Wednesday, January 18, 2017

Bühren and Pleßner (2014) on “The Trophy Effect”

Christoph Bühren and Marco Pleßner, “The Trophy Effect.” Journal of Behavioral Decision Making 27: 363-377, 2014 [pre-publication version pdf here].

• For everyday (convenience) goods, the endowment effect is reflected in about a 2-to-1 ratio of willingness-to-accept (payment to relinquish a good) to willingness-to-pay (to acquire the good). But for environmental goods or tickets to a basketball game, the ratio could be much higher. The gap is smaller when folks are in a good mood and larger when folks are in a bad mood, though sadness (as opposed to a bad mood) tends to reduce the gap. 

• The authors conduct a series of experiments involving endowing half of the subjects with a pen, under four treatment conditions. All the subjects know that the pen, though a nice one, could be purchased at a nearby shop for 2.10 euro. 

• In the Baseline treatment, half the subjects are given pens, then, willingness-to-accept (wta) and willingness-to-pay (wtp) are assessed. In the Trophy treatment, there is a 15-minute math quiz. Those who score above the median receive a pen, and become potential sellers in the exchange game to follow. 

• In the Work treatment, sellers are chosen randomly, but then they must take the math quiz before being given their pen. (They worked for their pen, they are told, though their performance on the quiz is immaterial.) In the Lottery treatment, everyone is informed that there is a lottery for pens, and the half who win the lottery are given pens. 

• The baseline treatment results in the usual (but weird!) endowment effect, with wta about twice as high as wtp. The Lottery treatment results in a slightly higher, but statistically equivalent, ratio. (Losers in the lottery don’t have a wtp that is lower than in the baseline treatment.) The Work treatment gives similar results, though the average wta (for those diligent workers!) is enhanced. 

• The broader “winning” condition (Trophy plus Lottery Treatments) yields a higher wta (compared to the other two treatments). The broader “work” condition (Trophy plus Work) yields a jump in wta, too. The Trophy treatment has a huge impact on wta, which went to 4.40 euro – and also dropped wtp from 1 euro to .5 euro; the wta/wtp ratio assessed at the medians is 9.6! It looks like the work element (taking the test) is slightly more important than the winning element in driving the trophy effect. And math quiz “losers” don’t like having the pen around to remind them of their failure. 

• The authors replicate a standard finding, that people do not anticipate the endowment effect. In the Work condition, they expect their wta to be less than 2 euro, but it is over 3.5 euro after the 15-minute quiz. 

• In one study, participants are asked how likely they think it is that their math test had been mis-graded. Trophy winners seem to decrease their wta when doubt of their deserving creeps into their mind. In yet another study, there’s (1) a two-hour delay or (2) a one-week delay before the wta and wtp valuations are assessed. With a one-week delay, we are back at the baseline endowment effect: the trophy effect evaporates. And the two-hour delay is statistically equivalent to the one-week delay.

Monday, January 16, 2017

Morewedge and Giblin (2015) Look to Explain the Endowment Effect

Carey K. Morewedge and Colleen E. Giblin, “Explanations of the Endowment Effect: An Integrative Review.” Trends in Cognitive Sciences 19(6): 339-348, June, 2015 [pdf].

• Endowment effects tend to be demonstrated in one of two ways: (1) the “exchange paradigm,” where people who are endowed with a good are less willing to trade it for another good than pre-endowment preferences would suggest; and, (2) differences between the willingness to pay (wtp) for a good by a non-owner and the willingness to accept payment (wta) by an owner – differences which seem to materialize about the time the non-owner becomes an owner. 

• Loss aversion is a standard underlying explanation for the endowment effect; once you own a good (or even expect to), your ownership becomes your reference point, and situations where you no longer own it are evaluated as losses relative to the reference point. 

• The authors look at five underlying mechanisms that are claimed to give rise to loss aversion and endowment effects, and offer a more general framework: “attribute sampling bias.” 

• Buyers and sellers pay attention to reference prices (low for buyers, high for sellers) that will increase their transactional utility. Prices are just one example of how buying and selling activate different cognitive frames that direct attention and recall to different pieces of information. Buyers and sellers do not have the same information readily in mind, so the endowment effect does not arise because they value identical attributes differently. People even have trouble recalling frame-inconsistent information. 

• Psychological ownership raises wta for two reasons: (1) ownership creates a connection between your identity and the good; the better that you feel about yourself, the better you will feel about the good. Losing the good can seem like a threat to your identity. (2) ownership helps you remember good feelings about the good, which otherwise might be harder to access. 

• Their attribute sampling bias explanation resembles the well-known phenomenon where people seek out information that confirms their current beliefs. 

• Sadness tends to reduce or reverse the endowment effect – it creates an implicit interest in changing your circumstances, so non-owners are more willing to acquire a good and owners are more willing to sell a good. But most frames in the exchange setting (other than sadness) tend to bias people towards maintaining the status quo. 

• People are eager to trade away a “bad”, which can’t be explained by some other approaches to endowment effects, where whatever you own you value more highly. Further, endowment effects are higher for those goods (like environmental goods) that have vague attributes, giving more room for attention to a biased sample of attributes to take effect.

Viscusi and Gayer (2015) on Reasons to Distrust Government Nudges

W. Kip Viscusi and Ted Gayer, “Behavioral Public Choice: The Behavioral Paradox of Government Policy.” Harvard Journal of Law & Public Policy 38(3): 973-1007, 2015 [pdf].

• Behavioral departures from full rationality are often used as justifications for government interventions in markets. But the resulting government policies can institutionalize, not rectify, the rationality shortfalls.

• Regulators themselves possess rationality shortfalls, and there are features of the environment in which regulators operate that push them away from pursuing first-best policies.

• If the median voter possesses biases, then a democratic government is likely to share those biases.

• Less-than-rational individuals tend to bear the costs of their errors themselves – not so with regulators. Further, individuals might have enhanced incentives (relative to bureaucrats) to acquire relevant information. Regulators, like all of us, can be overconfident in their abilities.

• Can we trust the claims that people are less-than-rational, or at least the universality of the claims? People are heterogeneous, and what looks like a mistake might reflect specific, reasonable preferences.

• Many consumer durables now have energy efficiency mandates, justified by internalities. But the energy-efficiency misjudgment is far from a proven problem. The claims of energy savings tend to be engineering-based, unavailable in practice, while individual circumstances can rationalize seemingly myopic choices.

• We could be more confident in an even-handed use of behavioral economics if a lot of pre-existing mandates were being replaced by non-coercive nudges. But instead, we see behavioral economics being used to tighten regulation, not to loosen it. Notice that the less-than-complete (narrow) self-interest that behavioralists often emphasize implies that even externalities might be internalized without government policy.

• The EPA instituted a fuel economy labelling requirement that seems intended to remedy all the problems that their later efficiency mandates also targets – don’t they trust their own labelling regulation?

• In dealing with health and safety risks, government does not seem to be more rational than individuals. In practice, worst-case scenarios are over-weighted in regulatory policy; EPA methodology leads to cascading of conservative estimates so that extremely low-likelihood problems can dominate policy. Further, the number of people exposed to a risk, which should be central in formulating policy, is ignored.

• Increases in risk are a sort of loss, and loss aversion kicks in – in the form of alarmist regulatory responses to ebola, terrorism, etc.

• The FDA fears errors of commission much more than errors of omission. [Nonetheless, the evidence base is weak – look how often risks are revealed only after approval; then there are off-label uses, which are quite legal, despite not having been tested in the usual sorts of controlled trials.]

• If organic veggies carry less risk than non-organic vegetables, but they cost more, it could still be better health-wise for people to eat more, non-organic veggies.

• For people to accept a small increase in risk often involves a payment some six times larger than they would pay for the same reduction in risk – a reflection of loss aversion. The “first, do no harm” principle leads to a similar effect in policy. It is often hard to identify victims of the FDA’s failure to approve a useful drug.

• Agencies can have tunnel vision, treating their issue in isolation. In OSHA, for example, regulators are not even allowed to look at the costs of fixing a hazard. One result: costs per life saved vary widely across domains, in ways that seem to be far from optimal.

Wednesday, September 21, 2016

Sunstein (2016) on (Mild) Preferences for System 2 Nudges

Cass R. Sunstein, “People Prefer System 2 Nudges (Kind Of),” July 19, 2016. Duke Law Journal, Vol. 66, 2016. [The outline here is based on an earlier version, that of February 19, 2016.]

• In Kahneman’s terminology, System 1 is the automatic, intuitive part of our decision making, whereas System 2 represents our more considered (though not necessarily better) thoughts. 

• Some types of nudges, such as graphic labels on cigarette packages or the selection of defaults, tend to be aimed at affecting System 1 responses. Other nudges, such as the provision of better information on nutrition, engage with System 2. System 2 nudges help people “exercise their own agency [p. 5],” that is, make better considered decisions. 

• Sunstein arranges for a survey to be administered to seven groups of Americans, with more than 400 people in each group; they are paid for their participation. 

• The participants are presented with four issues -- savings, smoking, clean energy, water -- and two alternative approaches, one System 1 nudge and one System 2 nudge, for each of the issues. The majority tends to prefer System 2 nudges, but a sizeable minority feels the other way. Democrats seem slightly more likely than Republicans to support System 1 nudges. 

• If told that the System 1 nudge is significantly more effective, about 12% of folks switch to preferring the System 1 nudge; precise quantitative evidence of superior effectiveness does not seem to increase any further the attractiveness of System 1 nudges. When folks are told that System 2 nudges are more effective, that information has no effect on overall preferences between the options.

• Sunstein also explores a second set of three, more ideologically charged issues: voter registration, childhood obesity, and abortion. For voter registration and anti-obesity, a majority favor System 1 nudges. For dissuading abortions, most people prefer System 2 nudges, even when System 1 (show fetus photos) is said to be more effective. 

• Alternatively, some people like System 1 nudges, even when they are told that those nudges are less effective. It seems that when people feel strongly about an issue, they support System 1 nudges that push their side of the issue. 

• Sunstein makes a meta-observation, that perhaps our brain's System 1 likes System 2 nudges, but sometimes System 2 overrides that preference. Note that often System 1 nudges are fairly easy to implement, such as by setting a default, for instance.

Saturday, August 27, 2016

WS on Hot States and Cold States (IV)

If to do were as easy as to know what were good to do, chapels had been churches and poor men's cottages princes' palaces. It is a good divine that follows his own instructions: I can easier teach twenty what were good to be done, than be one of the twenty to follow mine own teaching. The brain may devise laws for the blood, but a hot temper leaps o'er a cold decree: such a hare is madness the youth, to skip o'er the meshes of good counsel the cripple.

(Merchant of Venice, Act 1, Scene 2, lines 206-213)

Friday, August 26, 2016

Sugden (2008) on Incoherent Preferences and Paternalism; or, Let Me See Cake

Robert Sugden, “Why Incoherent Preferences Do Not Justify Paternalism.” Constitutional Political Economy 19(3): 226–248, September 2008.

• Standard economics takes individual preferences as sacred; hence, revealed preferences are respected and interference in individual choices, absent externalities, is disparaged.

• Behavioral economics questions whether choices reflect preferences, and whether preferences are stable, context-independent, and rational; as a result, behavioral economics seems to undermine the pre-disposition against paternalistic interventions.

• From the point of view of behavioral economics, nudges are forms of paternalism that are respectful of the deeper concerns about influencing individual choices that traditional economics reflects. Behavioral researchers sometimes argue that because choices are not context-independent, influencing choice is inevitable, so we might as well be paternalistic about it.

• The incoherent preferences that behavioral economists highlight look like a sort of “corrupted data [p. 229]” from the point of view of a welfare-maximizing planner. But if we take Hayek’s approach, we can dispense with the planner, and note that incoherent preferences provide little bits of information about preferences, and that markets can still use these bits of information in socially productive ways, and perhaps help to form more regular preferences.

• Voluntary exchange and mutual advantage are hallmarks of market exchange. Further, Sugden argues, these features are not compromised by incoherent preferences: for the version of a person who makes the trade, at least, these exchanges are welfare improving. Competitive markets will still exhaust all such mutually advantageous exchanges, even with incoherent preferences.

• Can a planner do better than mutual, voluntary exchange? How can a soft paternalist know that he or she is serving the interests of the nudged individual if preferences are incoherent?

• In the “arranging food in a cafeteria” example, why not task the choice architect with the pursuit of profit maximization? Profit maximization leads to a “customer is always right” bias, which doesn’t seem bad for customers.

• The profit-maximizing cafeteria owner doesn’t care about the coherence of customer preferences, only about the willingness-to-pay of the acting version of actual customers. A person with incoherent preferences nevertheless understands his interests.

• The cafeteria example, as well as others, suffers from the initial set-up, that there is some choice architect (planner) who will give the people what they really want: control is vested in the planner from the start. This hardly captures the crux of the argument against paternalism.

• Which approach, a choice architect aiming to maximize customer well-being, or entrepreneurs wanting to maximize profits, will best serve social welfare? Shouldn’t we, like the profit-maximizing cafeteria owner, privilege the acting self, too?

• Perhaps cafeteria managers don’t so much serve preferences as create them. But how is that a problem? Do people have preferences for fashion designs before they are produced? Doesn’t profit maximization do a good job in this incoherent setting to get desirable designs produced and exchanged, even without knowledge of consumer preferences?

• “…I would rather have my willpower challenged by tempting cakes than license cafeteria managers to compromise on the attractiveness of their products so as to steer me towards the ones that they think best for me [p. 247].”

Monday, August 15, 2016

Bhattacharya, Garber, and Goldhaber-Fiebert (2015) on Exercise Nudges

Jay Bhattacharya, Alan M. Garber, and Jeremy D. Goldhaber-Fiebert, “Nudges in Exercise Commitment Contracts: A Randomized Trial.” NBER Working Paper 21406, July 2015.

• The authors implement a natural field experiment: people who browse their way to looking to sign a contract that requires them to exercise regularly are randomized into one of three conditions. 

• The three conditions differ based upon the default length of the exercise commitment contract; the default (which is easy to override) can be 8 weeks, 12 weeks, or 20 weeks. More than 8,000 people take part in the experiment (unbeknownst to them, it seems), though some of the analysis relates to approximately 3,000 subjects for whom a longer period of data is available. 

• A nudge towards longer contract durations succeeds; that is, a 20-week default setting leads to longer duration actual contracts than do the shorter default terms. More than one-in-five contractors choose to put up monetary stakes – they lose money if they fail to exercise to the terms of the contract – that average $23 per week. 

• Not only does the 20-week nudge result in longer duration contracts, it induces more weeks of exercise – though the average weeks of successful exercise are less than half of the specified durations. 

• About 6% of the sample enters into a second commitment contract after the expiration of their earlier contract. The data suggest that people would be much more likely to sign a second exercise commitment contract if they were placed into a long (more than 18 weeks) initial commitment contract, as if the longer duration helps cement an exercise habit. 

• Following the reporting of their empirical results, the authors develop a parallel theoretical model. The model offers a four-period version of a quasi-hyperbolic utility function; the four periods allow for a pre-contract period and, later, the option of signing a second contract. 

• The subjects are assumed to be present biased and sophisticated about their bias – after all, the subjects are interested in committing to exercise. Exercise in the model is a habit-forming good, but one involving current costs along with future benefits. Without commitment, present-biased people will choose to exercise too little, from the point of view of their own long-run (non-present-biased) preferences. 

• Small changes in the depreciation of exercise “capital” (which underpins the habit-forming nature of exercise) lead to large changes in optimal exercise choices. In contrast, even sizable changes in the degree of present bias have little impact on optimal exercise. 

• The authors offer a definition of a nudge that incorporates asymmetric or libertarian paternalism: a nudge in a given period t cannot decrease the person’s period t utility by very much. (But a nudge surely will decrease that utility, that is, it cannot make the period t person better off.) And though nudges must be small in this sense, they nevertheless can have a large effect on exercise choices, in particular, by helping to promote an exercise habit. A large nudge, however, can lead to so much present exercise that in future periods, exercise is eliminated, as the subject finds it optimal to rest on his or her exercise laurels. 

• Are sophisticated but present-biased people better off with a nudge? By definition, here, the person in the nudged period is not better off. Future selves can be helped or harmed, however – the overall welfare effects of nudges for a heterogeneous population are ambiguous.