altruism in their decision-making. Put in simpler terms, the propositions of Economic theories do not always see their applications in reality because humans are inconsistent, fallible beings.

Of two minds

Economic principles assume people make decisions based on rationality and self-interest alone. This could not be further away from the truth. Herbert Simon, Nobel Prize winner for his work in developing the concept of bounded rationality, argues that the theory of rational choice places unrealistically high cognitive demands on people. Indeed, humans operate in two minds, not one! Our cognitive processes are divided into two systems – the Automatic System and the Reflective System. The Automatic System is rapid, intuitive and unconscious. On the other hand, our Reflective System is more deliberate, reflective and self-conscious. These two systems reflect different processes, different ways of handling information and forming responses. Evidently, this is incongruous with the economic theories we learn whose dominant assumption is that we make choices using only the Reflective System. Inherent in our natures, our irrational Automatic Systems may gain a foothold in decision-making instead. This ironically renders the economic principles we learn predictably inaccurate in anticipating human behaviour – but such is the consequence of the befuddling workings of the human mind. However, this does not necessarily translate as something negative.

Nudge Theory

            Recognising indelible human fallibility, Richard Thaler has proposed the ‘Nudge Theory’ – the subfield in Behavioural Economics that explores how psychological biases causes people to act in a way that diverges from pure rational self-interest. As humans are nudgeable beings, such a characteristic can be capitalised on by both private firms and governments to influence behaviour through nudges. However, it is important to note, just as the word itself suggests, that nudges are based on the principle of libertarian paternalism. At first glance, while libertarian paternalism may seem like an oxymoron, it is actually the movement that people should be free to choose what they like or want to do (libertarian aspect), but are simultaneously consciously influenced by choices in a particular direction (paternalism aspect). In its entirety, the Nudge Theory is grounded on the basis of altering people’s behaviour in a predictable way without forbidding options or changing their economic incentives. Choice architects, especially private firms and companies, frequently exploit the Nudge Theory for personal benefit. Conversely, the government, as another key choice architect, can use nudges in public policy in ways that are beneficial to society. In the following paragraphs, we will explore applications of the Nudge Theory – both from a firm’s perspective and the government’s perspective. More importantly, we hope to shed light on the mechanics of nudges, developing a deeper appreciation of consumer behaviour that does not always align with what economic principles anticipate of consumers due to man’s tendency to err.

Applications

An example would be the strategic arrangement of goods in supermarkets. Have you ever wondered why flowers and fruits are always placed near the entrance of Cold Storage or Fairprice supermarkets? Or why the slightly more expensive goods are placed on shelves that are at eye level? If not, be sure to keep a lookout for these completely uncoincidental and non-accidental marketing strategies employed by the firm when you visit a store next time. The vibrant colour of flowers and fruits project the store in a positive light, and the fresh smell subconsciously signals to consumers that the goods are in good conditions. As for placing goods at eye level, a commonly used phrase is “eye level is buy level.” Again, these techniques used by retailers are not forcing consumers to buy more, but in a way, guiding them to spend more. Thus, from this application of “nudging”, we can see that Behaviour Economics differ enormously from classical economics in the way that it works on people’s psychology rather than rationality.

A significant difference between “nudging” and other forms of intervention lies in its gentleness. While direct bans, taxation and subsidies are usually imposed by government to incentivise or deter people, “nudging” adopts a much “softer” approach to guide people’s subconsciousness to achieve desired outcomes. Another example of “nudging” could be our CPF scheme. Our government has been a textbook authority to utilise economics theories to carry out policy. In classical economics theories, people should be as willing to save for future as to spend it now. But in reality, nobody likes the idea of saving for later. “Enjoy life while you can” sounds more gratifying and much easier that few are drawn to the idea of carefully planning for the future. However, in retrospect, this is not beneficial to society– if nobody prepares for their golden age, the future taxpayers will have to pay for the generation of working adults today. Hence, the Singapore government uses “nudges” to subtly encourage citizens to take their initiatives to prepare for future (and to avoid criticism also). One of the nudge used is that the deduction of funds are made prior to people getting paid. The rationale of the scheme comes from a psychology theory showing that people are loss-averse, which means that they prefer avoiding losses than acquiring gains. In this way, saving can be accumulated more painlessly. Medishield also adopts this approach by making people feel that if they opt out the scheme, they are losing the privilege, thus maintaining high participation. Another nudge is the “status quo bias” which suggests that people are more willing to live with already established behaviour unless there is a compelling need to change. This is used in the default option setting in CPF scheme and Medishield which take advantage of people’s inertia. Hence, our government is well aware of the power of “bounded rationality” and use it extensively, which consolidates the effectiveness of behavioural economics in today’s age.

In all, economics is a social science. In essence, it is about using models to make sense and explain various phenomena in the world. So do not be surprised by the psychology involved in the calculation and modelling. As this science evolves, models become progressively more accurate and relevant. The aspects that were previously ignored or overlooked are now taken into serious consideration. Proponents of the concept of Libertarian Paternalism support the use of nudging by choice architects to consciously influence consumer behaviour. On the other hand, this study of nudging brings along with it wider ethical and proprietary concerns. To what extent does nudging influence the consumer? Does it infringe on the person’s fundamental right to freedom of choice? Or does it exploit the irrationality of the person’s automatic system to subconsciously “force” them into making a choice? Behavioural Economics is the new field that encapsulates the aspect of people’s thinking and psychology in decision-making. It explores a multidisciplinary approach across the Economics and Psychology, expounding on how rationality and emotions work together to help us to comprehend the world around us.

References

1. https://www.investopedia.com/terms/b/behavioraleconomics.asp
2. https://www.theguardian.com/world/2017/oct/09/what-is-behavioural-economics-richard-thaler-nobel-prize
3. https://bmcpublichealth.biomedcentral.com/articles/10.1186/s12889-016-3272-x
4. http://theconversation.com/the-science-that-makes-us-spend-more-in-supermarkets-and-feel-good-while-we-do-it-23857

https://www.valuewalk.com/2018/01/10-practical-applications-nudge-theory/

Sarah-Ann Tan (18-U1)

Income Inequality In Singapore

Income inequality in Singapore has worsened in recent times. The World Economic Report 2018 showed that the income share captured by the top 10% of income earners in Singapore increased from 32.1% in 1980 to 43.8% in 2014. Moreover, Singapore’s Gini coefficient after tax transfers (collection of taxes and redistribution of that wealth to the lower-income in society) stood at 0.356 in 2017, higher than many other developed countries such as Sweden and Japan. This is a worrying sign given that income inequality has the potential to create rifts between the rich and the poor, fracturing society and even giving rise to pro-protectionism and anti-globalisation views which hinder economic progress. To find a solution for this issue, we would hence have to delve into the causes and effects of this problem.

Cheaper alternatives for firms

            Advancements in technology and globalisation have stiffened competition for jobs by providing cheaper alternatives to local labour for firms. Automation has increasingly been adopted by many firms and this has led to the displacement of local workers. UOB is one such company that uses humanoid robots to address client requests and complete administrative tasks. A humanoid robot is purportedly 3.5 times faster than a human employee. Many profit-maximising companies choose to use automation to substitute human staff as automation increases work efficiency and enables them to save on labour costs in the long run, allowing firms to become more productive efficient. As a result, workers, especially those in low-skilled industries such as manufacturing, end up losing their jobs or earning lower wages. Globalisation also exacerbates this trend. Globalisation facilitates the influx of low-wage migrants and this leads to greater competition for jobs and wage depression for locals.

On the other hand, firm owners or top business executives earn high incomes derived from high profit earnings due to lower average costs. While many companies have been earning higher profits, this has not translated into higher wages for workers. In the 2018 Hays Asia Salary Guide, almost half of Singapore employers are considering salary increments of only 3 to 6%, which hiring firm Hays says is “conservative” considering that Singapore’s economic growth has risen this year.

Hence, this inevitably leads to an income disparity between beneficiaries of automation and globalisation, and those disadvantaged by those factors.

The effect?

            Income inequality leads to a lower consumer demand for goods and services, which ultimately results in stunted economic growth. Lower income reduces the purchasing power of consumers and reduces their demand for normal goods. Demand for necessity goods like food staples will fall less than proportionately and luxury goods such as restaurant meals or high-end retail products will also fall more than proportionately when income falls. As a result, there will be lower consumer expenditure and hence slower economic growth. This spells bad news especially for the retail scene in Singapore which has seen sluggish growth in recent years.

System of meritocracy

            Meritocracy has always been a crucial principle infused in our education policies and employment practices. While it motivates people to work hard in order to reap economic benefits, it has also worsened income inequality. In the present day, the playing field is no longer equal. Wealthier parents are able to afford tuition, giving their children the competitive edge over their less-advantaged peers. Children of more affluent family backgrounds are hence more likely to qualify for more advanced educational pathways such as the Integrated Programme (IP) and International Baccalaureate (IB) programme, as well as enrol into more prestigious schools such as Raffles Institution. These children are then able to join Ivy League universities and earn more prestigious degrees, assuming that they follow the conventional education pathway. Once they enter the working world, where wages are decided primarily based on academic qualifications, they get to earn higher starting salaries than other graduates. In 2016, the starting pay of polytechnic graduates was $2200 but that of University graduates was 52.7% more at $3360. Income inequality also exists within University graduates. While law graduates from SMU earned an average of $4778, their NUS counterparts earned an average of $4958. It is hence evident that meritocratic practices results in an unfair advantage amongst the rich in society, and perpetuates income inequality in the workplace.

The effect?

            Income inequality between the rich and the poor leads to a class divide which results in a social disconnect. A recent 2017 Institute of Policy Studies survey showed that class divide in Singapore has become more prevalent. Educational elites and non-elites tend to form isolated social circles with peers of similar socioeconomic status. These social circles have the potential to continue on into adulthood as well, especially since educational elites tend to fall under the same income bracket as their peers. This lack of interaction between the privileged and less-privileged inhibits mutual understanding between the two groups and may potentially foster feelings of resentment amongst the less-privileged towards the more-privileged, leading to social tensions. If the elite become policy-makers, policies could possibly be skewed towards protecting the interests of the rich and increasing the financial burden of the poor. This may lead to political polarisation and fuel populist politics. While Singapore has yet to experience this – which is happening in America and parts of Europe – it is a possibility that Singapore must take all steps to avoid to maintain the peace and harmony in the country.

Another effect of income inequality is limited social mobility. More privileged children are able to retain the socioeconomic status they were born into due to their being in the favour of our meritocratic system. They are also more able to reserve high-income jobs and assets for themselves or those in their social circles who are of similar socioeconomic status. This results in greater elitism and fewer opportunities for the less-advantaged to take on those jobs, which they could be more qualified for as compared to the more-advantaged. Lower-income individuals also meet with more challenges in trying to borrow money to start an enterprise and earn more income. Coupled with the difficulties in and the social stigma attached to requesting for financial aid from the government, lower-income earners will find it even harder to reduce their financial burden and advance up the social ladder, leading to perpetuated income inequality.

The government prioritizes the issue of income inequality and have implemented various measures to help the disadvantaged. These include Skillsfuture which aims to upskill and retrain workers so that they remain relevant in this age of technological disruption, the Workfare Income Supplement scheme which helps to increase low-income workers’ CPF or cash savings and the Edusave Bursary Award which is prize money given to students from low-income households to acknowledge their outstanding academic achievements. However, media reports have mentioned that requesting financial aid from the government is becoming more difficult. It is also often attached with a social stigma that those who seek aid have failed to be self-reliant and are therefore failures in society. If low-income workers are unable to receive necessary aid due to self-imposed restraint and external impediments, then income inequality would unfortunately persist. Moreover, in this era where receiving tuition has become a norm, it would be a huge disadvantage for students from lower-income families who do not receive tuition because they cannot afford it. This is especially so if those students need more guidance in their academics and have few adults to turn to if their parents are working to support the family. Hence, the government or voluntary welfare organisations (VWO) should consider providing subsidized or free tuition to poorer students.

Income inequality exists in every society and is never easy to reduce, let alone eliminate. However, it is important to stay updated with existing trends which affect the severity of this issue and review our policies to assess their effectiveness in solving this problem. No matter how tedious resolving this issue may seem, we must always strive towards this goal because as Nelson Mandela once expressed, “as long as poverty, injustice and gross inequality persist in our world, none of us can truly rest”.

Cheryl Doo (18-E5)

Behaviour Economics: Truth-telling

Reporting private information is common in most economics or non-economics activities, for instance, companies use advertisements to attract customers, a self-employed worker report her income to the tax authorities or doctors state a diagnosis.

But there is a question that concerns us: does everyone choose to misreport their private information if this maximises their material payoff?

Fischbacher, U. and Föllmi-Heusi, F. designed an experiment that allows detecting lies where subjects face no threat of being revealed individually. Instead, they can draw inferences on the population’s overall behaviour. At the end of the experiment, they found out that people tend to disguise their lies, and they believe it works. Subjects are informed that they must roll a dice, which will determine a payoff, the payoff equalling 1, 2, 3, 4, and 5 for the corresponding dice figure and zero if the figure is 6. Since the experimenter cannot see what number was rolled, the subjects can report whatever number they want. Nevertheless, the distribution of the reported numbers reveals information about patterns of lying behaviour within the population.

At the end of experiment, there are a few interesting observations. First, number below 4 is significantly lower than the expected true value of ⅙, while the numbers 4 and 5 are significantly higher than ⅙ (i.e. income maximising subjects). Secondly, 6.7% of subjects reported 0 which shows there are some honest people (i.e. honest subjects). Thirdly, not all lying subjects lie maximally as significantly more than ⅙ subjects reported a 4 (i.e. incomplete cheating).

Why people lie incompletely seems rather interesting to me. Imagine you rolled a 3, what would you report? You would like to maximise your income by reporting a 5 but you do not want others to suspect you for being a greedy liar. In the end, it is highly possible for you to report a 4 to ensure a higher income by disguising your lie.

Thus, we can conclude that:

Utility of lying = Income from lying – Psychological cost of lying.

And this explains the above-mentioned phenomena.

In short, subjects who reported a 1 can only be people whose actual result is 1 or 0. Their high lying aversion resulted in a high psychological cost of lying. Otherwise, they would have reported a higher number to gain a higher income. Subjects who reported a 2 can only be people whose actual result is 0, 1 or 2 and so on.

Many real-life situations are characterised by informational asymmetries between interacting parties. Obviously, such situations may provide an incentive for either party to exploit the informational asymmetries to one’s own advantage. Therefore, we should always question validity of things like advertisement or even news reports when there is presence of informational asymmetry, as income of not telling truth cause lies become ubiquitous from past till today.

References

1. Fischbacher, U., & Föllmi-Heusi, F. (2013). Lies in disguise—an experimental study on cheating. Journal of the European Economic Association, 11(3), 525-547.
2. Abeler, J., Nosenzo, D., & Raymond, C. Preferences for truth-telling. Econometrica, forthcoming.
3. Sutter, Matthias.Deception through telling the truth: Experimental evidence from individuals and teams.Institute of Public Finance, University of Innsbruck

Hu Han Ling (18-O5)

The Mystery of the $0.50 Shoyuemi snack

I’ve noticed people buying packets of Shoyuemi snackfrom the drinks stall and I wonder why. The Shoyuemi seaweed snack – a crispy cracker made from soy sauce and vegetable essence – whilst delicious, is nowhere worth its price of $0.50. Visit a value-dollar shop and you would find that 30 packets of the same Shoyuemi snack costs a mere $3.60 in total, meaning that the cost of each packet is $0.12. In contrast, the Shoyuemi snack sold in the canteen is almost four times its original price! Assuming that the Shoyuemi snack is part of a monopolistic competitive titbit market, by right, a rational student is unlikely to purchase a packet of Shoyuemi snack at all.

This curiosity thus begs the question of why and how an overpriced snack can survive in the school canteen. A theory that comes to mind immediately is that the drinks stall is in itself a monopoly within the school compound. As such, the demand for Shoyuemi snack is very price inelastic and even at a high price, there is still a sizeable quantity demanded. However, this theory fails to convince me due to two key reasons. The first being that Eunoia can hardly be considered as isolated. With Giant and a value-dollar store a stone’s throw away from school, buying a Shoyuemi snack at a cheaper price is entirely possible and so the drinks stall cannot be considered a monopoly. Secondly, as a ‘want’ and not a ‘need’, the demand for a snack is more likely to be price elastic and the Shoyuemi snack would be unable to fetch such a high price.

Does this therefore mean that students are irrational decision-makers? Yes, irrational in the sense that their decision-making does not align with the description of the commonly-used economic theory of rational decision-making. According to this theory, a rational consumer makes prudent and logical decisions that maximises his/her welfare. However, this theory assumes that consumers have perfect information and unlimited time to deliberate the available choices.

About 60 years ago, economist Herbert Simon challenged this view with his notion of ‘bounded rationality’. He asserts that decision-makers, ‘instead of trying to maximise value in a given choice, aim at satisficing’, which is to ‘search for alternatives that are good enough according to some pre-established criteria’. As such, students might be unaware of the price of Shoyuemi outside school or they might not have had the time to explore other options. Moreover, students could have preconceived biases against snacks from value-dollar shops. For example, although this sounds foolish, the transparent plastic wrap over the value-dollar shop Shoyuemi makes me doubtful of its authenticity. Otherwise, one might be hesitant to buy Shoyuemi in bulk (even though Shoyuemi-addicts probably buy more than 30 packets of Shoyuemi over the span of a year). These reasons add up to explain why an overpriced snack is still on demand in spite of more reasonably-priced options nearby.

Now, suppose that the Shoyuemi snack is sold for $1 instead, the same price as that of a bao in the school canteen. Would you still be willing to pay for it? Given the theory of bounded rationality, that people would be willing to pay for the snack at a suboptimal price as long as it satisfies their craving, the snack should still be on demand. Yet, I know I won’t buy a $1 Shoyuemi snack, because its price is clearly unreasonable relative to that of other snacks. Consider this scenario: if I were the drinks stall auntie and am insistent on pricing the Shoyuemi snack at $1, is there a way I could do this and still make it palatable for students?

In marketing, there exists a strategy of price framing, which is when a product is presented in the context of other related products. In a Psychology Today article titled ‘Pricing and Framing: When Are We Likely to Pay More for Products’, Dr. Gizen Saka suggests that the introduction of a super-premium expensive product that may not be profitable in its own right could make the next option down seem more attractive. For example, if the Shoyuemi snack is sold at $1 beside a packet of Oreo priced at $0.50, the possibility that you would buy the Shoyuemi snack is very low. On the other hand, should a Roller Coaster snack, priced absurdly at $2, be introduced to the snack basket, you would now feel more comfortable buying the $1 Shoyuemi snack since you consider it to be a more affordable, middle-ground option.

Similarly, despite the lack of an extremely expensive product, I propose that the popularity of the Shoyuemi snack within the school compound could also be attributed to its relative price. Compared to everything else sold in the vicinity of the canteen, such as a $1 bao or a $1.20 drink, the Shoyuemi snack is considered to be reasonably priced, thereby explaining its persistent demand.

Ultimately, the secret to the mysterious survival of the $0.50 Shoyuemi snack lies in our not-so-rational decision-making. Knowing how the inflated price of a Shoyuemi snack plays with your mind, would you ever look at that tricky, cunning and snaky $0.50 Shoyuemi snack in the same way again?

Bibliography

Ackerman, F., Goodwin, N., Nelson, J., Weisskopf, T. (2014). Macroeconomics in context. M.E. Sharpe.

Barros, G. (2010). Herbert A. Simon and the concept of rationality: boundaries and procedures. Brazilian Journal of Political Economy, 30(3), 455-472.

Gigerenzer, G., & Selten, R. (Eds.). (2002). Bounded rationality: The adaptive toolbox. MIT press.

People-triggers. (2015, January 30). Marketing Psychology: Price Framing. Retrieved, 2018, August 4, from https://peopletriggers.wordpress.com/2015/01/30/marketing-psychology-price-framing/

Saka, G. (2011, September 30). Pricing and Framing: When Are We Likely to Pay More for Products? Retrieved, 2018, August 4, from https://www.psychologytoday.com/intl/blog/the-decision-lab/201109/pricing-and-framing-when-are-we-likely-pay-more-products

Rebekah Seow (18-A1)

Prisoner’s Dilemma and Economics

ECONOMICS E-COLUMNIST

“The hazards of the generalised prisoner’s dilemma are removed by the match between the right and the good.” – John Rawls

The prisoner’s dilemma is a standard example of a game analyzed in game theory that shows why two completely rational individuals might not cooperate, although it will result in an optimal outcome. The prisoner’s dilemma was framed by Merrill Flood and Melvin Dresher while working at RAND in 1950, reflecting a paradox in decision analysis. The background to this is illustrated by the scenario where two members of a criminal gang are arrested. These two members are interrogated separately and offered a deal. If both of the members confessed to the charges, both will serve two years in jail. If one confesses whereas the other remain silent, the confessor will be freed while the other will serve three years in jail. Lastly, if both remains silent, then both will serve a year in jail. Essentially, one can choose to cooperate with the partner (staying silent) or to defect and betray the the other (confessing). This can be better visualised in a payoff matrix.

	B stays silent	B confesses
A stays silent	A: +1 , B: +1	A: +3 , B: 0
A confesses	A: 0 , B: +3	A: +2 , B: +2

Prisoner’s dilemma payoff matrix

The eventual outcome depends on each individual’s decision. In the case whereby both participants seek their self-interests by defecting, it will result in a less optimal outcome than when they have cooperated, meaning that their self-interest do not coincide with their best interest. The prisoner’s dilemma is normally used to help us in understanding the cooperation between two individuals.

In prisoner’s dilemma, each player’s decisions affects the other. The decision a player makes depends on what the player believe is best for him. In rational choice theory, each player will choose to defect as that has the best outcome. This is therefore the dominant strategy to employ. However, this will instead land them in the worst position. This concept is known as the Nash equilibrium, where no participant in a stable system can gain with a unilateral decision. The concept states an incentive for a player deviate from his original strategy after considering the other player’s decisions. Importantly, cooperation in prisoner’s dilemma stems from trust between the two parties. Both parties do not know the intention of the other and they usually do not have the chance retaliate after that decision. This tends to result in a stronger motivation to defect.

We may be unaware, but prisoner’s dilemma is in fact seen frequently in our daily lives.  One of the more commonly stated examples is in international relations. The recent trade war between China and America encapsulates this theory. Due to the trade imbalance with China, America feels incentivized to impose additional trade tariffs on Chinese goods, with the belief that it can change the balance of trade and put America in a better position than before. However, when it led to a retaliation from China, both sides suffer.

Another example will be on advertising strategy by different companies. When Company A advertises and Company B does not, Company A is likely to see an increase in its sales and Company B will probably see a decrease. Vice versa. However, should both companies advertise at the same period, both will likely retain the same sales figures but seeing an increase in expenditure on advertising. This means they are defecting. Yet if both adopt a cooperative behaviour by advertising less, they will have a win-win situation.

A more detailed example is prisoner’s dilemma as a model for oligopoly. Firms in an oligopoly can increase their profits by colluding and fixing prices to be (far) higher than market-clearing prices. The pursuit of self-interest and increasing individual outputs however, will result in smaller profits than monopolising. Hence, these firms are incentivized to monopolize the market through reducing output collectively. Despite so, collusive arrangements are inherently unstable. Individual firms are often enticed to lower their prices to increase their market share, therefore breaking the monopoly. In other cases instead of monopoly, firms in an oligopoly agree to have a “price leader” with other firms following so as to allow for generation of more revenues for all. Prisoner’s dilemma explains the breakdown in these price-fixing agreements, illustrating the difficulties in maintaining cooperation despite mutual benefits. This can be better understood in studying the case study of Organisation of Petroleum Exporting Countries (OPEC) as an Oligopoly.

As this essay concludes, perhaps today we can reconsider whether cooperation depends on the “complicated dynamics of environments where people challenge, betray and then trust each other over and over again or an internal sense of morality” (The New York Times, 1986). And some of you may be happy to know that in 2013, a real-life study done by 2 University of Hamburg economists on prisoner’s dilemma showed that inmates cooperated 56% of the time, far more than expected.

Bibliography

https://www.businessinsider.com/prisoners-dilemma-in-real-life-2013-7/?IR=T

http://www.open.edu/openlearn/history-the-arts/culture/philosophy/the-prisoners-dilemma

https://courses.lumenlearning.com/boundless-economics/chapter/oligopoly-in-practice

https://courses.lumenlearning.com/boundless-economics/chapter/oligopoly-in-practice/

https://courses.lumenlearning.com/boundless-economics/chapter/oligopoly-in-practice/

Lai Yi Qian (18-O5)