Plastic stochastic

Scan 34“DON’T bail out the big banks on Wall Street another time,” thundered Richard Durbin, an American senator, “Once in a political lifetime is enough!” His amendment to the Dodd-Frank financial reform of 2010 capped the fees banks can charge merchants to process debit-card transactions, on the grounds that banks were gouging businesses and their customers. But the limits on “interchange fees”, as the financial jargon has it, have not worked out as planned. They have resulted, by one calculation, in the transfer of between $1 billion and $3 billion annually from poor households to big retailers and their shareholders. These were not the beneficiaries Mr Durbin had in mind when the amendment came into effect three years ago this week.

Stores accept cards to increase their sales. Both the bank that issues the card and the one that handles the retailer’s account charge them a small fee for the privilege, as does the card network—an arrangement often criticised as opaque and anti-competitive. American banks, Mr Durbin claimed, took in more than $1 billion a month from such fees. The rules implementing his amendment capped interchange fees for most transactions at 21 cents plus 0.05% of the sum charged—a 45% cut. Retailers, Mr Durbin assumed, would pass the resulting savings to consumers.

Many in the rich world have been thinking along the same lines: the European Commission is currently seeking to reduce interchange fees for credit and debit cards to one low and uniform level throughout the European Union. The Reserve Bank of Australia has already mandated a cut, from 0.95% to 0.55%. Under pressure from regulators, le Groupement des Cartes Bancaires, which processes most domestic card transactions in France, has also reduced interchange fees, from 0.47% to 0.32% of the value of the transaction on average.

Mr Durbin’s amendment has cost the banks $6.6 billion-8 billion annually, according to a paper by the International Centre for Law and Economics (ICLE), a think-tank. But retailers, whose profits have been sapped by the weak recovery from the financial crisis, seem to have pocketed most of the windfall, just as they did when interchange fees were cut in Australia. (Their shares jumped when the new rules were announced.) Meanwhile the banks, which are in even worse shape, have tried to make up for the lost revenue with higher charges for other things, including monthly fees for having a debit card, or even a current account. In 2009 banks provided 76% of America’s current accounts free of charge; last year the figure was only 38%. The higher charges in turn, have pushed 1m Americans out of the formal financial system—not the result Mr Durbin was aiming for.

This article was published in The Economist on 4th October 2014.  See this link.

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Future, imperfect and tense

Time LostIF YOU want something done, the saying goes, give it to a busy person. It is an odd way to guarantee hitting deadlines. But a paper recently published in the Journal of Consumer Research suggests it may, in fact, be true—as long as the busy person conceptualises the deadline in the right way.

Yanping Tu of the University of Chicago and Dilip Soman of the University of Toronto examined how individuals go about both thinking about and completing tasks. Previous studies have shown that such activity progresses through four distinct phases: pre-decision, post-decision (but pre-action), action and review. It is thought that what motivates the shift from the decision-making stages to the doing-something stage is a change in mindset.

Human beings are a deliberative sort, weighing the pros and cons of future actions and remaining open to other ideas and influences. However, once a decision is taken, the mind becomes more “implemental” and focuses on the task at hand. “The mindset towards ‘where can I get a sandwich’,” explains Ms Tu, “is more implemental than the mindset towards ‘should I get a sandwich or not?’”

Ms Tu and Dr Soman advise in their paper that “the key step in getting things done is to get started.” But what drives that? They believe the key that unlocks the implemental mode lies in how people categorise time. They suggest that tasks are more likely to be viewed with an implemental mindset if an imposed deadline is cognitively linked to “now”—a so-called like-the-present scenario. That might be a future date within the same month or calendar year, or pegged to an event with a familiar spot in the mind’s timeline (being given a task at Christmas, say, with a deadline of Easter). Conversely, they suggest, a deadline placed outside such mental constructs (being “unlike-the-present”) exists merely as a circle on a calendar, and as such is more likely to be considered deliberatively and then ignored until the last minute.

To flesh out this idea, the pair carried out five sets of tests, with volunteers ranging from farmers in India to undergraduate students in Toronto. In one test, the farmers were offered a financial incentive to open a bank account and make a deposit within six months. The researchers predicted those approached in June would consider a deadline before December 31st as like-the-present. Those approached in July, by contrast, received a deadline into the next year, and were expected to think of their deadline as unlike-the-present. The distinction worked. Those with a deadline in the same year were nearly four times more likely to open the account immediately as those for whom the deadline lay in the following year. Arbitrary though calendars may be in dividing up time’s continuous flow, they influence the way humans think about time.

The effect can manifest itself in even subtler ways. In another set of experiments, undergraduate students were given a calendar on a Wednesday and were asked to suggest an appropriate day to carry out certain tasks before the following Sunday. The trick was that some were given a calendar with all of the weekdays coloured purple, with weekends in beige (making a visual distinction between a Wednesday and the following Sunday). Others were given a calendar in which every other week, Monday to Sunday, was a solid colour (meaning that a Wednesday and the following Sunday were thus in the same week, and in the same colour). Even this minor visual cue affected how like- or unlike-the-present the respondents tended to view task priorities.

These and other bits of framing and trickery in the research support the same thesis: that making people link a future event to today triggers an implemental response, regardless of how far in the future the deadline actually lies. If the journey of 1,000 miles starts with a single step, the authors might suggest that you take that step before this time next week.

Note: The text for this final Babbage post was originally submitted some four weeks ago. The editor claims full responsibility for procrastinating over the post’s production and publication, blaming his conception of time for the delay.

This article was published in The Economist on 3rd October 2014.  See this link.