Archivi dei tag: effect

Do You Know Why Storks Are Said to Bring Children?

Late February, early March, in Europe, storks are back on the chimneys! This year again, they will bring beautiful babies into homes…

Finally, this is what children are told, because no one believes in this cute legend. But by the way, where does it come from?

Weddings are often held in early summer, in June-July. And in earlier times, almost elsewhere, children were often conceived immediately after the wedding, especially because there was no effective means of contraception. After 9 months of pregnancy, a peak of births happened around March, precisely when the storks returned from their winter migration!

That’s where this little story comes from, the observable link between births and the return of storks. It is a correlation, namely a statistical relationship between two phenomena. But that doesn’t mean one is caused by the other. That’s causality, and we must not confuse correlation and causality as the legend does!

In economics, for example, looking at a graph, one might think that the more mobile phones a country is equipped with, the less infant mortality there is. The two elements are correlated, that’s for sure, but the real cause of the link lies elsewhere: the country concerned is rich enough to have good maternity wards and a population that can afford mobile phones.

Between storks and births, it’s the same thing. Causality is simply the calendar, which makes the reproductive habits of humans coincide with the migration of storks. This cute legend thus originates from an error of reasoning of which we are all victims and that we call the stork effect!

Did you know this little story about storks?

I Keep The Mug!

1990, Cornell University, United States. A professor distributes pretty mugs to some of his students. A general tour of coffee? Not really…

The professor is Daniel Kahneman, a psychologist who works on behavioral economics: he studies how individuals make their decisions to consume, buy, sell, invest.

With his mugs, he does a little experiment. Half of the students receives one, the other half does not receive anything. Then, the professor asks each group at what price they think the mug could be sold: those who have the mug said they are ready to sell for 7 dollars. And those who do not have it are ready to buy it for 3 dollars.

According to the economic theory, mugs should trade around 5 dollars: it would be a middle ground, the price which mug sellers (supply) and buyers (demand) would agree, after negotiation.

This is called the equilibrium price, which sets the value of the mug in the mug market. But Kahneman tries something else: he proposes to the students without a mug to receive either the mug, or   5 dollars. He offers to the students with a mug to buy them, also for 5 dollars. The choice is the same for everyone: a mug or 5 dollars.

The result is that the students who do not have a mug accept the money but the students who already have the mug refuse to give it away.

Why? The reason is the so-called endowment effect: we give more value to something that we already have and we are not ready to give it away to its real value on the market.

Because of this psychological bias, people have a hard time getting rid of a piece of furniture, their old car, or a house, because they overestimate the value.

But this bias that can also be useful for trading: when a seller offers us for example a subscription, a mattress or ... a mug to test for free for a while, it is because they hope that in the end we will be willing to pay to keep it!

And you, have you ever kept anything offered by a seller?