Salas-Morellón, Palacios-Huerta, and Call (2021), “Dynamic Inconsistency in Great Apes"

Laura Salas-Morellón, Ignacio Palacios-Huerta, and Josep Call, “Dynamic Inconsistency in Great Apes,” July 2021. 

• People often display impatience when they are making decisions about rewards either right now or (larger rewards) with a slight delay. 

• The impatience is reduced if both the options are delayed, say, by an additional month; hence, there is a possibility for dynamic inconsistency, where people opt to be patient for choices concerning the distant future, but when those same choices become closer to the present, the less patient, immediate gratification choice becomes more attractive. 

• Do bonobos, gorillas, and orangutans – who share some 99% of their DNA with humans – display similar choice patterns? If they do, that suggests that human preferences are not due to human cultural factors, but are rather baked into us by our genetic make-up. 

• The "N" is quite small: 6 orangutans, 5 bonobos, and 4 gorillas. One of the gorillas was left out of the full experiment due to not meeting the pre-test criteria. 

• In the experiments, apes are offered the choice between an immediate reward (fruit) and a three-times-larger reward that is delayed by three minutes. 

• The same choices are again offered to apes, but this time, the “fast” reward arrives after three minutes, and the delayed reward arrives in nine minutes. 

• The apes prefer more to less, if the time delay is the same. 

• The apes prefer sooner to later, if the reward is the same. 

• The apes show more patience for the larger reward when both the options are delayed; that is, like humans, they seem to be subject to dynamic inconsistency in their intertemporal choices. 

• As the small sample-size suggests, the statistical significance of the results is quite limited.

Collard, Walford, Vernon, Itagaki, and Turk (2020) on Endowment, Ownership, and Culture

Philip Collard, Alexandra Walford, Lucy Vernon, Fumihiko Itagaki, and David Turk, “The Relationship Between Endowment and Ownership Effects in Memory Across Cultures.” Consciousness and Cognition 78, February 2020, 102865. 

• One manifestation of endowment effects is that people require more money to part with an owned item (willingness-to-accept, WTA) than they are willing to pay (WTP) to acquire such an item if it is not yet owned – as if the mere fact that you own something raises its value to you. 

• Prospect theory offers one explanation for endowment effects: things you own become part of your reference point, so to “lose” them is particularly painful, thanks to loss aversion. 

• But maybe the endowment effect is not about loss aversion, perhaps it is about your identity being connected to owned items. You have a positive view of your self-worth, so things that become associated with your self become more valuable in your eyes. Ownership of items also has been connected with an increased ability to remember the item down the road. 

• Hmm, but maybe in some cultures people are not so wrapped in self-worth that they raise the value of stuff they own because it is connected to them? Maybe cultures differ, too, in how much ownership of an item increases the ability to recall the item? 

• Experiment 1 (n=32): eight household goods are divided into two equally-valued sets of 4 items each, where those equal values are based upon student valuations collected in a pre-experiment. A participant is told that they own one of the sets but not the other. Then each of the eight items is shown, and the subject indicates how much they would be willing to sell the item for (if they “own” it) and how much they would be willing to pay for it (if they don’t own it). 

• The 32 British undergraduates showed an endowment effect: they were willing to pay on average 9.25 pounds for the unowned set, but would have to be paid 10.65 pounds to part with their “owned” items. But would a similar endowment effect be identified if the experimental subjects were not British but Japanese? 

• For Experiment 2, 61 British undergraduates were recruited, along with 52 Japanese undergraduates. A version of Experiment 1's endowment task was performed, along with new ownership and memory tasks. In the endowment experiment, the Japanese students showed no endowment effects, but once again, the British did. (The endowment task was not identical in the UK and Japan for an unexpected reason: one of the everyday items that made up part of the sets of goods was not available in Japan! "For the Japanese participants, the spatula was replaced with a ladle as the former item was not available locally [p. 4].") 

• As for remembering the items, the British subjects were much better for the items they “owned” than for ones they did not own, but the Japanese showed no difference in recall based upon ownership. Further, British subjects (but not the Japanese) showed a positive correlation between their endowment effects and the impact of ownership on their recall. 

 • Maybe these (British) endowment effects are not about loss aversion, but rather about connections to self?

O'Rourke Stuart, Windschitl, Miller, et al. (2022) on Ambiguity in a Treatment-Seeking Context

Jillian O'Rourke Stuart, Paul D. Windschitl, Jane E. Miller, et al., “Attributions for Ambiguity in a Treatment-Decision Context Can Create Ambiguity Aversion or Seeking.” Journal of Behavioral Decision Making 35(1): e22249, January 2022, available here. 

• You have a nasty skin rash and need one of two treatments: either one with a 75% chance of working or one (the ambiguous one) with somewhere between a 60% and 90% chance of working. Which do you prefer? 

• Some prior work shows that people tend to be ambiguity seeking with respect to medical treatments – they would prefer the 60-to-90% option! But perhaps the reason underlying the fact that the probability of success is uncertain affects how people feel about the ambiguous treatment? 

• Study 1 concerns two alternative reasons for ambiguity in a treatment. In one condition, the range of probabilities is attributed to different outcomes from different research studies; in the alternative condition, the ambiguity is said to arise from the medicine coming from two otherwise identical production batches, one of which has a lower probability of working than the other. 

• The subjects are a combination of Amazon Mturk participants and university students, with an overall n of 492. 

• Both conditions, that is, both explanations for the ambiguity present in one of the health treatments, give rise to some ambiguity aversion – not ambiguity seeking, as some previous literature had suggested to be exhibited in the health domain. In both conditions, nearly two-thirds of participants prefer the unambiguous option. Further, on average, participants indicated that their beliefs about the likelihood of a treatment working were lower for the ambiguous treatment than for the unambiguous treatment. 

• A second study was performed utilizing university students, with n=271. This study replicated study 1, except the ambiguity condition that previously had been attributed to varying results from research studies now was attributed to variations in the overall health status of the patients. (The alternative ambiguity explanation, concerning different production batches, remained the same.) The idea is that people might tend to have optimistic views of their health status, and further, they have some locus of control over their physical condition. Previous literature suggests that these features might induce a preference for ambiguity. 

• When the ambiguity was tied to one's overall health status, ambiguity aversion (on average) disappeared. Further, people who rated their health highly were likely to take the ambiguous option when it was tied to overall health. 

• A third study (Mturk, n=242) looked more at self-focused attributions for ambiguity, beyond overall health. Now the ambiguity was tied either to: (1) how regularly you apply the medicinal cream; or (2) the strength of your immune system; or (3) your genetic makeup. A fourth condition brought back the "different results from different research studies" explanation of study 1. 

• Study 3 also tried out two different conditions for the underlying probability of success, one centered on 75% and one centered on 25%. 

• Attributions 1 – application regularity – and 2 – immune system strength – led to rather massive ambiguity seeking! [The other ambiguity explanations led to ambiguity neutrality.] People indicate (in attributions 1 and 2) that they were optimistic about the resolution of the ambiguity. Indeed, folks seem excessively optimistic about the relative power of their immune systems.

White and Perfors (2022) on Ambiguity Aversion in Vignettes

Joshua P. White and Andrew Perfors, “Ambiguity Aversion in Qualitative Contexts: The Role of Prior Beliefs,” May 22, 2022; available here.

• The idea is to test for ambiguity aversion in more-or-less familiar risky situations that are not about money, such as blind dates or election outcomes. Further, the issue of whether ambiguity aversion arises from people holding pessimistic beliefs about the actual odds facing them in ambiguous situations is explored.

• The three lab experiments employ Amazon Mechanical Turk (overall n>2000) and the analysis is pre-registered, including the data exclusion criteria.

• The 24 vignettes: Would you rather be in the risky situation or the ambiguous situation? Half of the vignettes concern potential gains (e.g., new job) and half concern potential losses (e.g., losing a job). 

• The results: ambiguity aversion is typically present on average in both the gain and loss framings; ambiguity aversion is greater, however, in the gain scenarios, and the amount of aversion varies quite a bit across scenarios. 

• The scenario that tracked an Ellsberg urn problem showed (easily) the highest ambiguity aversion. 

• For some individuals, the aversion to ambiguity seems to derive from pessimistic feelings about how ambiguity would be resolved. (The Ellsberg-style urn vignette – which involved a casino! – is particularly likely to be affected by pessimism.) But there remains a good deal of ambiguity aversion that does not derive from pessimistic beliefs (nor from "comparative ignorance," the concern that a decision maker is up against better informed folks – such as casino owners, perhaps?).

Berman, Ariely, Gosnell, et al. (2020), “Reframing the Loneliness Epidemic”

Kristen Berman, Dan Ariely, Evelyn Gosnell, et al., “Reframing the Loneliness Epidemic.” Pages 123-131 in The Behavioral Economics Guide 2020, edited by Alain Samson. 

• Loneliness involves a dearth of satisfying relationships 

• Some 20% of Americans report not having any close friends 

• Loneliness undermines subjective well-being and health – and there is no widely available, effective “treatment” 

• Nearly half of loneliness can be traced to one’s genes 

• People tend to get lonelier as they age 

• Women, on average, are lonelier than men 

• Unemployment and retirement both increase loneliness 

• Loneliness can be a sort of self-fulfilling trap 

• How to deal with the loneliness epidemic? Reframing!: instead of treating loneliness, perhaps we can prevent it. In particular, can we nudge friendship? 

• An old study found that a 45-minute meaningful conversation made people feel as close with their (previously unknown) conversation partner as they felt in their more established relationships. 

• But people are risk averse, and (perhaps) they shy away from conversations that could result in rejection. 

• One approach is to change the default, to make deep conversation the expected behavior.

• Experiment 1: A Conference Networking Study. At the beginning of a conference for finance sector workers, Conversation Cards were distributed that contained probing questions participants would answer in conversing with each other. Other conditions included a "just network as usual" command and an "avoid small talk" suggestion. 

• The subjects responded well to the Conversation Cards – but they still weren’t all that interested in following up to build friendships. (The "avoid small talk" folks were sort of frustrated, at a bit of a loss to break the ice.)

• Experiment 2: Nudging Deep Conversation in a Social Setting (Friday night happy hours)  

• The conditions were (1) conversation about the future v. (2) conversation about the past v. (3) an ice-breaker activity with no conversational guidance 

 • The conversational prompts both worked! More talking sessions, and more desire to build the connections... 

• Should we rethink social architecture to encourage deep conversations, without exposing people to large social risks? (And do the conversations really have to be deep?) 

• You can acquire the Conversation Cards at the cost of production and transfer (see p. 129).

Blanchflower (2020) on Unhappiness and Age

David G. Blanchflower, “Unhappiness and Age.” Journal of Economic Behavior and Organization 176: 461–488, 2020. 

 • We “know” that happiness tends to hit a nadir around the age of 50 – but do unhappiness and related conditions such as stress and loneliness and pain reach a peak at about that time, too? 

• This article looks at tons of data (total "N" almost 14 million) from many, many nations, for the most part drawn from the third millennium CE. 

• The conclusion is stark: unhappiness and related measures tend to peak for people in their late 40s or so, mirroring pretty closely the results for happiness measures. 

• There are a host of analytical issues involving, for instance, the precise measure of reported “unhappiness” and the selection of control variables for regression analysis. Nonetheless, the main finding of a peak of unhappiness in midlife is quite robust to how these issues are handled, even across countries. 

• The impact of some life events is symmetric with happiness and unhappiness: unemployment decreases happiness and raises unhappiness; higher incomes increase happiness and lower unhappiness. 

• Oddly(?), being of male gender seems to decrease unhappiness and to decrease happiness. 

• There’s a lot of variance in unhappiness between countries. Ireland in 2014 reported a 12.1% rate of adult depression, while in Poland, it was 4.2%. But in both countries, the rate of depression was highest for 55-64 year olds. 

• Americans are outliers with respect to the amount of pain reported; in 2018, one-quarter of Americans report having suffered pain on the previous day, and prescription painkiller use is common. 

• Suicide rates tend to show a peak in middle-age, but then they eventually begin to rise again at older ages. 

• In the US in 2018, almost 10% of people say that their mental health was not good for at least 20 of the past 30 days. 

• There’s even a midlife peak in the belief that the country as a whole is getting worse. 

• The increase in unhappiness associated with midlife is on a similar scale to what happens with bad events, such as becoming unemployed or losing a spouse.

Twenge and Cooper (2022) on the Happiness Class Divide

Jean M. Twenge and A. Bell Cooper, “The Expanding Class Divide in Happiness in the United States, 1972–2016.” Emotion 22(4): 701–713, 2022. 

• Signs of a growing class divide in the US include the data on income inequality, “deaths of despair,” and the rising mortality rate for non-college educated white Americans. 

• Has it become more true in the US that money and prestige buy happiness? Twenge and Cooper attempt to answer this question. 

• The data: the General Social Survey (GSS), 1972-2016, adults age 30 and above, n≈44,000. 

• “Class” here is of the socio-economic variety (SES), and is measured by income, education, and “occupational prestige” 

• The GSS happiness question: ‘Taken all together, how would you say things are these days—would you say that you are very happy, pretty happy, or not too happy?’ 

• Income, education, and occupational prestige all contribute considerably to happiness – and for income, the effect does not taper off as income rises. 

• The connection between SES and happiness has increased markedly between 1972 and 2016 – though some of this increase can be traced to increasing marital differences between SES classes. 

• The larger happiness gap between SES groups is, for white people, caused by diminishing happiness for those in the lower classes, while the upper-class folks almost held their own in terms of happiness. 

• For Black people, lower-SES people showed a small decline in happiness between 1972-2016, but high-SES people saw a significant increase in happiness. 

• Has class become more salient as income inequality increases?

Helliwell, Huang, and Wang (2020), “Happiness and the Quality of Government"

John F. Helliwell, Haifang Huang, and Shun Wang, “Happiness and the Quality of Government.” NBER Working Paper 26840, March 2020 [pdf here]. 

• Happiness studies have become pretty standard parts of social science and governance in the last two decades. Helliwell, Huang, and Wang look at cross-country evidence concerning happiness and government quality; 150+ countries, 2005-2017, n≈1,500.  

• One common measure of subjective well-being is the Cantril ladder, where respondents are asked to imagine a ladder with eleven numbered levels, from zero on the bottom (worst possible life for the respondent) to ten on the top (best possible life for the respondent). 

• Life satisfaction (as measured, for instance, by the Cantril ladder) varies much more on a cross-country basis than do hedonic measures of happiness – and the long-run connection between public policy and life satisfaction seems more solid than the policy-emotions link. “Good government may or may not make you feel happy, but does… make you happier with your life as a whole [p. 5].” 

• Some empirical results: the quality of delivery of government services contributes to life satisfaction; the extent of democracy does not, though the quality of democracy is fairly highly correlated with life satisfaction. 

• Further, per-capita income is positively connected with life satisfaction; confidence in the government is closely connected to delivery quality, and significantly raises life satisfaction. 

• In cross-country comparisons, health care spending seems to be associated with higher life satisfaction, while military spending is associated with lower life satisfaction. 

• Conflict is bad for life satisfaction, though some of the connection arises from the harm that conflict imposes on per-capita income. 

• Well-being inequality reduces average life satisfaction; raising well-being for those with the least does not have to come at the expense of the well-being of everyone else.

Leitzel (2021) on Regulating Cocaine

Jim Leitzel, “Double Defaults: Behavioral Regulation of Cocaine.” Journal of Behavioral Economics for Policy 5(1): 7-12, 2021 [pdf here]. 

• Can we protect against the dangers of excessive or highly risky cocaine use without imposing the huge costs that accompany cocaine prohibition? 

• Yes, we can! We can offer some protection against diseased or impulsive decision-making, without posing a large barrier to “rational” cocaine use. 

• We can manage the supply side like alcohol, perhaps, or prescription drugs, but… we also can “nudge” people towards rational cocaine-related behavior. 

• We can take advantage of the surprising power of default options. 

• The First Default: You are Not Eligible to Purchase Cocaine. 

• If you are of age, you can choose to override this default of ineligibility.

• Pass a test, pay a fee, acquire a cocaine buyer’s license; behave well or you will lose your cocaine buyer’s license!

• The Second Default(s): You Can Only Purchase Cocaine in Moderate Doses.

• Prices, Quantities, Waiting Periods – the default settings on all of these are aimed at enforcing modest consumption. The waiting period involves ordering your cocaine purchases in advance, by three days, say. 

• At some cost (time, money), you can override these default terms for more liberal access to cocaine (if you have a record of unproblematic cocaine-related behavior); alternatively, you can opt-in to more stringent rules, at low cost or even some subsidization. Want to only be allowed to purchase cocaine on weekends? – great, you can impose this restriction, and the suppliers will enforce it.  Want to have a cocaine-free February? Great, you can put in a no-purchases-during-February rule, and the sellers will enforce it.

Graham and MacLennan (2020) on Well-Being

Carol Graham and Sara MacLennan, “Policy Insights from the New Science of Well-Being.” Behavioral Science & Policy 6(1): 1–20, 2020; available for download here. 

• Advice for job-seekers! Inquire about autonomy, meaningful work, and a respectful atmosphere -- these will affect your well-being at work. 

• Economic growth can be accompanied by declining happiness (or declining subjective well-being (SWB)). 

• Three types of happiness measures: (1) Hedonic (or affective, or experienced); (2) Evaluative (life satisfaction); (3) Eudaimonic (meaning and purpose). These measures are far from perfectly correlated; people seem to think that evaluative measures (overall life satisfaction) are most important. 

• Four common findings: (1) Relative position matters; (2) Reference points matter; (3) Adaptation occurs, for both favorable and unfavorable events; and, (4) People can mispredict how their choices will affect their happiness, and actual choices might not reveal preferences (as measured by SWB). 

• Some additional common findings include: (4) Income is positively connected with happiness; (5) Income increases are subject to hedonic adaptation; and (6) With respect to age, happiness appears to be u-shaped. 

• SWB provides indirect evidence on the value of activities or possessions. 

• For instance, we don’t need to ask, how happy does smoking make you; nor do we just infer from your heavy smoking that it greatly contributes to your well-being. Rather, we can ask you in general how happy you are, and then learn about your activities, and see (across large numbers of people) if smoking is associated with increased happiness. 

• Maybe policy should aim to help the least happy people? 

• People in objectively poor circumstances might still have a lot of hedonic happiness – have they adapted, or lowered their expectations? 

• Beware of making happiness an official policy goal!? -- people will distrust the government's motives as well as the reliability of the data. 

• Much of your happiness is inherited. 

• Noise and commuting are hard to adapt to. 

• In health studies, SWB can be a supplement to QALYs. 

• Mental health becomes a priority when SWB is emphasized.

Folkvord, Codagnone, Bogliacino, et al. (2019) on Online Gambling

Frans Folkvord, Cristiano Codagnone, Francesco Bogliacino, et al., “Experimental Evidence on Measures to Protect Consumers of Online Gambling Services.” Journal of Behavioral Economics for Policy 3(1): 20-29, 2019 [pdf here]. 

• Internet gambling might be particularly likely to induce problematic play. 

• The outcome variables tracked in both a laboratory (n=522) and an online (n=5997) experiment are the average amount bet, the time between plays, and the likelihood of ending a gambling session when given the opportunity. 

• In the first stage of the laboratory experiment, gamblers receive one of four interventions: a pop-up warning with a picture about gambling addiction; the warning without a picture; a task to reveal overconfidence; and a picture of a logo of a gambling treatment service. A control group skips those pre-play interventions. 

• None of the first-stage (pre-play) interventions reduce the extent or speed of play, though two of the interventions seem to speed up play! 

• The second stage of the laboratory experiment and the online experiment expand the number of treatments, including the possibility to set monetary limits and using pop-up messages requiring an action to continue gambling. 

• Most of the interventions have no effects. Monetary limits and the warnings that require a response reduce average bet amounts and slow down the rate of play. Registration forms incentivize people to quit.

Bittschi, Dwenger, and Rincke (2020) on Nudging Donor Loyalty

Benjamin Bittschi, Nadja Dwenger, Johannes Rincke, “Water the Flowers You Want to Grow? Evidence on Private Recognition and Donor Loyalty.” CESifo Working Paper No. 8424, July 2020. 

• Nonprofit organizations often are heavily reliant on recurring donors; most studies of how to nudge contributions look at one-time, not recurring, donations. 

• Can a nice “thank you” message enhance donor “warm glow,” and motivate donors to continue their support? 

• Germany has a church tax, where church members are assessed a surcharge of 8 percent on their income taxes to finance the church. (In the sample in this article, the amount of the tax averages 478 euro per year, but with significant variance.) 

• The connection to the personal income tax makes the church tax progressive – like the fee structure for American Economic Association members? – and low-income church members pay no church tax.

• The church tax, which is automatically deducted from paychecks, is a default for anyone who is baptized, though individuals can opt out of paying it! Opting out requires “an official declaration made in person at a district court [p. 5].” People who opt out cannot enjoy the full panoply of church-provided services. 

• The authors conduct a large-scale field experiment, n≈198,000, circa 2015. Half the sample receive a letter thanking them for their church tax payments and are told that they are making “an important contribution to our community.” This is termed “a private recognition treatment.” (A postal survey of n≈1,000 provides another source of data.)

• The issue examined is how the receipt of the letter affects opt-out rates in the coming 12 months. 

• The survey suggests that people who receive the thank-you note hold higher opinions of the church and feel more appreciated. (Receipt of the letter does not make people feel better about the government.)

• The thank-you note seemingly does reduce opt-outs over the course of the year, perhaps by as much as 9% -- the “extra” church taxes collected exceed the costs of mailing the letters! The letter seems particularly effective at keeping low-income church members involved. 

• The highest-income people increase their opt-outs, however, immediately after receiving the letter, though over the course of the year, the receipt of the letter doesn’t seem to change opt-out rates of the wealthy.

• The century-plus imposition of church taxes collected by the German state might be doomed, letter or no letter, as people quit church to avoid the tax.

Holz, List, Zentner, Cardoza, and Zentner (2020) on Nudging Tax Compliance

Justin E. Holz, John A. List, Alejandro Zentner, Marvin Cardoza, and Joaquin Zentner, “The $100 Million Nudge: Increasing Tax Compliance of Businesses and the Self-Employed Using a Natural Field Experiment.” NBER Working Paper 27666, August 2020 (pdf here). 

• The tax authorities send you a message… 

• ...maybe the message just happens to mention the upcoming tax filing deadline: the control arm 

• ...maybe the message also notes the potential for your tax evasion to be publicized – one treatment arm, designed to increase the salience of social penalties for being a tax cheat. 

• ...maybe, instead of highlighting the public nature of identified tax evasion, the message notes the potential for your tax evasion to result in imprisonment – another treatment arm, designed to increase the salience of criminal penalties attached to tax evasion. 

• And for each of the three arms noted above, we can take half of the letter recipients and also mention in the letter that the tax authorities are prepared to potentially view mistakes in tax declarations, even honest mistakes, as intentional. (The notion is to frame evasion as a sin of commission, not of omission.) Mistakes imply that you were trying to be a tax cheat! 

• This very natural field experiment is conducted in the Dominican Republic, circa 2019, n≈56,000 firms and n≈28,000 self-employed people; tax evasion reportedly is rife in the Dominican Republic. 

• The field experiment applies to business entities subject to the corporate income tax and to self-employed taxpayers subject to the individual income tax. 

• The various messages are sent shortly before the tax filing deadline. 

• The threat of public disclosure of tax evasion dissuades tax evasion for both firms and individuals. 

• The “prison” message also reduces evasion, and for firms, about twice as effectively as the “publicity” message. 

• Framing evasion as an active choice, a sin of commission, in itself (without publicity or punishment prompts), does nothing (or worse than nothing), and likewise is ineffective if it is paired with the publicity notice. 

• But the combination of “intentional” framing with the prison message doubles the impact of the prison message. 

• The effectiveness of the interventions seems to arise from a decrease (by 20%) in potential taxpayers who declare (falsely, presumably) that their income is below the minimum required for taxation. 

• Large firms drive the reduced tax evasion – there is little or no compliance gain from the smallest 60% of taxpayers.

Goldin and Reck (2018) on Normative Ambiguity

Jacob Goldin and Daniel Reck, “Rationalizations and Mistakes: Optimal Policy with Normative Ambiguity.” American Economic Association Papers and Proceedings 108: 98–102, 2018. 

• Choices often look like they involve frictions, such as a psychic cost associated with considering more options. 

• But though choices look “as if” they are affected by such costs, are the costs themselves “real,” or, to use the authors’ term, “normative”? 

• If the costs are normative, then (all else equal) you want to avoid them, such costs detract from welfare. But if the costs are not normative (that is, if they are “behavioral” in the authors’ terminology) then it would promote welfare to ignore those costs, to willingly incur them by, say, considering more options or requiring active choices – as the costs are not real, no one will end up bearing those costs. 

• Initial health care choices have a tendency to become defaults, and hence have some (undeserved?) staying power. 

• But perhaps it is optimal to stick with even clearly dominated health care plans, because the costs of switching or of just to paying attention to more options are normative and significant. 

• That is, do we really want to encourage people to switch health care plans to ones that are better suited to their health care needs and preferences, given the potential for normative switching costs? 

• Costs of trying to qualify for the Earned Income Tax Credit (EITC): the need to file taxes; record-keeping; mental exertion and attention; increased risk of being audited. 

• Note that most of the costs of establishing EITC eligibility take place in the present, with the benefits delayed. Present biased people will find this temporal distribution of costs and benefits to be unattractive. Should we encourage EITC take-up among present-biased people? 

• Other “mistakes” (or behavioral features) that dissuade applying for the EITC could be procrastination or inattention. 

• Moving to a new residence is costly both financially and otherwise, and again, the costs often are immediate whereas the benefits are delayed. Do people move enough, or do the “not real” but behavioral costs discourage beneficial relocations? Public programs that promote moving will be less valuable to the extent that these costs are normative.

Sunstein (2020), “Behavioral Welfare Economics"

Cass R. Sunstein, “Behavioral Welfare Economics.” Journal of Benefit-Cost Analysis 11(2):196–220, 2020. 

• Economist Douglas Bernheim (2016) lists three premises when discussing individual welfare: (1) a person is the best judge of her wellbeing; (2) judgments are governed by our coherent, stable preferences; and, (3) preferences are what guides our choices. 

• None of these premises is self-evident; indeed, they might all be incorrect. 

• If people lack stable, consistent preferences, or if their choices are skewed by bias, how can we judge how well off they are, how good a job they are doing at serving their own interests? Further, their preferences might be shaped by rules and laws, so crafting rules to promote current interests might be a mistaken (or arbitrary) approach. 

• Behavioral science makes us suspicious of consumer sovereignty, or the claim that people are the preferred judges of their own situation, best positioned to make desirable self-regarding choices. 

• The behavioral evidence rightly undermines our unquestioned respect for consumer sovereignty, but we should be loath to turn it into general disrespect. It might make sense to start with deference to consumer sovereignty, but be willing to look to alternatives if evidence suggests welfare might otherwise be compromised. [Respecting consumer sovereignty as a default...!] 

• A standard description of rationality is that it consists of taking optimal (or, less stringently, reasonable) means of achieving your goals. 

• Nudges or other interventions that are designed to make choices more navigable, to make it easier for people to achieve their goals, are paternalistic with respect to means. 

• Economists generally are not in the business of questioning people’s goals, the ends they have in mind – but Professor Sunstein suggests that there can be strong evidence, in some settings, that (self-regarding) ends should be questioned: “The ends that people choose might make their lives go less well [p. 196].” 

• So, Sunstein starts from a position of alignment with Bernheim, where individual self-regarding choices are respected – but only if those choices are informed and free from behavioral biases. Further, Sunstein will not make a means/ends distinction: the ends could be problematic, just like the means can be. Nonetheless, “means” issues are generally what Behavioral Economics takes on. Tread carefully with “ends” stuff. 

• Bernheim thinks outsiders essentially lack standing to coerce the “direct” choices of others; the outsiders’ preferences are mere opinions and only one opinion, that of the individual involved, counts. Sunstein disagrees. [Benheim refers to choices that matter in themselves as "direct," whereas choices that only matter instrumentally in serving some larger purpose are "indirect."]

• People might be bad at forecasting the welfare they will receive from a choice, and prospective and experienced welfare needn’t match. (We might add retrospective welfare into the confusing mix, too.) 

• The three main contenders for what identifies “welfare” are: (1) preferences; (2) Subjective Well-Being; and (3) (the obtainment of) specified "objective" goods. All of these approaches to welfare are inadequate. 

• There are many circumstances in which people’s choices are wrong, with serious welfare consequences. And what is a direct choice? Perhaps “direct” issues only come in such high levels of abstraction – enjoy a good life – that choice architects in practice are unconstrained by respect for such issues. 

• Given the increased scope for intervention provided by behavioral considerations, how can they be held within reasonable bounds? Guideposts we can use for increasing our respect for individual choices are that the choices be informed, active, free of biases, and the product of a broad perspective.

Beine, Charness, Dupuy, and Joxhe (2020) on Earthquakes and Preferences

Michel Beine, Gary Charness, Arnaud Dupuy, and Majlinda Joxhe, “Shaking Things Up: On the Stability of Risk and Time Preferences.” IZA Discussion Paper No. 13084, March 2020. 

• It seems as if most economists believe that an individual’s risk and time preferences are pretty stable. 

• Patient people and the risk averse would seem to be less likely to migrate, and some empirical evidence supports this view. 

• Albanian per-capita GDP of just over $4000 per year is 30% of the EU average, despite recent high growth in Albania 

• The researchers converge on Tirana, where the currency is the Albanian lek, worth a bit less than one cent. Participants on average get about 12 dollars for a 20-minute or so interview, more than a day’s pay. 

• The 9 enumerators conducting the interactions speak Albanian. Geolocation data for the interviews is automatically collected, with n≈1500. 

• The first choice, aimed at gauging risk preferences: you have 100 coins, each worth 10 lek. You can put some of them in a bag. With probability .5, you will get triple what you put in; with probability .5, you will get nothing. How many coins will you put in the bag? (You keep the coins that you choose not to put in the bag). 

• For time preferences, the question concerns whether you would rather have 1000 lek today or some larger amount of money one month from today. The goal is to see how much more people will have to be paid to induce them to wait one month for their money. 

• The study started on August 31, 2019, and lasted through the end of the year. But on September 21 and November 26, 2019, two major earthquakes hit Tirana. 

• The control group in this (re-imagined post-quake) study is those people whose preferences were tested prior to the first earthquake. The two treatment groups are (1) those who experienced one earthquake, and (2) those who experienced two earthquakes, prior to their testing. 

• “the first earthquake reduces the amount invested in a risky asset (versus a safe asset) by about 25%, while the second one leads to an additional similar effect [p. 3].” Why the big change after the second one, when earthquakes have lost the element of surprise? And why should any changes in risk aversion be reflected in incentivized laboratory games with fixed probabilities? 

• Migration intentions share no connections with risk preferences among the study population, until after the second quake. (But pre-earthquake, already 70% of Albanians intend to migrate.) More exposure to the quakes makes more risk averse people more likely to migrate. More patience also means a lower intention to emigrate. 

• Before the first earthquake, about 42 coins are invested on average in the risk preferences situation: 144 people invest zero, 102 invest all 100 coins. (Aren’t there anti-gambling laws in Albania?) The number of coins risked falls from 42 to 34 to 23 with the earthquakes. 

• Would you take 2590 lek one month from now instead of 1000 lek today? Almost half of the participants would take the immediate 1000 lek. Patience (limited as it is) is cut in half with the first quake, and almost halved again with second. 

• Being exposed to heavier shaking (the geo data proxy for exposure) seems to be connected with a bigger change in risk and time preferences. 

• The earthquakes affect migration intentions indirectly, through their influence on risk and time preferences: the earthquakes mean that the now more risk averse people become willing to emigrate. More impatient people also are more interested in emigration.

Smitizsky, Liu, and Gneezy (2021) on Endowment Effects

Gal Smitizsky, Wendy Liu, and Uri Gneezy, “The Endowment Effect: Loss Aversion or a Buy-Sell Discrepancy?.” Journal of Experimental Psychology: General 150(9): 1890–1900, 2021; https://doi.org/10.1037/xge0000880. 

• The endowment effect, loosely: you value stuff more when you own it than when you don’t. 

• A standard way to “identify” endowment effects is to document a notable difference between the amount someone is willing-to-pay (WTP) to acquire an item and the amount that, if they already have the item, they would need to be paid to relinquish it (willingness-to-accept, WTA). 

• A WTA that is substantially higher than the WTP is evidence for an endowment effect. 

• A prospect theory-style explanation for endowment effects invokes loss aversion. Your reference point changes to include stuff you own, so to depart with owned stuff is coded in the loss domain. 

• An alternative explanation for WTA/WTP gaps is that people bring their buying and selling selves into the lab with them. Strategically, in the real world it often makes sense for buyers to understate their WTP and sellers to overstate their WTA, and maybe those strategies survive in the lab, despite efforts to incentivize truthful responses. 

• The authors invent the “Pay to Keep” condition. [Though for a parallel, see the “retention paradigm” of Gal and Rucker (2018).] There is no selling, only keeping, in this condition. If the amount you are willing-to-pay to keep (PTK) is similar to WTP (and hence typically less than WTA), the “endowment effect” can’t be due to loss aversion: unlike with WTP, the PTK condition involves a loss of something “owned,” but PTK is still below WTA. Any discrepancies (between PTK and WTA, and between WTP and WTA), then, might be consistent with subjects adopting buyer/seller roles. 

• In testing the role of Pay to Keep, those who are offered the opportunity to pay to keep their item must believe that they already “own” the item, that it is part of their endowment. 

• So, the experiments involve three conditions: WTP, WTA, and PTK. Subjects find a nice college-branded pen at their station when they enter the lab. 

• In the WTA and PTK conditions, subjects are told that the pen is theirs, and they should use it to complete some boring task. In the WTP condition, the pen is just near the subject and they are told “no touchies;” they complete the boring task with a pencil instead. 

• After the boring task, WTP folks are asked, want to buy the cool pen (and how much will you pay)? 

• WTA folks are told they could sell their pen (how much would they need to be paid?) or just take it home. 

• PTK folks are told, sadly, pay for the pen or lose it. How much are you willing to pony up? 

• In the experiments, WTP and PTK are similar on average, and much less than WTA. 

• So, there’s an endowment effect (WTA-WTP gap as well as WTA-PTK gap) – but no evidence for loss aversion, as the PTK folks think (?) that the pen is theirs, part of their endowment, even though they have to pay to keep it. 

 • People are not more interested in keeping the pen than in buying the pen: the valuation gaps can be due to buyer/seller discrepancies, though not to loss aversion.

Golman, Gurney, and Loewenstein (2020) on Information Gaps

Russell Golman, Nikolos Gurney, and George Loewenstein, “Information Gaps for Risk and Ambiguity.” Psychological Review 128(1): 86–103, 2021; http://dx.doi.org/10.1037/rev0000252 

• The authors argue that risk and ambiguity aversion arise from the desire to avoid unpleasant thinking about unanswered questions. (Risk and ambiguity loving, alternatively, is associated with the prospect of being spurred to think about pleasant matters.) 

• If you have a question with an unknown answer, you have an information gap. The attention that this gap attracts from you depends on salience (contextual factors which highlight the gap) and importance. 

• Gambling raises the importance of certain information gaps – which team will win? – and hence, directs our attention towards them. We therefore like to gamble when we welcome the increased attention, and are dissuaded from gambling on topics we don’t like to think about. 

• A key information gap concerns uncertain outcomes. Risk aversion (even with minimal stakes) can arise from our desire to avoid thinking about the uncertainty. Compound lotteries, er, compound the uncertainty, and the aversion. 

• The previous two bullet points offer new explanations for (1) betting on your favorite team and (2) low-stakes risk aversion. (A risk averse person presumably would want to bet against their favorite team, as a way of buying insurance against the bad outcome that arises if the preferred team loses.) 

• When shown risky prospects one-at-a-time, people seem to respond similarly to more and less ambiguous situations. When there is a choice between prospects, however, ambiguity aversion emerges. The comparison among alternatives presumably makes the information gaps (not knowing the precise probabilities) more salient. 

• People with relevant expertise enjoy ambiguity, as in racetrack betting. But those who feel uninformed find the ambiguity unsettling. 

• Study 1: Pittsburgh Pirates fans choose how much to bet on either their team’s hits or the number of strikeouts suffered by batters on their team. These bets involve no ambiguity – once the fans choose a bet size, their probability of being assigned the “winning” side of the bet is .5. Nevertheless, the fans bet more when hits are the relevant subject. Presumably they do not enjoy having to think about the strikeouts that the players on their team will suffer. 

• Study 2: Carnegie Mellon University alumni are given the opportunity to bet on the future relative rankings of two excellent CMU computer science departments – or on the relative future prospects of two not-so-good natural science departments. In this case, objective probabilities are not known, there is ambiguity in the prospects. The alumni display aversion to the ambiguity; however, they show a lot less aversion to that ambiguity when betting on the great departments. It seems that thinking about the future success of CMU star departments is a happy thought that they, to some extent, welcome.

Berger and Bosetti (2020) on Ambiguity Attitudes of Policymakers

Loïc Berger and Valentina Bosetti, “Are Policymakers Ambiguity Averse?” The Economic Journal 130(626): 331-355, February 2020 [gated copy here, ungated preliminary pdf here.] 

• Climate change is one policy area mired in ambiguity, where the relevant probabilities of outcomes are not known with precision. Berger and Bosetti travel to the 21st session of the Conference of the Parties to the United Nations Framework Convention on Climate Change to examine the ambiguity preferences of policymakers working on climate change.

• Berger and Bosetti end up collecting data from 80 policymakers at the Climate Change Conference, and reinforce this data via a laboratory experiment involving 189 university students.

• The main finding is that most of the subjects are ambiguity averse, and that policy makers and students show similar ambiguity preferences (when controlling for policymaker country of origin and quantitative expertise). About 15% of policymakers show ambiguity-loving behavior, along with 9% of the students.

• Less than 20% of both samples choose in a manner consistent with expected utility maximization, which requires ambiguity neutrality. 

• The main experiments involve choices among subsets of four urns with different colored balls; there are monetary incentives for getting the "right" color when a ball is chosen.

• Urn 1 contains 50 red balls and 50 black balls. Urn 4 contains 100 balls, but it is unknown how many are red and how many are black. 

• The comparison between Urn 1 and Urn 4 is another (two-color) version of the Ellsberg game. The decisions are to pick a winning color and to pick an Urn; then, a ball will be picked at random from your chosen urn.

• As noted, most people prefer Urn 1 to Urn 4: they are ambiguity averse. About one-quarter of policymakers and one-fifth of students find Urns 1 and 4 to be equivalent: they are ambiguity neutral.

• The researchers also compare Urn 1 with each (separately) of two other urns. Urn 2 (compound risk) starts with a coin flip that determines whether all 100 balls are red are all 100 are black. Urn 3 (model uncertainty) is where the number of balls is unknown, but one urnish expert swears that they are all red while another expert maintains that they are all black.

• Most subjects (especially students) treat Urn 2 like Urn 1, while that is not the case with Urn 3: model uncertainty is aversive.

• Conference delegates from OECD countries show similar ambiguity aversion as those from non-OECD countries; nor does the degree of quantitative sophistication affect policymaker ambiguity preferences.

• More stringent climate control policies might make sense given widespread aversion to ambiguity, if such policies are able to reduce ambiguity.

Azar (2020) on “The Economics of Tipping”

Ofer H. Azar, “The Economics of Tipping.” Journal of Economic Perspectives 34(2): 215-236, Spring 2020.

• Many features of tips make them hard to explain as a result of standard rational behavior.

• Tips are directly costly to those who give tips, but they are not mandatory – nor are tip practices identical around the world. 

• The US has a reputation as a country where tipping takes on a rather prominent role. 

• Some activities are tipped, but seemingly similar other activities might not be tipped.

• The practice of tipping as a percentage of the bill seems somewhat strange. And the typical percentage seems to creep up over time.

• Tips can be “rationalized” based on the potential for future interactions – but they occur in contexts (cabs, travel) in which such potential is minimal. And tipping does not take place in some repeated service situations, such as laundromats.

• Another attempted rationalization might be that tips occur in situations where the low-cost monitoring of employee behavior is provided by customers. But again, tip behavior does not seem to track this rationale very closely. (And when monitoring is difficult, it might be easy for employees to behave in a manner that will increase their tips but at the employer’s expense.)

• Maybe customers are willing to pay for their feeling of control?

• The not-uncommon claim by tippers of warm-glow from providing extra compensation to low-paid workers – is this a case of cognitive dissonance?

• Does tipping create price illusion that makes goods seem cheaper than they are? If so, then businesses that switch from tips to “equivalent” service charges or service-inclusive prices will be harmed.

• People often cite their tipping behavior as meeting a social norm. But it is a strange social norm: is it consistent with efficiency? Are there limits on how inefficient social norms can be before they cease being norms?

• Various nudges promote tips, including suggested tip levels or prominent tip jars.

• Sometimes tipping seems to be a sort of bad equilibrium: many people do not like tipping, but tip (or receive tips) anyway.

• “an explanation for tipping based on rational forward-looking consumers is not supported by the evidence. Instead, tipping is better explained as a result of psychological and social motivations of consumers who obey a social norm [p. 216].”

• [Incidentally, the pandemic surely has altered tipping behavior. In the US, for instance, tipping for take-away food has become common, when before Covid it was not a standard practice.]