JANUARY 20 , 2016THE GAME - INSTITUTE FOR LEADERSHIP EDUCATION IN ENGINEERINGUNIVERSITY OF TORONTO

MARK JUHASZ, PH.D

Behavioral Economics: Methods in Complex Systems

Research

What is Behavioural Economics (BE)?

ExaminesMental bias, behavior, thinking impact,

rational/irrational Tendencies, assumptions, habits.

So what? How BE helps develop better systems research?

Behavioural Economics:Theories

Neoclassical Economics & Rationality

Prior to NCE: Moral philosophy: economics, psychology, morality, fairness, justice > drive utility.

NCE: D-M deduced in direction of natural science, behaviour fundamentally rational, leading to unintended consequences.

20c: models of testing utility, uncertainty, risk, or consumption over time, put the challenge to utility and rationality.

Rational Choice, Utility, Probability

Rational choice revolution; math, physics, economics – probability, esp. post-WWII

John von Neumann: D-M - notion of ‘expected utility’ Utility = gains from probability guide action

Bounds of Rationality

Satisfice, Good Enough vs. OptimalEcological rationality: Context and

environment determine D-M, error avoidance, ‘rules of thumb’

Mind and culture influence D-MRational choice, utility maximization and BE

(Ir)rational Choice

Jealousy, Inferiority, Sexual Attraction, Anger, Frustration, Stress, Hunger

Social vs. Market Norms: Study: lawyers more likely to offer free service for cause than at

nominal cost. ‘Money, it turns out, is the most expensive way to motivate people’ -

Dan ArielyProcrastination and Self-Control:

Paying a deposit for doctor’s appointments leads to less cancellations

Perception and Expectation Study: In taste test between conventional beer and alternative with

added balsamic vinegar, preference to the alternative. In an equivalent control group, informed of the added balsamic vinegar, preference went for the conventional beer.

Criticism of Behavioural Economics

Experiments limited in actual market situations.Prospect theory

Experiments model decisions not general economic behaviour

Limits of experiments/system bias/strategic response

Response to criticismObtain insight from multiple situations,

geographies, in-field

Decision-making themes in BE

Heuristics Social context framing (Bounds) of (ir)rationality Choice (overload) Mental accounting Self-control/Self-discipline (Cumulative*) Prospect theory: Risk/uncertainty Loss aversion Probability weighing Time inconsistency Fairness/Inequity aversion Reciprocity vs. ‘perfect selfishness’. Lag response Imperfect information

Behavioural Economics:Case Studies

Auto Insurance & Organ Donation

Auto insurance honesty bar: if statement of honesty required at top of sheet, indicating true miles driven went up.

Organ donor form: If asked at top, ‘If you needed an organ, would you get a transplant?’, organ donation went up.

Nina Mazar, Rotman School of Management

Licensing Effect

Moral Pendulum: Test – Consumption and EthicsParticipants were given choice to purchase ‘green’ or

‘conventional’ products. Those who purchased ‘green’ where less likely to share

in subsequent choice, because of moral ‘license’.

Messaging matters:People who in engage in perceived moral acts, can tend

to transgress down the road.Green purchasing needs to be see as ‘norm’.

Nina Mazar, Rotman School of Management

Public Policy Design

UK Government – Behavioural Insights TeamIteration is key in BEKnow the literature and the methodsRandom trials, sample size matters

Behavioural Economics in Action, Rotman School of Management

Public Policy Design: Health

Expert overconfident and 2nd opinions Futures, uncertainty, awarenessPre-mortem scenario planning – Gary KleinPolicymakers consider:

What can go wrong and plan ideas

Chip Heath

Context Effect

Medium size is the most common choice, BUT it doesn’t matter as to the actual quantity, only as long as it is the medium size.

People use context information to make decisions.

Same can apply in consumer choice in terms of pricing.

Prof. Dilip Soman, Rotman School of Management

Decision making & Healthy Food

Freedom is important in designReactance

Ketchup Protest Ineffective Soda Pop ban in NYC

Attribution In a test, those given choice between: i. carrots and celery, ii.

just carrots, or iii.just celery, choose i. And ate 15% more carrots.

Messaging Cools names for vegetables

Latent desire: Cooperate with human intuition

David Just – Behavioural Economics, Irrational Decision-making and Food

Behavioural Economics: Methods

Behaviour Change Interventions

Target behaviouro Select > whicho Specify > precisely what?o Understand > why?

Design interventiono Intervention functions

Deliver interventiono Mode of deliveryo Policy categories

UCL, Susan Michie

Behaviour Change Interventions

What behaviour does your experiment want to test/change? Who, what, when, where, how? Individuals and/or

groups?What is the context for the behaviour?

Why so? What change?

UCL, Susan Michie

Behaviour Change Design

Approaches to better design Equip: information, engines, advice Pad: bad decision not too bad.

Tools of a choice architect Frame the context Lock-In: commit socially and mentally Prod: passivity to action

Types of choices that choice architects can influence Compliance: deadlines, requirements Switch: convert from one choice to another Follow through: commitment to act Active choice: break undesired habits

Behavioural Economics in Action,Rotman School of Management

Behaviour Change Design

Examples:Freedom with nudging: GPS software, the scenic

route and fastest routeGoogle cafe design: Ease of access to healthier

optionsCell phone plans: default to conservative cost-

savingPackaging: Consumers associate colours. Green is

healthier

Cass Sunstein

Nudging

Behaviour change without restraint to freedom

Examples: Reducing litter Employee Savings (imaging of one’s children/kin) Healthy eating

Context + Goal Setting Tools with Process + Counselling/Education = Greater Success

Dilip Soman and Nina Mazar

Behavioural Game Methods

Traditional game theory: Tests utility maximization/rationality

BGM test strategic choice and deviation from utility maximization

Norms influence interaction

Gaming group decisions: In the real world, groups often make decisions. How will groups use resources? Will they be more

rational? Behavioural Economics in Action,

Rotman School of Management

Gamification Assumptions

Competitive spirit Incentives Motivation Rewards Well-being and better choices

a) Understand the target audience and contextb) Define the learning objectivesc) Structure the experienced) Identify resourcee) Apply game elements

Behavioural Economics in Action,Rotman School of Management

Group Problem-solving Scenario

5 presentations of 5-mins each, to address:What type of social change problem?Incorporate key terms and tools as used in

BEWhat are examples of tests your group could

conduct using BE research methods?In what format: lab, in-field, survey, focus

group, product test, social media do you think would work best for your group? Why

How would you determine your target group?

EMAIL : MVJUHASZ@GMAIL .COM

TWITTER: @MARKVJUHASZ

Questions?