Heuristics and Biases Part II: Brexit from a Behavioural Economics Perspective - Risk Aversion, Overconfidence Bias, Present-Bias and David Cameron

by HK Lim (hklim [at] thetroublewitheconomics.com)

Following on from Part I of this series on Brexit from a behavioural economics perspective(where we discussed the role of attribute substitution in framing the Brexit question), we now shift our focus to the most important person in this entire episode, David Cameron, the former leader of the Conservatives and Prime Minister. To understand David Cameron's role in this episode(particularly the claims that he was largely responsible for precipitating Brexit), and ultimately see how a clash of mainstream economic orthodoxy and behavioural biases(and the failure to take into account such biases) could have influenced key decisions in the run up to Brexit, we first need to examine the Conservatives' complicated relationship with Euroscepticism. In doing so, we will see how the political and business establishment operating using one system of reasoning(economic rationality based off rational choice theory) came up against a portion of the electorate that did not necessarily subscribe to that same system's arguments in support of Britain remaining in the European Union.

In short, by examining why David Cameron called a referendum on Britain's membership in the EU even though he was effectively opposed to Brexit we will better understand the system of reasoning that resulted in the Brexit referendum and how a rejection of such a system resulted in a vote to leave. Confused? Well, the history of the Tories' relationship with the EU has been anything but simple.

Tory Euroscepticism in a nutshell

Historically, the Tories have been the more pro-European of the two major British parties and generally stronger advocates of closer European unity as a platform for securing greater British influence in European politics. There was however, a marked about turn in this party position in the 1980s under Margaret Thatcher, who in her 1988 Bruges speech strongly criticised this vision of a united Europe as tantamount to the re-imposition of the frontiers of the state at a European level, "with an European super-state exercising a new dominance from Brussels." This Eurosceptic shift did not sit well with many in the Conservatives and proved instrumental in bringing about both Thatcher's departure from Downing Street and the demise of her political career. These very same internal party tensions regarding Britain's relationship with Europe continued during the time of the succeeding Tory leader and subsequent Prime Minister, John Major, who while having brought Britain into the EU in 1993, was constantly dogged by Euro-feuds within the party which ultimately rendered his premiership ineffectual in articulating its own agenda.

More Euroscepticism this way comes

As the EU continued to grow both in political and economic might, and against the backdrop of sharply increased EU migration into the United Kingdom, Tory Eurosceptics were now able to markedly shift the party's overall tone to one that was increasingly unwelcoming to the very notion of greater EU integration. It was thus an internal party atmosphere that was somewhat hostile to further European integration that Cameron faced when he ran for the Tory leadership in 2005. As part of his platform pledges in running for leadership of the party, Cameron promised to withdraw the Tories from the European People's Party, the Europe-wide organization for centre-right parties, in a gesture that implicitly signalled his commitment to stand with the Eurosceptics if he were to be elected into office. Cameron thus adopted a straightforward modus operandi, in dealing with his party's hostility towards the EU, he chose the strategy of placating the Eurosceptics within the party rather than choosing to lock horns with them. 

Eurosceptic appeasement as a manifestation of risk aversion
 
Cameron's strategy of Eurosceptic appeasement can be understood as a manifestation of risk aversion. Risk aversion is a particular preference characteristic, where an individual is reluctant to engage in a bet with an uncertain payoff(technically there is a chance of either a gain or a loss) and instead prefers a smaller certain payoff. The typical investment related example of risk aversion relates to an investor preferring to place his money in a bank with a small but guaranteed fixed rate of return over the alternative of investing in a stock with a higher possible expected return but also the chance of losses in the initial investment.

In the context of Cameron's available menu of decisions as leader of the Conservatives, this risk aversion corresponded to his reluctance to bet on a confrontation with the Eurosceptics head on(with the possibility of either strengthening his control of the party or running the risk of losing control over the party),  instead preferring to placate the Eurosceptics and retaining the current level of control over the party but making no real progress towards resolving the party's ongoing tensions over Europe.

A quick aside on the classic principal-agent problem regarding leadership survival and ultimate party(and state) survival is appropriate here. While in light of the Brexit outcome, it might be argued that Cameron's strategy of appeasement of Eurosceptics could be construed as the result of his putting the survival of the self before the party and the state, we must not forget that we are also benefiting from hindsight bias(for hindsight is always 20/20). We should also not inadvertently fall into the trap of the "outcome bias", where there is a tendency to judge a decision by its eventual outcome as opposed to the quality of the decision at the time it was made. And at the time of the initial decisions, all that we could perhaps put a finger on is the inherent tensions introduced by the principal-agent problem that had already been initiated by the conflict between decisions driven by a desire for individual political survival against decisions in the best interests of the survival of the party and state..

[An additional aside: to the extent that Cameron was deemed to have an Eurosceptic bent, it could have been as much motivated by political calculation as much as deeply held personal political ideology. We can never be fully certain, for utterances to Norman Lamont like "Eurosceptic-but not as Eurosceptic as you are," and to Labour's Denis MacShane, "I'm much more Eurosceptic than you imagine," do not sufficiently pinpoint where exactly on the scale of Euroscepticism he stood, even less so if his "official" position changed with time, circumstances and audience.]

Cameron's premiership, intensified Euroscepticism and risk aversion part deux

Following the 2010 British elections, and having formed a coalition with the pro-Europe Liberal Democrats led by Nick Clegg, Cameron tried to steer the Tories away from continued divisive infighting over the party's Europe stance, urging members to stop "banging on about Europe," and instead refocus on more pressing issues of the time. However, amidst falling poll numbers, Cameron's position within the Conservatives continued to be undermined by the failure of his government's austerity policies(he had espoused a platform of fiscal conservatism) which effectively put Britain's recovery on the back burner, the Eurozone crisis that continued to fuel a vocal Tory Eurosceptics criticism of Europe, and pressures from an ascendant UK Independence Party(UKIP) that was also riding a wave of anti-EU and anti-immigration sentiment.

In 2012, Cameron mooted the idea of a referendum, not in its final Brexit form, but on renegotiating Britain's relationship with the EU, which according to sources, was largely a party management issue in response to "unbelievably Eurosceptic" backbenchers, rather than driven by true ideological conviction. So once again, a risk-averse Cameron postponed the possibility of going head to head with the Eurosceptics that he perceived to be potentially challenging his leadership, via another attempt at appeasement, this time by promising a referendum on renegotiating Britain's relationship with the EU(which in the final Brexit form, ultimately evolved into a referendum of whether Britain should stay in the EU). Granted he may not at the time imagined that the referendum would have taken its final form as a vote on Brexit, we nevertheless once again see the principal-agent problem at work.

The 2015 GE surprise, overconfidence bias and present-bias

In an attempt to secure party unity in the run up to the 2015 general election, David Cameron, committed formally to holding a Brexit referendum if the Tories were to win a full majority. At the time (January 2013) of this promise, this may have been perceived by Cameron to be party unity secured at no cost because the majority of political observers and pollsters felt that the Conservatives were most likely to lose, or in the best case scenario, win seats still shy of a majority and hence there would be no actual follow through on this promise. [For the interested, more fascinating discussions of what might have gone wrong in poll forecasts for the 2015 GE can be found here and here.] In the same manner as before, this decision to commit to a future promise at no cost is fully consistent with the risk-aversion tendencies identified earlier and not necessarily inconsistent with existing economic theory and the rational choice school.

The stage was thus set, and when the Conservatives won a shocking majority in the 2015 GE, Cameron was forced to follow through on his promise to hold a referendum on Brexit or face possible mutiny within his party from the Tory Eurosceptic wing and further loss of electoral support to UKIP. When Cameron announced the decision to hold a Brexit referendum, he positioned himself squarely in the corner of the Remain camp and pledged his commitment to oppose the UK departing from the EU.

And this was where things got really interesting. While previously risk averse with respect to confronting the Europe issue within his party, when forced to play an unwilling hand, Cameron appeared overconfident that winning the referendum would be easy with most of the British establishment and big business in the pro-Remain camp. This is a classic case of the overconfidence bias, where an individual's subjective confidence in their judgments is greater than the objective accuracy of those judgments. Notwithstanding the evident problems with polls themselves not getting things quite right(again, discussions of what might have gone wrong in poll forecasts for the 2015 GE can be found here and here), more evidence of this overconfidence bias could also be seen in Cameron's apparent inadequate consideration of the risks to his Remain campaign's credibility from his previous Eurosceptic stance within the Tories. It was perhaps not best-advised to think that one could convincingly campaign on behalf of the Remain camp suddenly when the track record of one's previous stance on Europe didn't align properly with that expected of a Europhile.

The economic rationale was that once voters were presented with the economic arguments against leaving the EU, individual economic self-interest(as dictated by mainstream economics) would prevail and engender a preservation of the status quo(with a vote to remain) over any concerns regarding the EU's encroaching of Britain's sovereignty. As Alex Massie noted, "They might not do so with any great measure of enthusiasm but a reluctant vote Remain was all Cameron, and his government, needed." As detailed in Part I of this Brexit series, we all know how that turned out. And as Charles Moore wrote rather prophetically, "The fear factor which may well win the referendum for Mr Cameron actually operates even more strongly on the elites than on the mass of the population."

Furthermore, polls in the run up to the referendum also seemed to give the Remain camp the edge which likely further reinforced the overconfidence bias at play(although the margin of Remain's edge fluctuated and even turned in favour of the Leave camp). And the disconnect from the ground probably was also due to an over-reliance on representative statistics and not nearly enough working and listening on the ground. As John Harris wrote in the Guardian with regards to polling, "understanding of the country at large has for too long been framed in percentages and leading questions: it is time people went into the country, and simply listened."

This overconfidence bias and a political establishment seemingly out of touch with the electorate was also underscored by the Remain campaign's constant reliance on parading their stable of "experts" to persuade voters of the soundness of their position, warning of the severe economic costs if Britain were to leave the EU. Michael Gove, who campaigned for Leave, noted, perhaps somewhat ironically, “I think people in this country have had enough of experts.”

Before we end this section, we should also note that Cameron's Eurosceptic appeasement strategy is also consistent with what behaviouralists term present-bias, where one tends to over-value immediate rewards at the expense of one's long-term intentions. As the next section elaborates, this often arises from the problemmatic way in which payoffs are discounted over time. Thus, Cameron's choice to appease Tory Eurosceptics by promising to a referendum can be interpreted as an over-valuation of the immediate reward of retaining party control at the expense of a (hopefully) once and for all settling of party divisions via an outright confrontation on the issue of Europe. Not surprising from a behavioural perspective but nonetheless clashes with what traditional economic reasoning would expect.

Present-bias, time inconsistency and a digression on conventional economic modelling of intertemporal choice

We now briefly discuss Cameron's Brexit decision tree in light of the problemmatic manner in which conventional economic theory models preferences and choices over time. A fundamental notion central to models of decision making at different points in time(that is, intertemporal choice) is discounting, whereby a payoff, say $100, is worth more today than it is sometime in the future(say a year from today). One implicit assumption in conventional models of intertemporal choice is that there is a constant exponential discount rate that applies as the time horizon to the future payoff lengthens. For example, suppose $100 received a year from today is worth $90 today, $100 received two years from today is worth $81 today, $100 received three years from today is worth $72.9 and so on(discount factor 0.9). This stability in this discount factor is crucial in ensuring that preferences are stable over time. That is to say, if you had to choose between two possible payoffs A or B to be received at some point(s) in the future, as time progresses, your preferences or choices should not change. That is what it means to have time-consistent preferences.

In contrast, if during early periods the discount factor falls rapidly but then falls more gradually over longer periods, this gives rise to what is termed hyperbolic discounting and present bias(technically, hyperbolic discounting is one way present-bias can arise). Individuals with present-bias(or employing hyperbolic discounting) have a tendency to make choices that are not consistent over time, that is the choices are inconsistent with the choices their future selves would have made. This is because future rewards are much more heavily discounted under hyperbolic discounting compared to that of conventional economic theory's exponential discounting. The bigger question here is how to real humans (not just the "homo economicus" of conventional economic models) actually apply a discount factor to future payoffs? That is something to think about, as I am certain the majority do not think in such a consistently mechanistic fashion.

We can also similarly analyse David Cameron's decision tree in the run up to the Brexit referendum from this perspective. For simplicity, let us focus on two dates, January 2013 when Cameron made the promise to the Tories that an EU referendum would be held if they won a majority in the 2015 GE, and February 2016 when the date of the Brexit referendum was formally announced. [Of course, the would be uncertainty in the actual referendum date and the actual referendum wording initially at the January 2013 point which will complicate matters.]

In January 2013, in appeasing the Eurosceptics within his party, Cameron's stance can be classified as leaning towards Euroscepticism(even if solely a result of political calculation). In February 2016, Cameron instead threw his weight behind the Remain campaign, which can be construed as a shift away from Euroscepticism to a pro-Europe stance(or a shift to benign Euroscepticism if you might). At face value, this might be construed as exhibiting time-inconsistency in preferences. But let us also note that it is not unreasonable to expect that the payoffs in choices(pro-EU or anti-EU) would have shifted with time, and consequently, political expediency would typically dictate a switch in position if necessary for survival, so the simple analysis should be considered with the usual caveats. [The astute reader would also by now have had a hint at how Cameron's strategy of Eurosceptic appeasement could be framed in the perspective of being present-biased.]

The objective of this brief discussion of time inconsistency is mainly for the purpose of illustrating the limitations of conventional economic notions of intertemporal choice. To ensure preferences over time are stable, models implicitly require a rather specific discounting factor(exponential). In actual situations, there is evidence that people tend to exhibit present-bias. While actions taken in the real world are not quite so surprising to observers, from the perspective of conventional economic theory they can sometimes be outright baffling.

Concluding thoughts - "don't hate the player, hate the game"

 And therein lies the paradox of David Cameron's failed political gamble. While Cameron's role in the series of events leading to Brexit resulted primarily from a combination of conventional risk aversion and the principal-agent problem, the final domino in the Brexit referendum toppled due to a combination of Cameron's overconfidence that Remain would eke out a win, combined with a disconnect from voter preferences and an incorrect understanding of electorate human self-interest. One cannot really get away from the conclusion that the principal-agent problem played a central role in getting us to this point where there was a clear conflict in interest between what might be good for the state and what might be necessary for a leader's political survival. As they say, "don't hate the player, hate the game." We really need to be re-examining our institutions, be they political, public service or business and re-design them so that they properly serve the stakeholders they should be serving. Recognising how easy it was(outcome and hindsight bias anyone?) to be critical of decisions made prior to the referendum, it was probably the case that with regards to the referendum(and particularly Cameron's political future), it was a damned if you do, damned if you don't type of situation.

And so this is how the cookie biscuit crumbles. David Cameron, as a product of the neoliberal establishment that espoused conventional economic rationality was ultimately taken down by a clash between the establishment view of how the majority should behave according to mainstream neoclassical economic rationality and the pushback from an electorate that(at least in part) chose to reject the current economic orthodoxy by choosing NOT to vote along the lines of pure economic self-interest. [In perhaps a slight tinge of irony, David Cameron was also instrumental in the founding of the UK Behavioural Insights Team(aka the Nudge Unit) that was originally placed within the Cabinet Office.]

Furthermore, Cameron's present-bias in appeasing Tory Eurosceptics and overconfidence bias in winning the Brexit referendum is consistent with the general perspective of how behavioral considerations play into our daily lives, not so much overriding conventional economic notions of rational choice completely but rather by modifying various aspects of our behaviour. Nevertheless, by omitting the human element in economics, one ignores the consequences at one's own peril, as David Cameron so unfortunately discovered.

In part III of this series, we will examine the other major player in this European tragedy, the Leave campaign. Stay tuned.

Heuristics and Biases Part I: Understanding Brexit from a Behavioural Economics Perspective - The Attribute Substitution Heuristic

Image: Shutterstock

by HK Lim (hklim [at] thetroublewitheconomics.com)

This is the first article in a series that examines how the Brexit referendum outcome can be understood through the lens of behavioural economics. We begin by first examining how limitations introduced by traditional economic thinking's reliance on the foundation of rational choice theory as a basis for economic decision making might have given rise to voter biases and the employment of heuristics and a subsequent deviation from "traditional" economic rationality. The usual argument by proponents of the rational choice school and its adherents is that individual economic rationality should prevail whenever the financial stakes are high enough, as would be expected in the case of the Brexit referendum. The outcome of the referendum clearly paints a very different picture, one of behavioural biases writ large.

The shock of Brexit and the day Britain woke to a changed reality

Friday 24th June 2016, the day Britain and the rest of Europe (and really the whole world) woke to a decidedly changed reality. In the Brexit referendum on Britain's membership in the European Union (EU), the British electorate had with a 51.9% majority (17,410,742 votes) voted to leave the EU versus a 48.1% vote (16,141,242 votes) to remain, stunning political analysts, pollsters, politicians both in the UK and across Europe, EU bureaucrats, as well as a deeply divided British electorate.

Source: Bloomberg

On the back of this result, Britain being the second largest economy within the EU as well as the fifth largest economy in the world, the Pound saw the biggest single-day fall against the greenback, the  leader of the Conservatives, David Cameron announced his resignation as Prime Minister, and Scottish First Minister Nicola Sturgeon immediately announced Scotland's desire to remain a part of the EU and reignited the Scottish devolution debate amidst calls for a new Scottish referendum in light of the United Kingdom's changed circumstances.

Source: Bloomberg

Framing the Brexit referendum question: "Should the United Kingdom remain a member of the European Union or leave the European Union?"

One interesting feature of this referendum was how broadly the referendum question was phrased, "Should the United Kingdom remain a member of the European Union or leave the European Union?" which arguably left open the option to interpret this question in many different ways. As a consequence, the run-up to the Brexit referendum was marked by vigorous campaigning in both the remain and leave camps that ranged the gamut from appeals calling on voters to carefully consider the aggregate economic costs and benefits of Britain's membership in the EU (and also constant reminders emphasising the potential costs to Britain of leaving the EU) to arguments that primarily channeled voter emotions of fear and/or the discomfort with future economic uncertainty.

While a myriad of economic justifications (of various degrees of complexity and plausibility) were bandied about by both the remain and leave campaigns in the run-up to the referendum, aggregate regional voting patterns across Britain painted a starkly vivid picture that highlighted the influence of deep socioeconomic divisions on vote choice that also revealed identifiable geographic variations in voter preferences and psychology. At the heart of these divisions were differing perspectives on the inequality associated with wage variations between regions as well as varying perceptions of the actual benefits of EU membership and the economic effects of the associated European immigration into Britain. These geographical variations also suggested the possibility that behavioral factors could have played a significant role in influencing the referendum's somewhat unexpected outcome through voter perception and behaviour. Well, the outcome was unexpected at least to the remain campaigners, the pollsters and the prediction and betting markets as well as even those who had campaigned to leave for this latter group appeared to be caught especially flat-footed by the referendum result with no clear plans on how to proceed with enacting Britain's departure from the EU.

We begin by examining how the limitations introduced by traditional economic thinking's reliance on the foundation of rational choice theory as a basis for economic decision making might have given rise to voter biases and the employment of heuristics and a subsequent deviation from "traditional" economic rationality. The usual argument by proponents of the rational choice school and its adherents is that individual economic rationality should prevail whenever the financial stakes are high enough, as would be expected in the case of the Brexit referendum. The outcome of the referendum clearly paints a very different picture, one of behavioural biases writ large.

Regional variations in voter preferences and divisions in aggregate geographic voter psychology

Before diving into a consideration of how behavioral considerations could have influenced the referendum result, a quick discussion of the aggregate regional voter patterns is in order. By regional totals, Scotland (62% remain vs. 38% leave), Northern Ireland (55.8% remain vs. 44.2% leave) and London (59.9% remain vs. 40.1% leave) opted to remain in the EU, while the remaining regions in England and Wales opted to leave.

Source: Bloomberg

The referendum results also indicated how polarised Britain was on the referendum issue, with regions that were expected demographically to vote remain voting overwhelmingly so, and regions that were expected to vote to leave also voting overwhelmingly to leave. To paraphrase the headline from an article in the  Guardian, "if you have money, you vote to stay, if you don't, you vote to leave." As it turns out, a significant predictor for a regional vote to remain was the proportion of the region's population with a university degree, consistent with the view that such individuals would have the greatest labour mobility (both within the UK and also within the EU) as well as also enjoy access to the highest paying jobs and were hence most likely to have benefited (and continue to benefit) from Britain's (continued) membership in the EU. Thus, voter patterns in the Brexit referendum also revealed deep divisions along socioeconomic lines. Similarly, younger voters overwhelmingly voted to remain in the EU while older voters overwhelmingly voted to leave. (Further referendum voter demographic pattern analysis is described here.)

Brexit as a failure of economic rationality? Hardly. 

One of the key questions raised post-referendum was whether there had been a failure of the majority of those who voted leave (or at the very least a significant proportion of this group) in "properly recognising" the supposed adverse economic impact of leaving the EU, based on the implicit assumption that supposed "experts" could be relied upon (to say nothing of their credibility) to aid the voter in understanding the ramifications of this decision. For now putting aside the subtler issues regarding the distinction between immediate short term adjustment costs contrasted against the longer-term uncertainty in both Britain and Europe's economic outlook given the dynamic effects of Britain's (and Europe's) response to the situation as well as changes in the EU membership as a consequence, the vagaries of the global economic cycles.

These considerations raise the associated question of whether there was a failure of economic rationality in segments of the British electorate who voted to leave. What does this all have to do with behavioural economics? Well, quite a lot actually. The very nature of the supposed economic arguments showcased in the referendum debate (particularly as articulated on the side of the remain campaigners) was hugely complex, often confusing and it was generally difficult for the typical voter to be expected to make sense of and evaluate all or even the majority of the arguments for or against Brexit, much less arrive at a well reasoned rational conclusion whether to vote remain or leave. This difficulty was further compounded by the contentious issue of European immigration and its perceived adverse impact on British jobs and wages, as well as growing perceptions of a broad increase in wage inequality between regions (and also between job categories), the reduction or stagnation of wages outside of a few major cities (for example London and Manchester), plus the failure of arguments based on trickle-down economics to convince the average voter of the benefits of the current economic system to say nothing of the actual distribution of such benefits. Taken together, we have all the ingredients for behavioural economics' main actors to play starring roles.

A quick caveat is in order, this article does not aim to examine or evaluate the economic arguments for or against Britain's membership in the EU, and the behavioral perspective discussed is not intended to detract from the argument that some of the leave voters may have in effect been casting a "protest vote" against the political establishment, the current economic system and its major players, and/or the supranational institution that is the EU. Rather, this behavioural approach is aimed at offering an additional perspective in understanding voter behaviour in the referendum via the insights of behavioural economics that are beginning to gain (an albeit) gradual acceptance within the ranks of mainstream economic thinking.

The attribute substitution heuristic: the role of perceptions of widening wage inequality between regions and the issue of immigration

What is the attribute substitution heuristic?  

In behavioral economics, a heuristic refers to a shortcut or a rule of thumb that assists, facilitates or simplifies complex decision making. We often unconsciously employ what behavioral economists term the attribute substitution heuristic when we are grappling with a complex or difficult question by instead answering a related simpler question in place of the original one. For example, in a home buying decision, instead of determining what price range might constitute a comfortably affordable home from the perspective of one's ability to afford the associated mortgage (based on one's expectations of current and future income and also taking into account related employment uncertainty dependent on future economic business cycles), buyers instead (often in consultation with mortgage advisors) typically work backwards by calculating the largest mortgage (and hence property value) they can afford given their current income coupled with often also an overly optimistic expectation of the projected growth in their future income as well as well as their future job prospects (this example is elaborated in the revised and updated edition of Dan Ariely's book "Predictiably Irrational").

Notice that in answering the more difficult question of "what size home and mortgage quantum is comfortably affordable?", the home buyer has instead substituted the question, "what is the maximum mortgage I can afford given my current and expected future income?" This easier latter question is easily answered using a standard mortgage calculator or spreadsheet to back out the maximum mortgage within the buyer's budget, but is an altogether different question from the original. So in effect, the potential home buyer has conveniently (well depending on the perspective) substituted a simpler but wrong question in place of the original question asked. In all likelihood, the potential home buyer will end up with a mortgage at the upper end of his or her affordability range (hence reducing the buffer for uncertain economic events), or even exceed the range of (comfortable) financial affordability altogether. Additionally, the potential home owner is also likely to exhibit an overconfidence bias in overly optimistic expectations of future income and employment prospects, and simultaneously underestimate the role of chance in his or her future, thereby compounding the original bias in selecting too large a mortgage. Clearly, this isn't a good outcome.

The attribute substitution heuristic and the Brexit referendum

This attribute substitution heuristic is also directly relateable to the Brexit referendum, where instead of evaluating the more complex and difficult question of the net economic benefit to Britain of remaining within the EU in deciding to vote remain or to leave (notwithstanding questioning the inherent lumpiness and typically unequal distribution of such economic benefits across individuals both by geographic area as well as by social economic strata), a voter may instead substitute a more readily answerable, simpler question. Instead of assessing whether the decision to remain in or leave the EU would be economically beneficial in the future to you and your family, voters (the swing voters as and particularly those those who voted to leave) would instead simply ask themselves questions similar to the following:

1. "Do I feel that Britain's EU membership has widened income/wealth inequality?"
2. "How do I feel about the European immigration resulting from Britain's membership in the EU?"
3. "Has European immigration on balance benefited me and my family?"
4. "Has European immigration contributed to a reduction or stagnation of wages in Britain?"
5. "Has European immigration resulted in a widening of income/wealth inequality in Britain?"
6. "Is immigration a positive for Britain?" (this last question was actually posed as part of a poll at the end of a Telegraph article in the run up to the referendum as can be seen here)

and their variations. All these questions can also be similarly posed with respect to a voter's perception and expectations of Britain's future prospects and need not be focused exclusively on past experiences.

Median wage variations across regions in the United Kingdom

The perception of a reduction or stagnation of wages in regions outside of the larger British metropolises (and perceptions of a widening income and/or wealth inequality across regions) is one possible reason why the attribute substitution heuristic might have played a major role in the framing of the referendum vote for those who voted to leave. This appears to be particularly true in the English regions outside of London (which overwhelmingly voted to leave) coinciding with the  regions with lower median incomes. Note that Scotland's interests in the outcome of the Brexit referendum are unique in that Britain's membership in the EU is perceived to be a significant factor in favour of Scotland remaining part of the United Kingdom (as per the 2014 Scottish referendum) and thus outlier demographic variations for Scotland should be considered separately from the rest of the UK.

Figure 1: Median full-time wages by region 

Source: ONS, Annual Survey of Hours and Earnings: 2015 Provisional Results

From the Annual Survey of Hours and Earnings: 2015 Provisional Results by the Office of National Statistics (ONS):

"In April 2015, London topped the regional list for median earnings for full-time employees, at £660 per week. Employees here earned £108 more per week than the next highest, the South East (£552), and £132 more than the median for the whole of the UK (£528). The high pay in London is largely due to a high proportion of its labour force being employed in high-paying industries and occupations, and also because many employees are entitled to allowances for working in the capital. The regional pattern has remained fairly consistent since the series began in 1997, with London and the South East consistently topping the list.

At the local authority level, earnings vary significantly. In April 2015 full-time employees working in the City of London had the highest median gross weekly earnings (£921) and those working in North East Derbyshire had the lowest (£389)."

As is clear from the infographic in Figure 1 as well as the accompanying text from the ONS reproduced above, by region, London topped the list for median earnings for full-time employees in the 2015 ONS survey and exceeded the median for the whole of the UK by £122 per week (23.1% higher than the UK median), and this regional pattern of median wage variation has remained fairly consistent since the series began first in 1997, with London and the South East consistently topping the list. This however, does not take into account part-time median incomes that would be even more relevant in areas with a significantly underemployed workforce. It is thus not surprising that the London region voted overwhelmingly for Britain to stay in the EU.

Does raising the economic stakes produce conventional economic rationality in voter decisions?

It is thus not implausible that local variations in economic prospects as perceived via variations in the median wage by region compared to more affluent regions can produce very different regional  perspectives on wage associated inequality as it relates to the Brexit referendum choice. There is an argument advanced by mainstream economic thinking (subscribers to the notion of "homo economicus" from rational choice theory as opposed to those espousing more nuanced behavioural perspectives) that if the financial stakes are raised (here in the form of the risk to wages and the subsequent possibility of further economic losses if Britain leaves the EU, further exacerbated by loss aversion), economic rationality with regards to the referendum decision will prevail. Tacit in this is of course the assumption that a plausibly convincing economic case can be made for Britain to remain in the EU coupled with the possibility of persuading portions of the electorate that do not directly benefit economically from EU membership in their sacrifice for the greater good. Thus the notion of rationality itself is very subjective and hinged on its definition. The very notion of the more narrowly defined economic rationality as a factor in justifying a remain vote from the portion of the electorate that does not directly see the redistributive benefits of the current economic arrangement with the EU is thus even less persuasive.

The arguments for remain based off the net economic benefits of EU membership are thus likely to be most compelling in regions like London (or in local authority areas like the City of London), where a higher proportion of the labour force is employed in high-paying industries anchored by multinational corporations and often involved in occupations like finance and banking. These areas are the ones most likely to directly enjoy (and perceive) the economic benefits of Britain's EU membership and the associated advantages offered by London's access to the single European market either through their jobs or via spillover opportunities from companies operating out of London serving the EU market. This would include for example employees in the financial sector (for example, foreign exchange traders for the Euro based in London) or sandwich shops servicing those individuals working for London-based multinational corporations servicing the EU market. 

In other regions (or local authority areas), it is less likely that voters will immediately perceive such direct economic benefits of Britain's membership in the EU and hence can be expected to reframe the referendum issue on more tangible terms related to their perception of the effect of Britain's EU membership on the median wage in their region compared to the more affluent regions/areas, and use this as a basis for assessing their feelings regarding the state of wage inequality across Britain.

Are we all expert economists and statisticians? The availability heuristic.

Of course, it is also not reasonable to expect every individual doing such an assessment to embark on a thorough evaluation of the totality on wage distribution data, and it is quite likely that individual voters will base their perspectives on their own circles and the experiences within their own communities, hence again producing a secondary bias via the "availability" heuristic. In the case of the availability heuristic, individuals typically draw generalised statistical conclusions of the frequency of occurrence for an event based off the ease with which they can recall particular examples of this event from memory or personal experience. So if one were to see depressed wages in one's immediate community, this would likely prompt the individual to over-generalise how widespread the phenomena of depressed wages might be hence biasing their subsequent evaluation of the issue (and thereby biasing the answering of the attribute substitution's replacement question), and vice versa. This is just one way the attribute substitution heuristic (combined with the availability heuristic) could have influenced and exacerbated differential viewpoints in the interpretation of the referendum vote decision.

The attribute substitution heuristic, the immigration issue and the experts

The topic of immigration was a hot topic in the run up to the referendum and duly exploited by some of the leave campaigners to sway the electorate's emotions in the vote (the "affect" heuristic also likely played a role here, more on this later). Notwithstanding the reduced faith in "experts" in reporting and forecasting net migration into the UK, immigration has been a polarising issue for the British electorate. The earlier discussion on regional wage variations segues naturally into the topic of how immigration also factors into the attribute substitution heuristic as evidenced by the direct mention of immigration in the sample of simpler substituted questions proposed above under the attribute substitution heuristic (Q2-6), for example to quote the earlier Telegraph example, "Is immigration a positive for Britain?"

A BOE report from 2015 found some evidence of the impact of immigration on wages (see "The impact of immigration on occupational wage: evidence from Britain" from the BOE Staff Working Paper 574), where it was estimated that in some low-skilled jobs a 10% increase in migrants resulted in a fall in wages for native workers of between 0.5% and 1.9%. While that might not seem like a lot, for someone working a retail job earning £17,000 a year, a cut of 1.9% translates potentially into £323 in lost wages. So it is entirely possible that regions characterised by lower median wages are also more likely to be affected by wage declines due to immigration, and voters examining the referendum choice from the perspective of immigration's effect on their wages are likely to be less quickly convinced of the economic benefits of EU membership and the accompanying free migration across EU member states (particularly into Britain).

Another way in which the attribute substitution heuristic could have worked via a voter's views on immigration is related to the notion of "a just noticeable difference" (JND) associated with the Weber-Fechner Law. The JND of some variable is proportional to the magnitude of the variable itself. For example, while it is less likely for you to notice if one of your car headlights is blown (especially when driving in a well lit city), going from one working headlight to none is definitely a JND. In the same way, rather than focusing on the percentage distribution of immigrants across Britain, it is typically more useful to consider the rate of growth of immigration within each region. A high value for this growth rate is more likely to constitute a JND and give the perception that immigration into that region is high. Based on the Labour Force Survey's data on foreign born persons living in the UK, it can be seen in Table 1 below that immigration across regions between 1995-2014 has in general exceeded 100% for most regions, which lends credence to the individual perception that immigration into the UK has been relatively high over the past two decades.

Table 1: Number of foreign born persons by region

Source: Oxford's Migration Observatory

According to Oxford's Migration Observatory's publication "Migrants in the UK: An Overview":

"The UK population was 13.1% foreign-born and 8.5% non-British citizens in 2014

The share of foreign-born people in the UK’s total population increased by over 50% between 1993 and 2014, i.e. from 7 to nearly 13.1%. During the same period, the share of foreign citizens rose from 3.6 to 8.5%, while that of recent migrants increased from 1.4 to 2.7%. There was a significant percentage increase in the share of foreign-born people in the UK’s total population during the 2004-2008 period."

So it is not altogether unimaginable that voters from regions with the greatest percentage increases in immigration may be more sensitive to the immigration issue raised by the Brexit referendum seeing as they are experiencing the largest growth (which are definitely more than the JND) in migration into the UK.

A further interesting insight on this issue regards the origin and citizenship of the foreign born residents (Note the reference here is to residents) in the UK. Again, according to the Oxford Migration Observatory's publication "Migrants in the UK: An Overview":

"India is the most common country of birth among the foreign-born, but Poland tops list of foreign citizens in the UK
 
India, Poland, and Pakistan  are the top three countries of birth for the foreign-born (Table 3) accounting respectively for 9.2, 9.1 and 6.0% of the total, followed by Ireland and  Germany. India and Poland remain the top two countries of citizenship of foreign citizens, with Poles being the biggest group, accounting for about 15% of the total." 

Table 2: Top 10 sender countries by country of birth and nationality, UK 2014

Source: Oxford's Migration Observatory

And as evidenced in Table 2 above, at least based on nationality, European nationals form the bulk of the share of the top 10 sender countries of foreign born persons in the UK as of 2014, and it is again not unforeseeable that voters in regions with the highest rates of immigration may associate Britain's membership in the EU with downward pressures on regional wages (and rising housing costs).

Taken together, it then becomes clearer how immigration pressures and depressed wages in regions with the highest rate of immigration are likely to contribute to the attribute substitution of the Brexit referendum question of whether the net economic benefits of Britain's membership in the EU warrant a vote to remain with the simpler question, "Is immigration a positive for Britain?" (Further analysis on the immigration question can be found in Oxford's Migration Observatory's "Migrants in the UK: An Overview" report here.)

Concluding thoughts on the attribute substitution heuristic and the Brexit referendum

Thus, as the aforementioned discussion illustrates, the attribute substitution heuristic may have played a legitimate role in reframing the Brexit referendum debate, and prompted voters in regions with lower median incomes to consider the referendum question from the perspective of whether EU membership may have contributed to widening wage inequality/differentials between regions (and also possibly between occupations) due to educational attainment related differential opportunities and the related impact of the effect of increased immigration from Europe into Britain on working class wages.

Despite the best efforts of remain campaigners to frame the Brexit referendum debate in terms of the net economic benefit of Britain's membership in the EU, the complexity of the economic arguments are likely to have prompted leave voters to substitute any such consideration of the referendum question with a simpler question that was more easily swayed by emotions. This was to be expected particularly if the public's faith in purported "experts" on the relevant economic issues had already been shaken. And of course, as highlighted earlier, it is entirely possible that a proportion of the electorate that voted to leave simply wanted to send a "protest" vote to the establishment to express their displeasure at being marginalised by the current economic arrangement. This economically disenfranchised group was more than willing to take a chance with another roll of the die, given that their existing economic situation was already pretty dire to begin with. And despite the risk that  things could possibly get worse, they would rather gamble on the chance that it could get better. I'll have more to say about this in a follow-up piece.

In Part II, the discussion will turn to focus on how cognitive biases could have influenced key players in the Brexit referendum itself. Stay tuned.