Kristian Segerstrale–owner of online games company Playfish (acquired by Electronic Arts for $400m in November 2009)–discusses why online game environments are exciting places for economics research (and specifically: “how social factors influence economic decision making”):
When economists try to model behavior in the real world, they’re always dealing with imperfect information. “The data is always limited, and once you get hold of it there are tons of reasons to mistrust it,” Segerstrale says. In virtual worlds, on the other hand, “the data set is perfect. You know every data point with absolute certainty. In social networks you even know who the people are. You can slice and dice by gender, by age, by anything.”
Instead of dealing only with historical data, in virtual worlds “you have the power to experiment in real time,” Segerstrale says. What happens to demand if you add a 5 percent tax to a product? What if you apply a 5 percent tax to one half of a group and a 7 percent tax to the other half? “You can conduct any experiment you want,” he says. “You might discover that women over 35 have a higher tolerance to a tax than males aged 15 to 20—stuff that’s just not possible to discover in the real world.”
Of course, there’s a fairly obvious caveat:
One possible flaw in this economic model is that the kind of people who spend hours online taking care of imaginary pets may not be representative of the rest of the population. The data might be “perfect” and “complete,” but the world from which it’s gathered is anything but that.
In a series of novel framing experiments, researchers have shown that our self-identified political leanings correlate with how we perceive financial losses.
Hundreds of online participants chose between various flights, computers and so on. In each case they could plump for a cheaper option or a more expensive, greener option, the latter including either a ‘tax’ to help reduce carbon emissions, or an ‘offset’ to do the same – depending on how the choice was framed. Whether the expensive option was framed as a tax or offset made no difference to Democrat (left-wing) participants. By contrast, Republicans (right-wing) and Independents were much less likely to choose the more expensive option when it was labelled as a tax.
Large bonuses and salaries are in place to attract prime talent and as an incentive to improve performance, goes conventional wisdom and the bankers’ rhetoric. However recent research by Dan Ariely (author of Predictably Irrational) and colleagues suggests that while large pay will attract the best talent, large performance-based bonuses may hinder superior performance.
Interestingly big bonuses succeeded in increasing performance only when the tasks undertaken were mechanical in nature (e.g. tapping a key as fast as possible) but not when they were cognitive. When tasks were conducted in public (public scrutiny as a task motivator), performance did increase.
Like money, social pressure motivates people, especially when the tasks require only effort and not skill or thinking. But at some point, too much of it overwhelms the motivating influence.
If our tests mimic the real world, then massive bonuses clearly don’t work. They may not only cost employers more but also discourage executives from working to the best of their abilities. The financial crisis, perhaps, didn’t happen in spite of the bonuses, but because of them.
Much has been written on the (ir)rationality of purchasing lottery tickets (Eliezer Yudkowsky’s viewpoint is particularly fine), but little has been said on applications of these biases that could improve the finances of all of those who buy a ticket.
Now behavioural economists are attempting to boost the historically poor household savings rate by using our lottery-like optimism as an incentive to save:
Psychologists have long known that people tend to overestimate the odds of rare events. Applying that behavioral insight, finance professor Peter Tufano of Harvard Business School has devised a clever program called “Save to Win.” Launched earlier this year for members of eight credit unions in Michigan, it is a cross between a certificate of deposit and a raffle ticket. Members who put $25 or more into a Save to Win one-year CD* are entered into a monthly “savings raffle” for prizes up to $400, plus one annual drawing for a $100,000 jackpot. […]
In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.
via Techdirt
* CD = Certificate of Deposit (similar to a savings account).
By donating funds to disaster-specific charitable organisations and campaigns we restrict the use of our funds to the relief of that problem only. This can cause long-lasting issues for charities and worldwide disaster recovery efforts in the future.
To ensure the charitable help best, the charitable should ensure they give unrestricted funds that are not earmarked for specific disasters.
[Médecins Sans Frontières] has already received enough money over the past three days to keep its Haiti mission running for the best part of the next decade. MSF is behaving as ethically as it can, and has determined that the vast majority of the spike in donations that it’s received in the past few days was intended to be spent in Haiti. It will therefore earmark that money for Haiti, and try to spend it there over the coming years, even as other missions, elsewhere in the world, are still in desperate need of resources. […]
The last time there was a disaster on this scale was the Asian tsunami, five years ago. And for all its best efforts, the Red Cross has still only spent 83% of its $3.21 billion tsunami budget — which means that it has over half a billion dollars left to spend. Not to put too fine a point on it, but that’s money which could be spent in Haiti, if it weren’t for the fact that it was earmarked. […]
If a charity is worth supporting, then it’s worth supporting with unrestricted funds. Because the last thing anybody wants to see in a couple of years’ time is an unseemly tussle over what happened to today’s Haiti donations, even as other international tragedies receive much less public attention.