Gestaltz

A slight change in focus can produce a profoundly different understanding https://twitter.com/gestaltz

Or, No Brexit At All…

A draft withdrawal agreement (for Brexit) has been produced that seems to satisfy no one. I appear to be the only one pleasantly surprised. It is much more coherent than I had expected. More important, it is a decisive step. This may not seem obvious given the opposition to it, the threat of no confidence votes, and of parliament rejecting the draft. The key lies in the title of this piece. The PM mentioned the possibility of no Brexit at all. I have not heard her concede this possibility before. It is her trump card.

The withdrawal agreement has passed through the cabinet. It must now pass through the EU council of ministers, the UK parliament and finally the European parliament. The biggest obstacle is the UK parliament. If parliament rejects the agreement then we go back to square one. This may be why it will not in the end reject it. Rejection of this agreement opens up two possibilities. Either we leave without an agreement or we do not leave at all.

The withdrawal agreement satisfies the terms of the 2016 referendum. The question was do we stay or do we go. The result was that we should leave and that parliament and the government of the day should proceed to negotiate our departure. It did not stipulate the terms of our departure. This was left up to the government and parliament. The government has produced a workable withdrawal agreement. The cabinet has approved. The terms of the 2016 referendum have been fulfilled.

Parliament must also approve but if it fails to do so there is a practical dilemma. It cannot simply ask the government to continue negotiations. This requires the EU to agree to do so and they are under no obligation to do so. The risk is that March 2019 comes and goes and there is no withdrawal agreement. This would be much more problematic for the UK and no one can claim it is what people voted for in 2016. It is unlikely anyone would want to force such a hard Brexit, given that a workable withdrawal agreement is available, without a clear mandate. This demands another referendum of sorts.

The question could be this agreement or leave with no agreement. Now even the least informed, gullible, and xenophobic, has by now grasped that leaving without an agreement is going to be painful, and unnecessarily so. Hence if it is a binary choice one can safely predict approval for this draft withdrawal agreement. However, if it is another referendum why would it be a binary choice? The PM has implied it will also include the possibility of remaining in the EU. Indeed I suspect the EU would insist as a condition for waiting for a referendum to be held. They are after all under no obligation to wait.

The threat of another referendum is the PMs trump card. She could only play it once a workable draft was in place. If Brexit supporters are unhappy with her deal that is unfortunate but irrelevant. They must support her or risk another vote. They may lose the vote this time. The Remain camp on the other hand has every incentive to reject the deal. They would welcome another vote.

Notwithstanding my compelling logic, stupidity (there is a lot of it about these days) might see the PM challenged within the Tory party as leader or Brexit supporters joining forces with Remain supporters to reject the draft deal in parliament. We may yet fall out of the EU with no deal. We may get another referendum. The odds however favour a grudging approval of this draft deal as the basis for negotiating a withdrawal. The negotiations for withdrawal will of course drag on for years. There is likely to be a change of party in power before they are complete. No one knows how that might affect the negotiations. This will not be ‘over’ for a long time. But the next step has probably been defined and the framework has been laid out.

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Blueprint: Implications of Genome-Wide Association Studies

Twin and adoption studies have established that heritability explains a large part of the variance in individual traits. Genome-wide association (GWA) studies connect individual DNA variations to individual trait variation. They allow the possibility of locating individuals on relative quantitative trait dimensions from birth (and indeed probably from before birth). GWA studies allow the possibility of predicting individual trait variation accounted for by heritability. In the case of psychological traits the heritability is typically around 50%. This does mean environment has no effect. The environment does not have a systematic or sustained effect. Indeed Plomin argues that much observed environmental influence is actually heritable through the ‘nature of nurture’. Put simply we have some choice in our environment and we systematically make such choice because of our nature. This is in summary the Plomin thesis.

Some observations may help clarify the importance of this work. Such work cannot, for example, predict what you will weigh. It can however make a ‘good’ prediction of in which percentile of the population you might sit. Average population weight varies over time and location because of many environmental factors but your nature will consistently place in the same relative position. The GWA studies identify and highlight a predisposition not an outcome. Indeed you may be predicted to be, by the GWA study, in the 90th percentile but your actual weight might be 70th percentile. It is however unlikely to be the 10th percentile. Of course weight is affected by height so some other measure such as BMI would be the trait variable.

DNA (or more precisely, SNP) variations are constant throughout life. These same predispositions will be operating at birth and at age 65. However, environment may have more influence in the early stages of development as we saw in Blueprint 1. The family can lead a child to university but they cannot ensure it succeeds at and beyond university. Environmental influence averages out over a lifetime (rather like good and bad luck) but predisposition does not change.

GWA studies are not about individual genes. They are about infinitesimally small differences in many genes. One cannot act on all these genes (gene editing) and create the individual one desires. The key is many small variations. It is a chaos theory problem. Small variations create dramatically different people. Moreover there is no way of knowing what to change or how to change it. As was noted in Blueprint 2, the associations are statistical and there is no way of knowing which variations are causal and which just happen to be along for the ride, as it were. So, the risk that we might create super-humans does not come from this work.

There are risks but these are already present in society and were introduced when psychometric studies entered psychology. Such work places you on various trait dimensions based on self-report questionnaires. These are marketed as stable over time as well (not much use otherwise) and widely used in personnel selection. Ironically they emerge from psychodynamic theory (Freud) and the work of Jung. All roads lead to fixed personality dimensions, the only debate is how the personality gets into us. Psychodynamic theory argues that it reflects early childhood experience rather than DNA. However the personality gets into us, clearly the notion that it is fixed throughout life is not unique to behavioural genetics. The obvious fear is that behavioural genetics will create castes within society. They already exist and are perpetuated by psychometric questionnaires for education and job interviews. Genetic studies provide a cross-check on the caste systems being generated by psychometrics.

The big problem in my view is not behavioural genetics or psychometrics, but society. Each society has a set of values and norms. Certain traits are valued more than others. The result is that certain individuals are valued more than others. Indeed those that find it difficult to cope in a given society are classed as having mental health issues. GWA studies offer the possibility that we can identify at birth those that might find it difficult to cope given our existing values and norms and to either adjust these values and norms or create safe spaces for these individuals within society. We can of course treat such people as inferior or problematic and incarcerate them out of sight. We do this now after the fact! This is a failure of society not a problem introduced by GWA studies.

Despite the cursory treatment given such work in the psychological degrees that I completed the issue came up in my masters dissertation in relation to addiction. People vary in their predisposition to addiction. Moreover, the variation applies across substances and behaviours. If we know, at birth, which individuals are predisposed to become addicted to which substances we have some useful self-knowledge. What we do with this knowledge is a personal and social issue. It is not the fault of the knowledge. If we avoid knowledge because we or society might abuse it in some way then frankly humanity is doomed.

 

 

 

Blueprint: 2

In Blueprint: 1 , the first section of the work of Robert Plomin, as described in his book, Blueprint, was introduced. It offers evidence of the importance of heritability in explaining the variation of individual traits in the population. Twin and adoption studies demonstrate the importance of heritability without offering any scope for the prediction of individual variation in traits. In the second section of his book Plomin shows how advances in DNA understanding and technology now offer the prospect of prediction. He begins section 2 with what he describes as the essentials of DNA literacy. It is quite a challenging chapter so I will try to short-circuit for my readers.

The most common type of genetic variation among individuals is called a single nucleotide polymorphism ( SNP). These SNPs play a key role in genome-wide association (GWA) studies. In such studies complete sets of DNA are scanned for genetic variations associated with specific traits. Each persons DNA is placed on tiny chips and scanned for variations in SNPs. The sample of individual participants contains two groups; those with and without the target trait. If certain SNP variations occur more frequently (in statistical terms) in individuals with the trait then such SNP variations are classed as associated with the trait. Note that not all the SNP variations need be actively ‘causing’ the trait but the causality is most certainly located in the set of SNP variations associated with the trait. GWA studies thus offer the possibility of predicting differences in individual traits from knowledge of individual DNA.

The GWA studies have demonstrated that it is not just one or two SNP variations that are associated with variations in traits among individuals. It is tens of thousands of SNP differences that contribute to infinitesimally small associations and that sample sizes must be very large in order to detect the impact of these many small associations. The trick is to combine these small associations into a composite score called a polygenic index. The latter are constructed by assigning weights to individual SNPs based on the correlation with the target trait. SNPs are included in the index as long as the addition improves predictive power (i.e. signal to noise ratio improves). The indices are typically constructed and reported in terms of percentile of the population. Plomin uses his polygenic scores for height and weight in order to illustrate the process of prediction using SNP-derived polygenic scores.

Plomin constructed a polygenic score from his own DNA and compared it to the results from a 6000 strong sample in his Twin early development study in the UK. Note the age difference is not relevant because DNA does not change. His polygenic score places him in the 90th percentile (i.e. top 10%). He is 6 feet 5 inches. Importantly, this prediction could have been made when he was born. In fact his actual height is at the 99th percentile so the score is not a perfect predictor. It is however a better predictor than his height at birth or the height of his parents!

Plomin points out that the predictive power is capped by heritability. Polygenic scores can never predict more variance than is accounted for by heritability. This is intuitively obvious. For the sample in question the polygenic score predicts only 15% of the variation although we know that heritability is closer to 80%. The predictive power of these indices thus has some way to go but ultimately we can expect to predict the relative height of individuals from birth with some accuracy. For psychological traits heritability is closer to 50% so our expectation must be less. Nevertheless, the ability to place individuals on a relative trait dimension at birth with this level of accuracy is promising.

Plomin illustrates the usefulness of polygenic scores for psychological traits using schizophrenia. Apparently polygenic scores explain 7% of the variation in the liability to be diagnosed as schizophrenic. This phrase needs some elaboration. Research uses a target group and a control group as we noted above. The target group consists of people who have been diagnosed with schizophrenia. But the diagnoses threshold is a single point and in many ways arbitrary. The predisposition to schizophrenia lies on a quantitative dimension, much like height. Those diagnosed are just the extreme of this dimension. There is some work needed in this area.

A more interesting and useful psychological ‘trait’ is ‘years spent in education’. Clearly this is not a trait but it is a continuously measurable variable and correlates well with more recognisable traits (correlation with intelligence is 0.5). It is also easy and cheap to collect such data for a large population (you do not have to test every participant for intelligence). So far, more than 10% of the variance in years of education has been explained by polygenic scores. Professor Plomin’s polygenic score places him in the 94th percentile. This prediction could have been made at birth and nothing else in his early life could have made such a prediction. Higher explanatory power is expected from new studies using much larger samples.

The message of Plomin’s work is that polygenic scores will allow us to explain the population variance in individual traits up to the heritability level of the trait. Hence for psychological traits it will be possible to explain typically 50% of the variance. This is a very large effect size and, given that the remaining 50% is apparently unsystematic, the main predictor of psychological variation among individuals will be genetic inheritance, as measured by polygenic scores. This conclusion is not going to be welcome in many quarters though it is less alarming than it might at first seem. The social and ethical implications of these results will be the subject of Blueprint: 3.

 

 

Getting Old….

The fact that I am getting old (as opposed to older) dawned on me this week when I went for a flu jab. The event had all the charm of a sheep dip. The NHS is doing the its best to look after us but dignity is not high on the agenda it seems. I was to have not only a flu jab but also a pneumonia jab, urine test, and BP check. All welcome but it would have been nice to have been told. In the chaos that was the GP surgery it is surprising anyone got anything done. I gave up on the BP check. By that time it was obvious what it was; too high! It was rather like being back at infant school. It turns out that when I turn 70 they will give me a Shingles jab as well. At least now I know. My main discomfort was that I now found myself in a room full of people, the majority of whom would have voted to leave the EU. Sigh…

The event was followed by a SMS inviting me to sign up for the myGp appThis completely confused me as I am signed up for the Patient Access app. They appear to do the same thing! Moreover, in order to fully activate the myGp app one must visit the GP surgery and get the codes that were given to access the other app. Needless to say I have not kept a record of the codes. My experience of the NHS (considerable) is that the clinical bits are outstanding but the information network connecting the clinical bits sucks large. Apparently this remains the case. This is a cause for concern as, getting older, means seeing more of the NHS. Sigh…

Getting old is not all bad. From age 60 one gets free public transport which is ironic as the main benefit of retirement is not having to use public transport at peak hours. There are also handy discounts for ‘senior citizens’ aka old folk over 65. Unfortunately in the chaos that ensued in trying to buy season tickets for the new White Hart lane I ended up in a section which does not allow a senior citizen discount. That is a tidy sum I have left on the table. Sigh…

The state also hands out some benefits like free prescriptions (from age 60), an energy allowance, and a decent basic state pension. The new basic state pension is £164.35 pw or £8546.2 per annum. It is not huge but qualitatively it is unsurpassed. It cannot decline in real terms and the triple-lock ensures it probably grows in real terms. Moreover, it does not cost much really. You need 35 years of NIC to qualify for a full pension and if you do not work you can get credits (JSA, Child Benefit etc). Even if you pay out for class 3 NIC (i.e. voluntary) this is £761.8 per annum or £26663 over 35 years. I am ignoring the interest foregone but also the fact that the NIC rate may increase. It gives a ball-park figure of cost. You would be hard pressed to get an annual income of £8546.2 in exchange for a lump sum of £26663, and especially an income that increases in real terms. Moreover, with credits, you would rarely need to contribute for 35 years. Yay…

The big problem with growing old is the quality of life. This of course varies from individual to individual. I have read a great deal about loneliness in old age and the debilitating effects that this can have on mental health, and indeed physical health. Social interaction is thought to stimulate the old ganglions and delay mental deterioration. Lots of rather vague advice is ‘out there’ but it, like the NHS, is not very personalised. It may be that social interaction makes matter worse. It rather depends on who you are!

Psychometric personality tests will place you on several trait ‘dimensions’, including the introversion/extraversion dimension. This dimension is widely misunderstood. It is rooted in Jungian theory and refers to how one is motivated or energised. Introverts are internally energised whilst extroverts are externally energised. For introverts, spending time alone, thinking, analysing, planning etc is an energizing experience. For extroverts it is exhausting. In contrast, if an introvert is forced to attend meetings, social events, meet clients, give speeches it is draining. Extroverts are energised by such activity. Being alone may not be a lonely experience for an introvert. Being with people may be exhausting.

There is much casual opinion circulating on this subject but the importance of understanding the personality traits of the individual is rarely involved. We live in a world where everybody thinks their opinion is valid simply because they hold it. If the opinion relates to a ‘value’ this might be true but if the opinion is a matter of logic or evidence then not all opinions are valid. Only informed opinions are valid. Unfortunately people express opinions with confidence that are not fully informed. Sigh…

 

Blueprint: 1

An interesting book has just been published titled ‘Blueprint’ by Robert Plomin. It is subtitled, ‘How DNA makes us who we are’, so by now you know what it is about. Plomin is a psychologist that has devoted his career to examining the influence of inherited DNA on individual behaviour. It is a controversial field and often characterised as the ‘nature versus nurture’ debate. It was skimmed over and largely dismissed in the two degrees in psychology that I received, as my department was firmly in the nurture camp. I kept an open mind and have returned to this controversial subject, in part, because advances in DNA sequencing have given us new research tools.

Plomin concludes that typically 50% of the variation in a population across a specific trait can be attributed to genetic differences. He argues that this is the largest systematic influence on behaviour. The remaining 50% he claims is unsystematic environmental effects. This creates the possibility of meaningful prediction of behaviour from DNA. In contrast, environmental factors, being unsystematic in their influence, offer little predictive value.

The original evidence is indirect and comes from twin and adoption studies. The idea is to hold the environment or the genetic make-up constant and look at the trait variation in a population that is explained by what is left. The best test is of adopted Monozygotic twins (MZ). The latter come from the same egg which is fertilised by the same sperm. The DNA is near identical. They share a common pre-natal environment. If they are adopted at birth and brought up in different environments then trait similarities can be attributed to genetics. The problem is that sample sizes are of necessity very small. Plomin demonstrates that for weight MZ twins reared apart are similar to those reared together. This is evidence supporting DNA as a large systematic influence on weight variation. Plomin suggests this is also widespread among psychological traits, and hence behaviour.

The common criticism of adoption studies still applies. Adoption is not random. There may be systematic similarities between the families chosen for adoption. There may be an unconscious desire to place the twins into similar families. The environments may thus not be completely different and if there are systematic similarities then these might be captured by any statistical analysis and attributed to genetics. It is such criticism that have often resulted in the downgrading of twin and adoption studies, though quantification of the significance does not always accompany the critique. There is a strong sociopolitical influence on the status of such studies.

Another type of twin study is the comparison of MZ with DZ (dizygotic) twins both reared together. The latter come from two eggs fertilised by different sperm so are only, on average, 50% similar in DNA. The argument is that both types of twin have the same pre-natal conditions and grow up in the same home, so have the same environment (or so it is argued). One can correlate the extent to which both types of twin are similar for a given trait (in a given sample). Plomin offers data for the physical trait ‘weight’ for illustration. The weight of MZ twins correlates 0.84 and DZ twins 0.55. The difference suggests genetic influence (environment is assumed constant for each pair of twins). The difference is 0.29. If we double this we get the contribution of genes to the weight variation between twins. In this case it is 0.58 or 58% of the variation can be attributed to genetic influence.

The is known as the Heritability of weight for this sample. Interestingly, as the twins in the sample get older (it is from a longitudinal study over many years) the heritability rises to 80%. This is one of the interesting findings of the book. Heritability typically increases with age. However, you are probably wondering why we doubled 0.29. First consider what it would mean if the correlation of both sets of twins was the same. This would imply genes make no difference and heritability is zero. By the same token heritability must be 100% if genes explain all the variation in the two twin sets. However, since DZ twins are only 50% similar the correlation can only be 0.5 whilst that of the MZ twins would be 1.0. The difference is 0.5 which is doubled to give 100%. Intuitively it is because DZ twins are only 50% related through genetics that we need to double the difference to see the amount of weight variation across the two samples that is explained by genes.

Adoption studies compare variation of a trait among children and how the trait correlates with adoptive and biological parents. If genes are important for the trait then the correlation should be greater with biological than adoptive parents and vice versa. The criticism of all such studies is the assumption that environments are different or at least any similarities are unsystematic. Adoption is not  random process. Nor indeed are twins reared together necessarily in the same ‘environment’. Parent/child interactions can be quite different even with MZ twins. Provided these environmental pollutions of the data are unsystematic it should make no difference to the conclusions.

One of the most powerful observations of this book is that heritability increases with time. This supports the idea that environmental influence is unsystematic. Early year environmental influence seems to fade as the child matures. An interesting example of this has emerged from a study at Kings College, London. Shared environment factors can explain a meaningful amount of variation among children in getting to university but none of the variation in their performance thereafter. As the Americans might say, DNA will out.

It is likely this book will be misunderstood as indeed the whole area of such research has been. It offers potential sociopolitical conclusions that many will fear and suppression may be the first instinct. The indirect evidence of twin and adoption studies has been accumulating for decades and now forms a powerful body of evidence. It does not however allow individual prediction. What makes this book compelling is the advances in DNA technology that has opened up the possibility of individual prediction. This will be the subject of my next blog followed by a discussion of the ethical issues that arise. What do we do with this knowledge? I rarely read books the whole way through (notes and all) let alone start reading them again. I also rarely recommend books to anyone. This is the exception. If you only read one book this year, I suggest it is this one.

Rethinking Identity

The question of identity is central to the human condition, so when a respectable FT journalist recommends a book claiming it has changed the way she thinks about identity, one is bound to take note. I purchased said book; The Lies That Bind by K A Appiah. I read the whole book (a rare feat for me) and concluded that the said journalist had probably not thought much about identity before. It was a huge disappointment. An undergraduate Social Psychology student would acquire a more profound understanding of identity than is offered by this book.

The main message of the book is that identity is fluid. True! One wonders who thinks it is not. I was hoping for a more profound philosophical discussion (the author is a Philosopher at NYU). I was hoping he would address the question of why identity is so central to the human condition? What function does it serve? Once this is properly understood its fluidity is self-evident. The author comes tantalising close to this issue on several occasions and then moves on. Very unsatisfying. And very uninformative. The net result of reading this book is to reinforce my prejudice against the American education system and to develop a dislike for the author, whom I have never met. The latter arose because of his constant reference back to his own exalted origins. Well, he seems to think they are exalted.

So why is identity so central? My understanding, gleaned from the study of Social Psychology, personal experience, and thought (I do a lot of this on my own without books) is in how it relates to power. Identity is central to the creation, acquisition, maintenance, and exercise of power at all levels. Power is an intrinsic but latent attribute of human beings. It is brought into being when human beings act in unison. Identity serves as a coalescing agent that motivates human beings to act in unison. By identifying with an idea or institution, the latent attribute is realised as the power of those that identify, acting in unison. Identity is about power.

A more controversial idea is that power operates on and through individual humans rather than is acquired and exercised by individual humans. Monarchy, for example, is an institution of power that acts through the current incumbent rather than is acted upon by the current incumbent. The king is dead, long live the king, is the hail. The king may be the heir to the previous king or queen but he or she may not. The institution is the power. The institution came into being in the deep recesses of human history as the idea of unified and strong leadership emerged as a form of human organisation. Once unleashed, the latent power of those identifying with the idea became vested in the institution. The monarchy took on a life of its own until a new idea, nationalism, usurped it. Identity is already self evidently fluid.

The importance of power is evident in everyday identity language. When someone asks you where you are from, it is not simply a polite enquiry. It is a statement that you are prima facie not from here, wherever here might be. The speaker has claimed the entitlement to challenge your state of belonging to your current location. It is an exercise of power. The context may be relatively benign (the speaker may also regard herself as not from here) but it may also be a prelude to a statement of entitlement. The speaker may have made two statements. First she is from here and therefore entitled. Second, you, prima facie, are not, and hence less entitled. You must prove your entitlement. It is a very clear exercise of power.

It bears on the question of integration. An individual can be aspire to be fully integrated but those more entitled (the ‘host’ community) determine how integrated he can be. Blaming immigrants for not integrating is thus an exercise of power as it is used justify discrimination. The whole process of identity is an exercise in locating oneself in the powerful, entitled, category or creating a powerful entitled, category. Of course identity is fluid. It is a constant jostling for power. Perhaps the more interesting question is why power dominates human behaviour and why human organisation consistently fails to contain it. This is where my paragraph 4 comes from. It is my attempt to explain this for myself. Human society is a victim of the latent power it unleashes through ideas and institutions that grow from ideas. There is a force that operates on humanity but it does not come from above. It comes from within.

If you have never thought much about identity before or think it is fixed in some way then do read Appiah’s book. It is a very accessible exposition of the fluidity of identity. If you have already internalised this idea (perhaps from reading my blogs), then I suggest you start exploring for yourself the idea that identity is about power.

 

Switch to Your Current Energy Provider!

The first clue that the energy switching market has become counterintuitive is found when you first register with a switching website. It will ask for your current provider and your current plan. The latter will be chosen from a drop down menu which, in my case, contained what seemed like hundreds of plans from my provider. Huh! I had never seen these plans, which presumably are current. On checking the website there were maybe 7 or 8 plans that my provider offers directly to switch to on the website. Where on earth did all these plans come from I wondered?

My existing plan expires end of October and hence I can switch without penalty some 40 or so days before. In the run up to the free switching period I habitually check what is available. I made a note of a few deals that looked good and checked the details and the reliability of the provider in so far as google search will allow. My existing provider was nowhere to be seen. The day after my free switching period began I received two emails. First from my provider pointing out the cheapest deal for me. It also pointed out this deal could only be accessed from a switching site. Sure enough right on the tail of this email came another email, this time from the switching site, pointing out it was now free to switch and I should take a look. When I took a look, the cheapest deal available was the one from my existing provider. It was marginally cheaper than the deals offered by the providers I had been checking out before the free switch period began. Hello, I thought, what’s occurring here.

Needless to say I switched to the new deal available from the switch site to my existing provider. This required the full switch process including another direct debit mandate. Interestingly, the switch site made a point of emphasising that my name on this mandate should be the same as on the previous (why would it not be?). The switch site assures me the switch is in progress but I have yet to hear from my existing provider about my request. I am sure I shall. The plan to which I shall be switching is nowhere to be seen on my provider website. The plans available to me directly are much more expensive. The switch provider, when retested, claimed the new plan was the cheapest available to me. Now even the least thoughtful amongst you should be wondering what on earth is going on!

To be absolutely clear, I am able to switch to a deal with my existing provider that is the cheapest available to me (according to the switch provider). This deal only materialised on the day I could switch free (no sign of it before) and just beats the deals that I was checking out before the free switch period. The deal is not on the provider website or one of the deals offered to me directly by the provider via my online account. The deal is much cheaper than those offered directly. What can we infer?

The details are consistent with collusion between the switch websites and energy providers. The fact that I was checking out new providers as my existing plan came to expiry is known to my existing provider (presumably via the switch website) and in an effort to keep me ( I am serial switcher) a plan is produced that will keep me with them. It is hard to believe this plan was produced just to keep me. It is likely I am not the only one and a cluster of switchers is emerging which the provider aims to keep by briefly matching the best offers. This explains the proliferation of plans on the switching site drop-down menu which have never appeared on the website.

This behaviour is known in economics as price discrimination. The idea is to charge consumers the maximum price possible for buying your product. Some people are willing to pay more than others and if the firm can charge each individual what they will bear then revenue is increased. Most users it seem never use switching sites. These users can be charged more and are charged more. The reason they do not switch is the hassle risk of moving to a new provider. But as I have demonstrated, it may be possible to get the best deal, or close enough, by switching to your existing provider. Serial switchers are not willing to pay more to stay. They must be enticed with better deals. However, the system presently allows energy companies to price discriminate, and quite legally so as far as I can see.

If you wish to stay with your existing energy provider it might still pay to do so by ‘switching’ to them via a switch website. The process is quite simple. Register with one or more switching website and give them your details. Then check the market. The chances are you will find a good deal popping up, albeit briefly, from your existing provider. How much hassle can it be to switch to where you already are? If this does not work then you may need to switch to another provider at least once to establish yourself as a switcher. However, I doubt this will prove necessary

Risk Preference and Psychometrics

There are now lots of automatic investment providers that offer cheap and easy investment management. They normally begin with a ‘risk assessment’ which consists of asking you to choose your risk profile on an ascending risk scale scale of 1-5 or 1-10. The risk scale is calibrated to the degree of market volatility. This strikes me as beyond naive. In an earlier blog I concluded that market volatility was not necessarily very important to someone saving for retirement or investing primarily for income. For many people that regard themselves as risk averse, the correct choice is in fact 10. The correct choice depends on far more than simply presumed attitude to market volatility.

In choosing a level of risk one begins with the objective. The risk assessment should be relative to not achieving the objective. The risk choice should be calibrated to the the seriousness for the individual of not achieving the objective. This has two components. First, the inherent uncertainty in the chosen strategy. Second, and most important, the interaction between this uncertainty and behavioural responses of the investor. Market volatility may play an important role in behavioural interactions. Hence, a well designed strategy for a clear objective may be thwarted because the investor panics at the first sign of mark to market loss. The strategy is abandoned, the objective lost, and quite probably a loss incurred. The problem is that no one knows how an investor will respond, least of all the investor.

The response of investors to mark to market losses or gains is neither known with certainty in advance nor necessarily stable. Asking investors to choose a risk preference in advance is a futile and potentially dangerous exercise. It may excuse the manager responsibility for what happens after investment but it does help the investor. The latter do not know their response to mark to market losses (or gains for that matter). Nor can they be sure to respond in the same way in all contexts. There is for example a well known tendency to protect gains and run losses. The investment strategy needs to account for potential investor behavioural response and the risk choice needs to be set at a level that ensures the strategy is not abandoned. Of course objectives change (birth, death, marriage, divorce) and some degree of flexibility must be built into the strategy in any event.

One route would be to use psychometric assessment to identify potential behavioural responses. Such assessments could be included on automatic investment websites. The investor could choose their risk preference and then complete the psychometric questionnaire. The questionnaire would either validate the initial choice or give the investor food for thought. The website could offer advice based on the objective and the questionnaire result. It seems to me that automated investment platforms must sooner or later involve psychometric assessment of risk preference as a perquisite. The problem is that suitable questionnaires are not yet available. There is a market gap for psychometrics methinks.

 

 

Who Pays the Tariff-man?

In my recent blog on The Law of One Price I explored how this useful economic abstraction was being rendered a reality by the internet. The piece ended with a reference to research that purported to demonstrate that the law of one price made inflation measures more sensitive to macro factors such as energy prices and exchange rates. A conversation through the comments section with a longstanding friend and ex-colleague reminded me that I had not explored some interesting implications in relation to tariffs, a rather pertinent subject at the moment. The discussion comes under the general heading of the incidence of taxation or who pays the tax-man.

One of the first things economics students learn about (even pre-undergraduate) is elasticity. This measures proportionate sensitivities. The elasticity of demand, for example, is the proportionate change in quantity demanded of a good for a given proportionate change in price. It answers the question  ‘if price rises by p%, by  what % does quantity demanded change?’. The discussion is bounded by four extreme cases; perfectly elastic demand, perfectly inelastic demand, perfectly elastic supply, perfectly inelastic supply.

In the case of perfectly elastic demand, price is invariant. The producer can sell any amount they wish at a given price but nothing at a higher price. This is not as daft a construct as it seems. An individual producer may well face such a short-term demand curve. All it is really saying is that an individual producer (e.g. a single farmer) is a price taker. The market will take all they have at the prevailing market price but nothing for a penny more. Most small commodity producers would recognise this demand curve. The same construct also has analytic value at the macro level.

What if the demand curve for imports is perfectly elastic for a country (e.g. the USA)? The exporting country is a price taker. They can sell all they produce at the prevailing price but nothing at a higher price. If the US imposes a tariff, the exporting country is on the hook for the whole tax. They cannot raise the USD price of the export (by definition of the problem). They must either absorb it into the profit margin or be bailed out by depreciation of the exporting country’s currency (the local currency). The latter keeps profits in local currency the same because the USD then buys more local currency. The same Dollar revenue translates back to more local currency and, most important, enough to pay the tariff. So in answer to the question, who pays the tariff-man, if import demand is elastic then it is the exporting countries. Note there is little or no impact on US inflation in this case.

The corollary is that if US import demand is inelastic then the US consumer is on the hook for the tariff. In this case US consumers are price insensitive and most if not all of the tariff is passed on in USD prices of the import. There is a full impact on US domestic inflation. The profits of exporters, and the local currency, are largely unaffected. One can immediately see that this simple concept, elasticity, can provide useful insights into the consequences of the current US experiment with tariffs. If demand is elastic the exporting country and company pays. If demand is inelastic then the US consumer pays and is being more heavily taxed in a regressive manner.

The elasticity of demand for US imports is an empirical matter. I do not have the data to hand but one assumes the US economists have ‘done the math’, as they like to say in the US, and the tariffs are being imposed on goods with elastic demand curves. This still means the global economic cake will shrink, but the elasticity determines how the shrinking is distributed among the global players, and the impact on domestic inflation rates. Premium products such as German cars tend to have inelastic demand curves. The higher price is one reason people buy them! Steel, however, may well have a more elastic demand curve. The US experiment is ultimately bad for the global economy but what remains to be seen is who suffers the most, relatively. I hope this brief discussion and taxonomy helps in thinking about the likely impact on specific companies and economies of the tariff war. Think price sensitivity….

Inequality

Discussion of inequality typically takes place in a philosophical quagmire. Observed inequality is an outcome of the social and economic process. It is an ex post concept. However some see it a social good (or bad). Wealth equality, it is argued, is a social good and more of it desirable whatever the cost. Indeed many argue that not only is more wealth equality desireable but it brings gains not costs. The evidence is however somewhat lacking. In part this is because no one is asking the right questions.

Inequality of wealth is an outcome in market economies. Even if everybody could somehow start from the same position, inequality of wealth would result. Differences in effort, skill, and luck would ensure differential wealth outcomes. For those that see wealth equality as a social good, restricting the set of possible outcomes is desirable even if the restriction demonstrably reduces economic growth. The question that needs to be posed and answered is does restricting wealth inequality outcomes reduce economic growth? This is a question that never seems to be posed in economics. It is assumed that it does, but this is not self-evident.

The issue comes down to motivation to work hard and take risk. It is likely that effort and risk taking are not linked to specific wealth outcomes. It is likely however that motivation is linked to the ability to keep the fruits of ones labour, whatever they happen to be, and dispose of such fruit as one sees fit. The question then becomes what happens to motivation if one is told ex ante that only x% of the fruit will be available and the accumulation of fruit will be capped at K. There might be a first generation effect on motivation as social narratives adjust but it is likely that the motivation would be unaffected for a range of values for x and K. It would be useful if economists and psychologists could generate some data on this range of values.

Less wealth inequality most likely would not affect the long run steady state of growth in a closed economy. It may well do in an open economy where acceptable levels of equality vary across economic jurisdictions. Hence we had the ‘brain drain’ to the USA at one point. Nevertheless, from a global perspective, less inequality, from current levels, may not have a material impact on growth. Indeed it might well boost global growth. One of the problems with too much inequality is that it limits demand growth and reduces incentives for risk taking. Beyond a relatively low-level of wealth accumulation it becomes about power (buying people) and not consumption (buying things). The motivation for power may not lead to optimal risk taking from an economic growth perspective. However the power aspect also makes acting on inequality quite challenging.

The marxist approach is to eliminate the market mechanism and centralise all economic decisions. There is no wealth inequality because there is no personal wealth. This does not eliminate inequality just inequality of wealth. Power inequality remains and can even become more extreme. Moreover, the elimination of the market mechanism creates problems in determining how to organise the economy. In simple terms, what should be produced? The Soviet system failed because it could not adequately address this problem. To my knowledge no one has adequately addressed this issue (we were taught about comparative economic systems at UCL when I was an undergraduate). For those that are quick to attack the market system be sure you have something that works with which to replace it other than fine words. It is not in any event necessary in order to reduce inequality.

The issue of inequality can be addressed within market based economies so long as the values of x and K are made clear ex ante and are not varied arbitrarily. What people hate most is adverse surprises. What is required is more emphasis in economics on the optimal ex ante level of inequality. Indeed it should be made the central question in modern economics. It is unlikely the optimal values x and K are zero but they are most likely smaller than the ex post outcomes that we observe today. Indeed a reduction in inequality from currently observed levels would probably boost growth and possibly even productivity.

 

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