Every year when I teach Behavioral Economics & Policy, around the time of Shakespeare's birthday (April 23 is the conventional date) I provide a handout entitled, yes, William Shakespeare, Behavioral Economist. The current version is some 11 pages long, and I thought that I would reproduce that handout (and augment it) in a series of posts here on Behavioral Economics Outlines. These posts will not consist of outlines, alas; rather, they will be Shakespeare quotes, generally taken from Open Source Shakespeare. The title William Shakespeare, Behavioral Economist, pays homage to Nava Ashraf, Colin F. Camerer, and George Loewenstein, “Adam Smith, Behavioral Economist,” Journal of Economic Perspectives 19(3): 131–145, 2005.
Sunday, July 24, 2016
Tuesday, July 19, 2016
Milkman, Minson, and Volpp (2014) on Temptation Bundling
Katherine L. Milkman, Julia A. Minson, and Kevin G. M. Volpp, “Holding the Hunger Games Hostage at the Gym: An Evaluation of Temptation Bundling.” Management Science 60(2): 283-299, 2014.
• Frequently our willpower to engage in activities we know we should engage in – like exercise – proves wanting. Frequently our willpower to resist alluring activities – like devoting a lot of time to reading a fun novel – also proves wanting.
• Temptation bundling to the rescue! The idea is only to engage in the tempting activity while you are investing in the desirable but oft-neglected activity: you can only read (or listen to) the compelling novel while you are exercising.
• The potential benefits of bundling go beyond nudging you to exercise as much as you want to anyway. Rather, the bundling can add to your welfare through two further channels. First, the exercise itself becomes less onerous. Second, the consumption of the tempting good need no longer be followed by guilt attached to squandering time on trifling indulgences.
• The analysis involves a field experiment at an almost unnamed university. The subjects are 226 university-affiliates with gym memberships who own an iPod with free memory. The subjects are randomly allocated to three treatments. In the full treatment, an addictive novel (such as The Hunger Games) is loaded onto a loaned iPod (one iPod per subject), and the iPod is stored at the relevant gym – so the full treatment group must go to the gym (and, presumably, exercise,) if they want to listen to their novel on that iPod. The intermediate treatment group receives an addictive novel on their own iPod, and is encouraged to only allow themselves to listen to the novel while exercising. The control group is encouraged to exercise and receives a $25 bookshop gift-card that could be used to acquire a tempting e-novel.
• Each participant undergoes an intake process, with e-novels selected by the non-controls, along with 30 minutes of exercise undertaken while listening to the novel, followed by rating how enjoyable the exercise proved. Everyone agrees not to discuss the experiment with others, and off they go, for the next nine weeks.
• The treatment conditions lead to more exercise – but only for the first seven weeks (pre-Thanksgiving). In these seven weeks, gym visits average 7.8, 6.5, and 6.1 across the conditions.
• The full treatment works better for those who report they like the initial workout experience, and for those who are most busy.
• A concluding outtake visit allows estimates of willingness-to-pay for one month of a novel/exercise commitment device like that provided in the full treatment. About 60% of subjects indicate a positive willingness-to-pay for the commitment.
• Perhaps the bundled temptation could be made more alluring, such as Netflix-style subscriptions that only work when you are on an exercise machine. Will the private sector create these?
• Frequently our willpower to engage in activities we know we should engage in – like exercise – proves wanting. Frequently our willpower to resist alluring activities – like devoting a lot of time to reading a fun novel – also proves wanting.
• Temptation bundling to the rescue! The idea is only to engage in the tempting activity while you are investing in the desirable but oft-neglected activity: you can only read (or listen to) the compelling novel while you are exercising.
• The potential benefits of bundling go beyond nudging you to exercise as much as you want to anyway. Rather, the bundling can add to your welfare through two further channels. First, the exercise itself becomes less onerous. Second, the consumption of the tempting good need no longer be followed by guilt attached to squandering time on trifling indulgences.
• The analysis involves a field experiment at an almost unnamed university. The subjects are 226 university-affiliates with gym memberships who own an iPod with free memory. The subjects are randomly allocated to three treatments. In the full treatment, an addictive novel (such as The Hunger Games) is loaded onto a loaned iPod (one iPod per subject), and the iPod is stored at the relevant gym – so the full treatment group must go to the gym (and, presumably, exercise,) if they want to listen to their novel on that iPod. The intermediate treatment group receives an addictive novel on their own iPod, and is encouraged to only allow themselves to listen to the novel while exercising. The control group is encouraged to exercise and receives a $25 bookshop gift-card that could be used to acquire a tempting e-novel.
• Each participant undergoes an intake process, with e-novels selected by the non-controls, along with 30 minutes of exercise undertaken while listening to the novel, followed by rating how enjoyable the exercise proved. Everyone agrees not to discuss the experiment with others, and off they go, for the next nine weeks.
• The treatment conditions lead to more exercise – but only for the first seven weeks (pre-Thanksgiving). In these seven weeks, gym visits average 7.8, 6.5, and 6.1 across the conditions.
• The full treatment works better for those who report they like the initial workout experience, and for those who are most busy.
• A concluding outtake visit allows estimates of willingness-to-pay for one month of a novel/exercise commitment device like that provided in the full treatment. About 60% of subjects indicate a positive willingness-to-pay for the commitment.
• Perhaps the bundled temptation could be made more alluring, such as Netflix-style subscriptions that only work when you are on an exercise machine. Will the private sector create these?
Monday, July 11, 2016
Beard and Leitzel (2016) on Compensated Live Kidney Donations
T. Randolph Beard and Jim Leitzel, “Compensated Live Kidney Donations,” 2016; a slightly earlier version, June 17, 2015, is available at http://ssrn.com/abstract=2619934. This paper builds upon Beard and Leitzel (2014).
• To what extent are problems associated with compensation for kidney donations actually problems that already exist in the current system and/or are problems stemming not from the transplant system directly but rather from the organ shortage? The argument presented here is that most problems associated with the provision of donor compensation are either problems in the uncompensated system, too (and tolerably well-addressed), or, are problems of shortage, not of compensation.
• Uncompensated organ donation decisions -- which are not exactly of the everyday variety with meaningful feedback to build upon -- might not be made in a particularly rational fashion.
• Standard “behavioral” influences, such as risk misperceptions, loss aversion, endowment effects, and present bias, seem to push people in the direction of not being a live organ donor.
• Safeguards (including the provision of Independent Donor Advocates) are built into the donation system to counter misinformed, rash, or imprudent (psychologically, medically, or otherwise) donations, as well as coerced donations.
• The introduction of compensation does little in terms of introducing new problems, though it might exacerbate present bias in decisions to donate, or intensify the potential for loss aversion along the "financial expectations" axis.
• One desirable system with compensation would look like the current system, though supplemented with back-loaded compensation, both in-kind and monetary.
• What are the likely effects of ending the kidney shortage, beyond the lives saved? Nine effects are identified: (1) a diagnosis of End-Stage Renal Disease becomes less devastating; (2) the reluctance to add patients to the transplant list dissipates; (3) the “who gets to live” question loses much of its salience; (4) patient incentives to seek out the black market evaporate; (5) the expansion of acceptability criteria for a kidney ends or is reversed; (6) one risk of donating a kidney declines, in that a donor is assured of being able to acquire one later him or herself; (7) the need for ESRD patients to plead their case for an organ is obviated; (8) family relationships become less strained by an ESRD diagnosis; (9) the incentives to take preventative measures to stave off kidney failure decline.
• So, eight of the dimensions affected by an end to the kidney shortage would alter for the better if the shortage were eliminated -- and the undesirable impact along the ninth dimension simply reflects the fact that an improvement in the treatment of a medical condition implies that the threat represented by the condition diminishes.
• To what extent are problems associated with compensation for kidney donations actually problems that already exist in the current system and/or are problems stemming not from the transplant system directly but rather from the organ shortage? The argument presented here is that most problems associated with the provision of donor compensation are either problems in the uncompensated system, too (and tolerably well-addressed), or, are problems of shortage, not of compensation.
• Uncompensated organ donation decisions -- which are not exactly of the everyday variety with meaningful feedback to build upon -- might not be made in a particularly rational fashion.
• Standard “behavioral” influences, such as risk misperceptions, loss aversion, endowment effects, and present bias, seem to push people in the direction of not being a live organ donor.
• Safeguards (including the provision of Independent Donor Advocates) are built into the donation system to counter misinformed, rash, or imprudent (psychologically, medically, or otherwise) donations, as well as coerced donations.
• The introduction of compensation does little in terms of introducing new problems, though it might exacerbate present bias in decisions to donate, or intensify the potential for loss aversion along the "financial expectations" axis.
• One desirable system with compensation would look like the current system, though supplemented with back-loaded compensation, both in-kind and monetary.
• What are the likely effects of ending the kidney shortage, beyond the lives saved? Nine effects are identified: (1) a diagnosis of End-Stage Renal Disease becomes less devastating; (2) the reluctance to add patients to the transplant list dissipates; (3) the “who gets to live” question loses much of its salience; (4) patient incentives to seek out the black market evaporate; (5) the expansion of acceptability criteria for a kidney ends or is reversed; (6) one risk of donating a kidney declines, in that a donor is assured of being able to acquire one later him or herself; (7) the need for ESRD patients to plead their case for an organ is obviated; (8) family relationships become less strained by an ESRD diagnosis; (9) the incentives to take preventative measures to stave off kidney failure decline.
• So, eight of the dimensions affected by an end to the kidney shortage would alter for the better if the shortage were eliminated -- and the undesirable impact along the ninth dimension simply reflects the fact that an improvement in the treatment of a medical condition implies that the threat represented by the condition diminishes.
Sunday, July 3, 2016
Sadoff, Samek, and Sprenger (2015) on Food-Related Time Inconsistency
Sally Sadoff, Anya Samek, and Charles Sprenger, “Dynamic Inconsistency in Food Choice: Experimental Evidence from a Food Desert.” January, 2015 [pdf].
• The authors present the results of a natural field experiment: the subjects did not know at the time that they were participating in an experiment.
• The subjects receive $10 in a special budget each week for two weeks; they can buy ten units of food each week, as each unit costs $1. There are 20 different food items available, half of which are healthy, and half of which are unhealthy. The selected food items are delivered to the subjects’ homes.
• At the onset, before selection or delivery, the more than 200 subjects rate how much they like the 20 food items. Then they choose their items for the first week’s delivery.
• At the time of delivery of the ten selected items, the subjects are given a surprise presentation of four additional goods, which can be exchanged on a one-for-one basis with any of the delivered items; so, participants have an opportunity to partly change their minds. The four additional items are foods they rated highly, two healthy, two unhealthy, and include at least one item of each type that was not in the pre-arranged bundle.
• The idea is that any exchanges made at the time of delivery are evidence of time inconsistency; the researchers focus on exchanges that alter the healthy-unhealthy mix: 21% (46 of 218) of the subjects show such an inconsistency, and 44 of those 46 move to a less healthy mix.
• In the second week, one day before delivery, subjects are asked if they would again like the extra four items brought for a potential exchange (with their new, pre-arranged bundle). One-third of the subjects say “no thanks,” that is, they choose to commit to not being offered a future opportunity to exchange.
• People who are dynamically consistent in week 1 are more likely (than are the dynamically inconsistent) to say "no thanks" to the offer to have the extra items available. That is, those subjects who successfully fight temptation in week 1 are those who make most intensive use of the commitment device that eliminates temptation. Further, those who prefer not to have the option to change tend to choose relatively healthy bundles in the first instance.
• The theoretical underpinning of Sadoff et al. (2015) derives from articles by Gul and Pesendorfer, and by Fudenberg and Levine. In these models, the mere existence of a tempting good, even if it is not chosen, in a sense alters a consumer’s reference point in such a way that the value of consuming other goods is somewhat compromised by the tempting option. People in this situation, and who understand it, will want to restrict their options, even though they are eliminating options that they know they will not choose in any event.
• In the O’Donoghue and Rabin (2003) approach (as described here), alternatively, it is only sophisticated, present-biased consumers who know that they would succumb to temptation who find it worthwhile to restrict their future options.
• The analysis suggests that encouraging people to make their food choices well in advance of consumption might help spur the consumption of relatively healthy foods. (Note that the grocery deliveries in the experiment generally are not consumed right away, either, and hence the additional items might not be all that tempting. Gains to precommitment might be even larger in the face of more intense temptation.)
• The authors present the results of a natural field experiment: the subjects did not know at the time that they were participating in an experiment.
• The subjects receive $10 in a special budget each week for two weeks; they can buy ten units of food each week, as each unit costs $1. There are 20 different food items available, half of which are healthy, and half of which are unhealthy. The selected food items are delivered to the subjects’ homes.
• At the onset, before selection or delivery, the more than 200 subjects rate how much they like the 20 food items. Then they choose their items for the first week’s delivery.
• At the time of delivery of the ten selected items, the subjects are given a surprise presentation of four additional goods, which can be exchanged on a one-for-one basis with any of the delivered items; so, participants have an opportunity to partly change their minds. The four additional items are foods they rated highly, two healthy, two unhealthy, and include at least one item of each type that was not in the pre-arranged bundle.
• The idea is that any exchanges made at the time of delivery are evidence of time inconsistency; the researchers focus on exchanges that alter the healthy-unhealthy mix: 21% (46 of 218) of the subjects show such an inconsistency, and 44 of those 46 move to a less healthy mix.
• In the second week, one day before delivery, subjects are asked if they would again like the extra four items brought for a potential exchange (with their new, pre-arranged bundle). One-third of the subjects say “no thanks,” that is, they choose to commit to not being offered a future opportunity to exchange.
• People who are dynamically consistent in week 1 are more likely (than are the dynamically inconsistent) to say "no thanks" to the offer to have the extra items available. That is, those subjects who successfully fight temptation in week 1 are those who make most intensive use of the commitment device that eliminates temptation. Further, those who prefer not to have the option to change tend to choose relatively healthy bundles in the first instance.
• The theoretical underpinning of Sadoff et al. (2015) derives from articles by Gul and Pesendorfer, and by Fudenberg and Levine. In these models, the mere existence of a tempting good, even if it is not chosen, in a sense alters a consumer’s reference point in such a way that the value of consuming other goods is somewhat compromised by the tempting option. People in this situation, and who understand it, will want to restrict their options, even though they are eliminating options that they know they will not choose in any event.
• In the O’Donoghue and Rabin (2003) approach (as described here), alternatively, it is only sophisticated, present-biased consumers who know that they would succumb to temptation who find it worthwhile to restrict their future options.
• The analysis suggests that encouraging people to make their food choices well in advance of consumption might help spur the consumption of relatively healthy foods. (Note that the grocery deliveries in the experiment generally are not consumed right away, either, and hence the additional items might not be all that tempting. Gains to precommitment might be even larger in the face of more intense temptation.)
Saturday, June 11, 2016
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.
• 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.
Monday, June 6, 2016
Dickson, Jennings, and Koop (2016) on Domestic Violence and Glaswegian Football
Alex Dickson, Colin Jennings, and Gary Koop, “Domestic Violence and
Football in Glasgow: Are Reference Points Relevant?” Oxford Bulletin of
Economics and Statistics 78(1): 1-21, 2016 (pdf).
• Football matches can provide emotional cues that might spur domestic violence; in particular, an unexpected loss might lead to more violent incidents. Such was the finding from a 2011 article that examined some American football games, where betting odds provided the reference point for outcome expectations.
• Dickson, Jennings, and Koop examine the Scottish Premiership (soccer), and domestic violence in the Glasgow area from January 2003 until October 2011. Two long-term and fierce rivals, Celtic and Rangers, are based in Glasgow. Together, they are referred to as the “Old Firm.”
• Old Firm matches (that do not have extremely “unexpected” outcomes as the rivals are always competitive with each other) are associated with increased domestic violence (by some 36%); other Scottish Premiership matches, not so. (Another event that brings a significant increase in domestic violence is the Christmas/New Year’s holiday.)
• Unexpected outcomes only are correlated with increased domestic violence for a restricted set of matches that are very important in terms of final league standings. That is, football-related loss aversion is not generally a big deal for Glaswegian domestic violence.
• Football matches can provide emotional cues that might spur domestic violence; in particular, an unexpected loss might lead to more violent incidents. Such was the finding from a 2011 article that examined some American football games, where betting odds provided the reference point for outcome expectations.
• Dickson, Jennings, and Koop examine the Scottish Premiership (soccer), and domestic violence in the Glasgow area from January 2003 until October 2011. Two long-term and fierce rivals, Celtic and Rangers, are based in Glasgow. Together, they are referred to as the “Old Firm.”
• Old Firm matches (that do not have extremely “unexpected” outcomes as the rivals are always competitive with each other) are associated with increased domestic violence (by some 36%); other Scottish Premiership matches, not so. (Another event that brings a significant increase in domestic violence is the Christmas/New Year’s holiday.)
• Unexpected outcomes only are correlated with increased domestic violence for a restricted set of matches that are very important in terms of final league standings. That is, football-related loss aversion is not generally a big deal for Glaswegian domestic violence.
Wednesday, May 18, 2016
The Ellsberg Paradox and Ambiguity Aversion
• OK, this is not really an outline of an article, but at least there is an urn involved. The urn has a total of 90 balls inside of it. Thirty of the balls are black, and the other 60 balls are either red or blue. (That is, anywhere between 0 and 60 of those balls are red, and the remainder of the non-black, non-red balls are blue.) A single ball will be pulled at random from the urn.
• Situation A: You can choose Bet 1A, which pays $100 if the ball that is chosen is black. Alternatively, you can choose Bet 2A, which pays $100 if the chosen ball is red. Which bet do you prefer? [Spoiler alert: most folks prefer Bet 1A.]
• Situation B: You can choose Bet 1B, which pays $100 if the ball that is chosen is either black or blue. Alternatively, you can choose Bet 2B, which pays $100 if the chosen ball is either red or blue. Which bet do you prefer? [Spoiler alert: most folks prefer Bet 2B.]
• The modal choices in these hypothetical urn-related decision problems, already spoiled for you, are to choose Bet 1A and Bet 2B.
• These modal choices are inconsistent with expected utility maximization. A person who (strictly) prefers Bet 1A to Bet 2A, and is an expected utility maximizer, must believe that the probability of choosing a black ball (here, precisely one-third) exceeds the probability of choosing a red ball. A person who (strictly) prefers Bet 2B to Bet 2A, and is an EU maximizer, must believe that the probability of choosing a black ball is smaller than the probability of choosing a red ball (because the probability of winning via the blue ball is the same in either alternative, 2A or 2B).
• The disposition that (presumably) leads to these modal choices is termed ambiguity aversion. In Situation A, the subject knows precisely the probability of winning Bet 1A, but is unsure of the probability of winning Bet 2A. In Situation B, the situation is reversed, with Bet 2B being the option with the known probability (precisely 2/3) of winning.
• The modal choices, inconsistent with expected utility maximization, are an example of what has become known as the Ellsberg Paradox, after the analysis given by Daniel Ellsberg in "Risk, Ambiguity, and the Savage Axioms," Quarterly Journal of Economics 75(4): 643-669, 1961 [pdf here]; Ellsberg's version is on pages 654-655. The version in this post follows closely the presentation in the Introduction (pages 3-4) by Adam Oliver in Behavioural Public Policy, Adam Oliver, ed., Cambridge University Press, 2013.
• Situation A: You can choose Bet 1A, which pays $100 if the ball that is chosen is black. Alternatively, you can choose Bet 2A, which pays $100 if the chosen ball is red. Which bet do you prefer? [Spoiler alert: most folks prefer Bet 1A.]
• Situation B: You can choose Bet 1B, which pays $100 if the ball that is chosen is either black or blue. Alternatively, you can choose Bet 2B, which pays $100 if the chosen ball is either red or blue. Which bet do you prefer? [Spoiler alert: most folks prefer Bet 2B.]
• The modal choices in these hypothetical urn-related decision problems, already spoiled for you, are to choose Bet 1A and Bet 2B.
• These modal choices are inconsistent with expected utility maximization. A person who (strictly) prefers Bet 1A to Bet 2A, and is an expected utility maximizer, must believe that the probability of choosing a black ball (here, precisely one-third) exceeds the probability of choosing a red ball. A person who (strictly) prefers Bet 2B to Bet 2A, and is an EU maximizer, must believe that the probability of choosing a black ball is smaller than the probability of choosing a red ball (because the probability of winning via the blue ball is the same in either alternative, 2A or 2B).
• The disposition that (presumably) leads to these modal choices is termed ambiguity aversion. In Situation A, the subject knows precisely the probability of winning Bet 1A, but is unsure of the probability of winning Bet 2A. In Situation B, the situation is reversed, with Bet 2B being the option with the known probability (precisely 2/3) of winning.
• The modal choices, inconsistent with expected utility maximization, are an example of what has become known as the Ellsberg Paradox, after the analysis given by Daniel Ellsberg in "Risk, Ambiguity, and the Savage Axioms," Quarterly Journal of Economics 75(4): 643-669, 1961 [pdf here]; Ellsberg's version is on pages 654-655. The version in this post follows closely the presentation in the Introduction (pages 3-4) by Adam Oliver in Behavioural Public Policy, Adam Oliver, ed., Cambridge University Press, 2013.
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