Wednesday, 2 May 2012

It’s Cheaper By Train: Economics and Behavioural Economics Postscript

What might conventional economics and behavioural economics say about the previous post? Conventional economics would presumably start off by saying that the reason why more people don’t come to similar conclusions - and take the train - is down to information failure. That is, for a market (let’s call it the market for personal transport from A to B) to operate effectively, all market players (including you and me) need to have access to all of the information out there. Which means knowing a) that you can get from Hove to Cromer by train and b) that cheap train fares are available.
The other information necessary for making a rational decision is the full costs of doing the journey by car. Of course, if you already own a car, many of the costs are fixed, and don’t change according to how much you use it – capital cost, depreciation, insurance, tax etc. Again, a car owner might say that since these costs are already incurred, it makes sense to use the car. In fact, a truly rational economic approach would be that these are “sunk” costs - if the money has been spent, and cannot be recouped, it should not play a part in the decision about a future journey. Instead, each journey should be evaluated on the basis of the marginal cost of that journey. Which means comparing the price of the fuel with the cost of the rail ticket. In the case of Hove to Cromer return, it’s still cheaper by train if there’s one person travelling, on par for two travellers, and only becomes cheaper by road if there are more than two people in the party.
What we think about the price of going by train is influenced by the “story” we tell  about train ticket prices. These “stories,” which just don’t play a role in conventional economics, are important in behavioural economics. The story is that train travel is expensive and complicated, as this article from the BBC illustrates. The reality is that sometimes fares are expensive, sometimes they aren’t. It mainly depends on how captive the customers are. Passenger yield management, familiar from airlines, is becoming commonplace on the rails. So price elasticity of demand is important – train companies will charge more if the customer can’t switch to another provider.
On top of all that, paying out the money for a train ticket is what behavioural economists call salient, or what you and I call painful: unlike many of the costs of owning and running a car, some of which, like depreciation, are practically unseen. At least until you come to sell the car. But the costs of fuel and the price of parking, are extremely salient, hence subject to intense focus by car owners.
So when it comes to making decisions, conventional economics says you need as much information as possible, while behavioural economics says that you can have too much information. So when it comes to making a decision, a key question is always going to be: how much information is enough? And just asking that question might be a good place to start…

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