So, is there a crisis? Or is there a crisis of the crisis, or what? On replicability, reproducibility, and other current challenges in the social sciences

As the old adage has it, before it gets better it will get worse.

I have previously written about the deepening sense of crisis in economics and psychology (e.g., in The Conversation and in Core Economics Today – here and here and here)

Three interesting recent exhibits

The last couple of weeks we have seen three interesting additional exhibits:

First, a quartet from Harvard tried to straighten out the public record established by the Open Science Collaboration (OSC)  – a group of 270 researchers from psychology — a few months earlier: that results in psychology are mostly not replicable. Gilbert and his colleagues make the remarkable claim that there is “no evidence for a replicability crisis in psychological science.”

Second, on the same day an author made the astonishing claim in Slate magazine that 20 years of studies of ego depletion, an influential and seemingly robust set of findings, have recently dissolved into thin air.

Third, a group of 18 researchers in economics published the (long awaited) findings of another replication project and – after the dismal findings of another such attempt reported by two researchers from the St Louis Fed last year — , had mostly good news for econs. A colleague of mine from psychology sent me the write-up from The Economist with these words:

“So all is fine in the house of experimental economics then…

http://www.economist.com/news/science-and-technology/21693904-microeconomists-claims-be-doing-real-science-turn-out-be-true-far?frsc=dg%7Ca

;-)”

Is it?

Is there a crisis, if not in economics, then in psychology?  Or, in the social sciences as such?

In the following I will briefly comment on each of these three events from the last couple of weeks and the heat that they have produced. I will then try to cast a broader net before I come to an assessment of the current state of affairs in the social sciences.

So, is all fine in the house of experimental economics?  

As I pointed out to my colleague, a replication of 11 of 18 experiments published in a couple of top journals (which have an acceptance rate of well below 5 percent and huge selection biases) says little about the state of the art – replicability, reproducibility — in economics.  I like to believe that evidence production in economics is more stable than in psychology because economists’ experimentation practices are less laissez faire but I fear that we have also a lot of false positives. In work that I have done with Le Zhang (currently under second- round review), we have shown that dictator game experiments published in the top experimental economics journal were typically severely underpowered, inviting them pesky false positives. While Camerer et al. ran their replications under an exacting standard of a required power of 0.9, until recently most (well, at least most dictator game) experiments in economics were not properly powered up.

It is also worth recalling briefly that a few months earlier two Federal Reserve economists came to the alarming conclusion that economics research is usually not replicable. Their conclusion was based on an attempt to replicate 67 empirical papers in 13 reputable academic journals of which they could, without assistance by the original researchers, replicate only a third of the results. With the original researchers’ assistance that percentage increased to about half. A good summary of their study can be found here. This is an arguably even more troubling result, as you would think that the additional variance that experimenters’ choice of experimental design and implementation details entails, would reduce the irreplicability of empirical findings (where data sets are, after all, pre-existing). This replication attempt indicates the magnitude of the problems that economics might have.

Indeed, we have seen for a couple of decades now that effects – for example, many so-called cognitive illusions – have not survived serious attempts at replication, or maybe I should say at reproduction. Take as a recent – non-laboratory — example the controversy over reference dependence and the alleged propensity of taxi drivers to shoot for income targets, thereby violating the neo-classical optimizing model of labor supply theory. In a recent article, Hank Farber, using a much larger and complete data set for New York taxi drivers than Camerer et al. (QJE 1997) had, finds that “income reference dependence is not an important factor in the daily labor supply decisions of taxi drivers”. My colleague Tess Stafford had come to a similar conclusion earlier, demonstrating how the results in Camerer et al. (QJE 1997) can be made to appear and disappear. Hint: proper metrics is a key. Complete and large data sets also help.

I could parade many examples (endowment effects anyone? Loss aversion? Conjunction fallacy?) where serious questions have been raised about the replicability and reproducibility of effects claimed in the Biases and Heuristics literature.

On balance then there is reason to believe that economists have way to go and ought to continue to improve their data collection and sharing efforts and to reflect on the design and implementation of their experiments and, very importantly, the appropriate econometric assessment of the evidence produced. The house of experimental economics, I fear, is not yet in good order.

Is all fine in the house of experimental psychology?  

The Harvard quartet’s critique of the OSC initiative, and Ed Young in The Atlantichttp://www.theatlantic.com/science/archive/2016/03/psychologys-replication-crisis-cant-be-wished-away/472272/ its provocative conclusion that “the reproducibility of psychological science is quite high and, in fact, statistically indistinguishable from 100%“  has been widely dissected by OSC as well as individual OSC members (e.g,, Brian Nosek and Elizabeth Gilbert hereA number of commentators had their take on the situation published in popular media (e.g., Katie Palmer in WIRED and Ed Yong in The Atlantic , for others see the retraction watch list or Mayo’s summary of the recent developments on repligate), and some highly qualified (albeit not always completely uninterested) parties such as David FunderAndrew GelmanDaniel LakensUri Simonsohn. and Sanjay Srivastava have done so in more specialized outlets. (Follow the links attached to the names.)

The latter three have, at least to my mind, demolished pretty good the case that Gilbert and his colleagues presented. As did Funder and Gelman (and some of the commentators on Gelman’s piece).

Funder and Gelman also step back from the battle and look at the war that really is being waged here and by doing so provide some much needed light where there is currently way too much heat.

Funder, for example, points out that the OSC study “is not the only, and was far from the first, sign that we have a problem”; he is too modest to point out that he himself has provided more than a decade back a lengthy contribution and problem description.

Funder, seemingly unaware of the replication crisis that economists are dealing with, points also out that “other fields have replicability problems too”; he mentions specifically biochemistry, molecular biology, and medical research including cancer biology studies.

He then argues, “if Gilbert & Co. are right, are we to take it that the concerns in our sister sciences are also overblown?” It is a rhetorical question to which his answer is pretty clear. He concludes with a useful discussion of  ”the ultimate source of unreliable scientific research”, locating it in a tightening market for academic jobs and opportunities, the emerging “academic star” system, and other perverse incentives for academics.

The apparent debunking of 20 years of ego depletion findings mentioned at the beginning as one of three prominent developments during the last two weeks is just another illustration of the current unsatisfying state of affairs.

So, is there a crisis?

You have to live in an ivory tower to believe that there is not. It seems obvious to me that there is and that before it gets better, it will get worse. That’s because suddenly everyone is talking about it and got interested in it. And a general sentiment has developed, and even found its way in editorial practices, that flashy results that barely clear conventional hurdles ought to be not trusted.

Some observers have taken the current debate as a cue to rethink the way we do science. In psychology for example, in the wake of huge and somewhat nasty controversies over the reality of various priming effects, a replication recipe has been proposed and it would indeed be a good start if it were widely implemented. Likewise the various offerings of pre-registration, while not completely uncontroversial, are a welcome move in the right direction if the rather stunning results from NHLBI funded trials recently reported in PLOS One are any indication.

How deep the crisis is, is a question that is harder to answer. That’s because any such answer depends on what our measuring rod is, and ought to be. Are we looking for what some people call direct replication, or are we really interested in what some people have called conceptual replication and yet others have called reproduction? Ben Strickland makes an excellent case for conceptual replication here, arguing that what we really ought to be after is reproducibility of robust effects. Rolf Zwaan makes a related argument here.

Which of course ties into important question of the appropriate choice of design and implementation characteristics, as well as the question of the correct statistical evaluation which is another but related battlefield.

In sum, there can be little doubt that there is a crisis. There is no crisis of the crisis, for all I can see. And it seems fair to say that the sense that there is a crisis has both widened and deepened to judge by the evidence that has been forthcoming.

That there is a crisis and that it is widening and deepening, at least for now, is the bad news. The good news is that overdue discussions – about replicability and reproducibility and everything that is connected to them — do take place and do take place in a serious manner. Mostly.

The widening sense of a widening and deepening crisis is upping the level of the game; it is for example encouraging to see the increasing offerings of pre-registered studies, the increased opportunities to publish replications or reproductions, the fact that many journals now require submission of data files before publications, etc.  Similarly, it is encouraging to see platforms such as retraction watch emerge and clearly stay for good.

 

Ten commandments for the social-media demagogue

  1. Ignore facts. Facts are pesky and quaint. They constrain your narrative and might constrain, oh my, your priors. And they might even make it necessary that you provide links. Which might actually be checked. So, don’t go there.
  2. If someone brings them (pesky and quaint facts) up, either ignore them and their facts or, if that is not possible, question them and their facts – and do so with the right mix of indignation and annoyance — but do so preferably with opinions of others. For example, you could say your acquaintances and/or friends told you so. Remember: facts are pesky and quaint. They could be fact-checked. Opinions of acquaintances and/or friends, not so much.
  3. When you identify something, stay away from precise descriptors; it’s just too friggin labor-intensive. So rather than being specific (lots of work to figure out), say something like “the left” or even better say “the regressive left”. That will a) signal unmistakably where you stand and b) draw the admiration of your followers. Hail, you.
  4. Never worry about base rates. Way too complicated an argument. For example, if you were to look up the percentages of sexual assaults and rapes in Germany, you might learn that those of immigrants were about the same as those of “natives”. Which would make posting attention-grabbing individual cases look kinda silly. But that’s where you want to go. Post attention-grabbing individual cases. (Don’t forget to prettify your post with some pictures that tuck at heart-strings. Children that have drowned, or at least look sad, are always a winner.)
  5. Don’t worry about the fine difference between allegations of facts and established facts. Again way too subtle an argument. They are really the same to most people anyways. Because, you know, the subtle distinction between allegations of facts and established facts is just too cumbersome. Again, it constrains your narrative and might constrain your priors about how the world is, and in any case ought to be. According to you.
  6. Attribute motivations, or use conversational implicatures to have them imputed. For example, say that Merkel does not care about her female compatriots and the fact that they get raped by those Magrev types. (Note the clever use of commandments 4 through 6 here.)
  7. Relatedly, freely and generously use innuendo. When doing so, make sure that you maximize the reputational impact on your target.
  8. Make sure to be aggrieved when someone challenges you.  Accuse them of being ignorant and not knowledgeable.
  9. Post and post and post (preferably articles you have not read so that you can post more of them; the headline should be good enough to discern which fits your priors.) Don’t bother to summarize key arguments you find in an article, or at least to cut and paste the key paragraphs of the article. Way too labor-intensive.
  10. Freely and generously dispense your opinions. Never miss a chance to comment just because you had the opportunity not to say something,

Slippery slipping standards

Attention has recently been drawn, yet again, to the spectre of falling skills standards in Australia. This time, several commentators from inside and outside academia have picked up on a newly-released report by the Australian Industry group claiming that employers are loudly complaining about their workers’ literacy and numeracy skills.

The AIG report contains the results of an employer survey – termed the Survey of Workforce Development Needs – in which employers could flag one or more of a number of possible problems that were being `affected’ by a lack of literacy and numeracy. Some 42% of respondents flagged the problem of `poor completion of workplace documents / reports’, and several other problems got votes of over 20% (`teamwork / communication problems’, `material wastage / material errors / non-compliance’, and `time wasting’).

The AIG report also shows the position of Australia relative to peer nations on the OECD’s `Survey of Adult Skills‘ for both literacy and numeracy, and proceeds to ring the following alarm bell: `It is clear that a major literacy and numeracy problem persists in the general population and the workforce.’

Sounds pretty bad, doesn’t it?

Around the merry-go-round…again

There is a strong element of deja vu about this. The fear that Australia is turning out a next generation that is under-prepared to succeed in the global economy is a perennial public hot button, because it calls into question the potency of the country on the world stage.

Heated conversations (e.g., here, here, here, and here) over the past several years about NAPLAN, teacher training, bureaucratic incentives, classroom management, monolingualism, the Gonski program and so on have demonstrated the public concern for the quality of education in our country.

Concerns about slipping standards in higher education have also been a popular theme in recent times, with fingers pointed at university incentives, student cheating, international students, and university governance.

These discussions have pointed to myriad possible ways we could try to improve the education provided to students studying in Australia, from primary school to university. But did all of these previous discussions miss something big that the new AIG report unearths?

The AIG Report

Let’s consider exactly what the AIG report is saying. The focal question posed of employers is as follows (lifted from here):

Is you business affected by any of the following problems due to a lack of literacy and numeracy skills? Check any that apply
Poor completion of workplace documents / reports
Time wasting
Potential for workplace injuries or unsafe work practices
Material wastage / material errors / non-compliance
Staff lack confidence / unwilling to take on new work
Financial miscalculations
Recruitment difficulties
Teamwork problems / communication problems
Other

Leaving aside the grammatical error in the question itself, the `problem areas’ listed have been significantly widened compared with the analogous `problem areas’ listed in the previous version of the report, reproduced below:

Inadequate completion of workplace documents or reports
Time wasting
Material wastage
Non-compliance
Staff unable/unwilling to take on new work
Staff lack confidence
Financial miscalculations
Recruitment difficulties
Ineffective work teams
Not applicable

Far fewer `yes’ boxes were ticked in this previous (2012) survey. The shock 42% of employers complaining about errors in document preparation in the most recent results was only half that size in the prior survey’s results. Was there a true 100% increase over three years in employer-reported document and report completion problems laid at the feet of poor basic skills? It seems more likely that fewer employers would agree that employee skill problems caused `inadequate completion’ than that they caused `poor completion’, because `inadequate’ is a subset of `poor’.

The report also does not make explicit where the `over 90%’ scare figure comes from that is picked up here. Further, while declaiming about the poor state of basic adult literacy and numeracy demonstrated in the OECD survey data, the reports fails to mention that Australia is actually ranked fifth best – between Sweden and Norway – in the OECD adult literacy league table, and only just below average (slightly above Canada) in adult numeracy. We may be bad, but then so are our friends it seems, at least on these measures.

More broadly, the AIG as an institution has every incentive to design surveys so as to highlight workforce problems for which industry cannot be blamed. Doing this successfully makes it easier for the AIG to lobby for more money to be spent on government programs to fix those problems, whether they are argued to be the fault of schools or poor (dare one say inadequate?) subsidies for post-school training programs.

And, exactly in line with these incentives, calls for more money for training programs (`national provision of foundation skills programs in the workplace’) feature prominently in the AIG report’s conclusions.

What’s news?

If the facts here broadly consist of old wine in new and somewhat leaky barrels, then what can we take away from the AIG’s investigations of workplace skills?

What this report makes me wonder is where exactly our literacy and numeracy skill inadequacies, to whatever degree they exist, are coming from. From a long-term policy standpoint, there are two distinguishable sources: inadequate formal education, or inadequate training for workers who did not attend formal education in Australia.

If the problem is the former, then Australians’ robust discussions around how to improve school and university performance, some of which are linked to above, are hitting the source of the problem on the head. We should be experimenting with different mechanisms, from meritocratic teacher compensation to flipped classrooms to foreign-language immersion from kindergarten to university governance shake-ups, with the goal of isolating a few potent levers and them implementing them on a broader scale. The policymaker concerned with getting everyone over minimum thresholds in basic literacy and numeracy before they enter the workforce should focus particularly on innovations that can be implemented in failing schools, rural schools, and those that serve disadvantaged populations and children whose first language is not English.

If, however, the problem is inadequate basic skills of people arriving here after their formal education has been completed, then a very different long-term policy prescription would be written. One would then want to see more government investment into cultural assimilation programs, English training programs, and workplace numeracy programs – much more in line with what the AIG report’s writers call for. Countries that welcome immigrants who do not possess the skills to succeed in their new country, yet are not offered affordable and accessible training in those skills, do so at their peril.

Is this a description of Australia?  While the AIG report writers did not disaggregate their results by type of respondent (schooled abroad or schooled in Australia), they could contribute more to the public dialog on this question by doing so in the next iteration of their survey – while keeping their focal survey questions identical across waves.  It may be considered un-PC to ask directly whether Australia-raised or overseas-raised residents are more under-skilled, but it is arguably bad for the country – and for all its residents – not to ask it.  Without good data, one cannot design good policy.

Random observations on China

Warning: This is mostly a personal travelogue, with some generalizations and conjectures thrown in for good measure. A colleague of mine was so kind to comment on a draft and nonchalantly suggested that the title of the piece ought to be “Clueless Westerner hops off a plane and makes many random observations”. So there, I warned you.

This was my first visit to China and these are indeed very first impressions but …

it is a fascinating and intriguing country. Certainly, Shanghai and Beijing are. I will be back.

I was there mostly for professional purposes, gave a couple of talks and worked with a former student — now assistant professor at ShanghaiTech University — on a couple of manuscripts. It’s publish or perish there, too.

I stayed at the Hope Hotel in Shanghai – somewhere in the west of the city, near the downtown campus of ShanghaiTech U — where, it seems, I was for a while the only foreigner among all Chinese guests. But these Chinese were clearly middle class or maybe even higher up.

Food was plenty and often excellent. Curious and exotic, too.  Spicy chicken feet for breakfast? Well, maybe not. And frog at lunch in a fine eating establishment next door? Thank you but no, here, too.  Also, scorpions, spiders, and snakes are just not my thing. Even fried or grilled. I did try the salted eggs and the ginger threads and the lotus roots and the various mushroom delicatessen and other fascinating food stuff. The fish in chilli peppers was fabulous both times I had it. Also, it is amazing in how many ways you can prepare bean curd and I really liked the black rice cake. But I am digressing.

I made an excursion to the Hope Hotel neighborhood on the second day, just strolling through a few streets off the main traffic artery (about half a dozen lanes in each direction). While spending the weekend in Beijing  I likewise strolled through several neighborhoods there, mostly off the beaten tracks and with the help of a fabulous guide born in Beijing. A very different picture emerged in these excursions (a couple of them through hutong neighborhoods that the government has the good sense to preserve in their original building substance.) Hundreds of little shops, often literal holes in the wall (struggle town right there), offering an astonishing amount of riches at rather reasonable prices. Just for the record, the next time you are in Beijing, try Grandma Creative Kitchen, a little unconventional gem off the beaten track. You can thank me later.

Whatever legitimate gripes people might have about the system (and there are some such as pollution, restricted access to information, and corruption that seem very justified), it is remarkable that China, or at least Shanghai and Beijing, are the functioning metropoles that they are. Much of this remarkable development — remember, just a couple of decades back the country had trouble feeding its citizens — seems to be driven by entrepreneurial activities in the large and small. In particular the latter, as exemplified by the numerous eating places, many of them so small that it is hard to imagine how they can make ends meet. In any case, many people seem to do very well although it is also clear that the wealth and income distribution is rather unequal. This is communism? Or at least real existing socialism? I wonder what good ole Kalle would have to say about it. Or for that matter Chairman Mao.

For the most part, I did not dare to eat street-food although some of it looked rather yummy.

I did buy local beer (excellent) and wine (better than expected, in fact quite enjoyable). Also, the coffee is often much better than its reputation and I am not talking about coffee at a Starbucks which seems to have many outlets in particular in Shanghai. Outlets that are crowded indeed. Goldmines, surely. A regular skim latte with two extrashots? That’d be … 38 yuan (almost 10 Aussie dollars). Wow. (For comparison, four times that amount buys you a delightful lunch, for two, at the Grandma Creative Kitchen.)

I arrived on Sunday evening (December 6) in Shanghai and the next day read in the news sites that I could access (yahoo, Spiegel, SMH, no google or gmail or facebook there lest one goes VPN) that the authorities in Beijing had issued the highest environmental alert ever for Tuesday through Thursday. As it is, pollution in Shanghai was about ten times what it typically is in Sydney when I arrived but then, after some rain Wednesday and Thursday, reduced to three times that benchmark. None of it seemed to faze my local friends much (although allegedly pollution has gotten to the point where some expats are getting really concerned). My head, in any case, noticed the improvement. And on the day when I left, it also noticed – having been pampered for several days in Shanghai and Beijing by pollution levels classified as green or yellow (i.e., acceptable) – the sudden worsening in pollution from two / three times the Sydney standard to ten times, a worsening that happened within a couple of hours. It was remarkable: In the late morning good visibility and blue skies and even sun and then a couple of hours later clearly reduced visibility, grey skies, and if there was a sun it was well hidden behind a haze that got stronger with the minute.

The worsening environmental pollution seems the biggest threat to the welfare and productivity of the country and also to the pre-eminence of the party. (As in Vietnam, one keeps forgetting  that this is a “communist” country because on the individual level, entrepreneurialism is alive and well, and one sees little in the streets in terms of police, or other manifestations of state power, or what not.)

When I read about the Red Alert in Beijing, and in light of the threat that pollution poses for the government, I found it interesting that the authorities would allow some such alert: the worsening environmental pollution seems so obviously a systemic failure and hence to reflect on the party that runs the country.

Not really, my friends said. It is considered a failure of everyone and most Chinese seem to be able to relate to that because self-regarding preferences and a lack of concern for the commons, or for that matter, for externalities that one’s own behavior produce, are constituents of life in China. That’s similar to what I noticed in Moscow, or for that matter in Prague a decade or two back (and even now), or during numerous visits in what was then East Germany. Real existing socialism seems to bring out some pretty nasty sides in people. China, of course, is a very strange variant of real existing socialism: The planners in the state party that think they know best economically and socially and otherwise are at the top but at the bottom unrestrained Darwinian competition seems to carry the day. Even in its daily manifestations: Queueing anyone? Also, why worry about litter? Them pesky cigarette stubs – away with them on the side-walk.

I had been warned that in China I would face a hard test of my addiction to facebook (and google for that matter). Well, all true. But I survived it and it is easy to access many sites that you would normally google via bling or equivalent. Plus VPNs are on offer everywhere if your fb addiction were to get the better of you. I did just fine. Life without facebook is possible.

It seems that the Chinese authorities block some sites – such as facebook — religiously and you wonder why. Really. Everyone can access whatever they want if they really want. And what threat to the system does a 25-year old beauty queen really pose? Its’ puzzling. Likewise, allegedly the authorities seem to currently – again – be going after some young feminists. Someone somewhere high up in the state party hierarchy seems to have problems with their priorities. Did I mention air pollution? And ground and water pollution for that matter? Also, it is simply stupid from a public relations point of view. Anastasia Lin and Li Tingting clearly know how to work (social) media and the authorities seem woefully out of their depth in understanding the dynamics of it all.

As mentioned, one does not really notice much of state power in the streets; for someone visiting major cities it seems to show up mostly in odious reporting requirements (if one does not stay at a hotel), the restrictions on certain foreign sites, and access to free wifi in cafes that requires a working mobile phone in China. (So much for free wifi at the airport.)

I mentioned the occasional nastiness, or maybe I should better say unfettered self-regarding behavior, of some of the people I saw/encountered. There is a couple of notable exceptions.

First, everyone I met professionally was unfailingly polite and concerned to various degrees.

Second, children. The Chinese adore children in a way that I have yet to see in any other culture. They dote on them and I wonder what it does to these kiddos – overwhelmingly now sole children – down the road. (Yes, I am aware of the work of some my Australian colleagues, and also of Gigerenzer and his colleagues, about little emperors but also the dispute that it generated.) At the same time, everyone is worried about the future of their children and whether they can make the grade. The expectations are high and many kids are being pushed hard to perform.  I am not sure that is the way people get educated in ways that serves a society well. In fact, I am pretty sure it is not. A friend who I discussed this observation with explained it in terms of an intergenerational social contract: She thinks that the way how parents and grand-parents treat (their) children is related to the idea of parents bringing up children for the purpose of being looked  after well in their old age. When there is no well established financial / banking system and social security, people rely on children and may value the investment in children as insurance againist longevity. Chinese people thus  emphasize or value the filial responsibility as the most important value. Children have the obligation to pay the “loan” back to parents and grand=parents. That strikes me as a credible explanation.

Finally, corruption. When you visit a country for a few days it is hard to see many manifestations of it but corruption is clearly a problem for China; the authorities would otherwise not engage in high-visibility campaigns of various forms against it. I saw one striking example of likely corruption in the small: At the Shanghai hi-speed train station a mafia-like, well-organized mob was aggressively trying to persuade those arriving to take private and presumably unlicensed cabs  rather than to progress through an extraordinarily long queue that it took about half an hour to clear. The aggressiveness of the mobsters was disconcerting and it is astonishing that the city and train station administrations allow for it to happen. Likewise, taxi services in Shanghai seem to cost about twice as much. Apparently the mafia-like mob at the trainstation has considerable clout with these administrations. I’d be surprised if it did not come at a price.

Feel free to comment on my observations, generalizations, and conjectures above, especially if you know the country first-hand and better than I do. I am eager to learn more about it.

Why don’t Australian banks support Apple Pay?

Apple Pay is near ubiquitous in the US despite the relative lack of terminals to support them. But in Australia, those terminals are all over the place yet the only card accepted on Apple Pay is American Express; a card not issued by the major banks.

Why?

For those who don’t know, Apple Pay is as convenient as a tap and pay card but with the security that no one can use it other than you because of the finger print identification. It came to Australia and Canada last week but only with AmEx. I have used it this week and it works beautifully. As magically as Apple claim.

With iPhones capable of doing this the now largest set of iPhones out there, why is the use of Apple Pay so constrained in Australia but not in the US.

In this morning’s SMH, Ed Husic, a Labor politician, lays blame at the big banks and specifically at some sort of collusion or coordinated boycott by them of Apple.

Normally when politicians suggest the banks are colluding they are off base; tapping into our generic distrust of banks. But this time around, it is hard to come up with an alternative rationale.

The card issuing market is supposed to be relatively competitive and the banks pay a ton of money in terms of loyalty programs to get users to use them. As Apple Pay makes it easier to do just that, why isn’t competitive pressure driving adoption?

The banks appear to be claiming that Apple are negotiating for too high a fee. That may be true but two things run counter to it. First, Apple are providing a real cost saving in terms of radically decreasing the probability of card fraud through the touch ID system. Second, this hasn’t been a problem in the US and the UK. Why would Apple be different? I suspect they are offering exactly the same model to the banks as AmEx.

Now one possibility is that the banks actually earn margins over the fraud costs on transactions and so Apple eliminating those costs threatens their business.

But another that I am unable to readily dismiss is that there is some coordinated conduct going on. I am not saying that there is but, in my opinion, I am struggling to provide alternative explanations. Credit cards is one area where the banks cooperative in order to have a system and for that reason the Reserve Bank and ACCC have always paid closer attention to it. The question is: where are they now?

Australia after 3 years

I have been back in Australia this past week for the first time in over three years. Here are some brief impressions:

  • The airports are great. Even better than before, Security is no issue (I passed through in 30 seconds) and Canberra airport is now fantastic — world class as they say. Why airline lounges are still popular I have no idea as the terminal themselves are as good as lounges elsewhere in the world.
  • Broadband is terrible. If anything it appears to have deteriorated over the last 5 years (if such a thing is possible). People complain about it and they have legimate complaints. This is not about streaming video but just doing what is now normal business that has to be conducted from the home. For instance, relying on video conference calls is, for many, virtually impossible. Wireless, by contrast, is actually a better performance option. At the time, I liked the idea of the NBN as private investment had stagnated. Now I have to admit that I place some probability on the notion that Australia may have been better off letting Telstra run the show. In reality, the lack of vigilance on encouraging competition in this space is likely the big culprit. In Canada — no paragon for great broadband — I have 300Mpbs at home on cable from Rogers. The reason I have that is that there are three broadband cable competitors.
  • Nothing has changed with the Universities. Same issues, same challenges, same toying with the idea of spending $$$ on online education without any proven model existing anywhere. Oh yeah, they also throw money at startup incubators now.
  • Melbourne CBD is booming. Full of people and buildings. Large shopping malls. Indeed, it has to be the largest concentration of affluent people in the world not to have an Apple Store anywhere near them. What is the deal with that?
  • Coffee is wonderful. I mean really wonderful. Australia has that reputation and it is deserved. Virtually whereever you go you can get coffee that is equal to the best in the best cities elsewhere. The coffee you have to search for in other places is flowing in the streets. Why? I have no idea. It is not expensive but the barristas are competent and everywhere. Chains, by contrast, are far less prevalent. No Starbucks etc. Perhaps that tells us something.
  • People are the happiest with their government than I have ever seen. In my left leaning set, folks are talking about voting Liberal in the next election for the first time ever. Of course, that set prizes intelligence and the PM has that (especially in contrast to the previous one). But Australians tend to default to cynism. At this moment, that isn’t happening. It is nice to see.

Opportunities for innovation in Australia

The Australian startup ecosystem is growing too slowly, but existing firms are becoming more interested in innovation as a source of competitive advantage.

MBS students brainstorming during the Innovation Bootcamp
Students brainstorming during the MBS Innovation Bootcamp

Australia performed poorly in the global startup ecosystem ranking 2015 which was published recently (http://goo.gl/UXcGcO). Sydney fell 4 spots and now ranks 16th in the world, while Melbourne fell entirely out of the top 20 despite being on that chart in the previous version of the report published three years ago. The study expresses concerns about the Australian ecosystem that echo those in other studies performed by academics as well as in the Australian Government’s Innovation System Report (http://goo.gl/kvQZhK). The 2014 AIS report sums it up nicely: “Australia performs relatively poorly on ‘new to market’ innovation”.

Yet on the ground, interest in innovation and startups has never been stronger than before in Australia. Compared to five years ago, we now have many more ‘meetup’ groups in Melbourne and Sydney for founders and entrepreneurs, a variety of incubators and accelerators, and a number of innovation-oriented programs at leading universities including Melbourne, UTS, Swinburne and QUT. There is strong interest in courses on “design thinking” and “lean startups”. MBS has our innovation bootcamp for MBA students, while the University of Melbourne now has an accelerator and is about to launch a new Masters in Entrepreneurship program. A growing number of entrepreneurs are contacting me to discuss new business models, market entry and how to protect their innovations. These will take time to bear fruit.

How do we reconcile the weak findings at the ecosystem level with growing interest at the ground level? Part of what’s happening is that other startups ecosystems are maturing faster than the one in Australia. Many ecosystems abroad have continued to enjoy stronger government support, better access to venture capital and closer industry-university linkages. The most successful ecosystems (including Silicon Valley, New York, Los Angeles, Boston, Tel Aviv) have continued to develop and reinforce a coherent system for connecting resources, talent, funding and market access. Here in Australia, we have bits and pieces that are good in each major city, and we also have specific firms and sectors that are incredibly innovative. But that distribution is uneven and the parties involved are not as seamlessly interconnected as they could be.

A second part of the explanation is due to the business environment in Australia. Given our small domestic market, many of our startup entrepreneurs will continue to sink at least one foot (if not both feet) into other ecosystems. This makes sense from the point of view of being close to market and expertise.

A big change however is the growing interest in innovation by existing firms. In recent years, incumbent firms in industries ranging from retail to energy, news and financial services have been jolted out of a comfortable (often monopolistic or duopolistic) existence due to the threat of entrants, both online and offline.

The embrace of innovation by Australian firms has taken a long time, partly due to the difficulty of changing the mindsets of senior executives who run these organizations. However, it is clear that in a variety of industries across the globe, the terms of competition have changed and Australia is no exception. In conversations with senior managers at Australian organizations, I am discovering a growing interest in innovative strategy, business transformation, ‘design thinking’ and ‘business model innovation’. These conversations often begin with a reactive or defensive tone reflecting a need to respond to market or technological threats. However at some organizations the discussions have begun to advance beyond that stage: managers at some firms start to view innovation as an opportunity to reconsider their existing ways of doing things, engage new stakeholders and to develop new capabilities.

In the short run, I see a good opportunity in helping existing Australian firms learn to innovate and become more agile and competitive. In the longer run, it would be nice to see the startup ecosystem flourish in Australia, but that is something that will take time and sustained effort.

Note: I was invited to write this article for the Melbourne Business School student newsletter. It is reprinted above, sightly edited.