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Intro to Concepts in Behavioral Economics and Decision Making - Mar 2010
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I've had a look at the readings, except the WSJ article which required a subscription. I'll see if I can get it through my library.
Anyway, one issue which struck me reading the financial advisers take on Ariely was the way in which 'emotion' was presented. The message seemed to be: "If only people were more 'cold' and 'rational' in judging their own interests, and didn't let emotion get in the way, everything would be better." I think that might be good advice for a financial adviser to give to an 'over-emotional' investor (one who chooses investments based on 'feel-good' factors, or refuses to adjust investment strategy because looking at falling values is too depressing, and so on).
However, in general, I'm suspicious of attempts to divide up behaviour (or people) into 'emotional' (bad) and 'rational' (good). In one of his pieces, Ariely himself talked about whether humans are more like Mr Spock or more like Homer Simpson. Maybe we should be a bit more like Mr Spock in our financial planning, but I wouldn't want to eliminate emotions (even 'bad' emotions) from all the other areas of our lives. We should understand our inner Homer, but not try to eliminate him. For all of its difficulties, being emotional is an essential part of being human. That's my take on it anyway.
Talk of Homer Simpson naturally leads to consideration of obesity, the second topic for the week. I listened to the podcasts from EconTalk which Antonio mentioned. I particularly liked the quotation about puritanism being the sneaking suspicion that someone, somewhere is having a good time. Any policy which aims to reduce obesity has to come to terms with the idea that eating is pleasurable and pleasure is a good thing. Many of the things we do for pleasure risk shortening our lives, but make like worth living. I would support sensible policies to address obesity, but we need to keep a sense of proportion. Banning foods which are enjoyable, because some people over-indulge in them would be an over-reaction. So I wonder if there's a libertarian paternalist solution?
Using labelling is one approach, but the short piece in the reading was interesting. If the nutritional label is confusing enough to distract people from the price, then companies may be using BE techniques to increase spending rather than promote health. (Like the cafeteria example of Thaler, you have to arrange the food somehow, but you can choose to arrange it for 'good' or 'evil'.) If a corporation is choosing how to do its own labelling, then it will try to do it to increase profits, presumably. On the other hand, an employer might use labels in a cafeteria to promote health and productivity of employees. At my work, there is a 'traffic light' system, which shows red, yellow, green circles for fat, salt, sugar etc, so it's pretty easy to say at a glance whether something is high or low risk (based on percentage of recommended daily amount). Of course, I have to trust that the person doing the labels isn't lying to me, and that the recommended levels are based on accurate research, which may not always be true, but I do use the information (usually to choose between two options both of which look equally enjoyable - I wouldn't choose the healthy option if I wasn't going to enjoy eating it). Now my employer may have similar goals to me, in wanting me to be healthy and productive, but I'm not convinced that a restaurant has my interests at heart. They want me to keep coming back spending money, but as long as I'm healthy enough to get through the door, that's good enough, and if I'm more likely to come back for sweeter, fattier food, then that's what they'll offer. I think there's a role for government in ensuring that restaurants tell the truth to their customers about the health impact of their food, and that the information is presented in a way which allows for sensible comparison.
In the article in the reading, it is suggested that the trade organisation is in favour of the provisions in the healthcare reform legislation, because it's better to have a single set of requirements, rather than different rules in each City or State. That allows restaurants to compete with each other by offering food which is healthier, or tastier, or cheaper than their competitors. Without a system of fair labelling, the restaurant which was trying to offer healthier food would be at a disadvantage, because taste and cost are more obvious to the consumer, whereas health is harder for the individual consumer to judge, without a reliable source of information. I wouldn't trust a private business to give me the information about the product they were trying to sell me, unless there was a system of regulation to ensure that businesses could not take unfair advantage of consumers, or competitors.
As a nutritionist who has been learning about libertarianism, the Austrian school and behavioral economics, this is a really complex problem. Do you solve the symptoms - obesity (big difficult problem) or try to get to the root causes (historic, regulatory and cultural)? The US used to be about WIN-WIN - everyone was better off if everyone was better off. But the US sugar beet farmers were able to get legislation that kept imported sugar prices high. Then the food industry needed to find cheaper sweeteners and High Fructose Corn Syrup was invented - great for agra business and corn farmers in particular. Now lots of "empty" calories in attractive packaging with an infinite shelf-life cost next to nothing while real food (with actual nutritional value) is expensive and often not available in neighborhoods where obesity is most prevalent.
So where to start to fix this problem...
Great points. Labelling only helps if people have a choice that's available. If the only 'convenience' food is junk, and there are no real food options, then labelling just tells you how bad it is.
interesting reference to Behavioral Economics as it relates to training and education ...
Behavioral Economics is about slight of hand
Behavioral Economics is actually the marriage of economics with psychology and sociology. Some programs use it to “improve the accuracy and empirical reach of economic theory“. One of the main premises of behavioral economics is that humans have bounded rationality – which means the rationality of individuals is dependent on the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make decisions (via wikipedia). This is a field with decades of research to back it up. Maybe a bit complicated to understand and explain, but deserving of a better description than a comparison to a magic trick.
... We’re at a time when the roles that would traditionally defend us against information imposters are being eliminated by the move to digital. What if defense of truth and logic is one of our new responsibilities as elearning and social learning professionals?
http://gminks.edublogs.org/2010/03/27/lets-get-real-about-analysis-start...
reference to the link above
...Same with "behavioral economics is about slight of hand." If this were true, we'd never know how long to make left-turn lanes (or even whether to make them at all), stores would always run out of stock, and restaurants would have no reason to close between midnight and 6:00 a.m.
http://www.downes.ca/cgi-bin/page.cgi?post=52105
Good point. The political economy definitely influences the choice set. It could also be that even our produce is actually less nutritious now than it used to be. Anyone read Omnivore's Dilemma?
Good point on the emotion vs. reason. Even a lot of our rational thinking is influenced by emotions. In many cases we decide what we feel, and then use our rational mind to justify it! Also things like fear actually have a real purpose to move out of the way of a speeding car, a chasing tiger. I think we need to understand what types of decisions should be made with what part of your brain and also be humble enough to know that our rational brain doesn't always know what the other side will do when it's aroused.
In The Upside of Irrationality article, the Investment Advisor author observes "If we rely too heavily on the expectation that people will act rationally, we can end up making mistakes when we design policies and institutions." This is a very thought-provoking article with many good observations that helped connect the psychology to financial behavior.
But is this the problem? It seems that way too many people are taking advantage of this known predictable irrationality for their own gain. Instead of eliminating the conflict of interest, there seems to be a systematic migration to allowing and even encouraging these behaviors. Not only are we moving away from identifiable cash money, everyone - government, corporations, non-profits, financial advisors, kids - is 'generously' spending other people's money (yours and mine).
Is this really the problem or is it just me?
My suggestion for a scheme using the insights from BE to combat
obesity would be along the lines of the savings plan that Thaler and a
colleague devised. Defer the pain of eating more healthily to the
future. If I like candies that's bound to be connected to some brain
chemical that gratifies me whenever I eat the candy.
I don't think that any plan that tries to make junk food bad by
showing obese extremely overweight persons or displaying the calories
would work. Not even showing "how easy it is" to start on the healthy
food path. A striking example of bad publicity not working is the slim
success of the "tobacco kills" campaigns throughout the world.
Instead, increasing the price of cigarettes has been much more
effective, up to a certain point of course. Since there's a threshold
when contraband of cigarettes becomes an activity whose risks are
compensated by the prospective returns.
I know a little about a matter that bears some resemblance to
inducing people in the path of a healthy diet and away from carb
loaded foods. In the realm of classical music appreciation there have
been a lot of plans for getting more people to enjoy it. But most of
them revolve around the concept of crossovers, i.e., exposing
non-classical music aficionados to concerts that compromise in
quality, most of the time, and downplay the real difference between
pop music and classical music. Doing that devalues the gains that
someone can get by starting to appreciate classical music: the new
vistas that it will be provided by crossing the chasm that separates
classical music from pop music. Enough digression: back to food.
Implementing such a plan, of healthy eating habits, is feasible,
specially if people work in a company with a cafeteria where they
lunch every workday. My putative plan:
1. You commit yourself to eating less X hi-carb food during the next
Y months.
2. If you fail to follow up on your commitment, that will translate in
the hi-carb food being more expensive for you.
3. Provide a simple measure of success that the persons following the
plan can access and infer their evolution.
4. As you progress in the healthy food plan, the healthy food becomes
cheaper for you. I think that a case could be made for the employer
subsidizing this plan that leaner/healthier employees are better
employees.
5. Hopefully the increase in energy the person will get from being
leaner will act to reinforce the away from bad food and the towards
good food.
I'm afraid that the classical music question is much more
difficult. Perhaps someone here can devise a scheme for classical
music adoption. Needless to say that if you crack that nut, there's
much $ to be made by consulting work with the world opera houses,
concert halls and such. For me I think that it's a ill-posed problem,
I believe that classical music it's not for the masses, but I guess
that now I've exposed myself as an elitist and committed a mortal sin
against the all pervasive dogma of egalitarianism ;)
I'm not sure if classical music is for the masses or not. I'll leave that one up to you. I do like the idea of employers making healthy food cheaper. So at lunch you can either get a healthy lunch for $2 or for free, or pay $7 for a highly caloric lunch. People love bargains or free things (it's called transaction utility) so you might be pitting one's love for a free/cheap meal against the pleasure of chocolate cake :) worth experimenting on!
Simply raising the price on the 'bad' stuff for everyone seems like an old-fashioned classical economics approach to incentives. Antonio's approach seemed to feature a plan which the person agrees to, where the incentives change over time if you don't stick to the plan. More responsive to individual goals, but more complex to implement because the price for the same food item varies for diffferent consumers at different times. You'd need a fairly sophisticated (perhaps confusing) labelling system but I like the idea if it can be made to work.
Raising prices makes me ask who takes the extra profit? If the employer raises prices on unhealthy food that creates a perverse incentive to sell more of it, if they keep the profit. They could use the money to pay for a party, or the office gym, or charitable contribution, but that might make people feel better about eating the wrong things if the 'penalty' is for a good cause.
Phil (currently trapped in New Jersey by volcanic activity)
On an oblique path or some ramblin' on my mind...
Pondering on some of the subjects that we've been discussing here it
surfaced in my mind the idea that BE, notwithstanding it's brilliance,
could be used in the same vein of the mostly 19th century social
engineering concepts that we've seen unfold during the 20th
century. The welfare state, increasing government regulation of the
lives of it's subjects. The ever expanding sphere of influence of
government in our private life.
Since neo-classical economics has as one of its axioms the rationality
of humans we can see the governmental plans as ways to perfect the
imperfect market. Yes we're not perfectly rational and the market it's
a harsh master, but with the right regulations and laws we can make it
behave. Underlying all this thinking is a mechanistic conception of
the world, and specifically of the social world. Very much a 19th
century idea. Philosophically that's rooted in determinism. Given a
set of values for an input, with a certain model, we'll get some
outputs. Given the model, the input determines the output.
BE goes beyond that, and accepts non-determinism and incorporates a
stochastic conception of the world. The role played by emotions and
psychology is to be one of the variables and the model becomes more
sophisticated, although the answers it gives are less reliable. It's a
sort of a paradox.
Question: Could it be that this new concept of stochasticity, rendered
explicit through the insights of BE, will be used by governments and
other powerful institutions to devise new plans, or to "perfect" the
old ones, instead of recognizing their unintended consequences and
thus abandoning the tinkering approach to society and letting its
intrinsic phenomena and forces play their role and thus achieve its
own local extreme points?
That's a big question :) The problem is governments are run by people and people are self interested and often irrational. Furthermore, behavioral economics is not quite mainstream yet, at least from my view. But how about we take a slightly different approach for thinking about how behavioral economics can impact our own lives personally. For example, now that you know defaults are really powerful, would you not think twice if you were automatically enrolled in something? Or if you read the Asian Disease problem in one of the assignments you wouldn't be surprised to know in one experiment with surgeons they framed a particular treatment from a loss perspective, something like a 10% death rate, or from a gain perspective, a 90% survival rate. When they framed is from the gain perspective more surgeons said they'd recommend the surgery. Knowing this, as citizens, consumers, etc., how do we change how we interact with the world?