But economists, like other people, also have to eat (cue ‘free lunch’ joke). Some even like food so much that they write books about it. And when nobody invites them to dinner, economists do the rational thing and go out for food themselves. Sometimes, they hunt in packs and book a table at a restaurant together – it has been proven that such arrangements minimise social welfare loss measured in conversation utility. For these reasons (and perhaps some social motivation of minor importance), a group of us (mostly PhD students at UoN) are planning to go out for a meal this Friday. We do this about once a term, and don’t worry – we’re easy to spot in case you want to make a timely exit from the restaurant.

The tipping issue

There is a slight concern among my office mates that we will repeat last time’s painful conclusion to the dinner. Thing is, we came up short. After the bill had been passed around the table, calculations made and cash and cards gathered in a big heap… the restaurant was still owed some money (cue grumpy waiters). Some of us eventually made up the difference – insisting they had now paid for their mail, factored in a lavish tip AND paid for somebody else’s food. As a matter of fact, everyone of us seemed to be convinced that they had paid at least their share and that the shortfall was due to others. Unsurprisingly, the waiters did not receive a tip.

It appears that economists have yet again ruined the fun for everyone – many restaurants now automatically add a ‘service charge’ to the bill of any group of at least 6 diners. Whilst the fairness of this practice is disputed by some (you can sign an e-petition against it on a government website and have the honour of being the 3rd person in the UK to officially complain about it), I believe it is quite common. Not for a second do believe that the service charge compensates the restaurant staff for increasing marginal effort expended per guest. I remember well from my job as a waiter in my undergrad days that a table of 12 is a lot easier to serve than 6 couples (which, come to think of it, also explains why my former boss only required my skills when there was a group reservation). So it must be about the money.

Whether the restaurant owner keeps all the tips for himself or shares them with the staff is not important, seeing as higher tips are always better for the restaurant owner. Anyway, that’s not the point – the point is that groups have to be ‘encouraged’ to tip. I think the restaurant owners’ association might at some point have added this 1975 paper with the great title ‘Cheaper by the Bunch‘ to its reading list. The study presents evidence that the average tip in groups is lower, and the authors claim this is due to a diffusion of responsibility effect (the with remarkable foresight aptly titled best-seller The Tipping Point calls this the bystander effect). So the more bystanders, the less the urgency to tip – makes sense, right? A more recent empirical study suggests that there is a counterbalancing force – the social penalty imposed on the person that doesn’t tip – and that these effects cancel each other out.

Unfortunately neither of these studies prevents evidence on groups of economists failing to pay even the required amount minus tips at the first time of asking. Perhaps that’s just a reflection of academic funding these days…

I found a cheatsheet on the web but I felt that it could be improved. So I created my own: a two-page PDF [click to download] of the Elements of Style, clearly laid out in compact tables with examples. I plan to print a double-sided copy and laminate it for everyday use.

Disclaimer: having to compress the whole book into a two-page sheet meant I had to sacrifice some of the rules and finer points. I hope I have succeeded in leaving out only those parts that are either (too) obvious or no longer necessary in a world of auto-correcting text editors and pop-up dictionaries. I also moved some of the examples from the Words and Expressions Commonly Misused section to an earlier section. I take full responsibility for any remaining errors and poor judgement.

N.B.: if you like the cheatsheet, buy the book. You won’t regret it.

Because of the risk involved in making pay day loans, the cost to the borrower of obtaining such ‘alternative finance’ is higher than regular credit. The problem is that pay day borrowers usually don’t have access to regular credit. As the Economist eloquently puts it: “For someone who is truly hard-up, the only thing worse than borrowing $200 at 600% APR may be not borrowing $200 at all.”

So pay day loans are expensive. But are they harmful, and should they be regulated? The arguments for and against pay day lending are familiar and well-rehearsed economic justice arguments:

• AGAINST: “Offering pay day loans is taking advantage of vulnerable people.”
• FOR: “But no one is forcing the borrowers – it’s their own choice.”
• AGAINST: “But poor people make poor choices when tempted by shrewd lenders – somebody do something!”
• FOR: “Who? The government? Who says they know what’s best for people?”

Obviously, this discussion is going nowhere – it’s unavoidably political. But don’t despair, there is a third way: the behavioural intervention. A behavioural intervention is Nudge speak for giving people better structured information so that they can make better choices. This is what a pair of economists from the University of Chicago investigated in a well designed field experiment. The researchers manipulated the print on the cash envelopes used in 77 branches of a US pay day lending firm over a two-week period. They tried three print versions as experimental treatments:

1. A comparison of pay day loan APR to other forms of credit
2. A list of the accumulated cost of pay day loans in dollars, compared to credit card borrowing fees
3. Information on how quickly people repay pay day loans

Compared to a control group who receive non-manipulated, company branded envelopes, the second envelope manipulation reduced the likelihood of the recipient re-applying for a pay day loan in the next pay cycle by 11%. Furthermore, individuals in all three envelope treatments reduce their average borrowing over the next pay cycle by more than the control group.

So, assuming that at least some pay day borrowers would rather not use pay day loans to make ends meet, the behavioural intervention is a success. Whilst I’m not sure that the conclusion “information disclosure that is inspired by, and responds to, cognitive biases or limitations that surround the payday borrowing decision has a significant effect” is warranted (the treatment is actually less effective for those who spend the loan money on eating out and holidays), the reduction in loans across the whole sample is encouraging. Perhaps this is one for the Behavioural Insights Team?

Now, assuming you’ve got Stata installed properly, you will probably want to update your version and set and save your preferences. Because these tasks are not as easy as you would like, I’ve documented them here.

Updating Stata version

Why would you want to update your newly installed Stata software? Because it’s probably not the latest version, and therefore contains bugs. Stata 11.0 is rumoured to contain a bug that affects its calculations (I can’t actually find a online bug report for it at the moment) which means your statistics and therefore your conclusions could be way off the mark! So protect your academic credibility and enter:

update query

If the outcome is ‘all files up to date’ then you’re safe. If not, you want to type:

update all

and when that’s all done, restart Stata like this:

update swap

Setting your preferences

After you have applied the update, you can change your settings through the Preferences screen (I changed the default font to ‘DejaVu Sans Mono Book’ because the default font is awful). For some reason Stata wouldn’t save my preferences before the update, but the update to Stata 11.2 seems to have resolved this.

Furthermore, the paper takes some of the bubble blame away from individual investors by identifying big institutions (such as hedge funds) as the main drivers behind the bubble. This finding again (remember this guy?) contradicts the idea that the dot-com bubble was fuelled by personal investors, which seems like a textbook case of mistaking correlation for causality.