“Cities that actively promote physical activities” (that’s walking and cycling, folks) “enjoy an economic advantage”

That’s the BBC headline covering a new report on “Active Cities”, a meta-study based on research findings from 17 countries. One of the key findings is that, based on studies that assessed the economic benefits of walking and cycling interventions, the average return was £13 for every £1 invested. In the UK, the return was shown to be as high as £19. Here’s a link to the executive summary of the study.

And here’s a snip from the report, covering the wide range of benefits that are generated for cities where physical activity is more attractive and convenient. Including the economic benefits.

Source:Making the Case for Designing Active Cities (2015) Report prepared by James F. Sallis, PhD, Active Living Research, University of California, San Diego Chad Spoon, MRP, Active Living Research, University of California, San Diego

Carfree economic rockstar

Yo! I’m an economic rockstar. Apparently. Have a listen to the podcast and find out about economics, behavioural economics, being carfree and more. Yeah, yeah, yeah.  

The Economics of Car Hire: PAYG Beats Ownership

The fact that you don’t own a car doesn’t mean that you can never use one. So what are the economics when you need to hire some wheels? It would be easy to assume that like PAYG vs “owning” a phone on a contract you’ll end up paying a really high price on a per-unit basis, whether it’s the price per minute or the price per mile. Don’t assume: a couple of weeks ago I needed to hire a car to do some awkward cross-country journeys at inconvenient times across Sussex, Kent and Essex. Public transport didn’t work, so I hired a car from Enterprise, which has competitive rates, unlimited mileage, helpful staff, and a pick up/drop off service if you need it. I booked online, collected a newish Vauxhall Corsa at the appointed hour, and did the journeys. Here’s what it cost: 24 hour hire, including collision damage waiver and VAT: £51.95 (it’s cheaper at weekends). Fuel: £25 (18½ litres at £1.34 a litre). Miles travelled: 177.7, averaging 42.5 miles per gallon of petrol. Total cost, including fuel, (which you’d also pay for if you owned a car) was £76.95. Which sounds expensive, until you do the math, which shows the overall cost was 43p a mile. Compare that with the official 2011/12 rate allowed by HM Revenue and Customs for using a company car: 45p a mile. So hiring a car and paying the one-off costs still works out cheaper, on a cost per-mile basis, than what the government has decided it costs to use your own car. Better still, when you’re finished with a hire car, you take it back and walk away, and the costs became someone else’s problem. Now that’s what I call freedom.

50,000 Page Views: Passing A Milestone (But Not In A Car)

For Jules Verne the magic number was 20,000 (Leagues Under The Sea). For cockneys, Londoners born within the sound of Bow Bells, it could be 40,000 – after all, there are “forty fousand fevvers on a frush.” (translation: 40,000 feathers on a thrush.) But for this blog the magic number is 50,000: the number of page views registered since the first post in 2010. So big thanks to everyone who reads it - as these page view figures show, you are a pretty international lot: United States: 30142/United Kingdom: 12385/Canada: 668/Australia: 514/Italy: 445/Germany: 422/France: 418/Russia: 370/Norway: 212/Belgium: 168.

You are also fairly reticent, as in not given to making comments. Perhaps you are in violent agreement with the content? Either way, it would be nice to hear more from you. As for the popularity of the posts, top rankings go to posts on economics and behavioural economics, followed by a short story about the oil running out (A Week to Ten Days), then Banksy, Nick Cave, Dave Gilmour….and Hove greengrocer the late Tony Magdi.

It would be very nice to hear more from you, so please feel free to comment on anything that you see here. And of course, send a link to your friends and anyone who you think might be interested. Onwards and upwards…on foot, by bike, by bus and by train, naturally.

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…

Economics, Behavioural Economics, Cars and Car Clubs

Today, the car club firm Zipcar, which acquired another car club firm, Streetcar in April 2010, is withdrawing its cars from Brighton and Hove and re-deploying them to London: good news for Londoners, and good news for City Car Club, which is now the only car club in Brighton and Hove. As a transitional deal, Zipcar is providing a year’s free membership to City Car Club. And Zipcar members will still be able to hire Zipcars in other locations, both around the UK and in Canada and the US.
Thinking about Zipcar’s departure from Brighton got me pondering how conventional economics and behavioural economics could help explain what’s going on here. Conventional economics would explain that providing a service like a car club (sometimes known as car share) means sweating the assets to the max – the costs are mainly fixed (capital cost of the car, insurance, cost of the parking bay etc), which makes it important to hire out the cars for as many hours a day as possible. It’s clear from Zipcar’s decision that this is going to be easier when the cars are parked in London. So why weren’t the people of Brighton and Hove using the Zipcars more often?

Behavioural economics (which I teach) can help explain this. A car club is a substitute for owning a car. But giving up your car is not easy: we hate to give things up. Human beings are loss-averse - psychologically, the “pain” we suffer from a loss is more than twice as much as the benefit we feel from an equivalent gain.  Adam Smith (picture from wiki), the man on the back of the £20 note, is sometimes described as a prototypical behavioural economist. In the Wealth of Nations he said, "we suffer more... When we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better.” Consumers view parting with an already owned good to be a greater loss than the potential gain from acquiring another good of equal value.

In 1979 Daniel Kahneman and Amos Tversky published Prospect Theory: An Analysis of Decision Under Risk.’ This seminal work of behavioural economics charted objective and subjective gains and losses with respect to a reference point, as opposed to the standard utility function of conventional economic theory. The shape of the curves using Prospect Theory illustrates that we focus on what we might lose, rather than what we might gain - thinking about selling something, we think about the things we'll miss, rather than the hassles of ownership. Combined with the status quo bias, this means that people prefer situations to remain static and unchanged. Change of ownership would disrupt the status quo, causing unease.

“Giving up” something like a car feels like a big loss: studies show that the perceived benefits need to be at least double the perceived losses to persuade people to give something up. A consequence of loss aversion is that people tend to place a higher value on a good that they own compared with an object of identical value that they do not own. This is called the endowment effect, and it means that people value things differently depending on whether they are gaining or losing them. Loss tends to be felt more keenly than gain.

And the latter means that ownership weaves it’s own spell, making it even harder to let go: people become attached to objects that are in their possession and are reluctant to part with them, even if they would not have particularly desired the objects had they not been endowed with them.

And there’s something else. Zipcars were pretty discreet. Nice cars, usually VW Golfs. You had to look hard to spot that they were Zipcars. No doubt it was a marketing decision to put them on the street practically unbranded. City Car Club cars are different: the company logo is emblazoned on the side. They get noticed. Unlike Zipcars, they are salient. And salience, the extent to which something stands out from its surroundings, translates in behavioural economics to a tendency to over-weight certain phenomena, which may then account for bias in decision making.  Zipcars, lacking salience, weren’t “front of mind.” So maybe fewer people were aware of them, fewer people who might join up and use them, which meant less sweating of those assets. Which was where we came in… And, as far as Brighton is concerned, where Zipcar goes out.

Quote Of The Week: Paul Krugman

“I don’t know about you, but most of my friends have two feet.”  Krugman, who is a Nobel Laureate, Professor of Economics at Princeton University, and a New York Times columnist, was commenting about a controversy on a bike lane in New York, in his blog “The Conscience of A Liberal.”