Recent allegations have reminded us that some initiation ceremonies can be a little unusual. I'd be failing in my duty if I did not point out some economic aspects of this.

Such rituals are common: we see them among army recruits, football teams, primitive tribes and university students. This very ubiquity suggests that they serve a useful purpose. This has been well described by Robert Cialdini in Influence. He points out that we have a strong urge for consistency. We will therefore rationalize a humiliating initiation ceremony by persuading ourselves that the high cost of joining a society means that membership thereof being very valuable.

This was established experimentally by Elliot Aronson and Judson Mills way back in 1958. They got female students to join a discussion group, with some of them having to experience the embarrassment of reading out swear words before doing so. They found (pdf) that the embarrassed subjects valued membership of the group more highly than those who weren't embarrassed. They concluded:

Subjects who underwent a severe initiation perceived the group as being significantly more attractive than did those who underwent a mild initiation or no initiation.

Initiation rites thus act as a bonding device, making people more loyal to their fellows: Lawrence Richards is right, therefore, even though he misdescribes the mechanism through which this happens.

This is very similar to the endowment effect - our tendency to value something merely because we have sacrificed effort or money to get it. Dan Ariely calls this the Ikea effect: having suffered the eighth circle of hell in going to Ikea and then the pain of assembling their furniture, you will value it all the more. He writes:

The more work you put into something, the more ownership you begin to feel for it...On the basis of price alone, it is easy to imagine that a $4000 couch will be more comfortable than a $400 couch. (Predictably Irrational, p135,180)

The classic demonstration of this, for which Ariely won an Ig Nobel prize, was the finding that expensive placebos work better (pdf) than cheap ones.

All this has some important and general implications. Here are three:

1. Where customers are ill-informed, sellers might overcharge for products in the hope that naive buyers will interpret a high price as a sign of quality. This (as well as the fact that people are forced buyers) might help explain the huge price of textbooks and academic journals. It also explains why financial advice is expensive even though some of it is worse than useless whilst a lot of good advice can be found freely and quickly; advisors use a high price to signal quality to phools.

2. Some markets can quickly become illiquid. One reason why houses are so slow to change hands when the market weakens is that home-owners are prone to the endowment effect and so value their house far more highly than potential sellers do. As Will Goetzmann has shown, this can mean that house price indices which only measure the prices of houses that actually sell can over-estimate prices in bad times and so under-estimate the risk of home ownership.

3. We can throw good money after bad. The endowment effect and our desire for consistency can give rise to the sunk cost fallacy - our tendency to stick with a bad idea just because we've spent time and effort upon it. This is sometimes called the Concorde fallacy, because the French and British governments continued to invest in Concorde even though the project looked a poor one. It might also explain why people remain in religions, political parties and indifferent relationships - because they have invested time and effort in them.

Perhaps, therefore, piggate illuminates a much wider range of behaviour than those who are laughing at Mr Cameron would like to admit.