Brexit & risk attitudes

Simon Wren-Lewis points out a paradox – that on the one hand we have good evidence that older people tend to be more risk averse than younger ones, but on the other hand they supported the risky prospect that is Brexit. How can this be?

It’s not – or at least not wholly - because older people, being retired, are insulated from some of the costs of Brexit. People tend to vote sociotropically (pdf) – for the common good as they perceive it rather than their own narrow interest – and so older folk should have considered the interests of their children and grandchildren.

What’s more, there’s a good reason why older people should be more risk averse. They have learned – often at that most effective pedagogic establishment, the school of hard knocks – that big ambitions often fail. They should be more aware than most of our cognitive limits, not least because many older folk are so limited (pdf). They should be small-c conservatives, and hence Remainers.

So why weren’t they? Part of the answer, I suspect, lies in a paper (pdf) by Michael Woodford and colleagues. They point out that attitudes to risk are shaped by how we code (pdf) prospective wins and losses.

Take, for example, the question: how much would you pay for a 50-50 chance of winning £1000? The expected value of the bet is £500, but most of us would pay less because we’re risk averse.

Just how much we’d pay, though, depends on how we think about the win and the loss – how we code them. We ask: what could I do with £1000? How much would the loss of (say) £400 hurt? Differences in these codings generate differences in how much we’d pay – that is, differences in risk aversion.

This seems trivial. But it explains a lot. It explains why more intelligent people are more willing (pdf) to take on good bets. They can more clearly translate pay-offs into prospective mental well-being, whereas for others the coding is noisier and so they avoid such bets. It also helps explain why older folk are more risk averse: knowing their cognitive limits (and perhaps knowing that money doesn’t buy happiness) they avoid bets that others would take.

It also explains one element of prospect theory; the tendency to seek risks when you’ve lost money. We see the chance of £1000 and think “yay, I can get even” and think of the loss as “I’m in so much trouble already a little extra won’t make any difference.”

And it also explains why our attitudes to risk vary across domains: why we hold equities and buy insurance; why some avoid financial risk but play risky sports; and so on. It’s because the codiings differ from domain to domain.

Which brings me to Brexit. Brexit was not presented simply as a choice between a risky pay-off (Leave) and a safe one (Remain). Brexiteers also offered what they claimed to be intrinsic goods such as national self-determination. For various reasons – being brought up on 1950s war films, discomfort with immigration, whatever – these goods appealed more to oldsters than youngsters. And this appeal offset the tendency for oldsters to regard Brexit as risky.

In a sense, this is consistent with the coding view of risk aversion: oldsters saw Brexit as the offer of valuable intrinsic goods. They therefore coded it as a safe option. Youngsters, being less attracted to those goods, saw it as riskier.

I offer this only as a theory. But I think Simon’s point is sound: there is a paradox here that needs some sort of explanation, and this is the best I have.  

Update/clarification. I intended this post to be more about the nature of risk aversion than about Brexit. It poses a radical question. If the same option can be coded as either relatively risky or relatively safe -as Brexit was/is - then does the concept of risk aversion apply at all? And if it doesn't apply here, might it be unhelpful in other real-world complex choices we face? 

Comments

[Dipper]

Wittering on about forecasts of this % GDP growth and that % GDP growth are a complete irrelevance as my local area hurtles towards complete gridlock in public services and transport. All those jokes about paving over the South-East of England are literally coming true around us. If we remain in the EU there is absolutely nothing the UK government can do about this. So the biggest risk, by far, is handing over control of the nation to people who have no interest in its welfare and prosperity and over whom we exercise no control.

Oh, and Oxbridge economists ignore the biggest risks to their analyses, which is that Oxbridge economists may be talking through their backsides, as Wren-Lewis demonstrated with his recent foray into forecasting currency rates.

[Matthew Moore]

I agree this is about relative weighting of risk.

However, my perception is that older people saw it as far less risky for three main reasons:

1) As you say, being homeowners and pensioned, they were insulated from some economic risk.

2) They remember pre-EU Uk, and so are less prone to the loss-aversion that characterises prospect theory

3) They were more skeptical of the more alarmist claims of Remain, having lived through more alarming times and come through OK.

[Patrick Kirk]

I think Matthew nailed it. Older voters are the ones who originally got us into the EU, they remember life before the EU and just don't see the risk of leaving. Younger voters don't have that set of memories of Britain muddling though and fear the worst.

[Ralph Musgrave]

Patrick, What's so "muddle through" about being outside the EU (as per before the days the UK joined the EU or as per after we leave in about 18 months time)? Trading with the rest of the world under WTO rules, assisted by sundry special agreements with sundry other countries worked before we joined the EU. It can work afterwards.

The OBR estimates the cost of Brexit at £5 a week per head I think. Not a disaster.

[Dave Timoney]

There is a well-known correlation between age and voting leave in the EU referendum, but as this is broadly a linear trend we need to focus on those voters in the middle who swung the result, not those at either end.

The pivotal age group appears to have been 45-55 years old. Given that we joined the EEC in 1973, these people will have been no more than 10 at the time, so I doubt their memories of "life before" amount to much.

Many of them will also not yet have paid off their mortgages, and plenty will still be prone to anxieties about job prospects and the value of non-state pensions. Many will have young children, not grand-children.

[Daniel]

My parents (in their 50s) voted Brexit. They generally believe they were saving their children and grandchildren from a future EU dictatorship and a UK swamped with Muslims and other undesirables. I can cope with the first reason regardless of how pointless I think that is in the context of global capitalism but the latter xenophobia and racism is hard to stomach. It doesn't matter how much I try and convince them that maybe if they were voting for their children's future maybe they should ask what they want...

[George Carty]

Daniel, do you think that perhaps the European refugee crisis helped foment a Malthusian atmosphere in the UK that helped bring about Brexit, just as the malnutrition suffered by the Germans during World War I (as a result of the British naval blockade) was key to the rise of Nazism?

[gastro george]

"... my local area hurtles towards complete gridlock in public services and transport. ... If we remain in the EU there is absolutely nothing the UK government can do about this."

Hysterical nonsense. A failure of successive UK governments.

[gastro george]

"Trading with the rest of the world under WTO rules ... worked before we joined the EU.

The WTO was created in 1995.

[SimonB]

Older people are more trusting of, and influenced by, old media. "They wouldn't be allowed to print it if it wasn't true.".

The correlation of increasing public xenophobia with increasing and relentless xenophobic headlines surely demonstrates this?

[Mark Brinkley]

I'm old (64) and I can remember pre-European Britain, We were at the centre of something called the Commonwealth which was far more frightening than anything the Europeans have ever cooked up, Free trade? I think not. It was all about creaming off the wealth of other nations. It had to end as the other nations were fed up with us.

[Dipper]

@ gastro george. Well, it isn't nonsense, it is happening on a grand scale largely due to mass immigration.

And I suspect you are right about political failure by successive governments, but there wasn't any indication that was about to stop.

[Phil]

What we also saw in a lot of the commentary and vox-poppery around the Brexit vote was risk *discounting*: people taking the view that their personal situation was already at the zero lower bound, so there was no downside to a punt on Brexit. As Lisa Mckenzie wrote in the Guardian: "The women in east London and the men in the mining towns all tell me the worst thing is that things stay the same." If you genuinely believe that, risk aversion is irrelevant - there's no risk to be averse to.

What I don't quite understand is what state you land yourself in if you *affect* to believe that, and then act on your affected belief (e.g. by voting Leave). As I wrote the last time I commented on this mindset,

"have you got paid work? Imagine losing it. Are you out of work? Imagine not finding work ever again. Benefits been sanctioned? Imagine they never get reinstated. It’s always possible for things to get worse; anyone who’s ever been in poorly paid or insecure work, or out of work, knows that perfectly well."

And anyone who voted Leave on the basis that it couldn't make things any worse knew perfectly well that it could. But they discounted the risk nevertheless - in the way that mattered most, casting their vote - because they were committed to denying it.

[Blissex]

«We were at the centre of something called the Commonwealth [ ... ] all about creaming off the wealth of other nations.»

That's exactly what the "dark blue passport" kipper vote is all about bringing back, at least in their imaginations, at least in "00" scale; it is the "Dubai economy" dream.
That segment of the kipper vote want to replace uppity, expensive polish and romanian immigrant servants with cheaper, more deferential african and asian indentured wallahs.

[Blissex]

«People tend to vote sociotropically (pdf) – for the common good as they perceive it rather than their own narrow interest»

Maybe once upon a time, maybe some people, maybe in other countries -- in England many voters have consistently voted for bigger asset prices and lower wages, "Blow you! I am alright Jack" votes.

«– and so older folk should have considered the interests of their children and grandchildren.»

Maybe they should have, if they felt they were invested in those children and grandchildren. But currently older folk (in large majority women) are invested mainly in defined benefit pensions and southern property, they no longer need their children and grandchildren to support them in their old age.

Also consider the very clever (and no doubt deliberate) effect of the triple lock: if state pensions were just wage-linked, pensioners would vote for better wages, if they were just inflation-linked, pensioners would vote for lower exchange rates, but with a minimum raise of 2.5% it is in the best interests of pensioners to vote for lower wages and lower prices, that is for permanent recession or upward redistribution; and every one of the many pensioners just about managing on the state pension feel every increase in prices and wages as a direct attack on their low living standards.

[Arthur Murray]

Blissex : "Also consider the very clever (and no doubt deliberate) effect of the triple lock: if state pensions were just wage-linked, pensioners would vote for better wages, if they were just inflation-linked, pensioners would vote for lower exchange rates, but with a minimum raise of 2.5% it is in the best interests of pensioners to vote for lower wages and lower prices, that is for permanent recession or upward redistribution...."

Thank you for pointing that out. Now why didn't the newspapers do that...?

[Blissex]

«pointing that out. Now why didn't the newspapers do that...?»

That's why blogs and blog commenters exist :-). More generally I feel that for several topics there is a kind of convention "we don't talk about that", even with many bloggers; usually these are topics that could be interpreted as "(right-wing) class war" or "politically incorrect". While often the slightest hint of "(left-wing) class war" is denounced in the strongest terms as the first step towards the gulags. Also I have noticed that newspapers less often illustrate their stories with data and graphs, I guess because they underestimate their readers.
Part of the reason I comment on blogs is to learn unconventional but valuable insights, and interesting data points. Sometimes I learn them from newspapers (e.g. A Chakraborty's mention of C Crouch's "privatized keynesianism" analysis, the colossal swing from staff to volunteers in public libraries), but far less often. This blog by C Dillow often helps looking at things in a different way, and some commenters too.
For example the someone (I can't remember who it was) who pointed out that in England for the past several decades the governing party changed only when there was a southern house price crash.
Or the one on another blog who pointed out that T Blair had losts dozens of seats and 5 millions votes to Labour over 10 years, such was his electoral toxicity and that of his mandelsonianism, and despite roaring southern house prices.

[George Carty]

@From Arse To Elbow

The fact that the population changed from Remain-majority to Leave-majority at approximately 45 would seem to be yet another piece of evidence consistent with your "Phone Home" hypothesis: that resentment over youth flight was a key driver of support for Brexit!

Since it was mostly less-educated people (most of whom will have married and had children in their twenties people with university education marry later, but also tend to be mostly Remain voters anyway), the critical age of 45 more-or-less corresponds to the age when the children of such people are leaving school and possibly thinking that they'll have to move away to find decent employment.

And perhaps the trauma of losing family members to migration (coupled with the fact that they live in economically decrepit small towns with few social activities available due to lack of local spending power) may even have screwed up their neurochemistry to the point that are more likely to make irrational decisions like voting for Brexit.

[gastro george]

@Dipper

blah, blah, mass immigration, blah, blah.

Same old.

[George Carty]

gastro george, actually it looks like Dipper's obsession is overpopulation rather than foreigners per se.

[Guano]

To respond to Dipper's point - the south-east of the UK is growing in population because (since the 1980s) a growing part of the UK economy is based in the south-east of England. The effects of this have been worsened by the fact that no public body acknowledged this until about 15 years after it started to happen. At the time of the Big Bang the GLC was abolished, and it was only after the establishment of the GLA that a public body took on board the fact that London and the South-east should be planning for population growth and not population decline: local authorities in London were still locked into policies of selling off school buildings to balance the books while the number of pupils was growing.

Young people have tended to move to London and the South-east from the rest of the UK, and also to move there from the rest of Europe. If young people from the rest of Europe are prevented from moving to south-east England, will this help the areas of the UK with weak economies? It is far from clear that there are enough young people in those areas willing and able to move to south-east England to take up jobs. And even if there are, it is far from clear how that impacts those areas of the UK with weak economies; in fact there is some evidence that older people in northern England voted "Leave" because younger people in their communities had migrated out.

People in areas of the UK with weak economies are right to feel resentful: Brexit and/or curbing of FoM is certainly not going to address the fact that they live in areas of the UK with weak economies. Brexit and/or ending FoM may end population growth in south-east England by throwing the UK economy into crisis but I am not sure how that helps anyone.

[Guano]

The least risky option that the UK has is staying in the EU.

The option that follows that in terms of risk is leaving the EU in a well-planned orderly manner.

The most risky option is leaving the EU in an unplanned, chaotic, rush-for-the-exits manner (which is what is happening now).

The Mail, Sun and Leave.UK worked assiduously to persuade voters that remaining in the EU was full of risks (usually comparing that to a golden era of stability in the 1950s and early 1960s).

Vote.Leave worked assiduously to persuade voters that leaving the EU would be a smooth transition and not compromise UK trade relations with the rest of the EU.

Between them they appear to have convinced certain voters that Leave was the less risky option. Possibly these were older voters who remember some past decades (pre-EU) as an era of stability and who have difficulty in realising that people like Gove and Johnson are more crooked than a bent corkscrew. Other voters, possibly those who are younger or trained to be sceptical, didn't believe the claptrap.

The world is more risky (or seems more risky) than it did in the 1950 and early 1960s. Leaving the EU is a distraction from dealing with antibiotic resistance, for example. "Taking back control" from the EU isn't going to help deal with those risks but does appeal to some older people who associate pre-EU days with a period when (it seemed) those risks did not exist.

It is going to be necessary to listen to experts (and question them) to deal with these risks. The attacks on "experts" and the chaos created by leaving the EU sometimes appears like a deliberate distraction from dealing with these risks.

[Scott F]

I am not sure that the default position is Remain in the EU while the change needing risk assessment is to Leave. For older voters it is the EU that is the new kid on the block, especially if integration has become tighter and tighter over the years due to increasing EU regulation. To them the EU is still in it's trial period. Only Remaining must be evaluated. There is no Brexit because life outside the EU is what they grew up with. They feel like they understand that "risk".

The other problem I have with punditry on this issue is that the Brexiters are accused of (stupidly) voting against their interests based solely on the supposed economic effects. Ignored are perceived threats to the local culture, language, and national identity. To extend @George Carty comment on the Nazi take over of Germany, psychological factors related to the outcome of WWI made it possible as much as economic factors. It is a common mistake to discount things like national pride as a force in world affairs.

[gastro george]

@Guano - The Tories abandoning any semblance of regional policy in the 80s didn't help either.

[Guano]

"If the same option can be coded as either relatively risky or relatively safe -as Brexit was/is - then does the concept of risk aversion apply at all? And if it doesn't apply here, might it be unhelpful in other real-world complex choices we face?"

It is easy to distort perceptions of risk.

[Guano]

Scott F.

"For older voters it is the EU that is the new kid on the block ...... to them the EU is still in it's trial period."

To some extent I agree, though it was said very clearly (after the 1972 parliamentary vote and after the 1975 referendum) that it was a decision that was being made for all time.

In 2016 the same political party that had said that the choice had been made for all time (and had done most to integrate the UK into the EU) offered people a choice and misled them about how easy it would be to leave.

[Blissex]

«a growing part of the UK economy is based in the south-east of England. The effects of this have been worsened by the fact that no public body acknowledged this until about 15 years after it started to happen.»

That is amazing optimism, because the thesis is stupidity rather than intent.
But governments and the civil service are not *that* stupid: the obvious goal was to pump up debt sales and property prices in the south, and the way to achieve this was to heavily subsidize jobs creation and property buying in the south, a deliberate strategy to push congestion to ever greater levels.

When the government and the civil service decided to act more overtly, they then spent fantastic sums on very expensive infrastructure projects in the south, with a a goal of ever greater densification.

Consider even just Crossrail: building new railways inside London must cost a multiple of building them in the north, and its main effects have been a colossal property price boom along it straight away and further congestion in the longer term.

Was building Crossrail stupidity or cunning electoral strategy? I simply can't believe the "stupidity" case.

[Blissex]

«The Tories abandoning any semblance of regional policy in the 80s»

That's the euphemism of the century -- it looks to me that they proactively targeted unionized industries and areas where unions were popular to teach them a lesson, what english governments have always called "to reduce", whether it be the medieval welsh or the 20th century north. This is how V Cable, a "centrist" liberal, describes it:

«the ‘Icelandic disease’, whereby a banking sector outgrows its host economy, creating chronic financial instability. A brutal solution would be drastically to prune back the industry, as Mrs Thatcher did to coal-mining when Mr Scargill posed a threat to stability comparable to that created by Mr Adam Applegarth of Northern Rock, Sir Fred Goodwin of RBS/Nat West and Mr Bob Diamond of Barclays today.»

BTW instead I defend some of the discussions by some Thatcher ministers about Liverpool: several of them obviously were not intent on smashing Liverpool, they just considered it a lost cause, as specific cities come and go (very slowly usually) as they are very dependent on location and happenstance.

But for whole regions the story is different: there is nothing that makes Yorkshire or Cheshire as a whole a less desirable location for living and industry than Kent or Berkshire, and yet government policy has been to pump up the tory voting southern areas and (at best) neglect the union and labour supporting northern areas.

[Frank]

If you paid 500 pounds you are not making any return on your investment in the bet - makes sense to pay less