When behavioral biases meet the market

Have you ever gone shopping, only to be overwhelmed by the number of options available to choose from?  You're not alone.  In fact, psychologists have created a name for the phenomenon: the "excessive choice effect."  In one of the more famous studies on the topic, aptly titled "When choice is demotivating", the authors found that when consumers were offered the opportunity to buy an exotic jam, 30% bought when only 6 varieties were presented.  However, only 3% of consumers bought when 24 variety were presented.  On the face of it, this seems to violate basic economic logic: when there are more varieties available, there is a greater likelihood of finding one you like, and thus there should be a higher likelihood of purchase.  

These sorts of findings have led to popular books (like this one titled The Paradox of Choice) and some bold claims that we'd all be happier and our society would have less depression if we (or namely the government) restricted our choice and freedom.  

Well, as it turns out, subsequent studies found that the "excessive choice effect" doesn't always exist, and the phenomena is much more nuanced than first suggested.  

Now, enter of of my Ph.D. students, Trey Malone (who is on his way to an assistant professor position at Michigan State University).  Our co-authored paper on this topic was just released by the Journal of Behavioral and Experimental Economics.  Trey's insight was this: if the "excessive choice effect" (or ECE) exists, surely companies will want to do something about it.  It's bad business to present consumers with so many options that they don't make a purchase.  Yet, in many markets (and in particular in the market for craft beer which was the focus of our study), there is an apparent explosion of variety of choice.  What's going on?  

From the paper:

“In a competitive market, the choice architecture is endogenous, and sellers compete to provide environments that consumers find appealing, thereby increasing profits. In such cases, the market, at least partially, provides incentives to ameliorate the ECE by, for example, reducing search costs for consumers (e.g., see Kamenica, 2008; Kuksov and Villas-Boas, 2010; Norwood, 2006). This raises the possibility that ECE may arise in laboratory contexts or oneshot field experiments while at the same time having limited relevance in day-to-day business decisions. Whereas prior research mainly focus on the identification of an ECE, we show that sellers have access to market-specific mechanisms (or informational nudges) that narrow its influence. We demonstrate that if the ECE exists, sellers can mitigate or exasperate its negative effects through targeted interventions.”

The interventions (or private nudges) that we consider were beer sellers providing consumers more information about the varieties either through a "special" or the provision of beer advocacy scores.  

Trey worked with a local wine bar in town to run field experiments. Unbeknownst to the patrons, we strategically varied the number of options on the beer menu over time.  The menu either presented 6 or 12 options (note that the menu of 12 included all 6 of the varieties on the smaller menu).  And, we also varied information about the beers as previously indicated, sometimes there was no extra information (the control) and other times we tried to reduce search costs by labeling one of the options a "special" or by providing beer advocacy scores for each option (these are akin to a quality rating by a reliable third party).  

The results are summed up in the following graph:

Thus, we found that the excessive choice effect was alive and well in a real-life purchase setting (people were more likely to NOT buy a beer when there were 12 options as compared to 6), but only when no extra information was provided.  The effect reversed itself when the menu included beer advocate scores. These results show how the excessive choice effect might be turned on and off by companies manipulating search costs.  

One of the main lessens here is that it would be a mistake to take a finding of a supposed "behavioral bias" (like the excessive choice effect) in a laboratory experiment to make grand claims for large government interventions without also considering how consumers and businesses themselves might react to those very same biases in the course of everyday life.  

How much will that organic, gluten free, vegetarian diet cost you?

I recently ran across this interesting website and online tool put out by the lender lendingtree.com.  According to their website:

“The total cost of a grocery bill is majorly influenced by consumer shopping habits. According to the U.S. Department of Agriculture (USDA), the national average weekly grocery bill for individuals from ages 19 to 71 is $61.85. By referencing the USDA recommended balanced food plate to create a healthy grocery list and the national average for an individual food budget into consideration, we’ve uncovered how changing one’s diet to reflect a gluten free, organic, vegetarian or vegan diet can significantly affect the cost of their grocery bill.”

Here is one of several graphics at the site.

On that note, I'll also link to a paper I recently published with Bailey Norwood where we compare the food expenditures of self-identified vegetarians and vegans to non-vegetarians.

How does the media cover GMOs?

I just ran across this interesting article by Katherine Mintz in the Journal of Environmental Studies and Sciences (ungated version here)  Here's a portion of the abstract:

“To understand this divergence in opinion related to GMOs, I analyzed 200 headlines and articles from the Los Angeles Times, New York Times, Wall Street Journal, and Washington Post published between 2011 and 2013. I focused on the key arguments and who is making them. The results showed that newspapers presented 207 favorable and 250 unfavorable mentions of GMOs. The findings revealed the arguments “GMO technical performance” and “potential for environmental harm,” along with actors described as the “biotechnology industry” and “U.S. government,” received more media attention, measured by the frequency of mentions in articles.”

Interestingly, of all  the groups mentioned in media stories, the one that received the least attention was the actual people paying to use the technology: farmers. 

Why large scale organic requires large scale non-organic

The NPR Planet Money podcast just ran an interesting episode about the challenges a farmer started having with bald eagles when he went organic and started raising chickens outdoors.  It's a nice story, but I want to take a minute to correct a subtle (but important) message about organic production promoted in the podcast that is widely mis-understood.  It has to do with the nitrogen cycle.  Here is Planet Money:

“He went organic. He started making changes. To replace the chemical fertilizer, he brought in chickens and let them roam free. Free-range chickens would fertilize the grass; the grass would nurture the cattle, and shoppers at Whole Foods would love Harris’s organic beef.”

Here is the problem - the "chemical fertilizer" wasn't actually replaced (at least not fully).  

All farms, if they want to be productive, need fertilizer, and they need nitrogen in particular.  There is ample nitrogen in the air, but it is not in a form that is available to most plants or animals.  Up until about a hundred years ago, we had to get the bulk of our nitrogen from microbes that grew alongside legumes that "fix" the nitrogen in the air and make it available to plants.  Animals would then eat the plants, use some of the nitrogen, and then excrete some of the nitrogen in their manure.  This is why manure is a great fertilizer - it contains residual nitrogen. But, here's the main point: the nitrogen didn't come from the cow, pig, or chicken.  It came from the microbes in the soil and made it into the animal via the plant. 

Then, along came Haber and Bosch.  They figured out a way to get nitrogen from the air.  This greatly increased the amount of nitrogen available, increased crop yields, the number of animals we could feed, and ultimately the human population.  Here is Thomas Hager in the fantastic book The Alchemy of Air on the effects of this extra nitrogen:

“As a species we long ago passed the natural ability of the planet to support us with food.
Even using the best organic farming practices available, even cutting back our diets to
minimal, vegetarian levels, only about four billion of us could live on what the earth and
traditional farming supply. Yet we now number more than six billion, and growing, and
around the world we are eating more calories on average than people did in [the late
1800s]”

So, what does any of this have to do with the NPR podcast?  The farmer (and the reporters) apparently believe they have escaped the use of "synthetic" fertilizer brought about by the Haber-Bosch process because the farmer's fertilization now relies on manure from chickens.  But, where did the nitrogen in the chicken manure come from?  The answer is that it came in via the feed the farm bought and brought in from another farm.  

Maybe the farmer bought organic corn to feed his chickens.  That solves the problem, right? Not exactly.  Your see, the organic corn farmer who sold our organic chicken farmer corn undoubtedly used fertilizer.  There is a very good chance that this fertilizer was some form of manure.  Yet (and this is a very important point), organic rules don't discriminate whether manure comes from an organic or non-organic fed animal.  Because there are many, many more non-organic animals, chances are that the manure came from an animal fed non-organic grain.  Where did the nitrogen in that non-organic grain and then manure come from?  Haber and Bosch.

Thus, even assuming that organic chicken feed was used, there is a very high probability that the nitrogen in the chicken manure that was used on our organic farm featured in the NPR story came from corn that was fertilized with manure that came from a cow or pig or chicken that was fed corn that was fertilized using nitrogen made available via Haber and Bosch.  

So, despite what is implied by the journalists (and perhaps even believed by the farmer), we haven't returned to some kind of "natural" nitrogen cycle.  We've simply found ways of importing "synthetic" nitrogen into a system that makes it look "natural."  This academic paper looking at French farms, for example, calculated that organic farms strongly rely on non-organic farms for their nutrient flows finding on average, 73% of phosphorus, 53% of potassium, and 23% of the nitrogen used in the organic farms in their studies was imported from conventional, non-organic farms via processes like the one I described above.  As one writer put it:

“However much nitrogen exists in manure today, much of it has been fixed industrially before being taken up by corn plants and laundered through the guts of conventionally-farmed animals. ”

Now, one could avoid all this by requiring organic producers to use only manures from organic animals fed organic feed.  However, I seriously doubt there is enough available nitrogen from this "natural" system to support the present size of the organic market.  As the organic market grows, this likelihood becomes even more remote.  Indeed, if one wants large scale organic, it almost certainly implies (given the current population) the need for large scale non-organic.  All that life-supporting nitrogen has to come from somewhere.  Until we find a better way, right now it is coming from Haber and Bosch and is smuggled into organic agriculture via animal manure.  

The Great Bacon Freak Out of 2017

By now, you've probably all seed the headlines: Now It’s Getting Serious: 2017 Could See a Bacon Shortage, Nation's bacon reserves hit 50-year low, and The Looming Disaster Of A US Bacon Shortage. 

As quickly as those headlines hit came another round of headlines proclaiming the original stories "fake news".  From the New York Times:  Bacon Shortage? Calm Down. It’s Fake News and USA Today: Bacon lovers, rest easy. You do not need to fear a shortage (coincidental, USA today also ran one of the initial stories hyping the issue before subsequently telling readers to "rest easy").  

Like so many issues, the truth is somewhere in the middle.  No, we're not going to run out of bacon.  However, it is true that bacon stocks (the amount of frozen bacon in storage) hit a 50 year low.  All the focus on storage is misplaced in my opinion.  What you really want to look at are prices.  Prices reflect scarcity relative to demand.  If bacon were really scarce, we'd expect bacon prices to rise because people would bid up the price to get their hands on the fewer supplies that remain.

Let's take a look at USDA data on wholesale pork prices (these are the so-called primal cutout values).  Below, I've plotted daily prices (cents per lb) for pork belly, and for comparison sake, the ratio of belly prices to pork loin prices from the first of 2014 to January 30, 2017.  

There has, indeed, been a dramatic increase in pork belly prices.  Prices increased from about $0.98/lb in November 2016 to now about $1.64/lb (a 67% increase).  However, as the graph also shows, this price point for bellies isn't unusual even in recent history.  Belly prices were at the same point or higher in the spring and then summer of 2014 and again in the summer of 2015.  The price swing in April and May of 2015 was much more dramatic than what we're currently seeing.  

Pork belly prices may rise and fall not because of scarcity of bellies per se but rather because of increases or decreases in overall pork supply.  As such, it is also useful to look at price ratios (i.e., are bellies in more demand than loins).  On this measure (the red dashed line in the above graph), bellies prices are higher than they've been in the past couple years: today pork belly prices are about 2.1 times higher than pork loin prices; back in late August, early September of 2015, the ratio was also high but only reached 2.07.

But, there is no fear that we'll run out of bacon in the short term. The pork industry is actually on pace to produce more pigs over the next year than it did last year.  Still, a hog can't be produced overnight.  So, how do we allocate a fixed supply of bacon in the short run?  That's the magic of the market.  Prices will adjust to ration out the supply that exists.  As such, the entire question that made he headlines was silly.  We shouldn't ask: will we run out?   But, rather: how high will prices go?