Tim Harford The Undercover Economist

Articles published in June, 2012

U-turns are the least of Osborne’s woes

‘With U-turns on petrol, pasties, caravans, charities and churches, George Osborne’s Budget is now in tatters.’

Ed Balls, shadow chancellor, June 26

George Osborne isn’t going to raise fuel duty, then?

No. The man has more U-turns in him than The Dukes of Hazzard.

No shame in that. The Dukes of Hazzard is under-appreciated, I feel.

I’m not sure that claim will stand up in the face of repeat viewing.

Much like Mr Osborne’s Budget, then.

Indeed, indeed. But you have a point about U-turns being nothing to be ashamed of in their own right. If a policy is wrong it should be reversed. Politicians are far too proud of their inflexibility.

“The lady’s not for turning,” said Margaret Thatcher.

Yes, or Tony Blair claiming he didn’t have a reverse gear. It’s odd: you wouldn’t buy a second-hand car that didn’t turn or reverse but it appears to be a successful electoral strategy. Personally, I wish politicians would change direction more often.

So you approve of the U-turn on fuel duty, then?

Not really. What I’d like to see is politicians piloting their new policies wherever possible and rigorously evaluating them. And of course if the results prove the policy does not work, it’s time for an honourable and entirely admirable U-turn. But that’s not Mr Osborne’s approach. Instead, he seems to have floated half a dozen slightly flaky ideas and then withdrawn them all because people have complained about them. I mean, what does Mr Osborne now know about fuel duty that he didn’t know a few months ago when he proposed raising the level? Not much.

He knows that the euro is in trouble.

Which might arguably call for more economic stimulus. But this is not a stimulatory policy because Mr Osborne says it will be paid for by cutting departmental budgets.

He says he’s helping “hard-working families”.

I am endlessly surprised and faintly nauseated by the capacity of politicians to speak in clichés. If by “hard-working families” Mr Osborne means families in the upper half of the income distribution then he has a point – the poor are less likely to own cars.

Are you saying this is the wrong policy?

I’m saying it’s an odd way to go about it. There is a good case for much lower fuel duty if coupled with a proper system of congestion pricing, but even if that was politically feasible it would be a long-term project. If Mr Osborne really wanted to stimulate the economy he would be looking at publicly funded infrastructure, and perhaps sending everybody in the country a cheque.

That would surely damage his deficit-cutting credibility.

I am starting to fear that macroeconomics in general, and Mr Osborne in particular, have become obsessed with credibility. Not that it isn’t worthy of consideration. Of course it is. The idea, for instance, that monetary policy might become a lot more credible in the hands of an independent central bank is an influential and important one. But credibility has now been elevated, in Mr Osborne’s eyes, to a superpower. As long as you are willing to pay what it costs to achieve a reputation for toughness, Mr Osborne’s reasoning seems to go, great things will follow. I am not sure. If you credibly commit to the wrong policy, your credibility really will not help you much. It’s like that joke about the virtues of caffeine: “do stupid things faster and with more energy”.

He is determined to maintain that credibility, though.

It’s odd. There was an idea a while back that Mr Osborne should adopt a few small but symbolically unpopular policies – sell off Nelson’s Column, privatise Great Ormond Street hospital – but maintain overall levels of spending. That way the economy would get stimulus in the short term but the markets would realise Mr Osborne was capable of anything and would take tough long-term decisions if necessary.

But in fact he’s done the opposite.

Exactly: commodity prices and the euro crisis may have knocked the economy on its back, but Mr Osborne’s tax rises cannot have helped. He has refused to change direction there while flip-flopping on every piece of fiscal trivia he can find. As a consequence, he has managed to achieve something quite impressive: he has frittered away his credibility without ever deviating from his central policy of austerity – a policy that increasingly looks unwise.

Also published at ft.com.

30th of June, 2012Since You AskedComments off

Why real life needs real trials

Finding out what works is a serious business and this is a brilliantly simple way to do less harm and save money

I sometimes feel that if only politicians and civil servants had a “Ladybird Book of Randomised Policy Trials”, they’d understand why such trials were a brilliantly simple way for Whitehall to do more good, less harm and save money.

Well, I have hugely encouraging news to report: the “Ladybird Book of Randomised Policy Trials” now exists. Better than that, it’s not just some academic flight of fancy. It is the result of a collaboration between two academic experts, Professor David Torgerson and Dr Ben Goldacre, and two civil servants, Laura Haynes and Owain Service, of the Cabinet Office’s Behavioural Insights Team. In other words, something might actually happen.

My enthusiasm is scarcely dented by the fact that the document is actually called “Test, Learn, Adapt: Developing Public Policy with Randomised Controlled Trials”; no Ladybird, alas, although Goldacre tells me he wishes that had been the title.

Randomised trials are important in policy work for exactly the same reason that they are important in medicine: because our theories about what works are often badly wrong, and in a complex world it is often only a properly controlled trial that will set us straight.

A good example in medicine is the use of steroid injections for people with head injuries, to reduce swelling and brain damage. The theory was sound – so sound that many doctors argued that it was unethical to conduct a randomised trial. Yet when the trial was eventually run and published, in 2005, it turned out that the well-meaning steroid injections had been inadvertently killing people.

There are similar examples among the few randomised trials of policy. “Scared straight” programmes, designed to warn juvenile delinquents of the consequences of a life of crime, turn out to cause crime, alas.

You might think it is far harder to run a trial on a social programme than in medicine, but Torgerson, director of the York Trials Unit, tells me the opposite is true. Clinical trials are difficult – patients often wander off or drop out. By contrast, many of the trials one might do in a school or prison involve people who were going to be there anyway.

The difference is in our priorities. Torgerson points out that he recently spent £500,000 testing verruca treatments; for the same money he could find out whether phonics is an effective method for teaching children to read.

So why is it so hard to get funding, and approval, for randomised policy trials? One common objection is that we don’t need trials because we already know what works. This is nonsense, of course: very often different experts or political parties “know” things that are mutually contradictory.

A second objection is that trials are expensive to run. Perhaps; although not as expensive as blundering around without a clue, and trials are often cheaper to run than one might think.

Policies are often rolled out gradually; if this gradual roll-out is randomised, drawing conclusions from the new policy becomes vastly simpler and more robust.

Perhaps the real problem is that too many politicians and civil servants have little knowledge of, or respect for, basic scientific methods. According to Mark Henderson, author of The Geek Manifesto, a mandarin at the Department for Work and Pensions once told Tony Blair’s chief scientific adviser that the DWP could function perfectly well without any contribution from science – a demonstration of grotesque ignorance and arrogance. Fortunately, as the new guide explains, the DWP is already benefiting from evidence gleaned from randomised trials.

What matters is what works, we have been told by generations of politicians. But finding out what works is a serious business. Perhaps, at last, it is also a business that Whitehall is taking seriously.

Also published at ft.com.

Change of date: Speaking at LSE (@lsepublicevents), 15 October 2012

Details to follow; event starts at 6.30pm. Come along!

(Was previously 2 October.)

27th of June, 2012SpeechesComments off

Who (still) wants to be a millionaire?

‘Being a millionaire in modern Britain no longer guarantees an extravagant lifestyle, after a study found that inflation has significantly downgraded the trappings of wealth that £1m can buy over the last 20 years.’

The Daily Telegraph, June 20

Wow. Where was this ground-breaking study published? Surely it ranks with the general theory of relativity, the discovery of penicillin, and development of the transistor?

Indeed. I doubt that a Nobel Prize awaits. The “study” was a press release from a bank.

Which bank? I must transfer my current account there at once, so keen is their grasp of contemporary economics.

You’ve made your point.

Good.

The idea that “millionaire” is losing its status is intriguing, though. Perhaps it is surprising that the word has held its allure for so long.

Blame Cole Porter for writing such a memorable tune.

I suppose so. The term is much older. The Oxford English Dictionary has The Times using the word in 1795. Actually, although Porter’s song dates from 1956, it was for a remake of a 1940 comedy. There was a sense that the stereotypes of a gilded age for the idle rich were already dated.

Spare me the history lesson – especially since the gilded age seems to be making a comeback. What was £1m worth in 1795?

Compared to average earnings, about £1bn in today’s terms.

Serious money.

Indeed. An alternative way to think about this is to note that £1m in 1795 would buy you goods and services comparable to what you could get today for about £80m.

Would it? Most of what I have today you couldn’t get in 1795 for any money: smartphones; penicillin . . .

You really have penicillin in your bathroom cabinet? But you’re right. Hold that thought for a moment.

I’m holding it.

If you want to go back only to 1940, £1m then would be worth about £140m today, relative to other people’s earnings. Relative to the price of goods and services it would be worth about £50m.

Yes, yes. Money isn’t what it used to be, we already know that from the very surprising and insightful press release.
Answer my question about penicillin.

Implicitly your question is about how to measure changes in the price level. The basic idea sounds really simple: look at what a bunch of goods cost in 2012 and then what the same bunch of goods cost in 2011, and you can measure how the price of goods is changing. Extend that exercise for a couple of centuries and you can compare today’s bunch with a bunch from 1795. Except, of course, the goods you might plausibly look at keep changing.

How do you cope with that?

Well, you can’t, really. One problem is that when new technologies arrive, they tend to be expensive at first and then get cheaper. When it’s expensive, few people buy it. By the time it becomes popular enough to be included in the representative basket of goods by statistical agencies, the price has already plummeted. This is a specific instance of a general problem: what people choose to buy is inextricably connected with how much those things cost. You can’t study the change in price of what people buy because what people buy is changing because of the change in price.

That sounds pretty deep. What does it mean?

It means you can’t really compare the general price level in 1940 with the general price level today. Not that that stops us trying. Actually, the economist Timothy Taylor has a fascinating thought experiment that bears on this topic.

Really? The words “fascinating” and “economist” tend to go together in your sentences a lot more than in mine.

Open your eyes to the joys of the dismal science. Prof Taylor asks his students whether they would rather have $70,000 a year now, or $70,000 a year back in 1900 – when it would have supported a mansion with servants. About two-thirds of the students say they would rather have the money in the modern world, apparently preferring mobile phones and modern medicine to the services of a butler and a cook. I find that rather encouraging. It suggests that while £1m may no longer buy a Kensington home and a yacht, the things that Frank Sinatra and Cole Porter could not buy back in 1956, even as millionaires, are things that are well worth having.

Also published at ft.com.

What babysitting can teach the world

The parallels between the crisis and Krugman’s parable are not exact but they are close enough to be instructive

One of the most renowned parables in economics is that of the Capitol Hill babysitting co-operative. It became famous because of Paul Krugman, a winner of the Nobel memorial prize in economics and a pugnacious columnist for The New York Times.

Long, long ago (the 1970s) in a town far, far away (Washington, DC) there was a babysitting co-op with a problem. The 150 or so families in the co-op, mostly congressional staffers, shared babysitting duties and kept track of who was owed babysitting, and who was owing, with a system of “scrip” – tokens good for a half-hour’s sitting.

Thanks to an administrative misstep, the co-op ended up short of tokens. Most families wanted more, as a buffer in case they had a run of social engagements, and so most families wanted to stay in and sit for others. Of course, if everyone wants to babysit, nobody goes out, and that means nobody babysits either. The co-op suffered a demand-led depression: there was no shortage of people willing to supply babysitting services, but because of a failure of monetary policy, this potential supply was not called into play. As a hint of how serious things became, the co-op introduced a rule compelling families to go out at least twice a year; I am no party animal but that seems a low hurdle.

These administrative measures failed. But then a wonderful thing happened: the co-op decided to print more scrip. The depression immediately ended. Krugman likes the story for two reasons: first, because it shows that it is possible for an economy to fall into depression because of a lack of demand, something which not everyone accepts; second, because it shows that sometimes economic problems have simple technical solutions.

Is the developed world suffering a babysitting co-op recession? The parallels are not exact – for one thing, the authorities in the US and the UK have hardly been slow to create new money – but they are close enough to be instructive. The babysitting co-op’s income equalled its spending; when everyone tried to earn more but spend less, the laws of arithmetic intervened.

Since the world’s total income also equals the world’s total expenditure, who is going to do the spending when consumers start trying to save up? Krugman says it will have to be governments.

The case is not quite as open-and-shut as it was for the babysitting co-op, although he has a point. Business investment or housing could, in principle, take up some slack, but it is hardly a propitious time for that sort of thing.

In depression conditions, the bar over which government spending must leap to pay for itself is low. The questions that remain: are we really in depression conditions? (Almost certainly.) Can governments find halfway sensible things to spend money on? (Probably; remember they only have to be halfway sensible.)

Two-and-a-half cheers, then, for Krugman. But something has been nagging at me ever since I read the original story of the Capitol Hill babysitting co-op, published in 1977 by Joan and Richard Sweeney. Paul Krugman’s most recent retelling does not mention how the original story ends: the co-op prints too much scrip, inflationary pressures spring up and are suppressed, and the co-op seizes up again because nobody wants to stay at home babysitting. Krugman is right when he says that economies sometimes suffer from problems that have technical solutions. Perhaps he is too quick to suggest that those technical solutions are simple.

But let me look for compromise. The babysitting co-op was ruined because it was run, incompetently, by a bunch of Capitol Hill lawyers. In this respect I think we can all agree that it remains an important cautionary tale.

Also published at ft.com.

Speaking at Warwick Words, Thursday 4 October

This is an evening speech; details to follow. Do come along if you’re in the area.

The Warwick Words website is here.

22nd of June, 2012SpeechesComments off

Heads or tails? Just don’t bet on it

Forecasts are useless and behavioural economists know that people see patterns that aren’t there

An old horse-racing tipster scam takes the following elegant form: send predictions about the winner in a 10-horse race to 10,000 people, with 10 different predictions, each sent to 1,000 people. After the race, focus on the 1,000 who received a successful prediction and send each of them a prediction of the winner in another 10-horse race; again, 10 different predictions, equally spread. After the second race, 100 people will have received two successive winning predictions and will be unaware of the 9,900 who have not. As a final flourish, forecast another 10-horse race and you will have 10 people, each of whom has received 10 three successive correct forecasts against substantial odds. Then simply write to each of them and ask for a few thousand pounds in exchange for your next three tips.

Punters can be forgiven, I feel, for falling for such nonsense – because it is at least cleverly constructed nonsense. But a recent working paper, written by two behavioural economists, Nattavudh Powdthavee and Yohanes Riyanto, makes me wonder whether such classic scams are overkill. They conducted a laboratory experiment (actually, two: one in Thailand and one in Singapore, both with undergraduate students as subjects), which duplicated the old fraud. The twist was that the mechanics of the trick were entirely transparent. The tips were given in sealed, numbered envelopes – each set of envelopes unique to each student.

Instead of horse-racing, the students were shown coin-flips and given a number of good reasons to believe that the coin-flips were random: the coins came from the participants, not the experimenters; the coins were changed every couple of flips; participants, rather than the experimenters, would perform the actual flips. The students were told that each numbered envelope contained a forecast of the next coin flip.

The students were given tokens to gamble with and invited to bet on each coin-flip, with the stake to double or to disappear. The students were also invited to pay a fixed price to look inside each envelope ahead of time. After each coin-flip, the students could open the prediction for free and see whether it was correct or not.

You can appreciate that the forecasts here are transparently useless. With almost 400 students, some were bound to witness a string of correct forecasts by chance. The question is, would the students who randomly received correct predictions through sheer fluke actually start to pay for future predictions? And how long would it take for them to start buying?

The researchers answer these questions pithily: “Yes, and not long.” After witnessing a single correct forecast, students were more likely to pay to see a second forecast; this effect becomes large and statistically very significant after a second correct forecast. After witnessing four correct coin-toss forecasts, more than 40 per cent of students were willing to pay to see the fifth, although the chance of four correct predictions is a not-exactly-stunning one in 16.

In some senses this should be no surprise. Behavioural economists and psychologists have known for some time that people see patterns that just aren’t there. Powdthavee and Riyanto also speculate that this is a particular feature of Thai culture.

But what gives pause for thought is the obvious uselessness of the tips. A horse-racing tipster will boast of insider knowledge and hint that racing results are pre-arranged for the convenience of the cognoscenti. Nobody believes that there is much “insider knowledge” about the next toss of the coin.

Of course, the cultivated readers of the FT would not make the same crass errors as the young students did. But, just in case, next time you see an investment manager touting impressive returns on a couple of funds, ask yourself how many other funds the company manages.

Also published at ft.com.

To save or not to save, that is the pension

‘The government’s pension reform is the most radical change in decades. But according to the OECD, the reform is unlikely to achieve its goals because saving will not be compulsory.’

Financial Times, June 12

Sorry, I didn’t pay any attention to that. I’m browsing reviews for the new Samsung phone.

Well, you’re exactly the problem, then: too busy thinking about consumption today to save for your pension.

Well, my father always says “you can’t take it with you”.

I see. And what happened to him?

He survived a heart attack, took early retirement and at 78 he’s into his third decade of a civil service pension. “Every day’s a holiday”: that’s another of his mottos.

I can see why.

Mind you, I have four siblings so I don’t know if my mother saw it that way.

Your father is a wonderful example of why things have to change and why we don’t want them to. First, he’s already lived longer than expected. Second, he has had a long retirement after a short career. Third, he has lots of children. As long as each generation is much larger than the previous one, it can easily afford to pay for retirement luxuries for the elderly. But fertility has fallen and longevity is rising – your life expectancy is increasing by about five or six hours a day. So it seems difficult to provide for future generations the sort of effortless pension that your father receives.

My heart bleeds.

As well it might because your generation are likely to get pension reform good and hard. The state pension in the UK is universal but minimal, although the government plans to beef it up while gradually deferring it. Alternative pension provision is thus essential.

Wake me up when the sermon is over, OK?

Fine. While you’ve been sleeping, companies have closed their “defined benefit” schemes. These used to provide the kind of absolute certainty that your father received. The replacement, “defined contribution” schemes, are not only less certain but are also less generous. Worse, many employees don’t sign up for such schemes at all.

And what’s that got to do with Fifa, or whoever has been grumbling about our pensions?

It’s the Organisation for Economic Cooperation and Development. They have been commenting on the government’s new wheeze – which has been in the pipeline for several years – to set up a low-cost private-sector scheme with contributions from employer, employee and government, and in to which every employee is automatically enrolled, or into an acceptable alternative.

Sounds pretty compulsory to me.

Auto-enrolment isn’t compulsion, it’s behavioural economics. It turns out that default options can influence behaviour greatly. The government has taken the view that most people would want a subsidised pension if only they thought rationally about it. Auto-enrolment is supposed to give people what they probably need, while giving them the freedom to opt out if they want.

Who would want that?

If you were trying to save a deposit for a house, or some other one-off expense such as a wedding, you might be better off stopping pension contributions for a bit, rather than take on expensive debt. And there’s another problem: many low-income pensioners receive means-tested supplements to their pension. If you expect to fall into that category then contributing to your pension simply eats away at your future means-tested benefits. For all these reasons, plus the increasingly old-fashioned values of liberty and autonomy, the government wants to let people refuse to save for a pension if they choose to.

So what is the OECD worrying about?

If your only aim is to maximise pensions then of course you must make it compulsory and the OECD’s report was about pensions. But if you have practical or philosophical reasons to respect people’s right to opt out, then auto-enrolment is probably your best bet.

But there will be a shortfall.

Yes, there will. Richard Thaler, the Chicago economist who is arguably the godfather of auto-enrolment, reckons that enrolment rates in comparable schemes in the US are 90 per cent. In New Zealand they are close to 70 per cent. That’s not ideal. But neither is heavy-handed compulsion. And after all, you have a phone to buy.

Also published at ft.com.

Stock market molecules

Testosterone may be the hormone for market manias, and cortisol for panics and busts

With a syringe in one hand, a pre-labelled test tube in the other, smelling salts in his pocket and a centrifuge and 30kg of dry ice nearby, Paul Zak advances upon a nervous bride, minutes before her wedding.

On a Wall Street trading floor, John Coates finds his “sober and prudent” subordinates gradually succumbing to a collective mania, clubbing until the early hours of the morning, surfing for porn on their workplace terminals and making ever more foolish financial bets.

Coates and Zak have much in common. Both trained as economists before becoming convinced that physiological factors were crucial in governing individual decisions and even the way economic systems work. Both have turned this research agenda into a hunt for economic influences at the molecular level.

For Zak, whose new book is called The Moral Molecule, the chemical in question is oxytocin. It was once associated purely with childbirth and breastfeeding. If you need to be convinced that the human body is to a large extent a chemically driven mechanical system, just stimulate the nipples of someone in the early stages of labour: with luck you’ll trigger the release of oxytocin and kick off a strong contraction. (I suggest asking for permission before you try this.)

But oxytocin is now associated with love and sex, and also with trusting and being trusted. It doesn’t take a genius to figure out why the female body would evolve a link between sex and trust, but it turns out the oxytocin hormone also regulates trusting behaviour in men. The link between national economic prosperity and levels of trust in a culture is strong; it is intriguing to know that the trust part can to some extent be bottled.

John Coates, meanwhile, has been on the hunt for the molecular triggers of financial manias and panics. His new book is The Hour Between Dog and Wolf; it alternates between war stories from the trading floor and a lucid discussion of human physiology. The two critical hormones in Coates’s investigation are steroids, hormones that have dramatic impacts not only on the body but the brain, too. If oxytocin is the moral molecule, testosterone may be the molecule for market manias, and cortisol could be the molecule in charge of panics and busts.

Bull animals such as rutting stags will experience build-ups of testosterone in anticipation of a fight with other males; if they win the fight, testosterone continues to build, fuelling aggression and giving animals an edge in future fights. Cortisol is a hormone that triggers physiological changes designed to deal with ongoing threats – cortisol can shut down the digestive system as the body breaks down stored glucose instead.

On the financial markets, the story is much the same: traders who are making money are also making testosterone, while a bear market is a breeding ground for cortisol. Both processes tend to self-reinforce, leading to sustained upswings or downswings in market psychology.

Females have a very different physiology when it comes to testosterone, of course – and Coates argues that banks should be bearing this in mind when choosing staff on a trading floor. When Harriet Harman was equalities minister, she famously mused that “Lehman Sisters” might have met a different fate; it was an odd comment given that Lehman Brothers’ chief financial officer was a woman – but perhaps she was on to something.

None of this will be easy for conventional economics to incorporate. Textbook analysis – and even some behavioural economics – assumes people have stable preferences. “Neuroeconomics” reminds us that your cognitive processes may vary depending on anything from whether you’ve recently had sex to whether you’ve recently eaten a sandwich.

Also published at ft.com.

Pound for pound 99p is worth every penny

‘Supermarkets, and also chemist chains, have started to rely on distinctive red stickers and very clear £1 or £2 prices in a bid to attract shoppers on a budget, as well as those consumers fed up trying to work out complex deals. One-in-four of all products sold by Asda is now either £1 or £2.’

The Daily Telegraph, June 5

What’s their game, eh?

Always the right question when dealing with supermarkets. They know what they’re doing when it comes to slapping a distinctive red sticker on a pack of chicken wings.

I thought prices always ended in 99p. Is this just an excuse to fatten their margins?

I think it’s a safe bet that most self-respecting retailers will charge as much as they can get away with, but that with every price increase they will expect to lose some customers. A key skill for those who set prices is to pick the perfect compromise between losing margins and losing customers.

And yet the perfect point often seems to end in 99p.

Indeed it does. There are three main theories as to why it makes sense to end prices with a “9”. The first is an explanation favoured by economists because it works even in a perfectly rational universe. Product prices with 99p endings are difficult to pay for with exact money; the shop assistant will almost always have to make change.

Why is that a good thing?

Because it means the sale must be recorded to open the register. The shop assistant can’t just hand over the product and trouser the cash.

Cunning. That’s not really why product prices end in 99p, though, is it?

Probably not – perhaps it once was, but in a world of credit cards, e-commerce and self-checkout, the story does not really fit. We need to look for a psychological explanation.

Not very true to the spirit of economics.

On the contrary, behavioural economics is très chic these days. And there are two theories at play here. The first, called the “left digit effect”, suggests that consumers can’t be bothered to read all the way to the end of a price. “£79.99” reads as “70-something pounds”. The alternative theory is that a price ending in 99p is simply a shorthand for good value.

Which explanation is correct?

The Telegraph’s story makes sense if the “shorthand” theory is correct. It’s easy to imagine that the shorthand for a bargain was once a 99p price, but now it’s a nice round number thanks to the pound shops.

It may be easy to imagine, but is it true?

Two business school professors, Eric T. Anderson and Duncan Simester, published the results of some field experiments in 2003 in which they had teamed up with a mail order company and manipulated the advertised prices. A $59 dress, for instance, would sometimes be priced at $54 or $64 instead. Mr Anderson and Mr Simester found that prices ending in “9” were more likely to find buyers, relative to the prices ending in “4”. This was always true but particularly if the product in question was something new. That last fact does suggest that the “9” was conveying overtones about an unfamiliar product. It’s some support for the “shorthand” theory. But there’s a catch.

Which is?

Several studies support the more intuitive idea that consumers simply ignore the pennies and round down. Whatever the reason, the fact is that 99p endings are extraordinarily common and they appear to attract consumers.

But The Telegraph says that many products are now rounded to the nearest pound.

Not quite. The Telegraph says that 16 per cent of items sold by Tesco, Sainsbury’s or Asda are priced at £1 or £2. It doesn’t reveal the pricing of the other 84 per cent. There’s no contradiction between that statistic and the typical finding in the marketing literature, which is that prices ending in a “9” make up between one-third and two-thirds of all products on sale and most of the other products have prices ending in “0” or “5”.

So has The Telegraph spotted a non-existent trend?

That’s harsh. There might be a trend, but this fundamental rule of marketing hasn’t changed. I spotted a similar story in a couple of other newspapers. The Daily Mail headline was “Asda axes the 99p price ploy”, while the Sunday Times went for “Stores abandon 99p sales ploy”. They were published in May 2000 and October 1995. We’ve been here before.

Also published at ft.com.

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