Sebastian Bobadilla-Suarez, Cass R. Sunstein, and Tali Sharot, “Are Choosers Losers? The Propensity to Under-Delegate in the Face of Potential Gains and Losses.” February 15, 2016 (pdf, perhaps somewhat updated, available here).
• People seem to value control over decisions, and are willing to sacrifice (in terms of expected returns) to make a decision themselves rather than to delegate. Perhaps for decisions involving losses, however, people might prefer to delegate, to insulate themselves a bit from painful choices.
• This paper reports on two laboratory experiments that are conducted to look at delegation versus control. Sample sizes are rather small: 26 subjects for the first experiment, and 25 for the second. In some trials, participants can delegate the choice to an advisor, after being informed of the reliability and cost of the advisor. (In reality, the advisor is a computer player programmed with the appropriate reliabilities.)
• Both experiments start with a learning phase. Participants are shown two geometrical shapes, and are asked to pick the better one. They are not told what criteria go into “better,” but if they pick correctly, they receive a higher payoff (or avoid a bigger loss) than if they choose incorrectly. Unbeknownst to the players, there is no underlying rule for “better,” the computer just designates, randomly, one of the two shapes as better. But humans are good at finding patterns in random events!
• In the delegation phase of experiment one, participants are given the option, prior to being shown the shapes, to delegate their decision to an advisor (actually, a chooser) whose probability of choosing correctly is revealed in advance, along with the cost of using the advisor. After the delegate-or-not decision, the two shapes are revealed, a choice is made (although, if made by an advisor, not revealed), and onto the next round (60 in total). Subjects do not learn the outcome of individual trials, but are compensated at the end on a random subset of ten of the trials.
• Given that the subjects themselves have a 50% chance of choosing correctly, it is easy to determine when the expected monetary payoff to the subject is higher by delegating the decision to the advisor (thanks to those known probabilities and costs; incidentally, the price of using the advisor is only imposed if the advisor is used, and if the advisor chooses correctly).
• The advisors are configured (costs and accuracy) in such a way that the subjects would do best (in expected monetary terms) by delegating on half of the trials. Instead, subjects choose to delegate only about 30% of the time, whether they are choosing for gains or to avoid losses. The departures from “optimal” play are almost all in the direction of failing to delegate the decision when expected returns would have been higher with delegation.
• Subjects’ perceptions of their own abilities to choose are canvassed, and the aversion to delegation is not the result of excessive optimism with respect to the accuracy of their own choices.
• The second experiment is nearly identical to the first one, except that the decision to choose or to delegate is now made each round after the shapes themselves have been revealed. Still, there is substantial, even slightly worse, under-delegation.
• The fact that under-delegation also is present in the “loss” trials indicates that people, at least in this setting, don’t seem to want to shield themselves from painful decisions through delegation.
Showing posts with label agent. Show all posts
Showing posts with label agent. Show all posts
Saturday, May 6, 2017
Monday, January 16, 2017
Viscusi and Gayer (2015) on Reasons to Distrust Government Nudges
W. Kip Viscusi and Ted Gayer, “Behavioral Public Choice: The Behavioral
Paradox of Government Policy.” Harvard Journal of Law & Public Policy
38(3): 973-1007, 2015 [pdf].
• Behavioral departures from full rationality are often used as justifications for government interventions in markets. But the resulting government policies can institutionalize, not rectify, the rationality shortfalls.
• Regulators themselves possess rationality shortfalls, and there are features of the environment in which regulators operate that push them away from pursuing first-best policies.
• If the median voter possesses biases, then a democratic government is likely to share those biases.
• Less-than-rational individuals tend to bear the costs of their errors themselves – not so with regulators. Further, individuals might have enhanced incentives (relative to bureaucrats) to acquire relevant information. Regulators, like all of us, can be overconfident in their abilities.
• Can we trust the claims that people are less-than-rational, or at least the universality of the claims? People are heterogeneous, and what looks like a mistake might reflect specific, reasonable preferences.
• Many consumer durables now have energy efficiency mandates, justified by internalities. But the energy-efficiency misjudgment is far from a proven problem. The claims of energy savings tend to be engineering-based, unavailable in practice, while individual circumstances can rationalize seemingly myopic choices.
• We could be more confident in an even-handed use of behavioral economics if a lot of pre-existing mandates were being replaced by non-coercive nudges. But instead, we see behavioral economics being used to tighten regulation, not to loosen it. Notice that the less-than-complete (narrow) self-interest that behavioralists often emphasize implies that even externalities might be internalized without government policy.
• The EPA instituted a fuel economy labelling requirement that seems intended to remedy all the problems that their later efficiency mandates also targets – don’t they trust their own labelling regulation?
• In dealing with health and safety risks, government does not seem to be more rational than individuals. In practice, worst-case scenarios are over-weighted in regulatory policy; EPA methodology leads to cascading of conservative estimates so that extremely low-likelihood problems can dominate policy. Further, the number of people exposed to a risk, which should be central in formulating policy, is ignored.
• Increases in risk are a sort of loss, and loss aversion kicks in – in the form of alarmist regulatory responses to ebola, terrorism, etc.
• The FDA fears errors of commission much more than errors of omission. [Nonetheless, the evidence base is weak – look how often risks are revealed only after approval; then there are off-label uses, which are quite legal, despite not having been tested in the usual sorts of controlled trials.]
• If organic veggies carry less risk than non-organic vegetables, but they cost more, it could still be better health-wise for people to eat more, non-organic veggies.
• For people to accept a small increase in risk often involves a payment some six times larger than they would pay for the same reduction in risk – a reflection of loss aversion. The “first, do no harm” principle leads to a similar effect in policy. It is often hard to identify victims of the FDA’s failure to approve a useful drug.
• Agencies can have tunnel vision, treating their issue in isolation. In OSHA, for example, regulators are not even allowed to look at the costs of fixing a hazard. One result: costs per life saved vary widely across domains, in ways that seem to be far from optimal.
• Behavioral departures from full rationality are often used as justifications for government interventions in markets. But the resulting government policies can institutionalize, not rectify, the rationality shortfalls.
• Regulators themselves possess rationality shortfalls, and there are features of the environment in which regulators operate that push them away from pursuing first-best policies.
• If the median voter possesses biases, then a democratic government is likely to share those biases.
• Less-than-rational individuals tend to bear the costs of their errors themselves – not so with regulators. Further, individuals might have enhanced incentives (relative to bureaucrats) to acquire relevant information. Regulators, like all of us, can be overconfident in their abilities.
• Can we trust the claims that people are less-than-rational, or at least the universality of the claims? People are heterogeneous, and what looks like a mistake might reflect specific, reasonable preferences.
• Many consumer durables now have energy efficiency mandates, justified by internalities. But the energy-efficiency misjudgment is far from a proven problem. The claims of energy savings tend to be engineering-based, unavailable in practice, while individual circumstances can rationalize seemingly myopic choices.
• We could be more confident in an even-handed use of behavioral economics if a lot of pre-existing mandates were being replaced by non-coercive nudges. But instead, we see behavioral economics being used to tighten regulation, not to loosen it. Notice that the less-than-complete (narrow) self-interest that behavioralists often emphasize implies that even externalities might be internalized without government policy.
• The EPA instituted a fuel economy labelling requirement that seems intended to remedy all the problems that their later efficiency mandates also targets – don’t they trust their own labelling regulation?
• In dealing with health and safety risks, government does not seem to be more rational than individuals. In practice, worst-case scenarios are over-weighted in regulatory policy; EPA methodology leads to cascading of conservative estimates so that extremely low-likelihood problems can dominate policy. Further, the number of people exposed to a risk, which should be central in formulating policy, is ignored.
• Increases in risk are a sort of loss, and loss aversion kicks in – in the form of alarmist regulatory responses to ebola, terrorism, etc.
• The FDA fears errors of commission much more than errors of omission. [Nonetheless, the evidence base is weak – look how often risks are revealed only after approval; then there are off-label uses, which are quite legal, despite not having been tested in the usual sorts of controlled trials.]
• If organic veggies carry less risk than non-organic vegetables, but they cost more, it could still be better health-wise for people to eat more, non-organic veggies.
• For people to accept a small increase in risk often involves a payment some six times larger than they would pay for the same reduction in risk – a reflection of loss aversion. The “first, do no harm” principle leads to a similar effect in policy. It is often hard to identify victims of the FDA’s failure to approve a useful drug.
• Agencies can have tunnel vision, treating their issue in isolation. In OSHA, for example, regulators are not even allowed to look at the costs of fixing a hazard. One result: costs per life saved vary widely across domains, in ways that seem to be far from optimal.
Wednesday, February 17, 2016
Disclosing Conflicts of Interest: Loewenstein, Cain, and Sah (2011)
George Loewenstein, Daylian M. Cain, and Sunita Sah, “The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest.”
American Economic Review 101(3): 423–428, 2011 [pdf available here].
• Disclosure of conflicts of interest to customers would presumably eliminate any potential problems with such conflicts, if customers were standard rational actors.
• But how do people respond to mandated disclosures? Those providers who have conflicts might increase the bias in their advice, realizing that their advice will tend to be discounted. They might even feel that the disclosure provides them with a “moral license” to mislead.
• The recipients of the disclosure might think that the disclosure itself is a signal that the provider must be trustworthy. Further, they recognize that the rejection of the provider’s advice is now a sort of tacit accusation that the provider is corrupt – and people are wary of sending such signals. The desire to help out the provider might also push consumers to accept the conflicted advice.
• The authors describe some experiments in which mandatory disclosure of conflicts of interest did indeed lead to worse advice, and acceptance of worse advice, with degraded outcomes for consumers (relative to when conflicted advisors were not required to disclose their conflicts.)
• If the disclosures were not made by the provider, but by someone else, then consumers were better able to respond appropriately. It appears that it is when there is “common knowledge” of the conflict – the provider knows it, the consumer knows it, the provider knows that the consumer knows it, etc… – that the consumer’s incentive to go along with the biased advice is maximized. More time to respond to biased advice – a sort of cooling-off period – also is helpful to consumers.
• An in-depth follow-up article on disclosure previously received the BE Outlines treatment.
• Disclosure of conflicts of interest to customers would presumably eliminate any potential problems with such conflicts, if customers were standard rational actors.
• But how do people respond to mandated disclosures? Those providers who have conflicts might increase the bias in their advice, realizing that their advice will tend to be discounted. They might even feel that the disclosure provides them with a “moral license” to mislead.
• The recipients of the disclosure might think that the disclosure itself is a signal that the provider must be trustworthy. Further, they recognize that the rejection of the provider’s advice is now a sort of tacit accusation that the provider is corrupt – and people are wary of sending such signals. The desire to help out the provider might also push consumers to accept the conflicted advice.
• The authors describe some experiments in which mandatory disclosure of conflicts of interest did indeed lead to worse advice, and acceptance of worse advice, with degraded outcomes for consumers (relative to when conflicted advisors were not required to disclose their conflicts.)
• If the disclosures were not made by the provider, but by someone else, then consumers were better able to respond appropriately. It appears that it is when there is “common knowledge” of the conflict – the provider knows it, the consumer knows it, the provider knows that the consumer knows it, etc… – that the consumer’s incentive to go along with the biased advice is maximized. More time to respond to biased advice – a sort of cooling-off period – also is helpful to consumers.
• An in-depth follow-up article on disclosure previously received the BE Outlines treatment.
Saturday, July 25, 2015
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.
• 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.
• 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.
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