Youtube's 1 ad vs 2 Commercial Breaks

Youtube have recently implemented a policy of asking it's viewers when watching longer video's whether they want to watch one long advertisement before playing the video or proceed straight to the video but endure 2 commercial breaks during it. So the question; which one to choose?

Dan Ariely, among others, has done a lot of research (for further reading see his book "The Upside of Irrationality ) on whether people get more satisfaction from small broken up moments of pleasure or long continuous ones and found that unanimously the former is preferred though when surveying participants beforehand they predicted they would enjoy the long continuous one much more. However he found the same held through for negative experience. Given the length of the videos against that of the ads it would seem opting for the commercial's maximizes your viewing satisfaction.

However, the power the number exert over the human decision making mind is strong, there is a reason prices marked €4.99 seem far more attractive than those marked €5, and the thought of 2 short ads vs 1 long can be difficult to weigh, many people will simple see that 2 is greater than 1 and choose the long initial advert.

On the other hand human's are notorious for putting off  things we dislike into the future, because of our inability to think of our future selves as truly us. So perhaps people will make the decision maximizing their happiness by mistake, our of a purely selfish desire for instant gratification.

One thing is for certain, behavioral economics dictates that in this case 2 is a lesser evil than 1. Try both and let us know which you prefer.

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A video made by John Papola and Russ Roberts to illustrate the key arguments between the two great figureheads of the economic debate that rages between the right and the left. If all of the references and economic inside jokes are not apparent immediately it is my hope that after a few months of this blog you will be rapping along and explaining the video to your friends and less awkward family members.

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Keynes' Lovely Ladies

Possibly the most famous and influential economist of all time (for better or worse) and almost certainly the greatest intellect of the post war era we will be talking a lot of John Maynard Keynes in this blog but we'd like to start on a light note. In Nicholas Whapshot's illuminating dual biography "Keynes Hayek: The clash that defined modern economics" he recounts Keynes (by all means a fantastic investor who made a fortune, lost it in the crash of 1929 and then rebuilt it up again) being asked what he thought of the process of going about picking "the best" stocks.

He claimed it was the equivalent of a competition run in the local Cambridge newspaper which showed the faces of 5 young women and asked readers to choose not the one that they thought was the "loveliest", but the one that they thought the majority of other readers would find the loveliest.

What he meant by this was that trading does not rely on buying shares in companies that you think will do well, but in buying shares in companies that you think most other people think are going to do well. It takes a certain kind of mind to think from this perspective, and Keynes certainly had it.

PLAY ALONG AT HOME

Next time you're in a large group of people (you can do it with a small group too but the more the merrier) have everyone put a euro (or a dollar or a pound etc) in the pot and get everyone to write down on a piece of paper a number between 1 and 100 telling them the winner will be the person who guesses the closest to 2/3's of the average number. (for the numerically unsure, add up all the numbers, divide that by the amount of players, then divide that number by 3, then multiply by 2. the number closest to this is your winner!)

Credit to Benjamin Polak of Yale University for introducing me to that game. He does it with his Game Theory class to illustrate the same point. What you think about what others think matters. We are not rational individual actors, we are at best rational interlinked actors, and probably irrational interlinked actors.

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The Seattle Windshield Pitting Epidemic

On April 15, 1954, Bellingham, Seattle and other Washington communities in the United States are in the grip of a strange phenomenon -- tiny holes, pits, and dings start appearing in the windshields of cars. Initially the Bellingham police department believed that the damage was caused by teen vandals using BB guns, but the pitting soon spread to Sedro Wooley and Mount Vernon, towns up to 30 miles south of Bellingham. Roadblocks were erected and all cars and passengers were searched but to no avail. The vandal's theory took a hit when the pits were found in the windshields of cars at the secure Whidbey Island Naval Station. Over 70 marines commissioned a search of the entire station but could find nothing no signs of a break in. Within 24 hours over 2,000 cars had been reported damages at distances 50 miles from each other. It became clear that this could not be the work of mere vandals. It also became clear that the epidemic was moving south, towards the major town of Seattle.

On the morning of April 16th, the newspapers carried news of the northern events to the residents of Seattle. by that afternoon the reports of pitting attacks were coming in. Everyone from domestic car owners to parking lots to second hand car stores to police cars themselves were effected. Vandalism ruled out, more disturbing theories began to be voiced, Sheriff Tom Clark suggested it was the effect of H-bomb tests in the South Pacific, Geiger metres were run over the windshields but responded negatively, further theories included cosmic ray damage, sand flea eggs, a shift in the earth's magnetic field or maybe, just maybe gremlins.

Seattle Mayor Allan Pomeroy wired both Governor Arthur Langlie and the President, Dwight (Ike) Eisenhower:

"What appeared to be a localized outbreak of vandalism in damaged auto windshields and windows in the northern part of Washington State has now spread throughout the Puget Sound area...  Urge appropriate federal (and state) agencies be instructed to cooperate with local authorities on emergency basis."

Finally the University of Washington sent a committee of scientists to survey 84 of the pitted cars and found the damage to be "over emphasized  and said they were probably the result of normal driving conditions, the fact that all pits were found on the front rather than the back windscreen lent weight to their conclusion,

Nevertheless, the King County Sheriff's department conducted their own "tests" on pellets that they claimed were found near some of the pitted cars, their report claims that these pellets reacted violently when a lead pencil was placed next to them, but not when a ballpoint pen was. Right..

The case was closed when the Seattle Police Dept. showed that in "attacks" the older cars had pits and the new ones, simply due to their nonuse, did not. The pits had been there all along, just nobody had noticed, if you haven't already pop on out to your car and have a look, there's probably a pit or two. (Please don't go examine someone else's car, trying to explain what you're doing will probably make you look mad).

This is a textbook (literally) example of what behavioural economists call collective delusion, or collective nudging to go by the work of Thaler and Sunstein.

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The Value of Fear II

Let's start where the last post left off, with the words of Milton Friedman; That capitalism is a system of profit and loss and the latter is just as important as the former. The profit comes about because we are greedy, because wealth is relative, not only to what our peers have but also to what we ourselves have, most people do not consider themselves wealthy even though if you are reading this blog you are probably financially better off than 90% of the inhabitants of planet earth. Just as 90% of people think they are above average in terms of looks, intelligence and driving ability, we tend to thihnk of ourselves as less well off than we are and want more, all that stands in the way of this insatiable desire for more is fear. the fear that we may lose what we already have. This fear is powerful, in Nudge, Richard H. Thaler and Cass R. Sunstein show how we value what we have much more than an identical object we do not have. So surely this should stop us taking undue risks? It's what stops us putting our life savings on black 27 on the roulette wheel, stops us going all in when our odds of a flush are tiny. Regarless of the potential profit the fear gives us prudence. We are careful with our own money. 

The problem occurs when we are given an opportunity to gamble with other people's money, countless studies, some particularly good ones documented by Dan Ariely in his book "The Upside of Irrationality" demonstrate that giving an indidual money to gamble and telling them that it is theirs increases prudence, whereas if you tell them they are just gambling for you prudence goes out the window and that 100 to 1 shop becomes much more inviting because, after all, there is no downside. The work that best sums up the actions that governments and bankers used to allow investment banks to use more and more money, less and less of it being their money is one by Russel Roberts entitled "Gambling with Other People's Money: How Perverse Incentives Caused the Financial Crisis". Russ is the host of "Econtalk" a weekly economics podcast funded by the library of economics and liberty that I would recommend to anyone with even a passing interest in the way the world works.

In this paper Roberts uses the analogy of a poker player, but not in the way various economic correspondants and financial chiefs use it as trying to equate the economy with it's billions of unknowable factors influencing the probability of any single event occuring that is so lamented by Nassim Taleb, author of the recent "Antifragile", but instead to convey a compliated message in simple terms.

Imagine you are a poker player, a very good proffessional poker player, but you're having some cashflow problems. You want to enter a contest and it costs 100 dollars, and you come to me and tell me that you'll put in 3 dollars of the enterance fee if i put in the other 97. The conditions of this loan are that regardless of how much you win I'm just going to get my 97 dollars back, maybe with some negligible interest which we'll ignore for now.

This was the morgage market pre 2008 crash.

So why would I loan you the money? And why did the banks loan people money that meant they owned houses that were 32 times more than their deposit? Let's explore the possibilites.

1.  Maybe you're such a good poker player that you've never lost it (i.e. house prises are rising everywhere are steadily and they are projected to continue doing so) This is a classic example of greed. I see virtually no chance of you losing so why wouldn't I loan you the money?

2. Maybe I'm a huge fan of poker, I like to see it played and if I can facilitate it's playing in the same way that people buying houses is seen to be a "good thing" that banks want to support, and to be seen to support. Homeownership has been seen (for right or wrong and that's another blog post by itself) as part of what makes "the good life" and it's facilitation is seen as persuing a social good.

3. Maybe this isn't just a relationship between you and me. Maybe in addition to us and all the other player you're competing against and with there's another man in the corner of the room. Roberts calls him Uncle Sam, and most of the time he just sits there and watches the game because he, like me likes poker and likes to see it happening, occasionally he comments on how the tournament is going and that has an effect on how you and the other players play. His very prescence in the room changes the incentives for everyone, because there is a belief (the relative legitimacy of this belief both before and after the crisis will be the subject of future blog posts) that is shared by both all the players like you and all the people like me funding the players, that if everything goes pear shaped then Uncle Same will fix things, rescue everyone, bail people out. 

What is the effect of this? How does this change everyone's incentives? Let's have a look.

Without Uncle Sam you, the gambler, have so little to lose. 3 dollars. So if a 50:50 chance to win comes up, and you stand to either lose 3 dollars. or make 100 dollars (because after winning 200 you only have to give me back my 97 dollars), you're going to take it. Greed will outweigh what little fear you have, but I don't want you gamble like that, because it's my money you're going to lose, so I keep a close eye on the bets you make and make sure you arn't being too greedy, and if you don't listen to me then I'll just stop loaning you money. 

And this is what the banks should have been doing, monitoring who they were loaning money to especially people with low or no credit rating, they facilitated people that never should have gotten car loans to get mortgages! and all this based on one truism; that house prices would continue to rise and if the borrower couldn't keep up payments they could refinance based on the house's new worth, and if the worst came to the worst they would default and the bank would own the house which was still worth more than the original loan. Heads you win, Tails you win even bigger.

Uncle Sam's implicit prescence corrupted all this. No longer did banks care who they lent to. No longer did investors worry about the mortgages behind the bonds they were buying. Everyone knew that the government stood behind the banks. And with this betrayal of a fundamental free market principle the capitalist world imploded.

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The Value of Fear I

In the beginning there was man.
And man was all alone.
And he was very afraid.

And so he should have been, there were hundreds of natural things that could kill and/or eat him, but man was smart, and so for a while he was content to live as well as he could without being too greedy and subjecting himself to risks that could cost him too much, either in the form of his life in in the form of an injury that would reduce his efficacy as a hunter-gatherer. However, in the evenings, when man sat alone in his cave he thought about his fear, and he hated it, and he grew greedier and greedier.

So he found other men, and he brought them together and he called them a tribe. The tribe changed incentives. Suddenly each man could take bigger risks than he could ever have done on his own. As the risk of danger to the collective less outweighed the lust for ever bigger reward. Man had taken the first steps to his conquering of fear. Already there were side effects. Men were lost in swamps that a lone man would never set foot into, or gored by a beast that was many times the size of what an individual would dare take on, but the tribe as a whole thrived, and grew. The once insurmountable prey was conquered and the once terrifying forest was explored. Greed was sated. The tribe was content.

But still men had fear. Of lightning and earthquakes and death. So as the tribe huddled in their cave at night and grew more and more greedy, they thought of a way to overcome this fear. What if, they thought; when we die we don't just die? What if we are rewarded for our services to the tribe, for the struggle and the daily dangers, with a better life afterwards? And so the tribe invented religion. Religion changed incentives. Now men took greater risks, crazy risks. To kill some beast that would feed the tribe for weeks, to cross a swamp in search of a better home for the tribe. Great risks, but if each risk gave only a 50% chance of individual survival; heads you win, tails you win in the next life. So man attempted to conquer his fear. However, both tribe and religions need leaders, and leaders are but human, and humans are greedy. When the tribe looked to its leaders for reassurance of their greed that is what they were given. For leaders like being leaders, and the fearful leader does not last long, and so the regulators of the fear the tribe should have felt had perverse incentives to hide the true value from them and so bigger and bigger risks were taken. As greed grew strong and fear slipped away.

Millennia of wars, fought by men willing to risk anything because the regulators of their fear told them that there was no fear, that they could not lose, that they were on "the right side", and even if they personally lost, they would be losing their lives so that their tribe could conquer fear in whatever guise it had taken in another race, religion or philosophy and besides, they would be rewarded for it in the next life. Thus saw the age of theocrats and monarchs holding fear as a weapon to push on their followers and destroy their enemies. And when the tribes of the earth grew tired of these heavenly promises they grew afraid again, and they grew angry, and thus ushered in the age of dictators, with just as perverse incentives as the Godgiven rulers who went before them to sacrifice the people to remain in power themselves. Fear rules the lives of the elite, but those who suffer for it are the followers.

We saw an attempt to conquer fear in socialism, you need no longer worry about having enough to eat for all will be given the same, and we saw it fail, because fear drives innovation, fear is essential. Without fear we stagnate and like a shark once we stop moving we die.

And finally man realised he should not be avoiding fear, but embracing it. The capitalist free market was supposed to be this realisation of the battle in every man woman and child's mind between fear and greed. Greed for more from life, what your neighbours have or what your brother in law has, and that this is tempered by fear for what happens if you reach too far, as the mythical Icarus did, is not a bad thing, not something to be beaten or tricked out of people. It is instead and important factor and a useful one, weeding out the ideas that are too risky, not worth it. Fear adds worth.

In the wake of the financial crisis many economic commentators seem of the opinion that the balance is broken, that humans will always be too greedy and thus the market is destined to disaster and must be nursed like a child by the government, lest it hurt itself. Others, a minority, are of the view that it is that government, who like all prior leaders, created perverse incentives to remove fear from the equation and left only greed behind. We will examine the two opposing sides next time but for now I leave you with the words of Milton Friedman:

Capitalism is a system of profit and loss, and the second is just as important as the first.

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