Richard H. Thaler, “From Cashews to Nudges: The Evolution of Behavioral
Economics.” American Economic Review 108(6): 1265–1287, June 2018.
• "In the beginning there were stories [p. 1265]." Those stories were of anomalies with respect to the standard economic model of rational choice. For instance, the "cashews" in the title refer to an incident where guests thanked then-graduate-student Richard Thaler for rendering inaccessible the pre-dinner snacks: the guests seemed to believe that the loss of the option to eat cashews made them better off.
• A key development in behavioral science was the work of Kahneman and Tversky, which indicated that departures from fully rational behavior are systematic. This non-randomness suggests that modifications of the rational model could do a better job at explaining behavior. Further, Kahneman and Tversky's prospect theory offers a simple explanation for some of these systematic departures.
• Standard economic theory often is presented as a descriptive theory of how people choose as well as a normative theory of how people should choose. It is better at the latter (normative) task than at the former (descriptive) task.
• Thaler and Shefrin propose a planner/doer model of intrapersonal (or intra-firm) conflict; the planner component of a decision maker can alter the doer's incentives by employing commitment strategies or deploying the (payoff-compromising) induction of guilt.
• Economics typically assumes that dollars are fungible, that the best way to spend them is independent of where the dollars originated. But people assign income to different "mental accounts" according to its origin. Some income might be allocated to a mental checking account, so it is psychologically available for spending, whereas other funds might be assigned to mental savings, and therefore, are psychologically unavailable for quotidian consumer purchases. Dollars, in practice, are not fungible -- as anyone who has ever "played with house money" knows.
• Is it fair to raise prices just because demand increases, as when a snowstorm makes snow shovels highly sought after? Many people (but not many economists!) think that such price increases are unfair, and might punish businesses that engage in such behavior.
• The endowment effect is when mere “ownership” of an object (like a coffee mug) seems to raise the valuation that the “owner” places on the object. Endowment effects reduce the willingness-to-trade of owned objects, and some of Professor Thaler's work shows that endowment effects are common even when decision makers operate in markets, and when they have opportunities to learn over time.
• Even in financial markets, with their ongoing nature, high stakes, and sophisticated participants, security prices are not always right: for instance, parts of a firm can bizarrely be deemed more valuable in financial markets than is the entire firm (even though the complementary parts are not themselves of negative value).
• Draft picks in the National Football League are mispriced: the best value for teams seems to lie in draft picks in the early part of the second round. The people making the draft picks might be excessively optimistic about their ability to identify winners when making first round picks.
• In the standard rational choice model, nudges (aspects of the choice architecture that don't affect standard payoffs or incentives) would not have much influence on choices -- but they often do.
• Some firms try to use nudges to take advantage of those systematic departures from rational behavior on the part of their consumers; Professor Thaler calls this nefarious sort of choice architecture "sludge."
Russell Golman, David Hagmann, and George Loewenstein, “Information
Avoidance.” Journal of Economic Literature 55(1): 96-135, March 2017 [pdf].
• Why do you not want to see my outline of this article?
• Rational people in an individual decision-making situation – that is, situations where information possession holds no implications for inter-personal strategic concerns – should always be happy to receive accurate information if it is freely available. But people often actively avoid acquiring such information.
• Patients avoid medical information, teachers don’t read their evaluations, and, in down markets, investors don’t check the value of their portfolios. Golman et al. refer to “active information avoidance” as involving the avoidance of information even if the info is free and the person knows it is available.
• A studied ignorance might lend us moral wiggle room: for instance, if we “don’t know” the conditions on factory farms, we can live with our dining choices. (OK, that example is mine, not in the article.) We might want to maintain plausible deniability as a way to avoid unwelcome responsibilities.
• Even if you learn information, you might (strangely?) choose to ignore it.
• We might have protected beliefs, so we actively avoid information that might challenge those beliefs. We could go so far as to seek to silence dissenters from our views.
• Surely some information avoidance is good: if you will eat dessert anyway, perhaps it is best not to know its caloric load. Perhaps you can live a more pleasant life by not knowing of some looming medical problem, or about your partner’s infidelity.
• When new information becomes universally available, confirmation biases can lead to further polarization of opinions. New (controverting) information might even remind you of (and sustain) the reasons that you held your initial beliefs in the first place.
• Intelligence does not protect people against biased beliefs; rather, it might make it easier to justify one’s preferred beliefs.
• People can self-sabotage – undertake actions not fitted to their abilities, for instance – to avoid learning the quality of their talents.
• People might avoid information because they prefer that compound lotteries (that resolve over time) might best be enjoyed by only learning the final, overall outcome. (Do I want to know the score of the White Sox game in the third inning? If the Sox are behind, I will be sad, and if they are ahead, then the only new “news” I can get later occurs if they lose, and the loss will then be extra painful.)
• Sometimes people are just plain curious, they seek out information that is of no instrumental value to them.
• Humans often are mistaken in thinking that the receipt of bad news will unleash anxiety – and therefore they might be mistaken in trying to shield themselves from bad news. Sometimes the elimination of uncertainty can begin the process of adaptation to the new normal.
• Bad news attracts our attention, and so we might try to avoid potentially bad news as a method to prevent this “distraction” from occurring.
• Regret aversion might lead people to avoid information on how things would have turned out if they had taken a different path.
• People tend to be overly optimistic, and such optimism appears to hold benefits. Information might be avoided or ignored for the sake of sustaining optimism – within individuals as well as groups.
• One reason people might try to maintain existing beliefs is that they are serviceable, even if flawed – you can only rebuild a leaky boat at sea piecemeal, you can’t tear it down and start fresh.
• If you are committed to a belief, you will not want to acquire information challenging it. The belief might even be part of your self-image, your identity.
• Information avoidance might help with self-control issues, such as side-stepping temptations or maintaining motivation.
• Spoiler alert! People might avoid information to maintain pleasant suspense.
David G. Blanchflower and Andrew Oswald, “Unhappiness and Pain in
Modern America: A Review Essay, and Further Evidence, on Carol
Graham’s Happiness for All?” NBER Working Paper No. 24087, November
2017.
• The authors summarize and respond to a 2017 book by Carol Graham, Happiness for All?
• Graham’s work centers on subjective well-being (SWB) measures, especially the Cantril ladder question, which, according to the World Happiness Report, "asks respondents to think of a ladder, with the best possible life for them being a 10, and the worst possible life being a 0. They are then asked to rate their own current lives on that 0 to 10 scale."
• Some of Graham’s claims about happiness in the US: (1) SWB is getting more unequal, and income inequality lowers SWB; (2) people are increasingly unhopeful, especially white Americans and poorer Americans; and, (3) Americans, particularly poorer ones, suffer from high levels of pain and stress.
• The age-adjusted suicide rate for black American men is one-third the rate for white American men.
• Blanchflower and Oswald point out that almost surely, SWB is not nearly as unequally distributed as is income.
• It does appear that Americans are becoming less happy, and that reported pain is very high (34% in past 4 weeks) in the US; the international average is 20%.
• Middle-age Americans are particularly troubled. SWB tends to fall almost monotonically from the late teens until somewhere around age 40-50, and then tends to increase (slowly) for some 40 years.
• Education is associated with higher SWB.
• There has been significant convergence in SWB among racial groups in the US in the past 45 years.
• Though there is some evidence that women in the US have become less happy in the last 30 years relative to men, reported SWB is quite similar across genders.
Barry Schwartz and Nathan N. Cheek, “Choice, Freedom, and Well-Being:
Considerations for Public Policy.” Behavioural Public Policy 1(1): 106-121, 2017.
• A (misleading?) syllogism: more freedom means higher well-being; more choice means more freedom; therefore…
• Nudges constrict freedom of choice
• Should we maintain free choice (possibly even force people to make choices, as opposed to setting a default, for instance), or promote better choices?
• The availability of options is increasing in much of the world. But more options can: (1) paralyze; (2) spur regret and dissatisfaction; and (3) undermine the (objective) quality of decisions.
• Choices can (1) satisfy our preferences; (2) serve as utilitarian means to our ends; and, (3) express something about us. Pleasure (1) and utility (2) both can be undermined by large choice sets.
• Expanded choice sets provide new options for (3) self-definition. This seems desirable. But they also can increase the expressive stakes for trivial decisions, and those increased stakes need not be beneficial. [Who wants to be judged on what brand of soda they buy?]
• Further, large choice sets might divert increased attention to decisions about material goods, to the detriment of social connections.
• [Warning!: broad-brush cultural commentary to follow:] Western cultures tend to understand people as individuals, and believe that good societies give wide scope to individualism. Large choice sets, then, are requisite for self-realization.
More collectivist societies (including working-class America?) might focus on the interdependencies among people, so that a person’s relations are more important than individuality. People in such societies might prefer reduced choice sets.
• Older people seem more comfortable with fewer choices, while younger people prefer large choice sets in domains in which they are confident that they can make competent choices.
• A perceived lack of competence more generally detracts from the desirability of large choice sets – and the competence shortfall might concern knowledge of one's own preferences.
• Large choice sets can involve a cognitive burden, and might be worse for people already facing resource scarcity.
• Perhaps the right policy intervention is to encourage people to think through when they are most interested in making careful choices.
Matthew D. Adler, Paul Dolan, and Georgios Kavetsos, “Would You Choose to be Happy? Tradeoffs between Happiness and the Other Dimensions of Life in a Large Population Survey.” Journal of Economic Behavior & Organization 139: 60-73, July 2017 [pdf].
• Measures of subjective well-being (SWB) come in three different varieties: (1) life satisfaction; (2) happiness (positive/negative affect); and (3) meaningfulness. These varieties are termed, respectively, (1) evaluative; (2) affective; and (3) eudaimonic components of SWB.
• Decision utility (perceived when making a choice) and experience utility (the quality of lived experience) may differ; SWB seems to be a measure of experience utility. People might purposely choose an option that they know will not maximize their SWB. People might choose options in which their health is good, for instance, even if their SWB is lower than what they could achieve with alternative options.
• Adler, Dolan, and Kavetsos present pairs of options that trade-off SWB with some other characteristic, such as health. These options are presented in “choice” (which of two possible lives would you choose) and “judgement” (which of two possible lives is better) mode.
The options are presented as either brief scenarios or (less brief) vignettes; the vignettes are intended to increase the salience of the trade-off presented between SWB and some other life dimension. The three different varieties of SWB are tested separately, and each arrayed against five life characteristics: income, health, family, career, and education.
n≈13,000
• The US sample indicates a slightly higher average SWB than the UK sample, though the Americans are more anxious. (And higher anxiety lowers the likelihood of choosing the high SWB option.)
• About 60% of respondents choose the high SWB option. They also seem to be drawn somewhat more to the affective component of SWB.
• Judgement questions lead to a slightly larger pro-SWB vote than do choice questions, as does presenting the options as vignettes.
• People possessing higher SWB are more likely to choose the high SWB option.
• People with children and more education and people who are male are less likely to be seduced by SWB.
• People often choose good health over high SWB; they rarely choose career success over high SWB.
[John Stuart Mill comes to mind: "Whatever is desired otherwise than as a means to some end beyond itself, and ultimately to happiness, is desired as itself a part of happiness, and is not desired for itself until it has become so." -- from Chapter 4 of Utilitarianism; and the happiness that utilitarianism invokes is the happiness of all interested parties (Chapter 2 of Utilitarianism).]
[For a related article, see here.]
Robert Sugden, “‘Better Off, as Judged by Themselves’: A Reply to Cass Sunstein.” International Review of Economics 65(1): 9-13, March, 2018.
[Round 1 here; Round 2 here]
• Sunstein suggests that welfare is the goal, but that a person’s own preferences might not be the best metric of that goal. This interpretation allows pursuit of the nudger’s interests.
• The key isn’t preferences before or after the nudge, but rather, when preferences are or aren’t context dependent. If they are context dependent, then those preferences can’t be used to judge what context should be adopted. For "as judged by themselves" (AJBT) to be useful, it must “adjudicate between the judgements that the chooser makes in different contexts.”
• The acknowledged self-control cases are those in which AJBT seems to work. Are they rare? Sunstein’s survey itself involved a nudge that would lead people to admit to a self-control problem. (Though admittedly, people do take up options that are presented as helping overcome self-control problems.)
• Approving of nudges is not the same as wanting to be nudged, as the first is about a policy that applies generally.
• AJBT really is part of the defense to objections from anti-paternalists, despite Sunstein’s claim. Why else would one refer to voluntarily installed GPS devices as involving a form of paternalism?
Cass R. Sunstein, “’Better Off, as Judged by Themselves’: A Comment on Evaluating Nudges.” International Review of Economics 65(1): 1-8, March 2018.
[Round 1 here; Round 3 here]
• In trying to improve wellbeing, individuals’ judgments of their own welfare are a central metric.
This metric is complicated, however, if people have different judgments before and after a nudge, say.
• Sugden argues that two potential interpretations of “as judged by themselves” (AJBT) are flawed, one by applying only to relatively rare self-control issues, and the second by allowing individual preferences to be sacrificed to the whims of nudgers.
• Sugden's title asks if people really want to be nudged towards healthier living. The empirical answer is “yes.”
• AJBT is not our method to rule out charges of paternalism, but rather, to limit the coercive element of paternalistic acts – like a GPS, we want to improve “navigability,” so people can better serve their own interests. Nudges are about means, not ends.
• Reminders (such as text messages) serve people’s pre-nudge preferences -- likewise with information provision, as with calorie counts.
Other nudges can change behaviors in a manner that the nudged individual endorses after-the-fact, but not before, such as a mechanism to dissuade texting while driving.
• With self-control problems (akrasia), nudges might help to bolster Dr. Jekyll (planner) at Mr. Hyde’s (doer) expense.
Sunstein asked folks online if they had a self-control problem: the majority said yes. And programs to ends addictions are quite popular.
• Yes, preferences can be formed in the process of elicitation; for instance, people might stick with, and endorse, any of various default settings. Then nudgers are forming preferences, but AJBT limits what nudgers can do.
• To summarize, some nudges serve ex ante preferences when they increase navigability; some help with (widespread!) self-control shortcomings; and some contribute to preference formation, but in a manner that still respects after-the-fact preferences.
