Friday, December 4, 2015

Loewenstein and Ubel (2008) on Hedonic Adaptation

George Loewenstein and Peter A. Ubel, “Hedonic Adaptation and the Role of Decision and Experience Utility in Public Policy.” Journal of Public Economics 92(8–9): 1795-1810, 2008 [pdf].

• Choice-based measures of welfare are inappropriate because they assume what they need to demonstrate, that choice reflects (at least individual) welfare. Further, people mispredict what will make them happy, and are subject to all sorts of biases and preference reversals and framing effects and so on. 

• Experience-based measures of welfare are problematic, too, in part because people happily and repeatedly make decisions that they know will not increase their experience utility. Experience utility ignores non-hedonic dimensions of welfare such as a meaningful life or the acquisition and deployment of capabilities. 

• People who adapt (hedonically) to a disease or condition nevertheless would be willing to pay a considerable amount to be free of the disease. Can it really be the case that, given adaptation, more instances of paraplegia are welfare-neutral? 

Contra Bentham, not all pleasurable activities are equally valuable. Notice that wine experts tend to take less pleasure from average wines, but would not voluntarily renounce their expertise. They can appreciate nuance, and want to be able to. 

• Meaning in life could take different forms, including extending yourself, asserting free will, or having the capacity to feel anguish. Good life stories generally involve obstacles. Some altruistic activities lower happiness. People are willing to trade longevity for a good death. 

• For public decision making, we need to employ a hybrid of decision utility and experience utility. Keeping people informed about matters such as hedonic adaptation can help direct those decisions in desirable directions.

Robert Frank (2008) on Positional Externalities

Robert H. Frank, “Should Public Policy Respond to Positional Externalities?” Journal of Public Economics 92(8–9): 1777-1786, August 2008.

• The quality of a country’s military is almost a completely relative concept – countries compete not to be left behind. The importance of relative position, however, can stoke an arms race, where countries devote tons of resources to arms, without altering their relative positions. An arms control agreement, then, has the potential to make all sides better off, just as an enforceable contract could overcome the usual problem in a (multilateral) prisoners’ dilemma.

• Relative position seems to be an important element in lots of personal consumption decisions, such as the size of houses. But for other consumer choices, such as those concerning safety risks at work, absolute levels seem to dominate concerns with relative ranking. Some goods are more “positional” than others.

• Perhaps Easterlin’s “paradoxical” results are due to income being a positional good.

• Frank suggests that for positional goods, an increase in one person’s absolute consumption constitutes a harm to others – one that legitimately could be controlled by public policy. Frank proposes that we replace our income tax with a proportional consumption tax. And if consumption taxes correct for positional externalities, they are efficiency enhancing. Further, surely the social value of a marginal increase in public services exceeds the value of marginal private consumption – shades of Galbraith's "affluent society."

• If the rate at which house sizes grow were to slow down, there would be little effect on subjective well-being; housing, and celebrations of special occasions, are “hyper-positional” goods.

Friday, November 6, 2015

Loewenstein, Sunstein, and Golman (2014) on Disclosure

George Loewenstein, Cass R. Sunstein, and Russell Golman, “Disclosure: Psychology Changes Everything.” Annual Review of Economics 6: 391–419, 2014 (pdf).

• A good deal of information is disclosed through government mandate, and much of this information would not be disclosed in the absence of the mandate. The information would not be disclosed perhaps because it would not benefit sellers, or because information has a public good aspect that lowers the incentive for any single private entity to produce and disseminate the information. 

• Mandated disclosures involve some subtle costs, such as the time they take for consumers to read them, the subsequent loss of attention to other pieces of information, and even the emotional costs associated with graphic warnings, for instance. 

• Mandated disclosures tend to occur when there are significant gaps in the information known to sellers and that known to buyers, and when the informational disadvantage threatens the interests of consumers. Disclosure also can be used to help consumers overcome their own departures from rational decision making: perhaps “behavioral market failures” provide a rationale for policies to limit internalities. 

• Some information – such as a physician’s assertion that a certain treatment is needed – is not verifiable, and hence problems connected with this information cannot be solved simply through disclosure. But physicians might be required to disclose their interests (such as receiving royalties from the recommended treatment) if those interests are not fully aligned with patient interests. 

• Disclosure of conflicting incentives does not fix every problem. The disclosing agent might view the disclosure as allowing for carte blanche, for any sort of self-interested advice. The recipient (principal) might feel compelled to follow the advice, to avoid the inference that the advice giver is viewed as untrustworthy. 

• The technology of disclosure – who makes it, when, and what effort is made to render it noticeable – helps to determine its impact. 

• Sellers have little reason to put effort into those dimensions of a good that potential consumers do not pay attention to. A producer of a less deadly cigarette might not want to disclose its relative safety, because to do so might make the fatal consequences of smoking more salient. 

• Warning labels don’t seem to accomplish much; more generally, see Omri Ben-Shahar and Carl E. Schneider, More Than You Wanted to Know: The Failure of Mandated Disclosure, Princeton U. P., 2014. 

• The absence of information should best be met, perhaps, by assuming the worst, as otherwise the information would have been provided. But people often do not draw this inference, even when it is rational to do so. This presents a potential rationale for mandating disclosure. 

• Sometimes we want to be ignorant, sometimes information can lower our utility – a tendency that motivated the May, 2015 on-air radio killing of a young rabbit in Denmark

• The tell-tale heart effect: mandated disclosure might cause producers to up their game, even if no consumers pay attention. Revelation of calorie counts might lead to lower calorie offerings, even if consumers do not respond to the calorie information. Maybe producers suffer from a spotlight effect, a belief that people are observing their disclosures more closely than really is the case. 

• Simplified information, like restaurant health grades, is often more valuable to consumers than is more finely grained information. 

• Comparative information – how does my energy use stack up against my neighbors? – might be more influential on energy usage than other types of usage disclosures. But the potential for perverse outcomes exists, too. 

• Personal policies for information disclosure or non-disclosure on social media, for example, do not seem to be fully rational.

Educating Behaviorally with Koch, et al. (2015)

Alexander Koch, Julia Nafziger, and Helena Skyt Nielsen, “Behavioral Economics of Education.” Journal of Economic Behavior & Organization 115: 3-17, July 2015.

• Education decisions typically involve current investments of time and effort for (probabilistic) rewards that often will be realized only many years later. Education is rife with possibilities for less-than-rational decisions, including those resulting from low willpower. There is evidence that many educational decisions indeed fall prey to irrationality, such as decisions to drop out of high school. 

• Soft skills, such as personality traits and willpower, are as (or more) important as cognitive skills in educational success. 

• Family background and inputs, peer groups, school resources, and teacher skills, have large effects on scholastic success. 

• Some teachers seem to help students build cognitive skills, and some aid non-cognitive skills. Nevertheless, “it is largely unknown what constitutes a good teacher [p. 5].” 

• On average, it seems that girls get better grades and boys score higher on standardized tests. These outcomes seem to be partly explained by gender stereotypes and approaches to competition (which themselves might depend on gender stereotypes). 

• Good grades require self-control skills. People who under-study perhaps overestimate their sophistication, or lack precommitment opportunities. Dropping out and disciplinary problems might be signs of poor self-control. 

• Personal goal setting can help, by altering reference points and thereby leveraging loss aversion. Goals should not be so ambitious that they lead to despair and abandonment, however.

• Extra incentives (such as monetary bonuses) are generally good at motivating better performance with respect to attendance and enrollment. 

• Incentives are tricky, as they work differently for different populations. For instance, some students perform better with an absolute grading scale, while others thrive in relative grading systems with only a few broad ranks. 

• Effort and ability tend to be complements, so students do better if they have a positive view of their ability. A system that offers few high grades can induce students to not try, perhaps as a protective method against possibly learning negative information about their ability. A high reward offered to a child in exchange for a high grade makes it appear that the student is not expected to do well, which can lower the student’s self-assessment of her ability and subsequently undermine effort. 

• Bad schools might need to pay bonuses to attract good teachers, but good schools, which offer more intrinsic rewards to teaching, can attract good teachers without extraordinary bonuses. 

• In terms of encouraging one’s own effort and self-control, it is good to have a peer who has slightly less self-control. Then, that person’s victories can be encouraging, while that person’s failures can be distinguished from your own prospects by their relative lack of self-control.

Sunday, November 1, 2015

Kahneman (2011), “Experienced Well-Being”

Daniel Kahneman, “Experienced Well-Being.” Chapter 37, pages 391-397, in Thinking, Fast and Slow, New York: Farrar, Straus and Giroux, 2011. 

• “Happiness” conflates experienced utility with remembered utility. Questions about subjective well-being probably do not map well with experienced utility. In a previous chapter (chapter 35, pages 377-385), Kahneman indicates that people’s memories of a past event tend to neglect the duration of the event (which is quite important as the event is being experienced), and that their assessment of a past event primarily will reflect the average of the peak level (of pain, say, for an aversive episode) and the state at the end of the event. 

• How to measure experienced, moment-by-moment, utility? One method (“experience sampling”) is to interrupt people at random times throughout the day, and to ask them what they are doing and how they are feeling about it. The Day Reconstruction Method provides another measure, where people are asked to map in detail their previous day’s activities, and their emotional state at the time of the activities. 

• The U-index measures the proportion of time people spend in an unpleasant state. The U-index exhibits significant variance: “a small fraction of the population does most of the suffering [p. 394].”

• You probably can improve your personal U-index by switching your leisure pursuits away from passive forms (watching television) to active forms (socializing). 

• Policy might be able to reduce the overall U-index, perhaps by encouraging socializing for elderly people or by reducing commuting times. A small decrease in the percentage of time spent in an unpleasant state is quite significant in terms of suffering averted. 

• Poverty can bring unhappiness, but money does not add to experienced well-being for household incomes above $75,000.

Stevenson and Wolfers (2008) on the Easterlin Paradox

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.

• The Easterlin “Paradox”: Within countries at a point in time, income and subjective well-being (SWB) are positively correlated: richer people are happier. This relationship between income and SWB does not seem to hold when looking between countries, or in data over long periods of time within a country. 

• One possible resolution of the Easterlin Paradox is that reference-dependent preferences might be at work. People are happier if they are relatively rich within their country, but they don’t compare themselves with people in other countries or people thirty years ago. If happiness depends on relative income, maybe we need to have highly progressive taxation, as higher income (or work effort) for one person “imposes” a relative deprivation cost upon everyone else. 

• Stevenson and Wolfers re-examine the evidence, and the Easterlin Paradox disappears: time series and cross-country studies display essentially the same correlation between SWB and (log) income as is calculated from within-country cross-sections. On average, higher income goes with higher SWB. 

• Life satisfaction and happiness are not identical concepts, with happiness more about affect (in Kahneman's typology, System 1). Happiness is less strongly correlated than is SWB with income. Tanzania and Nigeria exhibit high happiness, low SWB. 

• A rise in income of $100 contributes more to happiness in poor countries than in rich countries – but it contributes to higher happiness in both rich and poor countries. 

• The US is the exception, with a small fall in SWB between 1972 and 2006, despite rising average income. The US data might reflect stagnation in middle-class income.

Sunday, October 25, 2015

Maniadis, Tufano, and List (2014) on Anchoring Effects

Zacharias Maniadis, Fabio Tufano, and John A. List, “One Swallow Doesn’t Make a Summer: New Evidence on Anchoring Effects.” American Economic Review 104(1): 277–290, 2014 [pdf of earlier version here]. 

• A 2003 article by Ariely, Loewenstein, and Prelec found huge anchoring effects in the willingness-to-pay for goods and the willingness-to-accept payment for listening to aversive sounds. These experiments, along with others, undermine the usual economics assumption of fixed preferences. 

• Maniadis, Tufano, and List replicate parts of the earlier study and find some anchoring, but the effects are about ½ to  the size identified in the earlier article. 

 • The general conclusion on anchoring drawn by Maniadis, Tufano, and List: anchoring effects are real, but there is no evidence concerning their magnitude in economically important settings. 

• Beware of interesting new findings! Statistical significance means little in isolation. Be a Bayesian: if the prior probability of a result is small, do not rush to accept it on the basis of one published study. 

• The greater the number of independent researchers who are working on a specific finding, the lower the likelihood that a single publication identifying the finding is correct. 

• Research and other biases also can enter the picture; for instance, journals might systematically be less interested in publishing non-findings than (statistically significant) findings. 

• The replicability of a study is the key to inculcating rational belief. One or two independent replications tend to greatly add to the probability that a finding is correct. [It’s a movement!; see]

• A potentially useful reference is Samuel Arbesman, The Half-Life of Facts: Why Everything We Know has an Expiration Date, Current, 2012.

Meub and Proeger (2014), Are Groups Less Behavioral?

Lukas Meub and Till Proeger, “Are Groups 'Less Behavioral'? The Case of Anchoring,” February 18, 2014; updated version available here

• Do groups (as opposed to individuals) filter out irrationality and promote rationality? Do they “debias”? The broad consensus position is “yes,” though perhaps the advantage of a group is more pronounced with issues that have objectively correct answers (as opposed to being matters of judgment.) 

• Experiments conducted by Meub and Proeger used groups of three players, faced with 15 questions, 5 each from the categories of: factual knowledge; likelihoods; and, price estimation. The experiments involved two conditions, the “calibration” condition and the “anchor” condition. 

• The calibration condition is employed to identify appropriate anchors. The high anchor and low anchor values come from the 15th and 85th percentiles of unanchored responses. There is a small monetary incentive to guess well; payments varied (based on performance and condition) from 5 to 15 euro. 

• The anchor index summarizes how much the anchors sway responses. The numerator of the index is the median difference in responses between the high anchor group and the low anchor group. The denominator is the difference between the high and low anchor values themselves. An anchor index of zero indicates that people gave the same response, on average, no matter what anchor they were exposed to. An anchor index of one indicates that the respondents, on average, just let the anchor be their response. 

• The authors find that over all 15 questions, groups are less biased, with an anchor index of .34 as opposed to .52 for individuals. 

• High anchors seem to matter more, but in any event, groups are less biased than individuals on the factual knowledge questions. Groups showed no advantage over individuals on the probability questions, nor for price estimation. 

• Participants were asked if they perceived an anchoring problem, and the responses did not vary between individuals or groups.

Kahneman (2011), Chapter 11, “Anchors”

Daniel Kahneman, “Anchors.” Chapter 11, pages 119-128, in Thinking, Fast and Slow, New York: Farrar, Straus and Giroux, 2011.

• Anchoring occurs when a person considers one number, before estimating another, unknown number. The estimate will tend to stay close to the original number considered, even if that original number is known to be completely unrelated to the estimated quantity. 

• Anchoring might result from two (separate?) mechanisms. One is priming, the power of suggestion, which works on our rapid responses (“System 1”); the second is when we deliberate (“System 2”) over the estimate by adjusting away from the anchor, but do not adjust sufficiently. 

• The asking price for a house can be a form of anchor – one that affects professional real estate agents as well as amateurs. The amount of damages requested in a civil suit also might serve as an anchor. Further, legislated maxima (caps) on damage awards might serve as an anchor, drawing upwards what otherwise might have been smaller awards. 

• Instructions to deliberately counter the anchor can be effective.

Dahl and DellaVigna (2009) on Movie Violence and Crime

Gordon Dahl and Stefano DellaVigna, “Does Movie Violence Increase Violent Crime?” Quarterly Journal of Economics 124(2): 677-734, May, 2009 [pdf].

• Experimental evidence and survey responses indicate a rise in aggressive behavior after exposure to movie violence. Dahl and DellaVigna examine evidence from an ongoing “natural experiment,” seeing what happens to reported crime after a blockbuster violent movie.

• Assaults fall on the evening (both before and after midnight) that a violent movie attracts a large audience.

• For every million people watching a strongly violent or violent movie, assaults fall by more than 1% that night; after midnight, the fall is closer to 2%. A popular violent movie reduces assaults by about 1,000 per weekend. (Still, an unseasonably cold day would lead to an even greater fall.) 

• The mechanism seems to be that the criminogenic population selects into watching the movie rather than, say, drinking. Note that most movie houses do not serve alcohol. So for the evening of the movie watching, there is “voluntary incapacitation.” For the post-midnight hours, presumably there is a carry-on effect from the relatively salubrious hours in the cinema. 

• Even though violent movies reduce crime by enticing violence-prone individuals into the comparatively peaceful setting of a cinema, there would be an even further reduction in crime if these same people watched a non-violent movie. The laboratory evidence isn’t wrong, but it does not capture what appears to be the most important element of the movie violence-crime connection, the incapacitation of likely criminals as they watch movies. There is no evidence for an overall cathartic effect from watching violent movies.

Tuesday, October 13, 2015

Duflo, Kremer, and Robinson, “Nudging Farmers to Use Fertilizer…” (2014)

Esther Duflo, Michael Kremer, and Jonathan Robinson, “Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya.” American Economic Review 101: 2350-2390, October 2011.

• The (limited) use of fertilizer seems to hold very high returns – both social returns and private returns. Why do so many farmers not apply fertilizer, when it would seem to be in their private interest to fertilize? Behavioral biases, perhaps – and in particular, procrastination. 

• Some farmers are only partially sophisticated, overestimating the probability that they will be patient in the future. Calibrations suggest nearly 50% fit this category. These farmers might choose to postpone fertilizer purchase, fully expecting to buy it later, and then fail to follow through on their plan. 

• Offering small, time-limited fertilizer discounts just after harvest (when farmers have cash) can significantly increase purchase by such partially sophisticated farmers. 

• The use of a second dose of fertilizer has negative social returns, but farmers might administer a second dose if the price is highly subsidized. Hence a small, time-limited discount might be a better policy than large subsidies, even if the large subsidies spur fertilizer use, too. 

• Small, time-limited discounts have other advantages. First, they are not that demanding upon the public purse; second, if fertilizer isn’t really such a good idea, if it has negative returns, farmers probably won’t administer it (which is the socially efficient behavior under the negative-returns circumstances). The small subsidy limits the possibility that socially-excessive amounts of fertilizer will be applied.

Mullainathan on Development Economics (2006)

Sendhil Mullainathan, “Development Economics Through the Lens of Psychology.” Proceedings of the Annual Bank Conference on Development Economics, 2006 [pdf].

• Parents claim to value education highly, but kids attend school sporadically. The problem seems to be the short-term decisions by the parents, so it might be best to target those decisions. The provision of meals in schools might help, and perhaps collecting school fees in small, regular payments rather than as one large, annual payment. Policies that increase school attendance also might improve teacher morale.

• ROSCAs serve as savings commitment devices, promoting regular, small deposits. The lottery-like, skewed payoff is a commitment not to spend the savings until there is a major purchase. Holding wealth in illiquid forms such as jewelry or livestock also helps solve commitment problems. If the access to microcredit undermines other savings commitments, then the mere profitability of a micro-lending program is not a good indicator of its social value.

• Making banks available to rural dwellers might make saving, and not spending, the default condition, providing some commitment. 

• Loss aversion suggests that there is a lot to be said for protecting status quo positions in the course of reform. Existing stakeholders might be grandfathered, as a means to avoiding the imposition of losses.

• People look at the world in a biased way, and can perceive failures of reciprocity even where they do not exist. They might conform their behavior in accord with a negative stereotype. 

• Development policies can be aimed at solving internal problems (commitment, self-control, bias) as well as external problems. 

Monday, September 21, 2015

Kremer and Levy (2008) on Peer Effects and Alcohol

Michael Kremer and Dan Levy, “Peer Effects and Alcohol Use Among College Students.” Journal of Economics Perspectives 22(3): 189-206, Summer, 2008.

• The data come from a large state university that randomly assigns some roommates. The finding: males assigned roommates who drank in high school had a lower GPA. 

• By using high school characteristics, we can rule out that the GPA connection stems from common shocks to the roommates. 

• For the most part, studies don’t find much support for the idea that academic characteristics affect the academic performance of roommates. Kremer and Levy likewise find no effect of academic background or social background on roommate academic achievement. 

• The GPA decline for males is about .27 if the roommate drank in high school. The drop is especially bad for weak students, and for those who themselves drank in high school, and it’s much greater in the second year (though you are no longer roommates). 

• Roommates who are not randomly assigned, but who choose each other, do not see falls in GPA from roommate drinking history. 

• Reducing the drinking of one student can reduce the drinking of others. But collecting non-drinkers in substance-free housing will concentrate the drinking students, with a negative effect on overall GPAs.

Falk and Ichino (2006), “Clean Evidence on Peer Effects”

Armin Falk and Andrea Ichino, “Clean Evidence on Peer Effects [pdf].” Journal of Labor Economics 24(1): 39-57, 2006.

• Observational methods make it hard to separate out peer effects from birds of a feather flocking together, or from a shared environment. 

• Here, the authors use random assignment to either a peer setting or to a solo task; the task is envelope stuffing. The existence of peer effects would lead to stronger correlation between peers than between unmatched others. 

• The authors find the requisite correlation, as well as evidence that the peer effects raise average productivity (mainly by raising the output of the less productive person). 

• The workers were Swiss high school students, given the envelope-stuffing job that paid more than $60 for a four-hour session. Peers worked separately but near each other. The total number of participants was but 24, eight of whom were in the solo condition. 

• They find that if one peer raises output by one unit, the other person raises output by .14 unit. 

• Would a non-working peer also tend to increase the output of a worker, by providing a sort of supervision?

Wednesday, August 19, 2015

Jayson Lusk Takes on Libertarian Paternalism

Jayson L. Lusk, “Are You Smart Enough to Know What to Eat? A Critique of Behavioural Economics as Justification for Regulation.” European Review of Agricultural Economics 3: 355-373, 2014.

• People make some 200 food-related decisions per day! 

• Food policy activists presume that people should be eating differently than they do. 

• Lusk argues that behavioral economics-inspired policies are best when they are applied to rules that are aimed at externalities, not internalities. 

• Behavioral economics is sort of an intellectual fad, boosted by the interest of journals in novelty. At the same time that behavioral economics articles started appearing claiming that humans are not rational, other journals were publishing articles claiming that non-human animals are rational. 

• Some behavioral economists jump quite quickly from small-scale experiments on undergraduates to major claims about appropriate policy. Laboratory conditions are not the real world, and lab experiments reveal how people operate in the lab. 

• People need practice to make good decisions, so the government should not remove opportunities for people to choose. People self-regulate, self-commit, and even employ

• Behavioral economics incentivizes the abdication of personal responsibility and normalizes abnormality. Markets, alternatively, anticipate our changing preferences. 

• If we abandon traditional “welfare” analysis based on consumer surplus, all we have to go on are the prejudices of researchers. 

• Is there really any evidence that those people who are subject to all of these behavioral biases actually do worse in life than others not similarly afflicted?

Adam Oliver on “Nudging, Shoving, and Budging”

Adam Oliver, “Nudging, Shoving, and Budging: Behavioural Economic-Informed Policy.” Public Administration, 2015; doi: 10.1111/padm.12165.

• There is no accepted definition of libertarian paternalism or nudges. As a result, many policies are described to be behavioral despite having little claim to that moniker. You should worry about being pro-nudge, because the nudgers might go way beyond what you think you are signing up for. 

• Oliver claims nudges should present “no” burden on the rationals while attempting to correct an internality. 

• Loss aversion is not something you choose, but something you are, like a White Sox fan [Okay, the White Sox are not actually mentioned in the article.]

• Libertarian paternalism concerns internalities, respects liberty, and employs behavioral means. The British Behavioural Insights Team goes beyond nudging: sometimes it addresses externalities, as with organ donation. Having teenagers mentor toddlers to reduce teen pregnancy is not an obvious behavioural policy, nor is the provision of information about the drinking habits of one’s peers. 

• Straight out paternalism, without the libertarian adjective, is a “shove”; smoking bans are shoves. 

• A “budge” is a behaviorally informed regulatory intervention, designed to counter the misleading nonsense thrown up by profit-seeking corporations, like the payments made by candy makers to grocery stores for check-out line product placement. 

• Maybe it is the opportunity to choose, and not the utility derived from the choices, that is the real measure of welfare.

Sunday, July 26, 2015

Alemanno (2015) on “Nudging Healthier Lifestyles”

Alberto Alemanno, “Nudging Healthier Lifestyles: Informing the Non-communicable Diseases Agenda with Behavioural Insights.” Chapter 14 in A. Alemanno and A. Garde, eds., Regulating Lifestyle Risks: The EU, Alcohol, Tobacco and Unhealthy Diets, Cambridge University Press, 2015.

• The European section of the World Health Organization has begun an initiative to combat “lifestyle” non-communicable diseases: those associated with tobacco, alcohol, and goods high in salt, sugar, and fat. 

• Regulations that commonly are applied to lifestyle goods include mandatory information disclosure; marketing limitations; taxes and other devices to reduce availability. 

• Behavioral economics-style nudges fit well with lifestyle issues. They tend to be low cost and preserve individual choice. Lifestyle nudges might include disclosure rules; default settings; and, simplification. For instance, the extremely graphic photos required on cigarette packs, and nutrition fact panels, are nudges of a sort. 

• The European Union (oddly) is requiring that cigarette packs not disclose tar, nicotine, and carbon monoxide content. The rationale is that such information might lead smokers to think that some cigarettes are less harmful than others. (There is some evidence that consumers smoke low tar and nicotine cigarettes more intensely, undoing any relative health benefits.) 

• Thaler and Sunstein’s “publicity principle” (borrowed from John Rawls, building on Kant) is that governmental nudges must be supportable if everyone is informed about them. If people will be upset if they were misled, even if the misleading resulted in better choices for them, then the misleading is wrong. 

• Much of the evidence for nudges comes from the laboratory, and might not work in the real world. Or, a nudge might work at first, but then become less effective over time. Notice that marketing experts think that nudges work, however.

Saturday, July 25, 2015

Sunstein on Choosing Not to Choose

Cass R. Sunstein, “Choosing Not to Choose.” Duke Law Journal 64(1): 1-52, October, 2014.

• This article essentially responds to a critique of one common behavioral economics-style policy intervention, the strategic use of default settings. The critique is that using default settings to nudge people is an affront to their autonomy, even if it is easy to choose something other than the default. 

• Sunstein’s response is to suggest that a failure to provide a default could just as easily be an affront to autonomy: often, people do not want to choose, they want a well-chosen default in place so that they can avoid choosing. 

• Therefore, mandating an active choice (as opposed to setting up a default) can itself be paternalistic, and maybe not even in a libertarian fashion. Sunstein calls it “choice-requiring paternalism” (page 7).
• A compromise between using a default and requiring an active choice would be to ask people if they want to choose, knowing that if they do not, they can “opt out” of choosing and receive a default choice (which they could alter) instead; this approach is called “simplified active choosing” (page 8).

• Of course, the question of whether you want to choose might itself be an unwelcome query. 

• If you can’t trust the default, there is much to be said for active choosing. But if the situation is unfamiliar, then why choose, if the default setters can be trusted?

• Active choice might make more sense in situations where you can learn about choices over time, or develop your preferences. 

• The rise of big data means that sellers might know better than consumers what the consumers want. 

• One reason not to want to choose is to deflect responsibility. Also, people have plenty of decisions to make (200 a day for food, we are told) and might prefer to focus their autonomy on an important but manageable subset of decisions. 

• Sometimes active choice is to protect third parties, or to provide credible proof that a choice was made in a deliberate fashion. This might be the case with organ donation, for instance. 

• Is GPS undermining our ability to navigate? Does Pandora hinder learning about different types of music? Jane Jacobs noted that cities bring about unwelcome but nevertheless consciousness-expanding encounters, by providing an architecture of serendipity

• People seem to value more highly options they have chosen than options they have been assigned, that is, they have a bias in favor of choice. 

• Would you be willing to have your book purchases chosen by big data? How would you feel about being defaulted into a regime where big data chose your books and charged your bank account? (You could return the books for a refund.) Would you feel differently if we were talking not about books but about household goods like paper towels or detergent? 

• In summary, choice can sometime be a curse, undermining your autonomy and your welfare. 

• This article later spawned a book with the same title.

Loewenstein, Bryce, Hagmann, and Rajpal, “Warning: You are About to Be Nudged”

George Loewenstein, Cindy Bryce, David Hagmann, and Sachin Rajpal, “Warning: You are About to Be Nudged,” March 28, 2014

• Does informing people about the use of a behavioral nudge – here, default choices – alter their behavior relative to using the nudge without informing them? 

• The experiment involves a hypothetical directive concerning end-of-life care. Subjects could choose the “Prolong” option, in which medical authorities do whatever is necessary to keep someone alive, despite the potential for more suffering, or subjects could choose the “Comfort” option, in which doctors would try to be make the patients comfortable, at some cost in terms of longevity. Subjects also could choose to deputize their relatives and doctors to make the choice for them at the appropriate time. 

• Each subject was provided with a default option, either “Prolong” or “Comfort,” though it was easy to override the default. Most people preferred the “Comfort” alternative, and the default setting did not influence these preferences in the aggregate. Telling people in advance about the extraordinary staying power of defaults had no effect relative to telling them after their initial choice. 

• Along with the general Prolong/Comfort option, there were questions concerning five specific medical interventions. Choices on whether to pursue these options showed a significant influence from the default settings, even when subjects were pre-informed that they were being “defaulted.” Some of the influence remained for the respondents who were post-informed that they had been defaulted, and were asked to choose again without a specified default. 

• Pre-informing people of the default had little impact on diminishing the power of the default nudge; likewise, post-informing them of the default, and giving them the opportunity to choose again, did not diminish the power of the default. Nonetheless, these findings take place in an experimental context in which default pressures themselves are not large.

Bartling, Fehr, and Herz, “The Intrinsic Value of Decision Rights”

Björn Bartling, Ernst Fehr, and Holger Herz, “The Intrinsic Value of Decision Rights.” University of Zurich, Department of Economics Working Paper No. 120, April 19, 2013 [updated version available].

• Consider a principal-agent situation, where the principal would like to have a task accomplished. The principal can control fully the choice of task and effort, or can delegate the choices to an agent with different preferences -- though the delegation, if it takes place, can specify a minimum effort level. The question that the authors explore is whether the principal is willing to sacrifice some expected return just to keep control.

• In their experiment, the answer is… “Yes”: principals give up more than 16% in certainty equivalent terms to control the choices. The higher the stakes, the greater the intrinsic value that principals place on control. Also, and oddly, the closer the alignment between principal and agent preferences, the greater the intrinsic value of control to the principal, even though the agent would make similar choices to what the principal makes, and the principal knows that.

• Note that the intrinsic value of control or ownership is non-transferable; it is subject to a sort of endowment effect. Sometimes proposed corporate mergers become undone because neither group of executives is willing to cede control.

• Entrepreneurs and scientists seem to sacrifice income for control.

Saturday, July 18, 2015

M. Ryan Calo (2013), “Code, Nudge, or Notice?”

M. Ryan Calo, “Code, Nudge, or Notice?” University of Washington School of Law Research Paper, February 7, 2013.

• Code (including physical and virtual architecture), nudges, and information disclosure (notice) can be alternatives to formal law. They can alter behavior, but they might not include the procedural safeguards, nor the transparency, that commonly accompany law. Some nudges, for instance, can be invisible and unknown to the public. Like placebos, they might even lose their effectiveness if they were known. 

• Consider driving. Speed bumps are a type of “code; visual illusions like those lines on Lake Shore Drive are a type of nudge; and, “kids at play” signs are a species of notice. 

• If code precludes violations, then the potentially beneficent role of civil disobedience is undermined. Code makes some types of legal activity impossible; for instance, some fair uses of copyrighted material are ruled out by Digital Rights Management techniques. 

• Calo invokes a rather singular definition of “nudges,” such that they necessarily take advantage of decision-making biases (such as the status quo bias) to push people in a preferred (by whom?) direction. Code rebiases, as opposed to debiases. 

• Does frequent nudging lead to infantilization? 

• Notice works where informed decision making works (and informing works, too). Some scholars take a very negative view of mandated information disclosure, on the grounds that it is frequently ineffective and even counterproductive. 

• Are extremely graphic cigarette warnings a case of information provision (notice), or nudge? The answer might determine the constitutionality of mandates for such warnings.

Cooper and Kovacic (2012) on Regulators

James C. Cooper and William E. Kovacic, “Behavioral Economics: Implications for Regulatory Behavior.” Journal of Regulatory Economics 41: 41-58, 2012.

• The principal is the legislative or executive overseer, whose preferences are assumed to be short-sighted. The agent is the regulator, who thinks she knows the (socially) optimal policy – but she might be biased -- and pays a price when the policy choice varies from what she views as best. The regulator also possesses career concerns that favor obeying the legislator. 

• If the regulator puts no weight on pleasing her boss, or if the overseer is unable to punish a wayward agent, the regulator will choose what she thinks is the first-best policy. 

• Behavioral biases (like availability, optimism, hindsight) make the regulator more like the short-term politician. The call to “do something” might push the confirmation bias in the direction of the principal’s preferences, too. The status quo bias and the confirmation bias have ambiguous implications for the regulator’s policy choices. 

• Regulators only hear about some issues when intervention is requested by a constituent – creating an anchoring effect. Publicly announced positions also generate an anchor. 

• Regulators do not operate in a competitive market environment, and their sources of feedback are not as strong or timely as firms often receive – so biases can persist. Poor regulators generally do not exit the profession. Indeed, the feedback received from legislators is likely to result in regulators who are too short-term oriented, or whose biases make them behave as if they were. 

• Internal and external adversarial proceedings might aid regulatory choices. The regulators can set up an A-Team and a B-Team and let them present their cases. (The FTC has economists work up a case independently of lawyers.) More ex post evaluations, focused on outcomes, not outputs, along with longer tenure for regulators, could help.

Friday, July 17, 2015

Rizzo and Whitman (2009) on the Slippery Slopes of Soft Paternalism

Mario J. Rizzo and Douglas Glen Whitman, “Little Brother Is Watching You: New Paternalism on the Slippery Slopes [pdf].” Arizona Law Review 51: 685-739, 2009.

• A slippery slope argument is one suggesting that adopting a policy in the instant case will increase the probability of another, substantially more worrisome policy in a “danger case” (Schauer’s terminology) down the road. 

• When cases vary along a continuum, then it might be hard to settle on a stable dividing line; such situations seem ripe for slippery slopes. Legal precedents can slide down the slope, for example, because of the inability to distinguish nearly (but not precisely) identical cases. 

• Policies involve fixed costs that, once paid, make it inexpensive (in terms of resources) to slide down the slope. 

• The common law typically endorses business customs and practices as its method of establishing defaults. Choice architects are not similarly disciplined, and hence are likely to both shift and increase transactions costs. 

• Soft paternalists shift the frame into one where intervention is the default condition, and the only question is how much to intervene. They do not sufficiently distinguish between public and private policies. 

• There is an inescapable arbitrariness in assigning any single discount rate for welfare comparisons involving quasi-hyperbolic people. A similar point applies to siding with cold state or hot state preferences. 

• Soft paternalism can crowd out, perhaps completely, self-regulation. 

• Quasi-hyperbolic policymakers will overvalue short-term gains and undervalue long-term costs.

Glaeser (2006), “Paternalism and Psychology”

Ed Glaeser, “Paternalism and Psychology [pdf].” University of Chicago Law Review 73(1): 133-156, Winter 2006.

• This article is a relatively early contribution in what has become a crowded area, critiques of the policy prescriptions -- typically soft or hard paternalistic policies -- that often accompany behavioral economics analyses.

• The sorts of shortfalls from full rationality that behavioral economics documents strengthen the case against government intervention. (Glaeser focuses on bounded rationality, not self-control shortcomings.) The key consideration is that mistakes are not exogenous, but respond to incentives. 

• Consumers have better incentives to make choices that are valuable to them than do bureaucrats, who are choosing for other people. Lab experiments generally do not capture the full scope of methods that people have for informing themselves about important decisions. 

• A firm might find it in its interest to persuade people to buy its product or behave in a certain fashion. It is probably cheaper to convince one bureaucrat (or a small number of bureaucrats) than it is to directly influence millions of consumers; therefore, leaving decisions in the market and not coerced by bureaucrats will mute the power of such a firm. 

• Consumers have better incentives to be informed and to choose wisely in their market activity than in their voting behavior. Politicians can be poor agents for voters. 

• Soft paternalism can become costly if implemented unwisely by bumbling politicians. 

• Do we want government to have more scope for, and practice at, persuading citizens? Propaganda is effective. Many policy positions that now are widely reviled were once promoted by the government.

• The emotional tax of soft paternalism might be dominated by an explicit tax – and soft paternalistic policies are harder for citizens to monitor. Further, political economy considerations suggest that soft paternalism is a road to hard paternalism.

Camerer, et al. (2003) on Asymmetric Paternalism

Colin Camerer, Samuel Issacharoff, George Loewenstein, Ted O'Donoghue, and Matthew Rabin, “Regulation for Conservatives: Behavioral Economics and the Case for ‘Asymmetric Paternalism’.University of Pennsylvania Law Review 151(3): 1211-1254, 2003.

• An asymmetric paternalistic regulation creates large gains for the less-than-rationals, while imposing little upon rationals. 

• Are there predictable circumstances in which people tend to be less than rational? 

• Asymmetric paternalism as a method for correcting internalities. The tradeoff is meant to assure that the interventions do not impose high costs on rationals. 

• It cannot be taken as given that people’s choices maximize their well-being. It’s an empirical issue, of course. 

• Many current regulations are asymmetrically paternalistic. 

• Defaults have to take into account what would be the most common best choice, as well as the possibility that the costs of error are asymmetric. 

• Cooling-off periods allow bad decisions to be reversed, but generally lower the value of the decision when it is rational. If sellers bear costs when decisions are reversed, they might want to ensure rational deliberation ex ante. Should consumers be allowed to waive cooling-off periods? 

• Constitutions implement the equivalent of cooling-off periods. 

• Are there private incentives to provide paternalistic interventions? Maybe the reason such interventions are needed is the reason they will not be demanded.

Monday, July 13, 2015

Sayette et al. (2008), “Exploring the Cold-to-Hot Empathy Gap in Smokers.”

Michael A. Sayette, George Loewenstein, Kasey M. Griffin, and Jessica J. Black, “Exploring the Cold-to-Hot Empathy Gap in Smokers.” Psychological Science 19: 926-932, 2008.

• The cold-to-hot empathy gap is the notion that people (when in the cold state) underestimate the extent to which visceral factors will impact their future decisions (made in the hot state). 

• The experimental set-up: smokers know that at the next gathering they will be in a craving state. They are asked to precommit to a willingness to pay (wtp) to accept craving (in the form of delayed access to a smoke). Some participants are asked for this wtp when they are craving, and others are asked when they aren’t. 

• In session 2, now with everyone in the hot state (craving), they are given a chance to revise their wtp. 

• Results: people in the cold state in the first session revise upward their wtp in the second session: they seem to suffer from a cold-to-hot empathy gap. The cold group also seems to underpredict the depth of their future cravings.

Bernheim and Rangel (2004) on Cues and Addiction

B. Douglas Bernheim and Antonio Rangel, “Addiction and Cue-Triggered Decision Processes [pdf].” American Economic Review 94(5): 1558–1590, 2004.

• Three premises: (1) use among addicts is frequently a mistake; (2) experience sensitizes users to environmental cues that trigger mistaken usage; (3) addicts understand their susceptibility to cue-triggered mistakes. 

• Addictive substances interfere with how the brain forecasts near-term hedonic rewards, leading to the cue-conditioned problems. 

• Upon exposure to cues, you might enter a “hot” mode, in which you consume the substance irrespective of preferences. Sensitivity to cues depends on past consumption. “Wanting” a drug is not the same as “liking” the drug; see Robinson and Berridge (1993, 2001).

• Some patterns of addictive behavior that the model is consistent with: (1) unsuccessful attempts to quit and recidivism even though the short-term, painful withdrawal costs have already been incurred; (2) cue-triggered recidivism; (3) self-described mistakes, even in the act of consuming; (4) precommitment strategies; and (5) the use of behavioral and cognitive therapy. 

• The model involves a consumer who enters each period in a cold state, but who can choose among different lifestyles for that period; each lifestyle has a different prospect of presenting cues, and hence of being forced to mistakenly consume the drug.

Loewenstein (1996) is “Out of Control”

George Loewenstein, “Out of Control: Visceral Influences on Behavior [pdf].” Organizational Behavior and Human Decision Processes 65: 272-292, March 1996.

• People can make choices that are mistaken, and make them in full knowledge, at the time of choosing, that they are making a mistake. This disjunction between perceived self-interest and behavior is caused by intense visceral factors such as cravings, “drive states” (hunger, thirst, sexual desire), moods and emotions, and pain. 

• While rational choices require that visceral states be taken into account, many types of self-destructive behavior seem to involve an excessive influence of visceral factors on choices. Indeed, some intense visceral factors seem to preclude “decision making” – no one chooses to fall asleep while driving. 

• Sales people, con men, cults: all take advantage of visceral factors. They tend to apply pressure for immediate action – visceral factors fade over time. 

• People under the sway of intense visceral factors tend to narrow their focus. Addicted people narrow their focus to the addictive good; people become more self-centered. 

• Loewenstein’s seven propositions amount to: “visceral factors operating on us in the here and now have a disproportionate impact on our behavior [p. 276].” Alternatively, the same factors, past or future, or experienced by someone else, are underweighted, despite substantial experience with visceral factors.

• Quasi-hyperbolic or other non-exponential discounting approaches have two significant limitations: (1) people seem to have such preferences only with respect to certain kinds of choices; and, (2) time delay is not the only feature of a choice situation that seems to involve impulsivity. Physical proximity and sensory contact, for instance – the smell of cookies! – also play a role. 

• Almost any cue associated with a reward can produce an appetitive response – especially a priming dose. 

• Vividness (such as terrorist attacks) affects decisions. Does vividness alter subjective probabilities, or does it intensify the emotions associated with thinking about the outcome? 

• Though visceral states have an undue influence on behavior, people are not fully sophisticated about the extent to which their own future (or past!) behavior will respond to visceral forces. A recovering alcoholic might underestimate how difficult abstaining will be if he goes to the office Christmas party. 

• Rational addiction is wrong because it doesn’t fit the facts – e.g., addicts should buy in bulk to save money on their long term habit; further, the “rapid downward hedonic spiral” is “difficult to understand” as a rational choice. So why do people become addicted? In part, because they underestimate the influence of craving and withdrawal on their future behavior. They wrongly believe they will be able to quit. 

• People blame themselves for a lack of past effort because they discount the effect of fatigue. 

• The visceral model suggests a multiple-selves interpretation. The farsighted self is the one relatively immune from visceral factors, and is much more consistent over time than the selves who are influenced by fluctuating visceral factors.

Becker, Grossman, and Murphy (1991) on Rational Addiction

Gary S. Becker, Michael Grossman and Kevin Murphy, “Rational Addiction and the Effect of Price on Consumption [pdf].” American Economic Review 237-241, May 1991.

• This paper provides a capsule summary of what might be considered the non-behavioral model of addiction, the approach to addictive behavior based on full-on standard rational economic choice; the original, fuller treatment is Becker and Murphy (1988). (A still earlier precursor is Stigler and Becker (1977), "De Gustibus Non Est Disputandum.") 

• A consumer's preferences can be described by the utility function U(t) = u[c(t), S(t), y(t)], where y is a non-addictive good, c is an addictive good, and S is the stock of addictive capital; t represents the time period. c(t), therefore, is consumption of the addictive good in time period t. 

• Reinforcement: the higher the stock of addictive capital, the higher the current consumption of the addictive good. The stock of addictive capital S comprises past consumption of the addictive good, though this stock depreciates at a constant per period rate, so if someone chooses to go cold turkey, S would wither away over time.

• Rationality here, as elsewhere, means having fixed, forward-looking preferences. 

• There exists a low-consumption, unstable steady state, as well as a high-consumption (addicted), stable steady state. At a steady state, each period's chosen (optimal) consumption of the addictive good (c) equals the depreciation in S, so that the next period, the consumer wakes up with an unchanged stock of addictive capital -- and hence once again chooses the same consumption c, and so on.

• Implications: long-run elasticities are greater in magnitude than short-run elasticities; current consumption responds to anticipated future price changes; past, current, and future consumption are mutually complementary. These implications can be tested, and the tests (generally on legal addictive behaviors such as smoking) tend to support rational addiction as opposed to myopic (non-forward-looking) behavior. 

• The government cannot help rational addicts by making it harder for them to procure their drug of choice. They freely chose to become addicted, knowing the consequences of their behavior. If they had to do it all over again, they would make the same choices. Addicts might not be very happy, but their other choices were even less palatable to them than was becoming an addict. They probably have high discount rates, however, as the future costs of current consumption of the addictive good did not weigh heavily in their decisions.

Saturday, July 11, 2015

Burke, Luoto and Perez-Arce (2014) on Soft and Hard Commitments

Jeremy Burke, Jill E. Luoto and Francisco Perez-Arce, “Soft versus Hard Commitments: A Test on Savings Behaviors [pdf].” RAND Labor & Population WR-1055, July 2014.

• One approach to increase savings is to offer people “commitment accounts,” which make it hard to withdraw funds and which might even result in losses if the saver does not live up to her commitments. It is commonplace for most people to turn down the opportunity to enter into commitment savings accounts. 

• This paper looks at a softer approach, where people are given a convenient way to save money, and are encouraged to do so, but without any commitment. The idea is that more people will find such accounts attractive, perhaps raising total savings relative to both commitment accounts and the status quo. 

• An online experiment is conducted with US subjects who indicated that they wanted to save more. They know they will be given $50, $100, or $500 (usually $50!), which they can receive after a brief delay, or they can save some or all of the money over the subsequent six months. Before they know which amount they are given, they are asked to make decisions regarding saving the different amounts at an annualized interest rate of 30%. 

• The savings options are not the same for everyone, however. Rather, the subjects are randomly selected to either the control – a standard savings account with no withdrawal restrictions – or to a soft or a hard account. The hard account allows no withdrawals until the six months have passed; the soft account is like the control, except that subjects receive subtle, active suggestions to save. Irrespective of the account they are selected for, the vast majority of subjects save some of their experimental windfall. Nonetheless, take-up is highest for the soft account, and the amount initially saved also is highest for the soft account – including among the most impatient savers. 

• After six months, the soft account leads to higher savings than does the control account. Nonetheless, as money is withdrawn from the soft accounts over the six months, the hard account leads to even higher total savings at the end of six months.

Atalay et al. (2014) on Prize-Linked Savings Accounts

Kadir Atalay, Fayzan Bakhtiar, Stephen Cheung, and Robert Slonim, “Savings and Prize-Linked Savings Accounts [pdf].” Journal of Economic Behavior & Organization 107, Part A: 86-106, November 2014.

• Lotteries are popular in the US, and poorer households tend to spend a relatively larger share of their income on lotteries. 

• A prize-linked savings (PLS) account is one that enters savers in a lottery, while protecting the principal, the amount of funds deposited by savers. The prize for the lottery typically is financed by paying lower interest on savings than would be paid in the absence of a lottery. It is as if a portion of all interest payments are confiscated and turned into a prize that goes to just one of the savers; the lottery usually features a probability of winning proportional to a saver’s share in overall deposits. 

• PLS accounts are common in some countries, but essentially illegal in the US due to anti-gambling laws. The experiments described in this article aim to determine if US residents would find PLS accounts attractive, and whether PLS accounts would raise total savings (as opposed to just diverting savings from standard savings accounts). 

• The experiments are web-based. Participants are asked about how they would allocate $100 between cash (to be received in 2 weeks’ time); standard lottery tickets (not a PLS); and standard savings (available in 10 weeks). The participants receive some recompense but not, for the most part, the actual results of their investment decisions – the starting $100 (largely) is imaginary. Later, they repeat their choices, with a PLS as an additional option. 

• The experimental results suggest that the introduction of PLS accounts would increase total savings markedly. Further, much of the money invested in PLS accounts would be drawn from funds that otherwise would have gone to purchasing standard lottery tickets. These effects are particularly pronounced among lower-income people and those with little savings.

Schwartz et al. (2014), “Healthier By Precommitment”

Janet Schwartz, Daniel Mochon, Lauren Wyper, Josiase Maroba, Deepak Patel, and Dan Ariely, “Healthier by Precommitment.” Psychological Science 25(2) 538–546, 2014.

• People find it hard to generate the persistent willpower needed to keep actions consistent with intentions. Features such as diffuse, future rewards from resisting temptation might contribute to this difficulty. 

• Financial incentives have been shown to help with weight loss, quitting smoking, and complying with a medical regimen. They might (but only might) even spur the formation of habits, giving temporary financial incentives a lasting impact. 

• Sophisticated folks are aware of their self-control shortfalls, and might welcome commitment devices. 

• The field experiment involved an existing healthy eating program in South Africa that gives 25% cash back at the end of the month for healthy food purchases. Some participants were given the option of forfeiting their cash back if they did not increase their healthy grocery component by five percentage points. The shoppers had no direct positive incentive to take part, they could only lose money relative to not participating (as in this earlier field experiment). A control group was informed about the possibility of such a commitment contract, but was not offered the option to make the commitment. 

• More than one-third of the households offered the commitment contract chose to join the commitment scheme. They were allowed to drop out after one month, however, and about one in six did drop out. 

• The committed shoppers did increase their consumption of healthier items relative to the non-committed shoppers. The commitment seems crucial for converting intentions into future action. But shoppers nonetheless failed to live up to their commitments on average: “…in any given month only one-third of the committed households met their goal.” 

• The standard ethical query applies: Is it ethical to offer (relatively poor?) people a commitment device when it is more than conceivable that many of them will suffer a loss of funds because they will not fulfill their commitment?

Karlan and Linden (2014) on Savings for Education in Uganda

Dean Karlan and Leigh L. Linden, “Loose Knots: Strong versus Weak Commitments to Save for Education in Uganda [pdf].” NBER Working Paper No. 19863, January 2014.

• Low threshold commitment devices (loose knots) might attract more participants, but not lead to as much behavior change as would stronger commitments. 

• A field experiment involved 136 rural or near-rural primary schools in Uganda. Some schools were given a “strong” commitment savings product – withdrawals took the form of vouchers that could be used only to purchase school supplies; other schools received a weaker (loose knots) version, where withdrawals could be made in cash and spent on anything. 

• Students deposited more money in the soft commitment account than in the hard commitment account, which led to more school supplies purchased and better test scores. 

• The savings account employed a double-locked lock box kept at the school, with the funds transferred to a bank at the end of a trimester. The accounts earned no interest, despite significant inflation. The savings decisions were taken in public. 

• When disbursements were made from the accounts, a small market was set up at each school to sell school supplies, tutoring, etc. With vouchers, this market provided the only legitimate use for the savings (other than re-deposit.) 

• Parent outreach does not affect savings, but it helps direct saved funds towards education. The loose knot (cash) accounts with parent outreach formed the preferred treatment in terms of incentivizing the purchase of more school supplies. 

• This commitment savings intervention was very costly to implement relative to the increased savings.

Wednesday, July 8, 2015

Giné, Karlan, and Zinman (2010) on Committing to Quit Smoking

Xavier Giné, Dean Karlan, and Jonathan Zinman, “Put Your Money Where Your Butt Is: A Commitment Savings Account for Smoking Cessation.” American Economic Journal: Applied Economics 2(4): 213-235, January 2010.

• Likely heavy smokers were randomly chosen to be offered a “Committed Action to Reduce and End Smoking” (CARES) savings account. After six months, a urine test was given to indicate whether the saver had given up smoking. A failed test meant that the money in the account was forfeited. A second treatment involved giving smokers aversive cue cards as opposed to the opportunity to open a CARES account. 

• CARES accounts were accompanied by weekly visits from a bank employee to collect additional deposits. Participants were urged to save the money they otherwise would have spent on cigarettes. The deposit collection seemed to be important for getting people to take up CARES. 

• Only eleven percent (a total of 83) smokers offered CARES signed up. Smokers randomly offered CARES were a bit more likely to pass a second, surprise urine test after one year. (That is, most did not quit smoking, but quit rates were about 1/3 higher than for smokers not offered CARES.) The cue cards didn’t help induce smoking cessation, though almost everyone who was offered the cards took them. 

• About 2/3 of CARES clients lost their deposits by failing the urine test. They tended to have lower deposits, though, and may have cut down on their smoking (and spending on smoking), even if they didn’t quit. Is it ethical to offer relatively poor people a commitment savings account in the fore-knowledge that many of them will end up unable to collect their savings?

Ashraf, Karlan, and Yin (2006), on Commitment Savings Accounts

Nava Ashraf, Dean Karlan, and Wesley Yin, “Tying Odysseus to the Mast: Evidence From a Commitment Savings Product in the Philippines.” Quarterly Journal of Economics 121(2): 635-672, 2006.

• The authors conduct a natural field experiment to see if people will open a savings account that has no advantages except for barriers to withdrawal. The offered SEED accounts (“Save, Earn, Enjoy Deposits”) prevent depositors from accessing funds unless a target deposit amount or date is met. Most of the participants who opened accounts chose the date-based method. 

• Individuals were randomly chosen to be offered a SEED account, and about 28% of those who received the offer accepted it. Others were offered nothing or were given encouragement to save more. All the people involved were bank clients who already had a regular savings account. 

• All participants were given a survey aimed at identifying customers who had time inconsistent preferences. The survey indicated that 27.5% of respondents were hyperbolic, while a surprising 19.8% were reverse hyperbolic, more patient today than for future choices. Hyperbolic women (but not men) are more likely to take up the SEED offer. 

• The Intent to Treat (ITT) effect reveals the impact of being offered (not necessarily accepting) the SEED account. The ITT effect involved a significant increase in savings. (The encouragement-to-save option did not increase savings.) The Treatment on the Treated effect reveals the increase in savings for those who opened a SEED account relative to controls who would have opened one if offered; here, it is about four times higher than the ITT effect.

• Is it ethical to offer relatively poor people a type of savings account whereby it is more than conceivable that they will never be able to recover their funds because they did not reach their savings goal? After one year, only 6 of the 62 participants who opened an amount-based account achieved their goal and hence could access their funds (page 657).

Kube, et al. (2012) on Non-Monetary Gift Exchange in the Workplace

Sebastian Kube, Michel André Maréchal, and Clemens Puppe, “The Currency of Reciprocity: Gift Exchange in the Workplace.” American Economic Review 102(4): 1644-1662, June 2012.

• The authors set up a field experiment, where people were hired for only three hours to type bibliographical information into a database. The workers did not know at the time that they were participating in an experiment. 

• The workers were paid a pre-agreed wage, but at the start, most of them (all except for the baseline sample) were presented with an unexpected gift. The main issue was whether they received a monetary bonus of 7 euro, or a thermos bottle that cost 7 euro. 

• The cash gift did not increase worker productivity relative to the “no gift” baseline, but the bottle brought about a 25% productivity hike. If workers could choose, they (18 of 22) took the cash, but having the choice still boosted their performance: as if they received the bottle without a choice. It didn’t matter if workers were informed or not of the price of the thermos bottle. 

• The largest performance enhancement came when the gift was seven euro that was cleverly presented in the form of an origami shirt-person. 

• Quality (accuracy) of typing performance (as opposed to quantity) also improved with the gift treatments, including with the cash gift. Origami cash also had the largest quality improvement, whereas the thermos bottle barely affected quality relative to no gift; cash (sans origami) was marginally better than the bottle on the quality dimension. 

• Is it the thought that counts?

Monday, July 6, 2015

On Varying the Stakes in Ultimatum Games (2011)

Steffen Andersen, Seda Ertaç, Uri Gneezy, Moshe Hoffman, and John A. List, “Stakes Matter in Ultimatum Games.” American Economic Review 101: 3427–3439, December 2011.

• A standard result is that varying the stakes does not lead to much of a change in the outcomes of ultimatum game (and related game) experiments. The ultimatum game is of interest in itself, but also because it seems to hold lessons for any “take-it-or-leave-it” bargaining situation. 

• Andersen et al. (2011) challenge this standard result. In particular, they hope to see if “proposers” offer more “unfair” splits when the stakes are high, and if responders turn down unfair splits, even when the stakes are significant.

• In the reported experiments, conducted in villages in India, the stakes are altered by a factor of 1000. The highest-stake version is on the order of one-year’s income. 

• The ultimatum game that the authors employ is structured in such a way as to nudge proposers into making “unfair” offers. Otherwise, the experimenters suspect that there will not be enough unfair offers to test reliably the willingness of responders to turn down unfair offers at high stakes. (The ultimatum game as it is typically implemented has its own share of nudge issues.) 

• In the experiments, raising the stakes monotonically decreases the average percentage of the pie “offered,” though the absolute monetary amount offered increases. At the highest stakes, there is but one rejection in 24 trials. Nevertheless, at the second-highest level of stakes (about one-month's income), more than one-quarter of the proposals are rejected.

• Is it ethical to go to relatively poor villages and offer some people the potential for one year's or one month's income -- along with the (likely) prospect that some of those selected people will proceed to "lose" that stake, after being nudged towards an "unfair" offer that raises the probability of their receiving nothing? Behavioral economics experiments sometimes challenge the Kantian precept that people are to be treated as ends in themselves, not means to the ends of others.