Behavioural Economics

Behavioural Economics

Economics Options Course

Autumn 2012

Cutting your food into bits makes us

feel fuller - those who has a sliced

bagel (vs whole) ate significantly less

meal afterward

Drink beer from a straight-sided

glass and you'll drink at half the

speed say University of Bristol

scientists

Earning 'points' for each traffic-violations-free month in Dubai, gives eligibility to prize-draws

95% of people believe they

have an above average

sense of humour

The surprising power of Free: Time Out magazine triples the readership it predicted when going free

Sadness increases the need for immediate gratification which leads to financial loss

Obese customers are more likely to sit

facing the buffet at a Chinese

restaurant (& 3x less likely to use

chopsticks)

If every 10th Pringle crisp was red

would you eat less of them?

Using coloured lids on recycling bins increases usage by 34%

Removing food trays from

cafeterias reduced food

waste by up to 50%

Students who use cash to pay for lunch tend to make healthier choices

At a hypermarket, the av. shopper has to select 1 product from a 1000 every minute - without heuristics this would not be possible

Econs v Humans

• ECONS

• Super-smart

• Rational

• Well defined preferences

• Self-interested / selfish

• Utility maximizers

• HUMANS

• Flawed

• Biases in behaviour

• Social animals

• Emotional – hot and cold states

• Not driven purely by a need to maximise their welfare

• Lack of self-control - at the heart of many undesirable behaviours, such as overeating, overspending, and even overworking

Behavioural Choices

Messenger

Incentives

Social Norms

Defaults

SaliencePriming

Commitment

Affectation

Ego

Beware the Messengers and Gurus

• We can be heavily influenced by who communicates information to us

• Expert bias

– Expert witnesses in trials and in the media

– The God complex and poor decision making

• Media as the Messenger – e.g. The Daily Mail Project

• Impact of peer effects and social networks

As of February 2012, there have been seventy-nine known deaths since January 2007, though police have found no evidence to link the cases together. Of 25 people who killed themselves between January 2007 and February 2009, all but one died from hanging

http://www.ted.com/talks/ben_goldacre_battling_bad_science.html

Behavioural Choices

Messenger

Incentives

Social Norms

Defaults

SaliencePriming

Commitment

Affectation

Ego

Incentives

Type

Financial

Rewards

Extrinsic Intrinsic

Penalties

Non Monetary

Reciprocity Status

Magnitude

Timing

Pay off now Pay off in future

Framing Risk Attitudes

Incentives Matter!

Which do you prefer?

£10 TODAY


£10 TODAY £12 TOMORROW


£10 IN A WEEK’S TIME


£12 IN 8 DAYS TIME

£10 IN A WEEK’S TIME

Immediate pay offs

Behavioural Choices

Messenger

Incentives

Social Norms

Defaults

SaliencePriming

Commitment

Affectation

Ego

Social Norms

Behavioural Choices

Messenger

Incentives

Social Norms

Defaults

SaliencePriming

Commitment

Affectation

Ego

Default Choice

Natural order

Standard practices

Organ Donation

Opt Out (France)

Opt In (UK)Non-working households

Convenience

Menu choices

Software settings

Friday nights

GP prescriptions

Defaults

Networks & Linkages

The preferences of agents are not fixed, they evolve in many ways. Specifically, they can be

altered directly by the behaviour of other agents

We are dealing in general with systems of interacting agents which are out of equilibrium –

complex systems

Paul Ormerod

Behavioural Choices

Messenger

Incentives

Social Norms

Defaults

SaliencePriming

Commitment

Affectation

Ego

Salience

Our attention is drawn to

what is novel and seems

relevant to us

Errors that affect you personally can completely change the rule of thumb that you use when driving – i.e. The risk of being caught by a speed camera

Behavioural Choices

Messenger

Incentives

Social Norms

Defaults

SaliencePriming

Commitment

Affectation

Ego

Behaviour affected by exposure to

Sights

Images Subliminal messages Objects

Words Sensations Touch Smell

Priming

Priming

Priming explains how our recent experience influences our thoughts, feelings and behaviour.

Small changes to the context of an experience can change the way we respond

Complete the word

SO_PGroup A

1/ Was Gandhi younger than 60 when he died? (Yes or No?)

2/ Estimate Gandhi’s age when he died (in years)

Group A

a) Do you think the price of this room is less than or more than £250 per night (answer: Less / More)

b) How much would you expect to pay for a night in this London hotel (write your answer in £s)

A: The Price of a London Hotel Room

Complete the word

SO_PGroup B

1/ Was Gandhi younger than 115 when he died? (Yes or No)

2/ Estimate Gandhi’s age when he died (in years)

Group B

B: The Price of a London Hotel Rooma) Do you think the price of this room is

less than or more than £70 per night (answer: Less / More)

b) How much would you expect to pay for a night in this London hotel (write your answer in £s)

1/ Was Gandhi younger than 85 when he died?

2/ Estimate Gandhi’s age when he died (in

years)

Gandhi died at the age of

78

Priming

1/ Was Gandhi younger than X when he died?

2/ Estimate Gandhi’s age when he died (in

years)

Gandhi died at the age of

78

Priming

Framing and Anchoring

Framing the cost of high street credit

Which has most effect? Showing the repayment total or representative APR %?

Anchoring with charitable giving

Less effective?

More effective?

Social Persuasion: Facebook and organ donation (2012)

Facebook’s donor-registration strategy allows people to announce to their friends what they have done, encouraging them to become donors, too. Studies have shown how information about people’s decisions to perform a public good can persuade others to follow suit

Dominos and

Electronic Pennies

New York Taxis – Framing Tips!

During payment, the user is presented with three default buttons for tipping: 20%, 25%, and 30%. When cabs were cash only, the average tip was roughly 10%. After the introduction of this system, the tip percentage jumped to 22%.

Priming knowledge about price can have strong behavioural effects

Behavioural Choices

Messenger

Incentives

Social Norms

Defaults

SaliencePriming

Commitment

Affectation

Ego

Nudging to change behaviour

Commitment

Commitment to change behaviour

https://www.resolutions.change4life.co.uk/

Behavioural Choices

Messenger

Incentives

Social Norms

Defaults

SaliencePriming

Commitment

Affectation

Ego

Affect

• Emotional associations can powerfully shape our actions

• All perceptions contain some emotion

• How best to create an emotional reaction to perhaps bring about behavioural change?

• Should some messages be presented in a counter-intuitive way to influence our emotions and choices?

• Human desire for reciprocity widely seen as strong and potentially very important in nudging social and economic behaviours

Behavioural Choices

Messenger

Incentives

Social Norms

Defaults

SaliencePriming

Commitment

Affectation

Ego

Ego

we act in ways that make us feel better about ourselves

Self image

Self esteem

Self-fulfilling expectations

Self-attribution bias

Group identification

Behaviours

• Cognitive – heuristics, mental rules of thumb that make decisions easier

• Chemical – the brain prefers actions with positive outcomes that release a feel good hit

• Social – acting as others do is easier and feels good

Drugs don’t work in people who don’t take them

Visual perception and mental effort

• Priming, framing and anchoring provide ways in which smart marketing can change perceptions and influence the choices we make.

• We are all prone to visual illusions

• Subliminal messages can have powerful effects

• We tend to baulk at tasks that take intense mental effort – system 2 runs low!

Rationality and tricks of the mind

Loss aversion

• Emotional and perceptual asymmetries between losses and gains

– Losses loom larger than gains

– People go out of their way to avoid losses, but they would not bother to go out of their way to gain something

– Diminished sensitivity to larger losses

• Linked to the endowment effect

– People try to keep something that they consider is ‘theirs’, even when it is quite arbitrarily given

Starbucks and Cutting Waste

Starbucks uses 4 billion cups per year

Starbucks and Cutting Waste

1/ Charge customers 10 cents for every paper cup they use i.e. List price $1.50 rises to $1.60

2/ Bring a reusable travel mug and get a 10 cent discount on any Starbucks beverage, anytime List price of $1.60 falls to $1.50 if a reusable mug is used

The Endowment Effect

Back in the 1950s, when the focal practice of baking was displaced by the advent of cake mix, Betty Crocker learned quickly that it was good business to make the mix not quite complete. The baker felt better about her cake if she was required to add an egg to the mix

IKEA and the Endowment Effect

IKEA customers are loyal to their self-assembled furniture because there is a piece of them in it

Heuristics• Heuristics are experience-based

techniques that we apply to solving problems

– Educated guesses

– Rules of thumb

• Main heuristics are

– Availability

– Anchoring

– Representativeness / similarity

– Cognitive biases• Loss aversion• Status quo

Availability heuristic

• False estimation of risk

• Predicted frequency / likelihood of an event based on how easily an example can be brought to mind (saliency)

• Fear often exaggerates the likely danger

• Come up with some examples

Consider these two scenarios

• A massive flood somewhere in North America next year, in which more than 1,000 people drown

A



• An earthquake in California sometime next year, causing a flood in which more than 1,000 people drown

A B



• An earthquake in California sometime next year, causing a flood in which more than 1,000 people drown

A B

Which is more likely?

Availability Heuristic

The Availability Heuristic

• Which has more?

– 1) Words that begin with the letter "R"

– 2) Words that have the letter "R“ in the third position

The Availability Heuristic

• Which has more?

– 1) Words that begin with the letter “K"

– 2) Words that have the letter “K“ in the third position


• Which has more?

– Words that begin with the letter "R" or "K"

– Words that have the letter "R" or "K" in the third position

• Answer

– Words that have the letter "R" or "K" in the third position are more common.

– There are three times as many words that have the letter "K" in the third position

Hyperbolic discounting and the zero price bias

• Which would you rather have?

• 50% off a new £20 shirt if you pay in cash

• 1.3% off a new £750 sofa

• £10 off the price of a £80 air ticket if you book online

• Which would you rather have?

• Receive a free £10 gift certificate

• Pay £7 for a £20 gift certificate

Default behaviour

• Default

– Sometimes known as status-quo bias

– Which aspects of your life are default?

– Default settings can become sticky• Computers and screensavers / sleep mode• TV schedules – watching one programme after

another• Choices made in the supermarket

Bounded behaviour

• Bounded behaviour

– People have limited time and capacity to weigh all relevant benefits and costs of a decision.

– Added complexity can distort choice

• Bounded will-power

– We tend to have more self-control “in the future” than now

• Bounded self-interest

– We are often keen to engage in co-operative behaviour for the common interest and the common good

Which sequence of eight babies born in a local hospital is most likely?

1 / BBBBGGGG2 / GGGGGGGG3 / GGGGGGBG4 / BBBBGGBG

In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake?

Maternity Wards

• A town is served by two hospitals. In the larger hospital, about 45 babies are born each day, and 15 in the smaller hospital. You know that roughly 50% of babies born are boys, though may be higher or lower on a particular day. Over one year each hospital recorded the days on which more than 70% of babies born were boys.

• Which hospital recorded more such days?

– LARGE or

– SMALLER

Names for Children

• Mary’s Father has 5 daughters.

• The first four are called:

• Sante

• Senti

• Sinto

• Sontu

• What do you think the fifth one is called?

Balls

• A baseball and bat together cost $11. The bat costs $10 more than the ball. How much does the ball cost?

• Write down your answer.

Personality Disorder?

• Geoff is shy and withdrawn, invariably helpful, but with little interest in people. He is meek and tidy, and has a need for order and structure, and a passion for detail.

• Geoff is most likely to be?

• 1. A Sheep Farmer

• 2. A Salesman

• 3. An Airline Pilot

• 4. A Librarian

• 5. A Novelist

Behavioural Economics

Education

Transcript of Behavioural Economics