Lowenstein (2019) Responds to Duckworth, Milkman, and Laibson (2019)

George Loewenstein, “Self-Control and Its Discontents: A Commentary on Duckworth, Milkman, and Laibson.” Psychological Science in the Public Interest 19(3): 95-100, 2019.

• Much to admire in Duckworth, Milkman, and Laibson (2019), especially the categorization of strategies to bolster self-control into situational v. cognitive and self-deployed v. other-deployed.

• Two (sort of) implicit assumptions seem to hover around the analysis, however, and I [Loewenstein] want to challenge those assumptions (assumptions which the authors themselves do not accept).

• One assumption that readers might come away with is that worsening problems such as lack of savings or obesity are brought about by self-control shortcomings, and that the strategies presented in Duckworth, Milkman, and Laibson (2019) are appropriate means to solve those problems. But inadequate self-control is not the source of (relatively recent) problems like rises in obesity and declines in savings. Rather, these problems have other, large causes, and thus, other solutions.

• A second assumption that readers might adopt is that self-control is about trying to get people to take a longer-term perspective. But many people suffer from being excessively future-minded (they are "hyperopic") -- these people need enhanced self-control to limit their future focus, to increase their current indulgence.

• The US has only become an outlier among nations with respect to undersaving and obesity in the past 40 years or so -- these problems do not reflect a new wave of a lack of self-control that swept across the land. What has changed is, for instance, a growth in income inequality and in the availability of snack foods and credit cards.

• Self-control is not about the present versus the future; it is about affect (System 1) versus more considered thinking (System 2) – this is why some people indulge insufficiently (“tightwaddism” and workaholism). (Look at the substantial investments people make in education -- do these evince present bias?) Mental accounting (like establishing an entertainment account) can help with future bias, too!

• Behavioral economics research might have a puritanical (or "Calvinist") bias.

Fennell (2019), "Personalizing Precommitment"

Lee Anne Fennell, “Personalizing Precommitment.” University of Chicago Law Review 86(2): 433-458, March 2019.

• Achieving long-term goals such as losing weight or writing a book requires the cooperation of many temporal selves of the same individual -- and perhaps the indulgences of some Mr. Hydes will undermine Dr. Jekyll's best-laid schemes. Precommitment can help, and the law might have a role to play in making such precommitments more available.

• Fennell invokes the "scale mismatch" terminology of Drazen Prelec; scale mismatch is when the goal (such as losing weight) is achieved in aggregate terms but the steps (literally?) to achieve the goal are lots of small individual decisions.

• Rigid rules – exercise one hour every day – might work in overcoming these temporal internalities, but such rules might be excessive or so demanding that they are abandoned.

• Perhaps people can fashion their own, less rigid but more sustainable rules? Good choices of “partitions” and “menus” can aid the process. For instance, appropriate serving sizes and types of serving utensils and single-serve packaging: all of these nudges can contribute to achieving a weight-loss goal.

• Segmentation eases metering and monitoring. How much cake did I eat? It might be easier to know the answer when the cake is consumed in segmented units -- I had three cupcakes -- than when I just keep picking at some unsegmented blob o' cake.

• Writing a book might be made manageable by segmenting the task into chapters and sections. But…while smaller chunks are easier to complete, given scale mismatch, they also look less meaningful in terms of progress, and more capable of postponement.

• Instead of segmenting work time, what about segmenting time not spent working – like limiting breaks to ten minutes?

• Monetary issues often can be addressed with precommitments and partitions. Purchasing a home can be a sort of forced saving – but this commitment device can be undone by easily acquired home equity loans. Can programs be provided that allow people to opt into a "no home equity loans" condition? 

• People might try to earmark money for savings by having special accounts or even physical envelopes -- though the commitment can be undone if an emergency arises. In general, setting high savings targets with sub-partitions (so that prematurely opening one savings envelope does not mean that all the others are opened, too) looks like a pretty good strategy. Even precommitting some money to indulgences can aid the larger goal of saving money. Should bank savings accounts come with earmarked sub-accounts that are made salient in web-based representations, say?

• Online menus could be personalized, by removing some excessively tempting items at the consumer’s request. 

• Rigid rules such as “no dessert” prune the menu to two choices: comply or don’t comply: “the reason that they can be so effective – the extreme chunkiness of the choices they present – is also the reason why they often fail” 

• Rules change the effective payoffs: the good choice becomes more automatic, and the wrong choice bears a higher price. 

• Lapses can induce further failures. Ex ante, it often is best to believe that behavior is bundled, that a lapse today will mean a rapid downward spiral. (Fennell calls such notions "behavioral firewalls"; in this case, good behavior today prevents future bad behavior.) Ex post (after a lapse), however, it is best to believe that the lapse was anomalous, that it doesn’t fore-ordain future behavior. Now the firewall changes: future behavior must be sealed off from the lapse.

• As with money set aside for financial indulgences, limited, planned exceptions can be helpful – but perhaps not implementable, perhaps zero tolerance, rigid rules are needed. 

• Receiving an income tax refund can be a form of forced savings or a welcome source of wam – but private firms can offer products that undo the commitment element of tax refunds. The IRS, incidentally, provides a split-refund facility, to allow the funneling of part of a refund into savings.

Quispe-Torreblanca et al. (2019) on Non-fungible Credit Card Bills

Edika G. Quispe-Torreblanca, Neil Stewart, John Gathergood, and George Loewenstein, “The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels, Not Sofas.” Management Science 65(11): 5392-5410, November 2019.

• Is money fungible? Many studies show that the source of money influences how it is spent – for instance, “playing with house money” 

• Consider the repayment of borrowed funds. Presumably the highest interest debt should be most rapidly repaid. 

• But durable goods create a stream of future benefits, so perhaps people can reduce the psychological pain of paying by paying off debts of transient goods more rapidly than debts associated with durable goods. 

• A vacation (a transient good) paid for in advance will be more pleasurable, by this accounting (“prospective accounting”) than the same vacation which is paid for after the fact. 

• People will be more willing to pay interest for a durable good like a clothes dryer. Pre-paying for the dryer does not appreciably raise its hedonic payoff. 

• These mental accounting effects might affect original decisions to make purchases, as well as how repayment occurs.

• A large field experiment is conducted, using UK credit card data. 

• Nondurable goods are indeed much more likely to be paid off at the end of the month than similar bills for durable items – an effect that would be matched by something like a 15% increase in the APR on non-durable debt.

Jung and Mellers (2016) Look at US Attitudes Towards Nudges

Janice Y. Jung and Barbara A. Mellers, “American Attitudes toward Nudges.” Judgment and Decision Making 11(1): 62-74, January 2016.

• System 1 nudges are those that take advantage of our relatively automatic, unthinking mechanism for making decisions – canny default settings are an example of a System 1 nudge.

• System 2 nudges enhance our cognitive abilities, perhaps by providing more information – calorie counts on food items are an example of a System 2 nudge. 

• Study 1 conducted by Jung and Mellers looks at nine System 1 nudges and four System 2 nudges, in an internet-based survey (n=250). Subjects are asked if they are for or against nudges, and then rate the intensity of their feelings on the subject. (If you are unsure, you will be asked to explain why!) Subjects also rate nudges on various scales, such as whether they are a threat to autonomy. 

• Jung and Meller's Study 2 manipulates the “framing” of the nudges, sometimes emphasizing individual effects, sometimes social effects; sometimes highlighting the benefits, sometimes highlighting the avoidance of costs. Attitudes also are collected about companies that institute nudges. 

• System 2 nudges receive more support than System 1 nudges – but one System 2 nudge, where government provides a website that tracks people’s expenditures on food, energy, and so on, is disliked in a System 1-like manner. 

• Also disliked are opt-out organ donation lists, those misleading white lines on Lake Shore Drive, one-click charitable donation opportunities at store check-outs, and credit card online payment mechanisms that default to fully paying off the debt. 

• Empathic folks tend to support System 1 and System 2 nudges; conservatives and individualists tend to oppose both types of nudges. (“Reactant” people oppose System 1 nudges.) System 2 nudges are viewed as more effective, though evidence generally supports the superior effectiveness of System 1 nudges. 

• Framing doesn’t matter much on average, but does matter with some sub-groups; for instance, “reactant” people oppose nudges more strongly when the frame points out the individual costs of not going along. Feelings about companies that nudge basically track the feelings about the nudges the companies implement.

O’Donoghue and Rabin (2015) on Present Bias

Ted O’Donoghue and Matthew Rabin, “Present Bias: Lessons Learned and To Be Learned.” American Economic Review 105(5): 273–279, 2015 [pdf].

• In extending the standard exponential discounting model to incorporate present bias, the β, δ functional form has proven to be “useful, tractable, and (importantly) disciplined [p. 273].” Further, the β, δ approach seems to correlate well with the psychological findings, in that most of the action in terms of changing discount rates over time concerns right now versus the future. [For more on the quasi-hyperbolic, β, δ approach, see this Behavioral Economics Outlines post.] 

• If β is less than 1, and hence the individual displays present bias, we still need to inquire as to whether the person comprehends that she is present biased. A person who fully understands her taste for instantaneous gratification is termed “sophisticated,” whereas someone who fails to understand her present bias – she repeatedly says, and believes, that she will quit smoking tomorrow – is said to be “naïve.” People who recognize that they are present biased but underestimate the extent of their bias are partially sophisticated or partially naïve. 

• Without uncertainty or liquidity constraints, choices among monetary streams should be made by maximizing present value at market interest rates: individual preferences and discount rates are irrelevant. In low-stakes experiments, people are unlikely to be liquidity constrained; therefore, those choices should not depend on discounting. For this reason, recent experiments exploring present bias try to use real effort flows, not monetary streams. 

• Pairs of decisions, such as those involving credit card borrowing along with those involving retirement savings, can inform the calibration of present bias. The idea is that credit card purchases are influenced by present bias, whereas retirement decisions reflect long-run (β=1) preferences. 

• Welfare assessments are possible despite the non-unitary (over time) actors that present bias reflects; long run (that is, β=1) preferences have much to recommend them as the welfare criterion [example here]. 

• Don’t rush to “explain” heterogeneous behavior by different degrees of present bias. Habit persistence or tastes for tobacco probably explain more variance in smoking than does different degrees of present bias, for instance.

Karlan and Appel (2011) on Buying or Not Buying

Dean Karlan and Jacob Appel, “To Buy: Doubling the Number of Families with a Safety Net.” Chapter 3, pages 39-54, in More than Good Intentions: Improving the Ways the World's Poor Borrow, Save, Farm, Learn, and Stay Healthy, New York: Dutton, 2011. [Also see this Q&A with the authors at the Freakonomics blog.] 

• For a successful anti-poverty policy, you need an intervention that reduces poverty, of course; but further, you need your intervention to be taken up by the targeted poor people. Many policies that “work” do not achieve high levels of take-up, including oral rehydration therapy (for protection against the effects of diarrhea), and ant-malarial mosquito nets. 

• Behavioral economist Sendhil Mullainathan talks about “The Last Mile Problem,” the relative neglect of take-up after the intervention has been designed. 

• Decisions to borrow money are influenced by far more factors than the interest rate. Randomized controlled experiments indicate that a photo of a pretty woman on loan informational material makes it more likely that men will borrow, and providing but one instead of four sample loans helps, too. In-person meetings, especially when introduced by a trusted acquaintance, doubles take-up. 

• In another randomized controlled experiment, a cell phone giveaway did not increase borrowing; indeed, that promotion had a perverse impact. 

• Choice overload leads to “I’ll think about it tomorrow”- type responses. 

• Rainfall insurance for poor farmers in India is woefully undersubscribed, although (so Karlan and Appel assert) very beneficial.

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.