WS on Hot States and Cold States (IV)

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

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

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Look thou be true; do not give dalliance

Too much the rein. The strongest oaths are straw

To th’ fire i’ th’ blood. Be more abstemious,

Or else goodnight your vow.

(The Tempest, Act 4, Scene 1, lines 56-59, Folger Shakespeare edition)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gilchrist, Luca, and Malhotra (2016) on Salient Workplace Gifts

Duncan S. Gilchrist, Michael Luca, Deepak Malhotra, “When 3 + 1 > 4: Gift Structure and Reciprocity in the Field.” Management Science, published online in Articles in Advance, January 19, 2016 [pdf of earlier version here]. 

• Previous experiments on whether an unexpected gift leads workers to increase their productivity – as a sort of reciprocal response to the gift – generally have not been able to distinguish between whether any productivity boost is due to the additional payment being a “gift,” and just the fact that the worker is being paid more. Perhaps the usual market price establishes a reference point, and any wage above that point is viewed as a gift, even if it is not framed as one. 

• The authors devise a natural field experiment – the subjects do not know that they are taking part in an experiment – to try to disentangle the effect of a higher wage from the effect of a gift. 

• Workers who have indicated interest are recruited for an online data entry position, one that only lasts four hours with no possibility of continued employment. They are offered randomly assigned wages of either $3 per hour, $4 per hour, or, $3 per hour followed by an unexpected bonus of an additional $1 per hour announced after the job has been accepted. Even the $3 per hour wage, incidentally, is a highly competitive wage offer for these workers; about 230 workers are hired. 

• Workers who receive the wage of $3 plus the $1 per hour gift show a 20% higher productivity compared to either the $4 per hour or $3 per hour workers; the productivity boost is maintained throughout the 4-hour length of the work. There is no statistical difference between the productivity of the $3 per hour and the $4 per hour workers. 

• The authors conclude that what matters for productivity is not just how much you pay, but how the payment is framed. Note that the $4 per hour workers and the $3 per hour plus $1 per hour bonus workers receive identical payments, but the workers who receive some of their pay as a gift are more productive.