Undercover Economist

Bread, Brexit, and the power of the third option

Written for and first published in the Financial Times on 18 May 2018.

Imagine that you sell bread-making machines. Your task is complicated by the fact that most people have only a hazy grasp of what a bread-making machine does, let alone the joys and sorrows of owning one.

Nevertheless, there is a simple trick that will help these machines to fly off your shelves: next to what seems to be a perfectly adequate $150 bread-maker, place a $250 bread-maker with a long list of bewildering extra functions. Customers will think to themselves: “I don’t need all that nonsense. The cheaper, simpler bread maker is the better option.” Some of them will buy it, even though they would not have otherwise.

Itamar Simonson, a marketing professor at Stanford University, attests that the kitchenware company Williams-Sonoma doubled their sales of bread-makers in the early 1990s using this sort of technique. Mr Simonson, along with Amos Tversky, one of the fathers of behavioural economics, demonstrated similar preference reversals in a laboratory setting.

Mr Simonson and Tversky showed that when people are wavering between two options, you can change what they choose by offering a third, unattractive option. A $1,000 camera might seem extravagant unless there’s a $5,000 camera sitting next to it. The grande sized cup at Starbucks seems restrained when put next to the venti, a Brobdingnagian vat of flavoured warm milk.

All this brings us to Brexit. What we voters feel about different flavours of Brexit (hard, soft, train-crash) depends in part on facts, in part on propaganda, and in part on our prejudices. But it also depends on the comparisons that come readily to mind.

That means that the re-appearance of the European Economic Area is an intriguing development in the debate. The House of Lords recently voted to keep the UK in the EEA, and therefore the single market, after leaving the EU. This “Norway option” seems a popular enough plan: a BMG opinion poll in January found 52 per cent of people in favour of staying in the single market, and only 14 per cent of people against. In these polarised times that is as decisive a margin as one might expect for anything. Nevertheless, both prime minister Theresa May and the leader of the opposition, Jeremy Corbyn, have rejected the single market option, making it unlikely.

This might seem illogical. Why not go for a popular compromise that respects both the close vote and the fact that the Leave campaign won the referendum? But, remembering the tale of the bread-maker, it makes perfect sense that Mr Corbyn and Mrs May, both Euro-sceptics, should fear the Norway option being placed in front of voters.

To most voters, the EU is like a bread-maker: we don’t really understand what it does and we don’t know what to think about it. The Norway option clarifies matters in a way that does not help Leavers. It is very much like being in the EU, except just a little bit worse. If it becomes a salient possibility, it makes staying in the EU look rather attractive by comparison.

A hard Brexit will probably go quite badly for the UK, but it does have the merit of being a very different path to remaining in the EU. A Norway-option Brexit might well work out smoothly, but it is almost guaranteed to underperform the option of not leaving at all. No wonder Brexiters — so cavalier about having their cake and eating it before the vote — are now determined to ensure that the Norway option is taboo. They realise that if the British public decides that staying in the single market is a plausible plan, they might eventually reach the conclusion that staying in the EU itself would be even wiser.

This sort of preference reversal can occur in other circumstances, too. A hard Brexit offers temptations to many voters: control over immigration; an independent trade policy; no more membership fees to Brussels. It also offers obvious risks: leaving the largest single market in the world; damage to the political settlement in Northern Ireland; setbacks to scientific and diplomatic collaboration. Staying in the EU merely offers business as usual.

Do we tend to find a mix of stark risks and clear rewards appealing? That depends on whether the costs or the opportunities seem more salient. During the referendum campaign, the opportunities opened by Leavers seemed expansive, while the costs (“lower GDP by 2030!”) were vague and dull. During the negotiation process, it is the opportunities that are starting to seem vague while the costs are becoming vivid, at least to the small number of people who are paying attention.

None of this makes it likely that Brexit will be reversed. The simple fact that Leave won the referendum is likely to be proof against all sorts of psychological subtleties. Yet these seem to be nerve-racking times for the Brexiters.

It was always clear that asking an absurdly simple question about an absurdly complicated decision was unlikely to work out well. There is one ironic consolation: however befuddled our referendum decision might have been, the divided cabinet is now doing its best to make us, the great British public, seem like philosopher kings by comparison.

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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