Loewenstein, John, and Volpp (2013) on Leveraging Behavioral Biases to Help People

George Loewenstein, Leslie John, and Kevin G. Volpp, “Using Decision Errors to Help People Help Themselves.” Chapter 21, pages 361-379, in The Behavioral Foundations of Public Policy, Eldar Shafir, editor, Princeton: Princeton University Press, 2013.

• The oddly named “Theory of the Second Best” indicates that if there are some number n of conditions that must hold for things to be fully optimal (first best), then that is no reason to believe that moving from n-2 of those conditions holding to n-1 of the conditions holding represents an improvement. Perhaps your “first best” is to go to the cinema with your special friend to watch a touching romantic comedy. But if your special friend is not available (or perhaps has found someone new), then going to a romantic comedy might not be an improvement over the status quo of wallowing at home.

• Loewenstein, John, and Volpp apply the notion of the second best to fight behavioral fire with behavioral fire: harnessing departures from rationality to counteract other departures from rationality. Maybe overoptimism can be used to cancel out excessive risk aversion? 

• Asymmetric paternalism is an intervention that helps “irrational” people make better decisions, without imposing in a serious way upon the decisions of rational people. 

• The self-serving fairness bias: what favors me is fair. This bias can prevent the settlement of disputes between two parties. It can be used to promote a settlement, however, because both parties might be willing to trust a “neutral” mediator who can impose a settlement. 

• The stickiness of default options and the attractiveness of lotteries are two biases that can be used to promote weight loss, exercise, medical compliance, public transport use, and charitable contributions. 

• Lottery prizes are good motivators thanks in part to the overweighting of small probabilities. A daily lottery that lets you know if you won or not, but only pays if you were in compliance with the desired behavior on the day you won, also adds anticipated regret into the mix. 

• Some commercial entities (e.g. casinos) have significant pecuniary incentives to appeal to our less-than-rational impulses. But some firms, such as health insurers or employers who gain from our better compliance with medical protocols, have monetary incentives to make our decision making more “rational.” 

• Loewenstein, John, and Volpp note a number of biases that many people seem to display in their decisionmaking. These biases include narrow bracketing; the hot-cold empathy gap; projection bias; and present bias. 

• “Narrow bracketing” occurs when decisions are examined in isolation (perhaps as potential changes from the status quo) rather than holistically. 

• The “hot-cold empathy gap” refers to our inability to predict how we will behave in the “hot” state (perhaps when we are very hungry or angry) when we are examining our behavior while in the “cold” state. 

• “Projection bias” is the idea that people predict that their future preferences will be pretty much the same as their current preferences. But there might be hedonic adaptation, or a change in visceral factors. Projection is one explanation underlying the advice not to go grocery shopping on an empty stomach. 

• People save too little not because the rate of return to savings is too low, but (in part?) because of a “present bias” or an interest in instant gratification. The “Save More Tomorrow” plan allows people to (semi-)commit to savings increases at a later date, and this program has been quite successful in spurring savings.

• Is it distasteful or unethical to take advantage of common decision errors for paternalistic purposes?