Monday, 6 January 2014

consumers, irrationality, high salaries, over confidence

In general, we often expect consumers to be rational, especially if they are of average intelligence and not currently suffering any delusions. For example, if we cut the price of something, we might expect that consumers are more likely to buy it. However, this is not always the case; diamonds, say, are desired by people because they are so eye-wateringly expensive rather than any actual use (other than being used in drills and whatnot, and Marilyn Monroe didn't look like the sort of gal who engaged in DIY), as a sort of status symbol. This is a very long and detailed article which explains the lengthy history of diamond price fixing and why they are essentially worthless, but I digress....

Another example of consumer irrationality is gift vouchers, which are just like cash, but much less useful. One case of irrational consumer behaviour I find particularly baffling is the purchase of CDs/books/DVDs of bands like One Direction/tv personalities like Kerry Katona and Katie Hopkins**, people with no apparent skills and are certainly not unique, yet have managed to make money due to freak occurrences in the market.

So if people are not always rational with their money, can we expect businesses (which are still run by humans at the moment) to make irrational decisions every now and then too? We might call into question super high CEO pay, which we have formerly been told is necessary to attract the best talent. It may be patronising for a jobless 25 year old to imply that HR departments with 20 odd years experience or whatever are subject to cognitive biases when it comes to financial remuneration, but the New Economics Foundation offers some convincing data which show us that the global market place for executives does not exist. The article also argues that CEOs are not uniquely talented as we are often led to believe. How or why do people rise to the top then? Of course there is some ability, but grounded in my own experience of the job market, there is a lot to be said about overconfidence. Have you ever walked away from screwing up a job interview from being so nervous even though you were perfectly qualified (if not overqualified) for the job?

Confidence is highly prized these days, but are the people who can shout the loudest always right? In his New Yorker article, "The Talent Myth" Malcolm Gladwell blames this misplaced confidence-in-confidence on the demise of the now defunct energy company Enron, where employees were promoted/given enormous bonuses/laid off according to performance reviews, resulting in inexperienced workers rising to the top in positions they were not ready for. This, Gladwell says, was due to their "narcissistic personality types" which make them more likely to take more credit for achievements and quickly disassociate themselves with any blame for failure. Similarly in this heartfelt TED talk, Susan Cain argues that the overconfident are more likely to take risks to the detriment of everyone else.

There are lessons to take from this, Enron isn't the first business to fail and won't be the last. So do businesses/banks/whatever hire the wrong people and pay them too much just because they're a bit stupid? Well, these individuals who reach the top are more than likely still highly qualified and hard-working, but we must stop thinking they have magical abilities just because they say they do whilst overlooking everyone else.

**In this instance I am defining rational behaviour as something that enhances our utility. I'm sure some 13 year olds would be willing to challenge me on One Direction, but at least there is widespread agreement that Katie Hopkins is somewhat of a waste of space.

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