Sunday, April 30, 2017

Easterlin (2016) Relocates the Seemingly Lost Paradox

Richard A. Easterlin, “Paradox Lost?” USC Dornsife Institute for New Economic Thinking, Working Paper No. 16-02, 2016.

• Easterlin’s version of the Paradox: At a given point in time, within a country, happiness is positively correlated with income, and furthermore, at a given point in time, richer countries are happier than poorer countries. That is, cross-section evidence suggests a positive association between income and happiness. Over time, however, happiness is not positively correlated with income. Paradox! But the time period in which the relationship between income and happiness collapses needs to be substantial: it is long trends in happiness and income that seem to be uncorrelated. 

• Over nearly 70 years, happiness trends in the US have been zero or slightly negative, despite per-capita income tripling. 

• Easterlin looks at countries with at least 1 million people, and that possess data from at least three Subjective Well-Being surveys, conducted over a period of at least ten years and one GDP cycle: 43 countries make the cut. He finds no significant relationship between growth and happiness in this panel data. 

• Some other researchers generate different answers because they look over shorter timespans. Transition countries, for example, tend to be included with only one phase of their transition cycle in the data, biasing results towards a positive connection between GDP and happiness.

Links to outlines of a few closely-related papers:

Betsey Stevenson and Justin Wolfers, “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox.Brookings Papers on Economic Activity, pages 1-87, Spring 2008. 

Daniel W. Sacks, Betsey Stevenson and Justin Wolfers, “The New Stylized Facts About Income and Subjective Well-Being.Emotion 12(6): 1181- 1187, 2012.

Richard A. Easterlin, “Happiness, Growth, and Public Policy.” Economic Inquiry 51(1): 1–15, January 2013. 

Richard A. Easterlin, “Happiness and Economic Growth: The Evidence.” USC Dornsife Institute for New Economic Thinking, Working Paper No. 14-03, November 6, 2014.

Wednesday, April 5, 2017

Samek (2016) Nudges Schoolchildren to Drink Healthier Milk

Anya Samek, “Gifts and Goals: Behavioral Nudges to Improve Child Food Choice at School.” CESR-Schaeffer Working Paper Series, Paper No: 2016-007, January, 2016; available at SSRN.

• The author arranges for a field experiment to take place at eight public elementary schools in Chicago; the 1400 or so child subjects do not know that they are participating in an experiment. 

• The only lunch menu choice that is available to these schoolkids every day is whether to get the (low-fat) white milk, the (low-fat) chocolate milk, or do without milk altogether. On the first day of the experiment, students are nonchalantly observed when they make their milk choices. Chocolate milk is the big favorite: more than 85% of kids take the chocy, 11% take white, and 3.4% go milkless.

• In the second and final day of the experiment, a control and two treatment goups are implemented. In the control condition, teachers very briefly explain the relative merits of white milk (chocy milk has added sugar, and that is less healthy, you see) shortly before lunch. In the “Gift” condition, the explanation is followed up by a gift of a sticker to all students, no questions asked and nothing required in return; and in the third condition, “Goal,” students are asked to make an unenforceable goal, a written pledge, as it were, to choose the white milk (though they can pledge themselves to chocolate). 

• The control condition induces a huge increase in white milk purchasing, to over 47%. The Gift condition brings a slightly larger shift to white, with the Goal condition in between. The goal-setting “works” better for younger kids, but the sticker “works” about the same for everyone. 

• The unconditional gift tries (and seemingly succeeds) to connect the milk choice to reciprocity; one advantage of an unconditional gift is that no enforcement (of conditions) is needed. 

• The choices in the Goal group suggest a good deal of time inconsistency – lots of kids who pledge to get the white milk change their mind when the decision itself is at hand – even though the elapsed time between pledge and decision is only about 15 minutes. 

• The fact that the nudge and its recorded effects are of the one-day-only variety is a pretty severe restriction on drawing policy advice from the experiment. My main takeaway, as it were, concerns the large shift towards choosing white milk in the control condition: a very short piece of pro-white-milk propaganda delivered by a teacher alters lots of elementary student milk choices. Use this power wisely!

Tuesday, March 28, 2017

Bratanova et al. (2015) Find that Ethical Food Tastes Better

Boyka Bratanova, Christin-Melanie Vauclair, Nicolas Kervyn, et al., “Savouring Morality. Moral Satisfaction Renders Food of Ethical Origin Subjectively Tastier.” Appetite 91(1): 137-149, August 2015 [pdf here].

• The taste of food isn’t just about the chemical and physical properties of the food; rather, it also depends on the environment in which the food is consumed and the expectations of the consumer: Zinberg’s Drug, Set, and Setting applies to food, too. 

• It is the connection between consumer expectations and taste that is at the heart of the analysis in this article. Taste expectations might be enhanced if you are supportive of the perceived underlying ethics of the food; for example, if the food carries a Fair Trade certification, you might expect it to taste better – and therefore it might actually taste better to you. Further, this mechanism can also augment your willingness-to-pay for the food, and bolster your intention to purchase the food in the future. The ethical origin creates a sort of halo effect whereby other dimensions of the food are perceived more favorably. 

• The first study involves a 2005 survey of some 4000 adult grocery shoppers spread throughout eight European nations; the relevant questions concern tomato sauce. First, beliefs about the environmental benefits of organic tomato sauce (relative to conventional, non-organic sauce) are gauged; then, whether buying organic is viewed as doing the right thing, or making the consumer a better person. 

• In the survey – which was not accompanied by actually tasting any food – beliefs about environmental benefits were positively correlated with beliefs about better taste; the beliefs about better taste increased future buying intentions. 

• Follow-up experiments added some actual tasting of food into the mix. Besides environmental benefits, beliefs about fair trade and local sourcing also were examined. 

• A biscuit (cookie) company was described as either environmentally friendly or unfriendly, in two treatments applied to a total of 112 undergraduate students. Students thought that the environmentally friendly company would produce a higher quality biscuit (though whether the perceived quality difference is due to the halo effect of being environmentally friendly, or to the alternative biscuit being produced by an environmentally unfriendly company, is unclear). Upon eating the biscuits, however, the reported actual taste of the two types of biscuits did not differ in a statistically significant way. 

• The final experiment looked at fair trade chocolate and locally produced apple juice, in comparison with conventional products (that is, not as opposed to environmentally unfriendly products). One hypothesis is that people who endorse altruistic values will find the fair-trade chocolate to be taste-enhanced, while people who endorse environmental values will like the taste of the local apple juice. The data from 50 undergraduates tends to support the fair-trade hypothesis, but for the apple juice, taste experience and willingness-to-pay are reduced for the locally sourced juice. Nonetheless, if we look only at that subset of the participants who endorse environmental values, the better taste and higher willingness-to-pay results are restored.

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.