Blogs | May 10, 2012

Save the best till last?

Economists can’t often give betting tips. But here’s a hint.

If you want a flutter on the Eurovision Song Contest later this month, you should consider backing either the very first song or those that appear late in the contest. Songs performed in the middle of the show are at a disadvantage.
This is the finding of some economists at the University of Groningen in the Netherlands. There might be a simple explanation for it. What we look for in a song is catchiness and memorability.
And it’s easier to remember what we first heard – because then we are most alert – or what we last heard, because we’ve had less time to forget it. Songs performed in the middle have neither advantage.
If this seems trivial, it’s not. It challenges two basic principles of economics.

Right place at the wrong time?
The first basic principle is that we choose what is best for us – the product that offers best value. This implies that the order in which things appear shouldn’t matter. Best is best. But order does matter. An experiment in the 70s, described in Robert Cialdini’s wonderful book, Influence, demonstrated this. Psychologists got male students to look at pictures of potential dates and rate their attractiveness.
They found that students who did so after watching Charlie’s Angels, a TV series starring three attractive female private eyes, rated the dates as less attractive than students who watched other programmes. What’s going on here is the perceptual contrast effect. Having seen very beautiful women, women of average attractiveness seemed less attractive by contrast – just as tepid water will feel warm if we move into out from cold water, but cold if we step into it from hot water.

Compared to the last one…
This contrast effect has everyday economic implications. If you buy a house, you could be more inclined to buy a new car, because its price seems low contrasted to the price of the house.
If a man buys a suit, he’ll be more likely to go on to buy shoes, tie and shirt as well because they look like bargains compared to the price of the suit.
Sales assistants can exploit this. They prefer to present us with expensive items first, because subsequent ones will then seem better value.
Our decisions as consumers are swayed by the order in which options are presented to us.

Will you go first?
The second basic principle challenged by the positional advantage shown in Eurovision is known as the “first mover advantage”.
Back in 1934, the German economist Heinrich von Stackelberg showed that if a firm were in a position to decide upon how much to produce before its rivals, it had a massive advantage over them.
Though non-economists haven’t usually heard of von Stackelberg, many of them have acted upon his thinking. One reason why investors flocked into new internet stocks in the late 90s was that they believed in first-mover advantage – which was Stackelberg’s idea.
Except that there was a problem – which Stackelberg knew but investors didn’t. First-mover advantage holds only under particular conditions. The fact that Google eclipsed Netscape, and that lots of ISPs overtook AOL shows that later movers can have the edge. Mathematical economists call this Bagwell’s paradox.

Hit for six
There is, though, one important field in which there is first-mover advantage – cricket. A team of UK-based economists have found that in day-night one-day internationals, the team that wins the toss and bats first is 31% more likely to win. Cricket teaches us another lesson about the importance of initial conditions.
Economists at the IMF have found that players who make their international debut at home go on to have more successful careers than players who debut in away matches. This is because players tend to perform better in home conditions than away ones, and selectors can mistake this home advantage for genuine ability, and so are more likely to continue to pick players who debuted at home.

The luck of the draw
What’s true for cricketers is true for whole economies. Economists such as Harvard University’s Nathan Nunn have shown that quite distant history still has effects today. Economies are path-dependent. For example, parts of Africa that saw a large slave trade are poorer than parts which saw less of it. And US states which were poor in the 19th century have tended to stay relatively poor.
There are some general lessons from all this. As consumers, we should be alert to the fact that our choices can be shaped not by what’s best, but by the order in which things appear. As investors, we should look askance at new companies which appear to have a first-mover advantage; such a thing might not exist. And as citizens, we should be aware that the economic fate of individuals and regions can depend upon the luck of which initial conditions happened to prevail.


Chris Dillow
Chris Dillow

Investors Chronicle writer and economist