NEUROSCIENCE AND Behavioural Economics...chair Jane Southren Jane Southren Consulting June 6, 2017...

chair

Jane Southren Jane Southren Consulting

June 6, 2017

NEUROSCIENCE AND Behavioural Economics

for Legal Practitioners

*CLE17-0060201-a-puB*

DISCLAIMER: This work appears as part of The Law Society of Upper Canada’s initiatives in Continuing Professional Development (CPD). It provides information and various opinions to help legal professionals maintain and enhance their competence. It does not, however, represent or embody any official position of, or statement by, the Society, except where specifically indicated; nor does it attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein should be used prudently, as nothing in the work relieves readers of their responsibility to assess the material in light of their own professional experience. No warranty is made with regards to this work. The Society can accept no responsibility for any errors or omissions, and expressly disclaims any such responsibility.

© 2017 All Rights Reserved

This compilation of collective works is copyrighted by The Law Society of Upper Canada. The individual documents remain the property of the original authors or their assignees.

The Law Society of Upper Canada 130 Queen Street West, Toronto, ON M5H 2N6Phone: 416-947-3315 or 1-800-668-7380 Ext. 3315Fax: 416-947-3991 E-mail: [email protected] www.lsuc.on.ca

Library and Archives Canada Cataloguing in Publication

Neuroscience and Behavioural Economics for Legal Practitioners

ISBN 978-1-77345-006-3 (Hardcopy)ISBN 978-1-77345-007-0 (PDF)

1

March 10, 2017

Chair: Jane Southren, Jane Southren Consulting

June 6, 2017 9:00 a.m. to 12:00 p.m.

Total CPD Hours = 3h Professionalism

Donald Lamont Learning Centre The Law Society of Upper Canada

130 Queen St. W., Toronto, ON

SKU CLE17-0060201

Agenda

9:00 a.m. – 9:10 a.m. Welcome and Opening Remarks Audience Polling

Jane Southren, Jane Southren Consulting 9:10: a.m. – 10:25 a.m. Behavioural Economics 101- Management and

Communication Strategies for Law and Business

Michael Sherman, BA, JD, MBA, President, Brainthinks 10: 25 a.m. – 10:40 a.m. Coffee and Networking Break

NEUROSCIENCE AND BEHAVIOURAL

ECONOMICS FOR LEGAL PRACTITIONERS

2

10:40 a.m. – 11:55 a.m. The Neuroscience of Leadership: A Lawyer’s Guide

Nathalie Boutet, Boutet Family Law 11:55 a.m. – 12:00 p.m. Question and Answer Session 12:00 p.m. Program Ends

TAB 1

Canadian Business Jumping on the Behavioural Economics Bandwagon

Michael Sherman, BA, JD, MBA, President, Brainthinks

June 6, 2017

Neuroscience and Behavioural

Economics for Legal Practitioners

1 Michael Sherman, President [email protected] 647 400 3008

Canadian business jumping on the behavioural

economics bandwagon

By MICHAEL SHERMAN Published Saturday, Feb. 13, 2016 05:00AM EST

Last updated Friday, Feb. 12, 2016 04:36PM EST

Michael Sherman is a business strategist and lawyer who advises some of Canada’s largest corporations on the implications and applications of behavioural economics.

Visit the lunchroom at Google headquarters and you’ll witness behavioural economics in action.

There’s a salad bar at the front of the cafeteria, encouraging people to fill their plates with healthy foods first. A sign is posted next to a stack of plates, reminding customers that people who use larger plates tend to eat more. Vegetable dishes are tagged with green labels, signifying healthy choices, while desserts are tagged with red ones, cautioning moderation. Desserts, if you can find them, are relegated to the sidelines and come in tiny three-bite portions.

Subtle cues like these – nudges – have proven remarkably successful in coaxing people to eat healthier and make smarter choices, without telling them what to do.

These days, a growing number of businesses are applying behavioural economics to better understand and influence the way people make personal decisions. Along with Google, companies such as JPMorgan, Merrill Lynch and Barclays Bank are actively employing BE principles.

In Canada, Canadian Tire, Proctor & Gamble and major Canadian banks are also integrating BE principles into the way they engage consumers.

It’s no surprise that many companies are jumping on the behavioural economics bandwagon. A recent U.S. Gallup study showed that firms employing BE principles have outperformed their peers by 85 per cent in sales growth and by more than 25 per cent in gross profitability.

BE first rose to prominence in 2002, when a team of Princeton psychologists led by Daniel Kahneman was awarded the Nobel Prize in economics for showing how the human brain is hard-wired to make irrational decisions over and over again in predictable ways.

Unlike traditional economics, which assumes that people make decisions with the logic and rationality of Mr. Spock, BE combines psychology and economics to show how people make decisions in real life. When faced with complex financial choices, people tend to act more like Homer Simpson than Mr. Spock. They get swept away by emotion, they rely on intuition and hunches, and they take mental shortcuts that lead them astray.

1 - 1

mailto:[email protected]

http://www.theglobeandmail.com/


Over time, Prof. Kahneman and his team discovered the existence of dozens of mental blind spots, known as cognitive biases, that cause people to make irrational decisions. Examples of these cognitive biases include:

Status quo bias. When faced with difficult decisions, inertia sets in and people tend to stick with the status quo.

Loss aversion. People dislike losing twice as much as they like winning, and they avoid selling items at a loss.

Present bias. People tend to prefer to receive smaller payments now than significantly larger payments in the future.

Choice overload. When faced with too many choices, people tend to become overwhelmed and freeze.

In 2008, University of Chicago professors Richard Thaler and Cass Sunstein published their groundbreaking book Nudge, outlining how consumers could be encouraged to overcome these cognitive biases and make better choices.

Nudges are a means of altering behaviour in predictable ways by making subtle suggestions, using indirect incentives and by framing choices in ways that will encourage better decision making. Nudges should be easy and cheap to avoid, without making any choice mandatory.

Nudges can be simple. Travel websites encourage consumers to purchase add-on products, such as travel insurance, by preselecting items once a trip is booked. They know that once a default option is established, it tends to stick.

Nudges can help people save for retirement. Some companies automatically enroll employees in retirement savings plans and set the default contribution rates at levels that encourage long-term saving. While these programs are optional and employees can reduce their contribution rate or opt out entirely, this approach helps overcome present bias and encourages saving for the future.

When government officials in Quebec send out notices of speeding violations caught on roadside cameras, they include photographs of the owner’s car and a close-up of the licence plate. They know that vivid pictures of drivers flaunting social norms will nudge speeders toward throwing in the towel and admitting guilt.

What’s more, marketers know that people tend to follow the herd, so they label products as “most popular” or “top seller” to nudge people to jump on the bandwagon and make a purchase.

Governments were some of the first organizations to adopt and apply BE in practical ways. In 2009, U.S. President Barack Obama appointed Prof. Sunstein as the White House’s “regulatory czar” and began integrating BE insights into the way the U.S. government operates. Last September, Mr. Obama signed a landmark executive order directing federal agencies to use behavioural science insights whenever possible, essentially embedding BE as a cornerstone of U.S. policy making.

In 2010, British Prime Minister David Cameron recruited Prof. Thaler to establish a Cabinet Office Behavioural Insights Team, otherwise known as the “nudge unit.”

Inspired by the remarkable success of the British experience, the Canadian government recently introduced the Innovation Hub, a team providing BE-related advice to federal departments. In early

1 - 2



2015, Ontario Finance Minister Charles Sousa announced the formation of a new Behavioural Insights Unit in his province, which is now using BE principles to experiment with more than a dozen different organ donation forms to see what works best.

The Canadian government strengthened its commitment to BE with the recent appointment of Prof. Dilip Soman as policy adviser and scholar in residence at the Privy Council Office. Prof. Soman, who is on leave from the University of Toronto’s Rotman School of Management, is one of Canada’s leading thinkers in behavioural economics.

“Governments have done a good job of looking through a BE lens when evaluating policies – and the appetite is growing,” he says. “Yet this is an area where business has lagged government.”

One of the reasons businesses have been slow to adopt BE strategies is that many business leaders have studied traditional economics theory and continue to believe consumers always act rationally. While traditional economics theory provides an excellent framework on how people are supposed to make decisions, behavioural economists caution that it shouldn’t be used to predict how consumers really think.

“The more you train managers in economics and rational thinking, the less they empathize with consumers,” Prof. Soman adds.

Although the shift toward BE in the corporate context is not as advanced as it has been in government, a growing number of companies are currently using BE to map their customers’ journey to uncover when cognitive biases might arise and distort the decision-making process. Marketers are using BE to examine how customers select products, how they consume them, and what features, prices and designs could be improved to enhance the way consumers make choices.

Advanced users of BE are conducting experiments on how customers evaluate and use products or services. Some companies have established research labs to conduct tests to assess the effectiveness of ads, websites, store layouts or products from a BE perspective. Others have gone a step further and are testing the effectiveness of nudges in the marketplace.

Nudges come in different forms in different places.

“I find it fascinating that Canadians are the biggest collectors of loyalty points in the world,” says Dan Ariely, a professor of psychology and behavioural economics at Duke University. “After all, loyalty points nudge you to focus less on product quality and service, and encourage you to behave in a different way.”

Meanwhile, business schools in Canada are supplying a robust pipeline of able graduates to fill the expected demand for future behaviouralists. Prof. Soman said the Rotman School of Management has 150 undergraduate business students enrolled in courses about behavioural economics and there are an additional 75 MBA students taking BE-related courses each year.

While the application of BE theory is still in the early stages of acceptance in Corporate Canada, it’s on the rise and there’s good reason to believe that nudges are becoming an integral part of the way businesses engage with consumers.

© 2017 The Globe and Mail Inc. All Rights Reserved.

1 - 3



OVERVIEW OF BEHAVIORAL ECONOMICS CONCEPTS

Anchoring Bias

Reference points matter. Anchoring is the common tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions, regardless of whether it’s a logically relevant reference or not.

During normal decision-making, individuals tend to overly rely on specific information or a specific value and then adjust to that value to account for other elements of the circumstance. Once an anchor is set, people tend to be biased towards that value (e.g., when you think about some quantity, like the manufacturers’ suggested retail price of an item, the first number that gets mentioned has an enormous impact on the way that people think.)

“…you should assume that any number that is on the table has had an anchoring effect on you, and if the stakes are high you should mobilize yourself …to combat the effect.” ― Daniel Kahneman

Availability Bias

The tendency to estimate what is more likely based on what is available in memory. This is biased toward vivid, unusual, or emotionally charged examples.

"Memory is deceptive because it is coloured by today's events." — Albert Einstein

Bandwagon / Herding Effect

The tendency to base actions and beliefs on the perception of what other people are doing or believing. Related to groupthink and herd behaviour.

“If everyone is thinking alike, then somebody isn’t thinking.” — George S. Patton

Choice Bracketing

People tend to break down complex problems into simpler ones that require less cognitive ability.

People tend to spend /consume less from multiple small pots than one large pot. An army General who focuses only on the battle at hand (narrow bracketing) might lose sight

of winning the war (broad bracketing).

“Sometimes by losing a battle you find a new way to win the war.” — Donald Trump

1 - 4



Confirmation Bias The tendency to search for, interpret and remember information in a way that confirms

preconceptions. Once you have made a decision, you look for signs that you made the right decision and attribute more weight to the factors that support your decision (you view information in such a way that it supports those preferences).

“Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof.” — John Kenneth Galbraith Endowment Effect We overvalue what we own or make ourselves. Once people own things -- or have “invested” in making a decision – the perception of its

value increases, making it harder to walk away. Essentially, people are strongly inclined to assign a higher value to things that they

themselves own than they would to identical items in the market. “One man’s ceiling is another man’s floor.” — Song by Paul Simon

Framing Effect Drawing different conclusions from the same information, depending on how or by whom

that information is presented. Framing effects exist when different description of the same situation yield different

judgments. "An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can't easily recognize that they are the same." — Daniel Kahneman

Halo Effect The tendency for a person's positive or negative traits to "spill over" from one personality

area to another in others' perceptions of them. “Nobody would say, 'I'm voting for this guy because he's got the stronger chin,' but that, in fact, is partly what happens.” — Daniel Kahneman

1 - 5



Hindsight Bias

Sometimes called the "I-knew-it-all-along" or “Monday morning quarterback” effect. The tendency to see past events as being predictable at the time those events happened. Canadian Courts have recognized the existence of the Hindsight Bias and have introduced

rules to counterbalance it when evaluating the reasonableness or prudence of decisions made by corporate officers and directors, after events have gone sour.

“…courts should be careful not to rely upon the perfect vision afforded by hindsight.” — Supreme Court of Canada Justice L'Heureux-Dubé J. in Lapointe v. Hôpital Le Gardeur, [1992] 1 SCR 351

Present Bias / Hyperbolic Discounting

The tendency to prefer smaller payoffs now over larger payoffs later, which leads one to largely disregard the future when it requires sacrifices in the present. It describes our tendency for immediate gratification at the expense of the future.

People often make short-sighted decisions that favour present consumption over future consumption, even if present consumption is disadvantageous in the long run.

“I never get enough sleep. I stay up late at night, cause I’m Night Guy. Night Guy wants to stay up late. ‘What about getting up after five hours sleep?’, Oh that’s Morning Guy’s problem. That’s not my problem, I’m Night Guy.” — Jerry Seinfeld

Information Overload / Choice Overload

We assume that information and education will aid consumer in making better choices; instead, too much information often leads to a feeling of helplessness and inaction.

People often find decision-making an overwhelming process. Presented with too many choices, people tend to feel overwhelmed and don’t know what to choose, thereby making it more likely they will make no choice at all or defer a decision.

“A brain is a lot like a computer. It will only take so many facts, and then it will go on overload and blow up.” — Erma Bombeck

1 - 6



Loss Aversion People will go to great lengths to avoid feeling a loss. Losses are typically twice as

as gains. Loss aversion is a common psychological barrier that deters sales and prevents people

from realizing losses. Research has shown that people are more strongly inclined to avoid losses than they are to seek gains. The emotional “pain” people experience from a loss is mentally greater than the benefit a person feels from an equivalent gain.

“I hate losing…I hate it. I hate losing more than I even want to win.” — Brad Pitt as Billy Beane in “Moneyball

Mental Accounting / Bucketing People tend to divide money into different categories and assign different values to it,

overlooking the fact that a dollar is a dollar. “People – consumers like you and me – spend money differently as a function of how we earn it, what we plan to spend it for, what physical form it takes, and what payment method we use.” Dilip Soman, The Last Mile

Optimism Bias The tendency to be over-optimistic, overestimating favourable and pleasing outcomes. Also known as the “Above Average Effect” or the “Lake Wobegon Effect”, after the public

radio program A Prairie Home Companion, set in the fictional town of Lake Wobegon. “All the women are strong, all the men are good looking, and all the children are above average.” — Garrison Keillor writing about the Lake Wobegon Effect Overconfidence Effect People believe that their knowledge and ability exceed their actual knowledge and

abilities. People tend to have excessive confidence in their own answers to questions. For

example, studies have shown 93% of people believe themselves to be above average drivers.

Studies have also revealed significant overconfidence in the judgments of doctors, scientists, engineers and lawyers.

1 - 7



“People exaggerate their own skills. They are optimistic about their prospects and overconfident about their guesses, including which managers to pick.” — Richard Thaler

Representativeness Heuristic

Where people judge the probability or frequency of a hypothesis by considering how much the hypothesis resembles available data.

For example, when a person tosses a coin and experiences a sequence of 5 consecutive heads, they might expect the coin is “due” to land on tails on the next flip; yet the odds of the coin landing on either heads or tails remain at 50-50% for each toss.

“Almost everyone's instinct is to be overconfident and read way too much into a hot or cold streak.” — Nate Silver

Regret Aversion

People exhibiting regret aversion avoid taking decisive actions because they fear that, in hindsight, whatever course they select will prove less than optimal.

“Never do today what you can do tomorrow. Something may occur to make you regret your premature action.” — U.S. Vice President, Aaron Burr, who shot and killed Treasury Secretary Alexander Hamilton in a duel without regret.

Status Quo Bias

People are very likely to continue a course of action since it has been traditionally the one pursued, even though this course of action may clearly not be in their best interest.

Once a default option is set, it tends to stick. Status Quo bias is related to Omission bias: when a decision-maker prefers a harmful

outcome that results from an omission to a less harmful outcome that results from an action

“Every body continues in its state of rest, or of uniform motion in a right line, unless it is compelled to change that state by forces impressed upon it.” — Sir Isaac Newton

1 - 8


TAB 2

Relevant Resources

June 6, 2017

Neuroscience and Behavioural

Economics for Legal Practitioners

Relevant Resources

Essay by Cass Sunstein, called: Nudging, A Very Short Guide

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2499658

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2499658

MY EXPECTATION AND MY INTENTION

Define your

intention and

expectation for all of

your business and

personal activities

Expectation

1st : Recognize our negative

expectations

2nd: Believe in a positive expectation and write

it down even if you don’t intellectually

understand how your expectation will be

fulfilled.

Intention

1st : Commit your intention to writing

2nd: Define :

i) who I will be

ii) what I want to accomplish

Event My expectation My intention

LEADERSHIP:

PREPARATION / INTENTION

Preparation

Sleep/ nutrition / exercise / stretch / breathe

Time in-time out / play / relax

Relationships/ intimacy / connection with others

Gratitude

Intention

Expectation:

o Do I have negative expectations

o Define a positive expectation

Intention:

o Define who you will be

o Define what you want to achieve

NEUROSCIENCE AND Behavioural Economics...chair Jane Southren Jane Southren Consulting June 6, 2017...

Documents

Transcript of NEUROSCIENCE AND Behavioural Economics...chair Jane Southren Jane Southren Consulting June 6, 2017...