The Weight Of The Anchor Effect

Assume you are at a store looking at an item, and the salesman comes over and tells you it is a great deal, do you believe him? 

The answer may astonish you.

Basic economic theory informs us that prices are set by a persons willingness to pay. But, what is behind a persons willingness to pay? Are there factors that influence perception of value? How does someone know how much they should pay for something?

The power of anchoring

The fact is, there are invisible forces at work in establishing what people think is a “good price.” And the funny thing is that these perceptions on “good price” can be relatively arbitrary.

Jack and Jill have been dating for two years. Every week, at the same time, they sit down together in front of their 30″ television to watch The Walking Dead. They value this time together. As their anniversary approaches, both of them want to do something special for the other.

Jack decides to go out to the store and buy a top-of-the-line large flatscreen for Jill. He knows nothing about television prices; he only knows that he wants something that would bring The Walking Dead to life. This could only make Jill happy, right? He goes to the store to look at televisions and finds a 60″ that would fit perfectly in their living room. The price tag reads $2499; however, it is on sale for $999. Jack is psyched and buys the television because he feels he is getting a deal he can’t pass up.

Unbeknownst to Jack, Jill also goes out to buy a large flatscreen for Jack. She reasons that it will make their time together even better. More importantly, she knows that Jack has wanted a new television for awhile. She knows nothing about television prices. She goes to a different store and looks at the exact same 60″ model that Jack looked at. She sees the price tag of $2499. However, in her store, the television is not for sale. As she is getting ready to leave, a salesman approaches and tells her he will take 20% off if she leaves with the television today. She pays the the $1999 because she feels she got a great deal.

What gives? How can Jack and Jill both feel they got a great deal, despite the fact that they spent dramatically different amounts? How can they both feel great about their purchases? How would they feel if they shared the amounts they spent with each other?

The answer lies in what behavioral economists and cognitive psychologists call an anchor. Since Jack and Jill both entered the sales process without expectation on price, they needed a reference or starting point. Some sort of cue to help them evaluate the item or price in context.

Both Jack and Jill were given the original price of the television – $2499. That became the anchor. It became the reference point that guided all other decisions about the purchase.

It is why Jack and Jill both thought they were getting a great deal, despite the deals being dramatically different.

How does anchoring work? 

By definition, anchoring is a heuristic where initial exposure to a number serves as a reference point. This number then influences later judgments about value. Simply stated, once an anchor is set, other judgments are made in reference to the anchor. 

In 1974, behavioral economists Amos Tversky and Daniel Kahneman conducted a study. They asked a group of people to estimate how many African countries were part of the United Nations. Before they began, the research participants had to spin a “wheel of fortune” with numbers from 0 to 100. As part of the experiment, the wheel was rigged to always land on 10 or 65. 

When the wheel stopped spinning, the researcher asked the test subject if they believed the percentage of countries was higher or lower than the number on the wheel. Next, they asked people to estimate what they thought was the actual percentage. 

They that found people who landed on 10 in the first half of the experiment guessed around 25 percent of Africa was part of the U.N. Those who landed on 65 said around 45 percent. 

The subjects answers to the question were informed by the anchor, i.e. the number from the wheel.

People like a point of reference and comparison; anchors provide that. Also, the value people place on items is dynamic and dictated by perception. This perception is guided by anchors. So perception of value is set by the very people selling you the goods and services.

In the end, merchants are telling you that you are getting a good deal… and you believe them.


The AI Governance Challenge

Avoiding the anchoring effect

The good news is that there is an a priori counter to the anchor effect. In a study conducted by Mussweiler, Strack, and Pfeifer, in the Personality and Social Psychology Bulletin (November 2000), the researchers found that simply taking the time to “consider the opposite” has proven to be effective in mitigating the effects of the anchor.

Considering the opposite is as straightforward as generating reasons why the anchor may be inappropriate. For example, asking “why”, i.e. what are the potential reasons that something is priced the way that it is, may be a sufficient corrective strategy.

Inherent in a considering the opposite strategy is having some background knowledge of the product or category for which you are making a purchase. This requires a little bit of research, i.e. looking at the same brand across retailers, or looking at comparative products across different stores. This offers a realistic view of the market and allows you to better understand the price in context.

In the end, a considering the opposite strategy can be distilled down to a single piece of advice – don’t make impulse purchases. By avoiding impulse purchases, you are naturally afforded the opportunity to consider the purchase and alternatives, i.e. considering the opposite.

How Can We Make Online Banking More Enjoyable?

This article originally appeared in [] and belongs to the creators.

A bank was once primarily a building with marble floors and high counters—a place you’d enter to deposit or retrieve your money. Cash machines and online banking moved the experience away from the lobby, but those were only extensions of the traditional ways banks thought about business. So when Josh Reich and Shamir Karkal, two MBA students at Carnegie Mellon University, went looking for ways to innovate in banking, they decided to start from the other direction, designing the mobile and online banking experience first and building the business around that.

They teamed up with Alex Payne, an engineer who was one of the first employees at Twitter, and set about creating BankSimple, a service that aims to make banking, well, simpler. They have partnered with an existing bank, which will hold the money in federally insured accounts, but the user interface is all theirs. Customers will notice it in all their interactions with the bank, says Bill DeRouchey, BankSimple’s creative director. “There was a designer somewhere in the process who has thought about every single touch point, every single aspect, and has just made every single moment as valid, as graceful, as appropriate, as possible,” he says. BankSimple is due to launch this year.

Leveraging behavioral design

To design the experience, they looked for insights from behavioral economics, which relies on psychology to understand economic decisions. For instance, it’s easier to get people to try something if they have to opt out of it rather than opt in. The team applied this insight to a feature of the bank that allows people to set aside funds toward a particular goal; it’s not a separate account, just a line highlighted on the screen with a label like “Hawaii trip” or “new laptop.” To encourage customers to try the feature, BankSimple starts them with the goal of saving $1,000 in an emergency fund.

To relieve people of the off-the-top-of-their-head calculations they might have to make when checking balances, the interface prominently displays a “safe to spend” balance, which deducts amounts set aside for goals, upcoming bills, and card debits that have not yet been processed. As a result of e-mail conversations with volunteers who’ve signed up for a future beta test, designers are tackling the aspects of banking that frustrate people. They promise there will be no hidden fees; all legal fine points will be presented in plain English; and users will be able to reach a real person in customer service by whatever means they prefer—e-mail, Skype, telephone, online chat. There’s even a designer working on making the experience of getting the bank card in the mail more interesting. “They need to activate it and sign it, but also they want to have that moment of joy,” DeRouchey says. Thinking about such issues helps a business’s brand, he says. “Every single moment that your customer interacts with you, those individual moments add up to what your user thinks of you and says about you and feels about you.”

PNC Bank: A Case Study

PNC Bank took a similar approach when it hired design firm Ideo to find ways to attract younger customers. The designers used ethnographic methods—observations, user diaries, in-depth conversations—combined with quantitative research on how people spend money. The approach was “let’s really understand what people need, then see if it’s technologically feasible,” says Ideo designer Mark Jones. They noticed that young people, even those earning a lot of money, would check their accounts several times a day, suggesting they were financially on the edge. Ideo took these insights and designed the Virtual Wallet, with features to keep better track of expenditures.


The AI Governance Challenge

They also heard stories about people getting some extra money they wanted for a specific goal and choosing to stash it somewhere—in a drawer, under the mattress, even in a souvenir coconut. So Ideo created “Punch the Pig,” an icon of a pig that a user could click on to spontaneously set aside a small amount of money, getting a small emotional kick at the same time.

Mike Ley, vice president of e-business at PNC, says the bank has been generating new accounts and getting positive feedback since it introduced the Virtual Wallet in 2008. He won’t give out actual numbers but says the retention rate for customers has been higher than with more traditional banking products.

Why Overheads Go Over Our Heads

‘Overhead’ is commonly marred as a dirty word in the nonprofit industry. It is consistently perceived as a gluttonous money monster that drains resources from the otherwise noble mission. As Dan Pallotta mentions in his popular TED talk, “Charitable giving has been stuck at 2% of gross domestic product [in the US] since the 1970s. In 40-plus years, the nonprofit sector has not been able to wrestle market share from the for-profit world.”

Donors’ aversion to overheads, including non-programmatic costs that cover administration, significantly impedes contributions charitably. As Pallotta points out, we complain about getting two pieces of mail in a short period of time from a charity, yet we rarely fret after getting three full catalogues from Pottery Barn. Similarly, we think it is unconscionable for the Breast Cancer Foundation to spend $25 M in marketing, yet few bat an eye after hearing that L’Oreal spent $1.5 B to sell products to the same women.

Our puzzling and disproportionate negative reaction to this inconvenient truth can be explained by a powerful unconscious bias. In this article, solutions sourced from behavioral insights are offered.

Evaluability Bias

The data reveals a negative correlation between the amount donated and the amount that organizations spend, suggesting that donors are sensitive to the management of collected funds (Tinkleman & Mankaney, 2007). From a purely rational perspective, donors should be most interested in efficiency. They should compare different charitable options that produce the same good and then choose the one that delivers optimal quality at the lowest price.

The actual decision-making process fails to coincide with this criteria as donors are typically unaware of the quality and the price of the goods. Researchers suggest that without clear information on cost-effectiveness, donors tend to rely on the evaluability bias to make a decision (Caviola, et al., 2014). In one study, 94 participants were presented with two possible charities. The two experimental conditions included a joint-evaluation group (participants were presented with both Charity A and Charity B enabling comparison) and a separate-evaluation group (participants were presented either with Charity A or Charity B).

Charity A spent $600 on administrative costs and saved 5 lives

Charity B spent $50 on administrative costs and saved 2 lives

Table 1. Charity options in Study 1

Results suggested that participants donated significantly more to Charity B compared to Charity A in the separate-evaluation condition. Interestingly, these preferences reversed in the joint-evaluation condition as participants donated more to Charity A (the more cost-effective option). This suggests that donors are clearly making suboptimal choices when left without a point of comparison. The researchers explain that this is not a deliberative process. Instead, Caviola, et al. (2014) argue that donors primarily value cost-effectiveness but manifest evaluability bias in cases where they find it difficult to make evaluations.

Our aversion to overhead spending is problematic as it negatively impacts charities’ ability to initiate fundraising campaigns, support their infrastructure, or invest in  future planning. This pressure often leads charities to underreport costs, which broadens the information-gap (Pollak, 2004). To fill this gap, some effective-altruism based charity evaluators like Givewell use an in-depth scientific approach to rank charities by using metrics based on cost-effectiveness (e.g., cost-per-lives-saved). Such websites take all the guesswork out of the decision-making process.

It is important to note, though, that increased information availability does not always result in behavioral change. In the next section, three nudges that effectively reframe fundraising solicitations are outlined.

Nudge 1: Seed Money

In an experiment that mailed letters asking participants to fund a capital campaign at the University of Central Florida (n = 3,000), donation amounts increased six fold and became twice as likely when solicitations described that a lead donor had covered a portion of running costs. This effect occurred when the seed donation, or the initial money allocated to funding the project,  was described as having increased from 10% to 67% (List & Lucking-Reiley, 2002). This finding suggests that donors’ contributions increase as the amount of seed money increases. Interestingly, the researchers explain that beyond a critical level of seed money, contributions start to decrease. Taking this insight into consideration should help nonprofits in finding the optimal amount of seed money.

Nudge 2: Matching

In a large-scale field experiment, researchers sent direct mail solicitations to donors who were unfamiliar to the charity (n = 61,483). In one group, donors were informed that their contributions would be matched by the Bill & Melinda Gates Foundation (BMGF), and a second group was told that contributions would be matched by an anonymous group. Results suggested that those who knew BMGF were 26% more likely to donate and donated 51% more on average (Karlan and List 2014). Donors reportedly trusted the BMGF foundation and felt comfortable enough to contribute. Matching employs the powers of social referencing. In the absence of information, donors tend to base judgements on the decisions of other societal members and authority figures. In this case, donors are likely assuming that BMGF has exercised their due diligence as they would not have otherwise agreed to match contributions.


The AI Governance Challenge

Nudge 3: Once and Done

In a recent field study, researchers sent out direct mail solicitations from Smile Train, a non-profit that treats children with cleft palates. The first group received a conventional invitation letter and a second group received “once and done” solicitations. In the second group, participants were given the option to check “never receive any other mail requests”. Results showed an initial response rate of 0.34% for the control group with a total revenue of $178,609. The “once and done” group had a higher initial response rate of 0.66% with a higher total revenue of $260,783. Most surprisingly, the “once and done” group gave more future donations than the control group. This is especially interesting as the control group did not have the option to opt-out of future mail solicitations (Mullaney et al., 2015).


Taken together, these nudges are reassuring donors when they have insufficient information for optimal decision-making. These nudges are designed to leverage our natural tendency to engage in social referencing. When we are told that a lead donor has covered running costs, or agreed to match contributions, we automatically assume that the charity has been vetted. This process assigns credibility, which makes us gain trust and comfort in our decision to donate.

Why More Choice Means Less Freedom

Q: What would you like to have … fruit juice, soda, tea, or coffee?

A: Tea, please.

Q: Ceylon tea, herbal tea, bush tea, iced tea or green tea?

A: Ceylon tea.

Q: How would you like it? Black or white?

A: White.

Q: Milk, whitener, or condensed milk?

A: With milk.

Q: Would you like it with sweetener, sugar or honey?

A: With sugar.

Q: Beet sugar or cane sugar?

A: Cane sugar.

Q: White, brown or yellow sugar?

A: Forget about tea just give me a glass of water instead.

Q: Mineral water or still water?

A: Mineral water.

Q: Flavored or non-flavored?

A: I’d rather die of thirst…


Unravelling traditional thinking about choice

This joke sheds some cautionary light on the potential risks, which arise when customers are blitzed with an overabundance of choice. Many corporations abstractly uphold the following half-truth: more choices will lead to more customer utility. At first glance, this assumption seems irrefutable. It is a rather simple deduction: the greater the number of choices, the greater the likelihood that the choice set will include the optimal choice for any given consumer. Upon closer inspection, the inadequacies of this traditional ‘econ-thinking’ begin to unfold. The fact that some choice is good, does not necessarily mean that more choice is better. Before explaining why, it is worthwhile to first justify how this pursuit can benefit us.

The relevance of choice architecture

Choice architecture is not some esoteric domain reserved exclusively for academics, behavioral economists or market research analysts. Instead, most of us have already adopted this role as we have all presented choices to others when selling. For example, we design and present choices when we sell our property (i.e., condo, car, collectibles, etc) or sell ourselves (i.e., prospective employers, landlords, dates). So, there is a take-home message for all of us!

What is the problem with choice?

To explain why more choice is not necessarily better, I will briefly introduce Dr. Barry Schwartz’s thesis presented in his book, The Paradox of Choice. As Schwartz’s subtitle suggests, “the culture of abundance robs us of satisfaction.” Schwartz explains that the consumer culture is strongly impacted by freedom, self-determination and variety. In fact, this cultural impact is so strong that consumers have grown accustomed to this availability of choice. Consequently, customers are now reluctant to give up options. However, Schwartz warns readers that clinging to choices leads to increased anxiety, and dissatisfaction.

Think of the last time you were in the personal care aisle of a pharmacy to buy toothpaste. Walking down the aisle you are presented with countless types of toothpastes; anti-decay, desentizing, anti-calculus, anti-plaque, whitening, organic, fluoride, fluoride-free. Which one do you choose? For many consumers, this decision comes at the expense of some level of anxiety. Some customers may think, “Maybe I should have bought the anti-decay instead of the anti-plaque. Now that I think of it, my teeth seem to be decaying. Maybe, I should go see the dentist. I actually shouldn’t have taken this job, my last job had a better dental plan.” Although this example is somewhat hyperbolic, I use it to illustrate the domino effect of negative post-purchase self-talk. We can see how doubt concerning which toothpaste to buy can quickly lead to more substantial doubt relating to career choices.

Substitute toothpaste with Medicare drug plans or social security investments and the stakes are dramatically raised. In some American states, in excess of 100 Medicare drug plans are available for senior citizens. In this example, senior citizens have a higher likelihood of feeling overwhelmed by the need to process information, understand policies, weigh out pros/cons and make informed decisions. Unfortunately, this paralysis typically reduces motivation to seek drug plans altogether because seniors put it off as non-essential. Seniors may think, “I’ll get to it eventually. Next week for sure.” Clearly then, an overabundance of choice should not be dismissed as a trivial affair. The consequences can be seriously detrimental and damaging.

Regardless of who choice architects (e.g., corporations, governments, friends) and decision makers (e.g., customers, voters, citizens) are or what is being chosen (e.g., toothpaste, Medicare plan, life insurance) the adverse consequences of choice overabundance are felt by all the parties involved. This is why strategically diagnosing the source of the problem via a psychological approach is so crucial.

What is the solution?

Consider a customer’s experience at a restaurant when ordering appetizers. Upon reading the menu, the customer is blitzed with a long list of soups: New England clam chowder, Philadelphia pepper pot, lobster stew, yellow pea soup, she-crab soup, tomato bisque, etc… In this case, all parties suffer. Customers become anxious, restaurateurs pay more running costs, service slows down and the quality of each soup reduces.

As choice architect trainees, the ‘specials of the day’ can now be appreciated. The specials act as a nudge because they prompt customers to order from the restaurateurs’ recommendations. Customers tend to jump to positive conclusions about these specials. The word itself makes us feel warm and fuzzy inside. Customers think, “The server recommended the yellow-pea soup today. They must have made it freshly in-house. I bet you they bought the peas from the local farmer’s market. They are in season!” Together, reducing the choice on the menu by replacing an exhaustive list with fewer daily specials minimizes the negative consequences associated with an overabundance of choice. This nudge increases the quality of the soup while lowering customer anxiety and running costs.

We can apply this insight into our daily consumption habits. In this restaurant example, customers can search for menus on restaurants’ websites, or consult yelp webpages. Customers could easily lessen the decision anxiety and paralysis by thinking of essential criteria to meet their specific appetitive needs. How much are you willing to spend on wine, an appetizer, a main course, or dessert? What kind of cuisine do you feel like eating? How much would you like to thrill your date?


The AI Governance Challenge

Why should we care?      

To answer this question, we must zoom out of the consumers’ psychology to scan the broader landscape of macroeconomic systems. One system that deserves some scrutiny in this matter is capitalism. Not only does capitalism nurse the tyranny of choice, it also parents it. Despite the variations in capitalistic or quasi-capitalistic practices (e.g., free market, state capitalism), defining characteristics unequivocally amount to private property, wealth accumulation and competitive markets. I do not aim to criticize capitalism here. Rather, I want to point a looking glass in the direction of a truth that often goes unnoticed.

Competition does not only dwell within corporations, it is also embedded in the minds of consumers. As consumers, we feel the pressure to make the best choices all the time. Our choices must always be better than those of our next-door neighbours. We aspire to enrol our children in better ranking private schools. We buy smartphones with better display resolutions, more connectivity, and longer-lasting battery lives. We buy cars with more luxury, convenience, and fuel-efficiency. These purchase decisions are to some extent based on the facade of our public image and status. The bitter truth is that we continue to play ‘keep up with the Joneses’. It is about time we realize that the game is rigged!

While as consumers, we like the illusion of choice because it perpetuates the even grander falsehood of freedom, competitive free markets and the resulting overabundance of choice actually limits our freedom.

How Culture Affects The Way We Work

This article originally appeared in [] and belongs to the creators.

Just how adaptable are we?

Human thought is different from animals in the degree to which it can be programmed to deal with a variety of information landscapes. For example, the deer who are unfortunate enough to be born in an urban or suburban area may have difficulty dealing with cars, roads, and buildings, but human children have no difficulty learning about the world around them no matter different that world is from that of our evolutionary ancestors.

The cost of that flexibility, though, is that it takes humans about 20 years of cultural programming before they are ready to take their place in the workforce.

Some of what we learn from our culture is the set of concepts that help us to navigate our world. A child growing up in a hunter-gatherer culture may need to learn about different species of plants, the habits of animals, and the weapons that can be used for hunting. If that same child grows up in a modern city, then that child has to learn about elevators, iPads, and subways.

How culture influences working style

In addition to teaching concepts and skills, though, culture also shapes more subtle aspects of thinking. One fascinating influence of culture on thinking comes from research by Richard Nisbett and his colleagues. They have looked at differences between people from Western cultures (like the U.S. and Europe) and those from Eastern cultures (like Japan, China, and Korea).

These cultures differ in how strongly individualistic they are. Broadly speaking, Western culture focuses on the individual. Western culture looks at individual performance and achievement. Members of Western culture do not need to be strongly attuned to who else is in the room when they speak, because Western cultures do not have a strong hierarchy.

Eastern cultures are more collectivist. They focus on the welfare of the group and expect group members to think of their group identity before their individual identity. As a result, members of Eastern cultures often have to be acutely aware of who is in the room and to give deference to those whose position demands more respect.

This focus on the individual or the group that emerges from these social interactions extends to the way that members of these cultures habitually think of a variety of aspects of the world.

In particular, members of Western cultures tend to extract objects from their context and to think about them in isolation. This can be very helpful when doing science, because it allows an intense focus on the properties of particular objects.

Members of Eastern cultures tend to focus on the relationships among objects the way that objects relate and change in the contexts in which they are found. This focus is great for the development of solutions to social problems, because understanding society often requires exploring how changes in one area of society affect other areas.

Personal behavior and cultural influence

Most people are blissfully unaware of these deep influences of their culture on the way they think. Luckily, by knowing more about the way culture affects thought, you can change your own typical way of doing things. If you have a tendency to focus on individual people and objects, then start paying attention to the way people and objects interact. These relationships are often a fertile source of new ideas.

Paying more attention to the context of behavior helps you to recognize these situational influences on behavior more easily.

For example, when you watch another person’s behavior, you often assume that they acted as they did because of some characteristic of who they are. But, the situation in which someone is engaged has a profound influence on what they do.


The AI Governance Challenge

Paying more attention to the context of behavior helps you to recognize these situational influences on behavior more easily. Then, if you are trying to influence what people are doing, thinking about the context of behavior provides more opportunities to influence their environment to change the situation around them in ways that will have the desired outcome.

Ultimately, learning more about how culture influences thought will help you to distinguish between those aspects of the way people think that are truly part of human nature, and those that are the result of the decades of cultural programming you have gone through before you reached adulthood.

Globalization Policy (2/2): Winners, Losers, And Solutions

Who gets richer from globalization?  

Globalization, in fact, has a side effect: inequality increased in most countries following a decrease in tariffs. This includes both wage inequality between groups of workers and shifts of profits to highly productive firms at the expenses of smaller enterprises.

Trade openness was creating winners and losers within each country. In other words, the gains created by free trade were greatly benefitting some people at the cost of most. This justifies a political economy story behind protectionism, that in a Ricardian world would be completely irrational, where losers oppose to trade and winners promote it.

What is the solution, then? Could impeding trade be beneficial? Trade does increase the amount of resources in all countries. Giving it up also means giving up that extra wealth. Then, what is the solution? If we are able to recognize who loses from opening to trade, we can compensate them. The solution is redistribution.

In order to effectively redistribute, we need to understand who wins and loses, and how it happens. Melitz (2003), in one of the seminal contributions to the topic, picks up that challenge by looking at the supply side of the economy. He shows that when trade is opened, low cost producers are able to enter the domestic market driving less efficient firms out of business.

The resources dismissed by closing firms can be re-employed by the surviving enterprises, more productive, increasing their production and sales. Business anecdotes confirm this story of the differential effects of trade on firms profitability depending on their starting point.

The country is overall more productive, a desirable effect. At the same time the owners of the firms that are closing due to the spike in competition and their workers that have been laid off must not be ecstatic about the change. The challenge, then, is combining this efficiency of globalization with fairness and economic inclusion.

Some economic actors are better positioned to take advantage of low barriers to trade. Multinational firms, for instance, can move production to low-wage countries, while workers are passive recipients of such decisions.

Then, how do multinational firms navigate this system ensuring they are on the winning spectrum?

The multinational firm and its strategy  

Multinational firms are key players in the global economy. The fall in trade and investment barriers, the technological innovation that makes transportation and remote management ever easier incentivizes the geographical dispersion of production (Antras, 2003; OECD, 2013).

Firms internationalize their production in search of lower wages, greater flexibility, looser regulatory boundaries, to tap into foreign markets and into their competitive advantage in certain aspects of production. Despite the efficiency of this process, does it happen at the expense of other members of society? What happens in the offshored country and what happens back home?

When production is outsourced in low-income countries, their firms can access a greater and richer market, their production increases, increasing the amount of workers employed, and they can acquire more sophisticated techniques and technologies. Is this a win for those developing countries?

According to the wide literature on Global Value Chains, there is a relationship between growing international outsourcing and increase in inequality in developing countries, along with the deterioration of other social variables such as labor vulnerability and women’s rights (Kaplinsky, 2000; Milberg and Winkler, 2013).

The greater bargaining power of multinational firms, in fact, allows them to impose conditions that are not necessarily beneficial to firms and workers abroad. The long term gains from inclusion in value chains impose short term burdens on current workers.

Once again, a trade off.

Which brings us back home. What happens to the workers in the country that has offshored its production?

What about the workers at home?  

Hecksher and Ohlin first started the literature on the distributional effects of trade, followed by many others, including among the most important contributions Grossman and Rossi-Hansberg (2008). The common denominator in all these models is juxtaposing low-skilled and high-skilled workers to see the differential effect of trade openness on wages and employment.

In OECD countries, in fact, wage inequality increased together with unemployment for the least skilled following an increase in trade (Wood, 1994).

Most interestingly though, offshoring led to a rapid growth in employment for high-skill individuals, and a modest growth for low-skill jobs. The slowest was experienced by middle-skill employment. In other words, middle-income workers were the ones that lost from globalization.

The argument is that it is easier to offshore manual tasks, like product manufacturing, where practices are highly codifiable and transmittable. It is harder for headquarter services or R&D, where developed countries enjoy a comparative advantage both in techniques and protection of proprietary knowledge. It is also hard to offshore the lowest-skill services that often require geographical proximity.

For instance, how could you offshore the cleaning services of your office? Not only it is impossible, but the growth in high-skill and traditional office jobs runs parallel to the need for people that clean those offices.

Skilled individuals are benefiting from offshoring at the expense of middle-skill manufacturing jobs.

One of the beneficial effects of trade, predicted and welcomed by trade scholars, is the displacement of workers. As unprofitable firms are driven out of business, their workers are laid off and move to more productive ones. A win-win for workers and society at large.

However, neither those industries that enjoy a competitive advantage, nor exporters are able to immediately reabsorb trade-displaced workers (Menezes-Filho and Muendler, 2007). There is a level of inertia in labor adjustments.

Dix-Carneiro (2013), for instance, estimates that it might take several years (for some industries even more than a decade) for the majority of workers to be reabsorbed into the labor market following a trade reform and that the costs of their reallocation can reach almost three times their annual wage.


The AI Governance Challenge

And inequality worsens if this transitional unemployment flows towards the informal sector, commonly displaying lower wages, benefits and job satisfaction.

The possible solution could be public support for this costly switch; some form of redistribution that helps people get back on their feet after these shocks.

Once again we are face with the principle that there is no free lunch. The benefits we all experienced from a globalized world come at the expense of some people. And despite anecdotes, empirical and theoretical research pointed out this fact, we decided to ignore it. 

This is far from an argument in favor of protectionism. After all, free trade does make countries overall better off. But we need to decide what to do moving forward for those that bear the costs of a globalized society.

In a world that seems directed towards more closure, can we find other solutions that are both efficient, fair and, most importantly, inclusive?

Consumer Patterns Of The New American

This article originally appeared in [] and belongs to the creators.

Compared with the rest of the world, Americans are feeling pretty good about their finances. While many consumers in other countries are living paycheck to paycheck and worrying about becoming unemployed, American consumers are comparatively unconcerned about their household’s financial future. This isn’t to say that US consumers are exuding confidence: financial-market volatility and the political uncertainty surrounding the upcoming presidential election are stoking fears of another downturn. Still, most Americans are staying loyal to their favorite brands instead of downgrading to cheaper options, and some are even splurging on certain types of purchases.

These are among the findings of our latest US Consumer Sentiment Survey, the 11th in a series we launched in 2008 (see sidebar, “Our survey methodology”). Our aim was to track how consumers feel about their financial prospects and how these sentiments are affecting their buying behavior. These insights have important implications for consumer-goods companies and retailers as they seek to meet consumers’ ever-changing needs and preferences.

Still cautious after all these years

Whereas in our 2014 survey 40 percent of Americans said they were living paycheck to paycheck, only 28 percent made that claim in 2015. Only 23 percent of survey respondents, down from a high of 48 percent in 2009, said they are finding it harder to make ends meet than they did a year ago. Most Americans—65 percent—expressed no concern about losing their job. In general, fewer American consumers are feeling economic pressure today than at any time since 2008 (Exhibit 1).

But it’s still no bed of roses. Only 20 percent of Americans expressed optimism about the country’s economy. That number has shown little improvement since 2011, when a mere 18 percent of respondents said they were optimistic about the nation’s economic prospects. Slightly more than 30 percent of Americans said they’re cutting back on spending or delaying purchases—although, encouragingly, that fraction is significantly down from the almost 60 percent who were cutting back or delaying purchases in 2009.

Would higher incomes spur US consumers to loosen their purse strings? Only a little. Consumers said that if their incomes were to rise by 10 percent, they’d spend only about 21 cents out of every dollar of that extra money; the rest would go into savings and toward paying off debt. Americans appear to be taking a more conservative posture toward spending than the rest of the world. On average, global consumers said they’d spend 35 cents out of every dollar of additional income.

Among US consumers who said they’d spend a portion of their extra income, most—57 percent—would buy everyday necessities such as food and household items. More than half of these respondents said they’d also allocate some of the money toward vacations. More than 40 percent would spend some of their money on clothing, eating at restaurants, and entertainment.

Five truths

The behavioral shifts among Americans mirror those of consumers around the world, to an extent. Certain consumer segments are exhibiting more of these shifts than others, but collectively, they underscore the challenges and opportunities that consumer-focused companies will face in the near term. Companies would do well to keep in mind the following five truths about today’s US consumers.

1. In the search for savings, millennial moms lead the pack.

American consumers are reducing their spending in a variety of ways. Overall, 49 percent agreed that they’re “increasingly looking for ways to save money.” Among millennial women (ages 21 to 34) who have children, 72 percent agreed with that statement. Indeed, millennial moms are much more likely than the average American consumer to engage in belt-tightening behaviors such as comparing prices, using coupons or loyalty cards more often, seeking out sales and promotions, shopping at several stores to find better deals, and buying more products in bulk. They are also more apt to change their eating habits: more than 40 percent of millennial moms said they’re eating at home and cooking from scratch more often, and about one-third said they’re eating leftovers and packing lunches more often.

2. They are brand loyal but look for ways to spend less on their brands of choice.

Among US survey respondents, 52 percent—down from 64 percent in 2012—said they’ve modified their buying behavior when it comes to their favorite brands. The trend is most pronounced among Hispanics: 61 percent of Hispanic consumers said they’ve changed their buying behavior. Many American consumers have remained loyal to their preferred brands but are watching their budgets more closely: buying only with discount coupons or when these brands are on sale, shopping around to find retailers that sell the brands at lower prices, or purchasing in smaller quantities (Exhibit 2).

3. They’re now much less likely to ‘trade down.’

Only 9 percent of consumers reported trading down—that is, buying cheaper brands or private-label products instead of their preferred brands. Millennial moms, consistent with their money-saving tendencies, had the highest percentage of down-traders, with 14 percent. The most vulnerable product categories (those with the highest trade-down rates) were bottled water, household-cleaning supplies, pasta, and rice—perhaps indicating that branded products in these categories haven’t differentiated themselves enough.

Compared with past survey results, a slightly larger percentage of down-traders reported being pleased with their experience—46 percent in 2015, up from a steady 42 percent since 2012. More than two-thirds said the less-expensive brand exceeded their expectations with regard to quality and value for money. And most down-traders didn’t regret their decision: 74 percent said they intend to stick with the less-expensive option and won’t return to the brand they bought previously. Interestingly, half of those who said they’d stick with the cheaper option still preferred the more expensive brand but weren’t willing to pay more for it.

Among US down-traders, 62 percent opted for private-label products. But the shrinking pool of down-traders has slowed private-label revenue growth. Witness what’s happening in the over-the-counter (OTC) drugs category: the percentage of consumers claiming to have traded down in OTC products has steadily fallen from 21 percent in 2009 to a mere 8 percent in 2015. And, in the past four years, the market share of private-label OTC products has been gradually declining.1A similar pattern is playing out in other consumer-packaged-goods (CPG) categories as well. After years of share increases, US private-label products saw their share fall slightly in 2015.2


The AI Governance Challenge

4. Some splurge on alcoholic beverages and personal-care products.

As Exhibit 2 shows, the percentage of US consumers who traded down is equal to the percentage who traded up. In 2015, 9 percent of consumers—compared with only 6 percent in 2013 and 2014—decided to upgrade their purchases in certain categories. Alcoholic beverages and personal-care products had the highest trade-up rates (Exhibit 3), suggesting that higher-end brands in these categories were able to persuade consumers that their products are worth the price premium. Exhibit 3

Trade-up rates varied by consumer segment as well. Millennial moms proved just as willing to trade up as they were to trade down—14 percent of them said they’ve traded up. Baby boomers (Americans between the ages of 55 and 74) were the least likely to trade up; only 5 percent of boomers said they did so.

5. They’re willing to shop across channels.

Another important change in spending habits has to do with where people shop. US consumers claimed to have shifted as much as one-fifth of their spending toward each of three channels: online pure-play retailers, hard discounters, and club stores. Their stated behavior aligns with actual retail sales figures; in the US market, those three channels have had the highest growth rates since 2009. (Online grocery’s share in US retail remains low, but—in light of increasing consumer interest and the channel’s rapid growth in other markets such as China, France, and the United Kingdom—sales in online grocery may very well rise in the US market in the near future.)

What If Your Neighbours Knew Whether You Voted?

With all the excitement surrounding the 2016 election, it might be surprising to learn that only 55.4% of eligible citizens, a little over half of the population, turned out to vote. Even the 2008 election, which had the highest turnout in recent history, only had a voter turnout of 63.7%. This kind of voter turnout puts America pretty low on the list of developed countries, which is not something to be proud of, but it also means that voter mobilization efforts have the potential to yield massive results. For example, Romney only lost to Obama by five million votes. That’s a pretty small number compared to the 112 million still up for grabs.

The current methods

The existing get out the vote campaigns come in a few different varieties: direct mail, phone banks, door to door. The most insane and probably the least effective is that kind where Robert Downey Jr. and a laundry list of other celebrities command you to vote from the TV.

Even self-aware and committed campaigns in this frame likely don’t move the needle all that much, because they rely on old-fashioned techniques. Namely, a handful of righteous messages that include things like “it’s your responsibility to vote” or “your voice won’t be heard otherwise” or even “it’s a historic and/or really really close election”. While these are all really good reasons to vote, they all operate under the assumption of a behavioral theory called rational self-interest. 

For decades, people assumed that if social norms about voting were heavily reinforced like they are in these ads, then people would just comply to satisfy their sense of civic duty. Unfortunately, when put to the test, these techniques came up way short.

Insights from behavioral science

In a landmark 2008 paper from Gerber, Green and Larimer, extensive studies show that rational self-interested behaviors generally fail to predict significant turnout. This goes for celebrities talking to you through the TV or online, as well as the phone banks, direct mail, or door-to-door canvassing.

The problem is that plenty of people tell you they’re going to vote, but don’t actually do so when push comes to shove. But behavioral research can offer some tricks to help.

Trick 1: Help voters make a plan. Studies show, for example, that if you ask people about their specific plan, this makes them significantly more likely to follow through and vote. Ask them where they are voting, how they are going to do so, and how they are going to get there. This could double or triple your effectiveness. 

Trick 2: Say there is going to be a big turnout. Campaigners often tell people that every vote counts, implying that turnout will be relatively low. But the research shows that people are more likely to vote if they think there’s going to be a high turnout. In other words, if everyone else is doing it too, they are more likely to do it themselves.

Okay, but what if you really wanted to boost the voter turnout. Is there anything that would motivate people in a really significant way?

What if your neighbors knew whether you voted?

First, it’s important to note that in America, our voting record is public. That means anyone can see whether or not you voted. Now, who you voted for is private, only you know that. But if and when you voted in the past is public record. With this in mind, let’s go back to the Gerber, Green and Larimer paper. What they did is they conducted a large-scale field experiment where they mailed out letters to four different groups of people.

Group 1. The letters sent to group 1 were standard campaign letters which said to do your civic duty and vote. Basically like those ads on Facebook.

Group2. The letters sent to group 2 informed people that they would be confidentially studied by the researchers who were studying voter turnout.

Group 3. The third group were sent letters which made people aware of their own voting record. For example, Robert and his wife were sent their own voting records from which Robert could see that while his wife voted in both the 2008 and 2012 elections, he only voted in 2012.

Group 4. This is where it gets really interesting. The researchers took it one step further for group 4, and sent out people’s voting records, including the voting records of their neighbors so everyone could see who was voting and who wasn’t.

Results. The voter turnout of first group who got the standard mail increased by 1.8% points. Turnout in group 2 increased by 2.5%, group 3 by 4.9% and most dramatically, group 4 by 8.1%.