Is more choice better? Ten years ago the answer seemed obvious: Yes. Now the conventional wisdom is the opposite: lots of choice makes people less likely to choose anything, and less happy when they do choose.

The most famous supporting evidence is an experiment conducted by two psychologists, Mark Lepper and Sheena Iyengar. They set up a jam-tasting stall in a posh supermarket in California. Sometimes they offered six varieties of jam, at other times 24; jam tasters were then offered a voucher to buy jam at a discount.

The bigger display attracted more customers but very few of them actually bought jam. The display that offered less choice made many more sales – in fact, only 3 per cent of jam tasters at the 24-flavour stand used their discount voucher, versus 30 per cent at the six-flavour stand. This is an astonishingly strong effect – and utterly counter to mainstream economic theory.

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My son has two children and my daughter four. I propose to give £5,000 to each grandchild in my will. Would this be equitable, given that £20,000 would go to my daughter’s side of the family and only £10,000 to my son’s?
Mr Robinson

Dear Mr Robinson,

Let me be frank: at first glance I thought your dilemma was idiotic. If you want to hand out equal shares, that’s fine – but make your mind up. Given your daughter’s fecundity and some basic arithmetic it is quite clear that you cannot simultaneously give equal shares to grandchildren and to children.

Why, then, would you hand out £5,000 to each grandchild and still fret about fairness between your children? Your children don’t get the money; your grandchildren do. Similarly, it would make no sense to hand out £15,000 to each child and then start worrying that your grandchildren had been unequally treated.

Yet arch-rationalists such as Gary Becker or Robert Barro might leap to your defence. Assume your children are Becker-Barro altruists. This means that they care not about how much cash they give, but about the total sum their children receive from all sources.

If you give your grandchildren £5,000 each, that is simply £5,000 that their parents don’t have to give. They will adjust their bequests in the light of yours. Viewed in this way, your attempts to give money to your grandchildren are really hidden transfers to your children – and you would be quite right to worry that your daughter was getting more than your son.

But before you pat yourself on the back (Becker has a Nobel prize; Barro may get one too), ask yourself if your children are Becker-Barro altruists. Most people focus narrowly on their bequests, not on the total receipts of their offspring. I doubt your children are Becker-Barro altruists. After all, you aren’t.

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When the Chancellor of the Exchequer reduced value-added tax from 17.5 per cent to 15 per cent as an incentive for consumers to spend, there was a widespread view that the reduction was too small to be of use. Now that we are approaching the time when VAT returns to 17.5 per cent, some retailers say that the increase will have a negative impact. This doesn’t sound logical, but is it true?
Andrew Hewett, Hertford

Dear Andrew,

I remember the complaints well: how is a 2.5 per cent cut in the price of goods going to boost spending? (Let us leave aside the facts that while the cut was 2.5 percentage points, it was actually only 2.1 per cent; that not all goods are liable for the tax; and that some retailers decided to increase pre-tax prices rather than reduce post-tax prices.) And in truth, the VAT cut, while billed as a “stimulus”, was tiny compared with the vast government deficit.

My own view is that people are price-sensitive, so the modest VAT cut probably had a modest effect, the increase will reverse that effect, and the details will be so small that we will never know for sure.

Is it logical to claim that the cut was pointless but the rise is significant? The motive for the claim is obvious enough. And it may be justified. The switch each way caused a fixed cost: menus had to be printed, staff trained, accounts re-counted and tills reprogrammed. It is reasonable, and perhaps true, to say that the benefits for businesses of the VAT cut were swallowed by the costs of adjustment. The VAT rise, and a second round of adjustment costs, simply adds injury to the insult.

Psychology may be at work too. Behavioural economists believe in “the endowment effect”, a tendency for people to overvalue the status quo. The VAT cut seemed trivial until retailers got used to it. Now they regard it as indispensable.

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Marketplace worked with me to produce this video about the economics of signalling in the workplace. They did a fantastic job, and you even get to hear my David Attenborough impression. The video is loosely based on one of the Dear Economist letters. Enjoy!

Joel Waldfogel, author of “The Deadweight Loss of Christmas”, has a book on the subject, “Scroogenomics“. Appropriately, it is a quintessential gift: beautifully presented but under the glorious exterior there’s not that much there: it’s about the size of a pocket diary. I’d guess it’s 20,000 words, tops…

I like it, though, having read the first half over breakfast. I’ll try to deliver a proper response in an appropriately-seasonal column.

If you want to see Waldfogel defend his thesis, go to the LSE on 3 December. I’ll be giving my own take on Waldfogel courtesy of the School of Life on 13 December - and I think Joel has it wrong. (But I’ll read on: he has thought about this a lot.) Here is my earlier take on Joel Waldfogel; here is the man himself.

Steven Landsburg, author of the original pop-econ book, the wonderful “The Armchair Economist”, is blogging in support of a new book, “The Big Questions: Tackling the problems of of philosophy with ideas from mathematics, economics and physics”. I expect he will infuriate everyone because that’s his style.

The blog is here. The first two posts are on healthcare reform (insurance is part of the problem: well said!) and on why Richard Dawkins is wrong about God.

With the imminent passing of my pet rat I am faced with a lot of grief; he has been a great pet and so I will be more saddened by his passing than if he had been a bad one. My question is: is it possible for the cost (the grief from losing a friend/pet/family member) to outweigh the benefit (the joy gained through time spent with them) and so make the purchase of my pet not worth it, as the net benefit would be negative? Would there be a point where you would say: “I don’t want to get involved because I love X so much that I will be destroyed if I lose him?”
Ilka

Dear Ilka,

Your intriguing problem has not, as far as I know, been explored by economists before, although it has been discussed by artists. Your ailing rat puts me in mind of a departed sparrow, mourned in verse by Catullus. Paul Simon expressed the trade-off more directly in his early song “I Am a Rock”: “If I never loved I never would have cried.”

But poetic speculation gets us nowhere. Let’s head straight to the data. Andrew Oswald, professor of economics at Warwick University, provides the following data points to ponder, based on surveys of life-satisfaction. Relative to never having been married, being married is worth 0.38 “points” of life satisfaction on a scale of 1-7. Being separated is worth -0.24, widowed -0.19 and divorced -0.09.

This is not much to go on, but it is better than nothing. If we incautiously interpret these numbers as causal – in fact they are merely correlations – then we could conclude that 20 years of marriage is compensation for up to 40 years of widowhood. Ten years of marriage more than justifies 40 years as a divorcee.

For human marriages, these odds seem pretty good. For a pet rat, less so: the little darlings hit puberty at six weeks and rarely live past three years. Perhaps you should buy a tortoise next time.

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