Reasons for the Nudge

8/9/2019 Reasons for the Nudge

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Reasons for the NudgeMichael Kratsios

Lecture 5

05.17.10


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What is rational choice theory?

What are potential limitations of RCT?Opening Discussion


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Behavioral EconomicsEcons vs. Human

Princetons Alan Krueger:

Decision making is less than fully rational. People are

prone to make predictable and avoidable mistakes.

Behavioral economics is concerned with the ways in which

the actual decision-making process influences the decisions

that are made in practice; combines psychology and

economics

Assumes bounded rationality meaning that people have

limited time and capacity to weigh all the relevant benefits and

costs of a decision.


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Cognitive System


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Cognitive Systems

Automatic Reflexive

Uncontrolled Controlled

Effortless Effortfull

Associative Deductive

Fast Slow

Unconscious Self-Aware

Skilled Rule-following


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Roger Shepards Tables


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Cognitive Reflection Test (CRT)

Source: Frederick (2005)


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Cognitive Systems

Source: Frederick (2005)


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Randomness


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Do you see a pattern?

Source: Gilovich (1991)


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Do you see a pattern?


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How about now?


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Misconceptions of

Randomness: The Hot HandMost fans think that a

player is more likely to

hit his next shot if he has

made his last shot or his

last few shots

Players who have made

their last few shots have

a hot handNo evidence of any

streakiness (Koehler &

Conley 2003)


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Please raise your hand if youbelieve you will graduate in

the top 50% of SEM?Question for the Class


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Optimism and Overconfidence

Chicago MBAs - only 5% believed that they would

graduate below the median

50% of marriages end in divorce

93% of American consider themselves above average

drivers (Sweson 1981)

US workers report that their own employers stock isless risky than a diversified mutual fund


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Status Quo Bias


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Yeah, whatever

Decisions makers tend

to stick with the status

quo even when the

decision is important &the SQ is sub-optimal

Magazine subscriptions

TIAA-CREF asset allocation of college professors

Switching channels on the TV

Organ donation


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401(k) Retirement account

Before: Must sign up (do nothing = 0% contribution)

After: Default is 3% contribution from salary

Source: Madrian and Shea (2001)


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Dynamically InconsistentBehavior (Temptation)


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Would you rather receive1,000 right now or 1,010

in a week?Question for the Class


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Would you rather receive1,000 in one year or 1,010

in a one year and week?Question for the Class


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Dynamically Inconsistent

BehaviorPeople have trouble when choosing for today vs.

for tomorrow

Often leads to irrational and inconsistent choices

Another example: Fruits and Desserts (Read & van

Leeuwen 1998)

Do you eat a dessert today with delayed health

consequences but immediate gratification, or eat

fruit today with less gratification but better long-

term health consequences?


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If you were deciding today,would you choose fruit or

dessert for next week?Question for the Class


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dessert for next week?Question for the Class

74% 26%


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dessert for today?Question for the Class


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dessert for today?Question for the Class

30% 70%


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Ulysses and the Sirens

Overcoming temptation

Sailors fill their ears

with wax

Crew ties him to the

mast


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Other Examples

Nail Biting

Orly No Bite (bitter nail polish)

Alcoholism

Disulfiram or antabuse (get

hangover feeling immediately

when you begin drinking)

Weight Loss

Stickk.com


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Clocky


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Follow the Herd


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Q1 - Tax ComplianceTax payers were

A) told their taxes go to various good works, including

education, police protection, and fire protection

B) threatened with information about the risks ofpunishment for noncompliance

C) given information about how they might get help if they

are confused about how to fill out their tax form

D) Told that over 90% of Minnesotans already complied withtheir obligations under the tax law

Which answer do you think had a significant effect on

tax compliance?


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Other examples

Obesity is contagious. If your best friend gets fat, your risk

of gaining weight goes up.

TV show producers copy one another

The academic effort of college students is influenced by

their peers. Random assignments of first year students to

roommates can have big consequences for their grades.

Which of the following do you feel is the most importantproblem facing out country today?

48% vs 12% chose subversive activity when exposed

to apparent group consensus. (Crutchfield 1955)


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Recap, Nudges in Action

Cognitive System

Randomness

Optimism and

Overconfidence

Status Quo Bias

Dynamically Inconsistent

Behavior

Follow the Herd

Examples:

Organ Donation

401(k) contribution

Cafeteria floor plan


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Nudges in Amsterdam


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Nudges in Amsterdam


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QuestionsNudges and behavioral economics


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Sources

Crutchfield, Richard S., 1955. Conformity and Character.

Gilovich, Thomas. How We Know What Isn't So: The Fallibility of Human Reason in

Everyday Life. New York: Free Press, 1991.

Koehler, Jon and Caryn Conley, 2003. The Hot Hand Myth in Profession Basketball.

Krueger, Alan. Bringing Behavioral Economics into the Classroom.

http://www.irs.princeton.edu/faculty/krueger/behavioral.ppt

Madrian, Brigitte C. and Dennis F. Shea, 2001. "The Power of Suggestions: Inertia in

401(k) Participation and Savings Behavior.

Read, Daniel and Barbara van Leeuwen, 1998. Predicting Hunger: The Effects of

Appetite and Delay on Choice.

Swenson, O., 1981.Are We All Less Risky and More Skillful Than Our Fellow Drivers?
http://go2.wordpress.com/?id=725X1342&site=biasandbelief.wordpress.com&url=http%3A%2F%2Fdx.doi.org%2F10.1016%2F0001-6918%252881%252990005-6&sref=http%3A%2F%2Fbiasandbelief.wordpress.com%2F2007%2F12%2F18%2Fwhy-there-are-so-many-idiots-on-the-road%2Fhttp://go2.wordpress.com/?id=725X1342&site=biasandbelief.wordpress.com&url=http%3A%2F%2Fdx.doi.org%2F10.1016%2F0001-6918%252881%252990005-6&sref=http%3A%2F%2Fbiasandbelief.wordpress.com%2F2007%2F12%2F18%2Fwhy-there-are-so-many-idiots-on-the-road%2Fhttps://www.dur.ac.uk/daniel.read2/My%20Paperspdf/predicting%20hunger.pdfhttps://www.dur.ac.uk/daniel.read2/My%20Paperspdf/predicting%20hunger.pdfhttp://www.retirementmadesimpler.org/Library/The%20Power%20of%20Suggestion-%20Inertia%20in%20401(k).pdfhttp://psycnet.apa.org/journals/amp/10/5/191/http://psycnet.apa.org/journals/amp/10/5/191/http://go2.wordpress.com/?id=725X1342&site=biasandbelief.wordpress.com&url=http%3A%2F%2Fdx.doi.org%2F10.1016%2F0001-6918%252881%252990005-6&sref=http%3A%2F%2Fbiasandbelief.wordpress.com%2F2007%2F12%2F18%2Fwhy-there-are-so-many-idiots-on-the-road%2Fhttp://go2.wordpress.com/?id=725X1342&site=biasandbelief.wordpress.com&url=http%3A%2F%2Fdx.doi.org%2F10.1016%2F0001-6918%252881%252990005-6&sref=http%3A%2F%2Fbiasandbelief.wordpress.com%2F2007%2F12%2F18%2Fwhy-there-are-so-many-idiots-on-the-road%2Fhttps://www.dur.ac.uk/daniel.read2/My%20Paperspdf/predicting%20hunger.pdfhttps://www.dur.ac.uk/daniel.read2/My%20Paperspdf/predicting%20hunger.pdfhttp://www.retirementmadesimpler.org/Library/The%20Power%20of%20Suggestion-%20Inertia%20in%20401(k).pdfhttp://www.retirementmadesimpler.org/Library/The%20Power%20of%20Suggestion-%20Inertia%20in%20401(k).pdfhttp://www.retirementmadesimpler.org/Library/The%20Power%20of%20Suggestion-%20Inertia%20in%20401(k).pdfhttp://www.retirementmadesimpler.org/Library/The%20Power%20of%20Suggestion-%20Inertia%20in%20401(k).pdfhttp://www.mccombs.utexas.edu/faculty/jonathan.koehler/articles/2003_JSEP.pdfhttp://www.mccombs.utexas.edu/faculty/jonathan.koehler/articles/2003_JSEP.pdfhttp://psycnet.apa.org/journals/amp/10/5/191/http://psycnet.apa.org/journals/amp/10/5/191/

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