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After taking a hiatus from my road biking due to other commitments and cold weather, I hooked it up to my trainer last weekend and went for a ride.

It was a much-needed break from all the lack of exercise and terrible eating I had been doing. So though it wasn’t exactly fun, it felt great.

As soon as I got off the bike, I also found that I suddenly had an aversion to snacks and fatty foods. Why should this be?  I know that exercise has been shown to be an appetite suppressant, but is what’s going on here really just physiological, or could it also be psychological?

As I pondered my situation, I realized that what was pushing me to suddenly eat more healthfully was the desire to not destroy the benefit gained from exercise.  I was, it seemed, experiencing loss aversion at work.

Could this be why dieting is so unsuccessful when not accompanied by exercise?  Could it be that when a change in diet is the focal point of healthier living, that exercise feels like an additional sacrifice?

When exercise is the focal point, however, eating healthfully is a natural response based in our loss averse tendencies.  I mean, you just burned all those calories. You’re not going to put them back on by eating that fatty cheeseburger, are you?

I’m embarrassed to admit it, simply because for the last decade or so I have tried so hard to reject the fast-food diet I had as a kid growing up in rural America.  Still, however, there is a warm place in my heart for the McDonald’s Monopoly game.

One thing I notice now, though, that I didn’t notice then, is how McDonald’s plays on our irrationality to make this annual marketing campaign such a success.  There are two elements, specifically, that it relies on.

“Threshold” Values

This is a term that I’m making up, perhaps only because I’m not aware of the official moniker.  The idea, however, consistent with behavioral economics thinking, is that we have a tendency to over-value certain amounts because of their symbolic value.  People play the Monopoly game not just because it is a fun complement to their dinner, but also because of the (very distant) possibility of winning that million dollar prize touted in all of the Monopoly game commercials.

A million dollars is a very powerful and motivating amount in our society.  We imbue it with all kinds of meaning and importance that is totally undeserved when you consider how close it is in proximity to 999,999.  For most middle-class Americans, to be a “millionaire” is to have reached the apex of financial success.

Money Illusion

A million dollars doesn’t buy what it used to.  And it sure as hell won’t buy in twenty years what it would buy you today.  McDonald’s recognizes this, but they also know that most Americans don’t, and so they don’t hesitate to reward the million dollar prizes in annuity payments of $50,000 over twenty years.

They are playing on what behavioral economists call money illusion – our tendency to value money in terms of nominal and not real (i.e., discounted for inflation) amounts.

For example, at an average rate of inflation of 3.5%, the $50,000/year that McDonald’s pays its winners would be worth (before taxes) about $735,000 in today’s dollars.  After tax, it would probably be in the neighborhood of $500,000.  (This is its “present value.”)

McDonald’s tactic here also takes for granted the idea that people don’t consider opportunity cost when thinking about how they spend and invest money.  If we did, we would almost certainly poo-poo McDonald’s annuity payment approach and demand a bulk payment in year one.

For example, let’s say that McDonald’s paid out that $735,000 to its winners immediately, instead of promising a million dollars over twenty years.  And let’s say that 50% is taken away in taxes, so you’re left with about $367,000.  If you were able to invest that money for twenty years at a modest 7% rate of return, you’d end up with about $1.325 million (in nominal terms), significantly more than the $1 million they give away.

Note: Robert Shiller and George Akerlof provide a great overview of money illusion and the history of the idea in their book, “Animal Spirits.”

To tie this all together.  Let’s imagine that, instead of the “Play the Monopology Game, Win a Million Dollars!” message that McDonald’s currently sends out, they said something like this…

“Play the Monopoly Game, Win Over $700,000! …Because even after taxes, your winnings can become well over a million dollars in twenty years by investing smartly!”

Now wouldn’t that be a hell of an ad campaign!?

It turns out that even medical doctors are subject to the whims of irrationality and the phenomena of behavioral economics.

This would come as no surprise to Nassim Taleb (whose next book I fear will not be very kind to the medical profession – http://www.fooledbyrandomness.com/notebook.htm), but is likely to be a bit disturbing to the rest of us who tend to be guilty of assigning god-like status to our physicians.

If you ever wondered whether pharma companies are effective at influencing the behavior of doctors, please read the linked article below.

The Ethical Taint of Post-It Notes — and the Power of a Company Policy « Lead Good

From the_amandas photostreamI majored in sociology and anthropology in college.  A couple of weeks before graduation, my academic adviser asked me, “What is the most significant thing that the major has taught you?”  

Of course, he had to ask the question in a public venue, so I felt obligated to provide an intelligent-sounding answer (I believe I spouted off some B.S. about the role of identity in decision-making).  However, I knew that I didn’t really know.  And so did my adviser, who informed me that my answer was unsatisfactory.  The question has stuck with me since.

Now, in my defense, his question was entirely unfair.  Nobody could provide a really good answer to such a fundamental question without some perspective.  I’ve been thinking lately that my study of economics may be providing just that.

As I learn more about traditional economic theory and its corresponding mathematical models and methods, I can’t help but envision a set of perfectly crafted boxes.  These boxes are elegant and glossy.  They are well structured, with clean lines and a logical size and form.  And they are strong, capable of withstanding virtually any weight or impact.  

These boxes have a single purpose in life – to get your personal possessions from point A to point B – and these boxes are designed to carry out that mission optimally, assuming the items in your home conform to particular “standards” and common assumptions.  When that’s the case, all of your items will fit in the minimal number of boxes, while also being maximally protected from damage during the move. 

But your home doesn’t quite fit the standard.  It’s full of third generation hand-me-downs, like your grandmother’s kitchen table, and all of those unsolicited wedding gifts (ooh, another crystal bowl!).  It includes various-sized mementos from international vacations and the six months you spent overseas in India after graduating from college (you were a child of the 60’s, after all).  And then there’s the antiquated microwave – oh, and those baseball trophies from your high school glory days will need to come, too.

In this world, the econ boxes break down.  You try your hardest to shove your belongings inside them, but despite their seemingly perfect design, their size and shape feels awkward and unaccommodating.  Not only that, but a number of your items aren’t even well-suited to boxes.  Some plastic bubble wrap and duct tape would do just fine.

This is the world where sociological and anthropological theoretical models and methods thrive.  As moving boxes, they come in all kinds of odd shapes and sizes.  Some are neat, new, and glossy. Others you collected from the local grocery; they are a bit dirty inside and smell of rotting fruit, but they fit your old college textbooks just right.  Several more you’ve been saving in your basement since your last move, as they worked perfectly for that mismatched set of pots and pans in the kitchen.  

In this way, theoretical models and methods in social sciences like sociology and anthropology often lack the grace, elegance, and appearance of perfection in engineering of their economics counterparts. Yet, the “boxes” in which these disciplines organize their thinking and interpretations of human behavior are often better-suited to our messy and unpredictable world.  Not only that, but the lack of a true canon in these fields makes problem-solving and research a much more creative and inductive, rather than prescriptive and deductive, process.  

It’s that open-ended manner of thinking and approach to understanding the world that makes these “other” social sciences so valuable, and why I am ultimately proud to have undertaken that course of study.

As the current economic and financial crisis is showing us, traditional economic theory is fragile, at best.  While the mathematical rigor that economists bring to their work is admirable, it will only be through the intersection with “messier” social sciences that economics will truly realize its potential.  I hope to be part of that movement.

Nice little post here from the blog “Unbundling as a Pricing Strategy.”  It’s a good example of applying choice architecture and libertarian paternalism to everyday choices that cary with them much grander consequences.

“When people see a 5 cent charge per bag they are more than likely to bring their own bags than if there were given a credit for each bag.”

I just finished Thaler and Sunstein’s Nudge.  Though my enthusiasm faded a bit as the book wore on, I have to admit that the concept of choice architecture that they explore is one of the most exciting ideas that I’ve encountered in a long time.  So exciting, in fact, that I would consider making a career of it (in some ways I already am).

Enthusiasm aside, as I finished the last chapter on “Objections” tonight, I was struck by one of the authors’ comments.  

They discuss the objection that policymakers should always attempt to be neutral.  Well, the premise of the book rests largely on the fact that many of us are choice architects, even though we may not realize it.  We are involved in designing the environments in which people make decisions.  Therefore we influence decisions, whether we like it or not.  So we might as well be intentional in how we go about our design.

What struck me about the neutrality discussion was the assumption that neutrality somehow denotes innocence.  For some reason, as a society we forgive neutrality and punish or reward intentionality (depending on how things turn out).  So if I kill someone unintentionally – in a car accident, for example – I am treated differently than if I kill someone in a premeditated fashion.  The first is likely to somehow be a result of negligence, while the second is a result of something much more insidious.  In this way, they are different.  Yet, both result in the same outcome.  

Along the same lines, choice architects who drive us toward stupid decisions unintentionally are somehow innocent.  Yet, those who drive us toward bad decisions intentionally are somehow evil because they game the system.  

This seems a bit strange to me.  Maybe it shouldn’t.  But  I would prefer a set of cultural norms that places slightly greater emphasis on personal awareness and responsibility.  

If you drive, you drive safely.  If you nudge, nudge intentionally.

From liccle_minxs photostream

From liccle_minx's photostream

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