Tuesday, 3 April 2012

Petrol Panic, Pump Rage and Pastygate: Economics and Behavioural Economics

3.4.12 P1090677

A week, according to former British Prime Minister Harold Wilson, is a long time in politics. And those queues on filling station forecourts across the UK as a fuel crisis loomed now look so last week. But it ain’t over till it’s over, and this one could run and run if the fuel tanker drivers go ahead with their strike. So, a couple of questions about what happened and why: how to avoid it, and how to explain it.

1. How To Avoid It

Give up your car.
2. How to Explain It: Economics and Behavioural Economics

A BBC commentator said that public response to the potential fuel shortages was a classic example of game theory: everything is ok until a few people form a queue. Then others join in and, before you know it, there’s a crisis. It’s debatable whether this is game theory: it might be better to start with economics - the most basic supply and demand analysis - and then add the psychology, behavioural economics. Starting with supply: there’s the long run industry trend which has seen concentration of fuel retailing into the hands of the supermarkets and the oil majors as thousands of independent petrol stations have closed in recent years - reducing diversity of supply, reducing resilience and redundancy, and maximising the prospect of supply side bottlenecks (something to think about when filling the tank at a supermarket). And there’s the short term supply side: tanker drivers, whose job it is to supply this depleted number of filling stations, start to consider strike action. Suddenly, those supply side bottlenecks look a lot more risky.
3.4.12 P1090676 And then there’s the demand side. Energy minister Ed Davey has said that, on a normal day, of the 31 million cars in the UK, about a third of tanks have full tanks, whilst the average tank is a third full. So people "just need to do the sensible thing... get a full tank of petrol, not a half-tank." When one minister starts talking about topping up the tank at every opportunity and another advises keeping jerry cans of spare petrol in the garage, the psychology is bound to shift: suddenly, there’s a new “normal.” How does behavioural economics help with explaining these demand side phenomena? Start with media images of long queues at the petrol pumps, and other images like these pictures. A reminder of what could happen. Loss aversion will kick in: even if it’s a potential, future loss, we want to minimise the chances of it happening. And before you can say “fill the tank,” the combination of these vivid images, salient to motorists, have triggered an availability cascade – defined by Daniel Kahneman in Thinking Fast and Slow as “a self sustaining chain of events which may start from media reports of a relatively minor event and lead up to public panic and large scale government action.” At this point, the story changes – there is going to be a fuel shortage and we’d better stock up. More and more drivers take action, feeding a new norm. The herd changes direction, hey presto, queues at filling stations, and say hello to a self-fulfilling prophecy. It there wasn’t a crisis to start with, there is now.
There has been a lot of coverage of the current UK government’s embrace of new methods of behaviour change, as exemplified by the Behavioural Insight Team, aka The Nudge Unit, in Number 10 Downing Street. Looking at this episode, which isn’t over yet, it looks more like low politics than high insight. But, from the government’s perspective, it has helped push higher taxes on grannies – and pasties - off the front pages.

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