Nudge is a lovely book recommended by Daniel Kahnemann in his book Thinking Fast and Slow (read: http://vbala99.blogspot.com/2017/10/thinking-fast-and-slow-daniel-kahnemann.html). The book can be downloaded - see here http://calmisc.blogspot.com/2011/11/free-books-online.html.
Quotes from this book (without permission):
Quotes from this book (without permission):
Most Americans have an Automatic System reaction to a temperature given in Fahrenheit but have to use their Reflective System to process a temperature given in Celsius; for Europeans, the opposite is true. People speak their native languages using their Automatic Systems and tend to struggle to speak another language using their Reflective Systems. Being truly bilingual means that you speak two languages using the Automatic System.
Automatic System refers to System 1 or S1 and Reflective System refers to S2. How nice it must be to speak in many languages using automatic system..
Most of the ideas in the book Nudge are about utilizing the behavior of S1.
Many of the examples and thoughts of Thaler and Kahnemann seem so alike. pg within pdf 216 now.
Books recommended by authors:
It is possible to predict the outcome of congressional elections with frightening accuracy simply by asking people to look quickly at pictures of the candidates and say which one looks more competent. These judgments, by students who did not know the candidates, forecast the winner of the election two-thirds of the time!The author hence concludes that voting is through S1. We vote for the person whose face looks competent and that happens through S1.
The Automatic System can be trained with lots of repetition—but such training takes a lot of time and effort. One reason why teenagers are such risky drivers is that their Automatic Systems have not had much practice, and using the Reflective System is much slower.
In many domains, the evidence shows that, within reason, the more you ask for, the more you tend to get. Lawyers who sue cigarette companies often win astronomical amounts, in part because they have successfully induced juries to anchor on multimillion-dollar figures. Clever negotiators often get amazing deals for their clients by producing an opening offer that makes their adversary thrilled to pay half that very high amount.There are apparently three causes of systematic biases
- Anchoring - we go towards an initial estimate.
- Availability - we are affected by what we hear or read about more often even if they are less probable.
- Representativeness - "The idea is that when asked to judge how likely it is that A belongs to category B, people (and especially their Automatic Systems) answer by asking themselves how similar A is to their image or stereotype of B (that is, how representative A is of B)." "We think a 6-foot-8-inch African-American man is more likely to be a professional basketball player than a 5-foot-6-inch Jewish guy because there are lots of tall black basketball players and not many short Jewish ones".
The following are more quotes from the same book:
"people do not assign specific values to objects. When they have to give something up, they are hurt more than they are pleased if they acquire the very same thing. "
"Heads you win $X, tails you lose $100. How much does X have to be for you to take the bet? For most people, the answer to this question is somewhere around $200. This implies that the prospect of winning $200 just offsets the prospect of losing $100... loss aversion operates as a kind of cognitive nudge, pressing us not to make changes, even when changes are very much in our interests."
People are unrealistically optimistic even when the stakes are high. About 50 percent of marriages end in divorce, and this is a statistic most people have heard. But around the time of the ceremony, almost all couples believe that there is approximately a zero percent chance that their marriage will end in divorce—even those who have already been divorced!
Unrealistic optimism is a pervasive feature of human life; it characterizes most people in most social categories....Gains and Losses People hate losses (and their Automatic Systems can get pretty emotional about them). Roughly speaking, losing something makes you twice as miserable as gaining the same thing makes you happy. In more technical language, people are “loss averse.”Human beings are optimistic unduly and also risk averse unduly (as shown in the coin tossing $100 / $200 experiment).
If you are reluctant to give up what you have because you do not want to incur losses, then you will turn down trades you might have otherwise made.If that is the case then most entrepreneurs won't estimate the probability of success of their venture to be higher than average. They would rather maintain status quo. This probably means that there are some people who are unduly optimistic and some who are risk averse and either these are two sets of people are people are overly optimistic about some things and overly conservative about some other things.
Most teachers know that students tend to sit in the same seats in class, even without a seating chart. But status quo bias can occur even when the stakes are much larger, and it can get us into a lot of trouble.
Those who are in charge of circulation know that when renewal is automatic, and when people have to make a phone call to cancel, the likelihood of renewal is much higher than it is when people have to indicate that they actually want to continue to receive the magazine. The combination of loss aversion with mindless choosing implies that if an option is designated as the “default,” it will attract a large market share... Default options thus act as powerful nudges. In many contexts defaults have some extra nudging power because consumers may feel, rightly or wrongly, that default options come with an implicit endorsement from the default setter, be it the employer, government, or TV scheduler.
Suppose that you are suffering from serious heart disease and that your doctor proposes a grueling operation. You’re understandably curious about the odds. The doctor says, “Of one hundred patients who have this operation, ninety are alive after five years.” What will you do? If we fill in the facts in a certain way, the doctor’s statement will be pretty comforting, and you’ll probably have the operation. But suppose the doctor frames his answer in a somewhat different way. Suppose that he says, “Of one hundred patients who have this operation, ten are dead after five years.” If you’re like most people, the doctor’s statement will sound pretty alarming, and you might not have the operation. Framing matters in many domains.
Framing works because people tend to be somewhat mindless, passive decision makers. Their Reflective System does not do the work that would be required to check and see whether reframing the questions would produce a different answer. One reason they don’t do this is that they wouldn’t know what to make of the contradiction. This implies that frames are powerful nudges, and must be selected with caution.
To simplify things we will consider just the two end points: hot and cold. When Sally is very hungry and appetizing aromas are emanating from the kitchen, we can say she is in a hot state. When Sally is thinking abstractly on Tuesday about the right number of cashews she should consume before dinner on Saturday, she is in a cold state. We will call something “tempting” if we consume more of it when hot than when cold. None of this means that decisions made in a cold state are always better. For example, sometimes we have to be in a hot state to overcome our fears about trying new things. Sometimes dessert really is delicious, and we do best to go for it. Sometimes it is best to fall in love. But it is clear that when we are in a hot state, we can often get into a lot of trouble.
This is something the behavioral economist George Loewenstein (1996) calls the “hot-cold empathy gap.” When in a cold state, we do not appreciate how much our desires and our behavior will be altered when we are “under the influence” of arousal. As a result, our behavior reflects a certain naïveté about the effects that context can have on choice.
For most of us, however, selfcontrol issues arise because we underestimate the effect of arousal. This is something the behavioral economist George Loewenstein (1996) calls the “hot-cold empathy gap.” When in a cold state, we do not appreciate how much our desires and our behavior will be altered when we are “under the influence” of arousal.
Self-control problems can be illuminated by thinking about an individual as containing two semiautonomous selves, a far-sighted “Planner” and a myopic “Doer.” You can think of the Planner as speaking for your Reflective System, or the Mr. Spock lurking within you, and the Doer as heavily influenced by the Automatic System, or everyone’s Homer Simpson. The Planner is trying to promote your long-term welfare but must cope with the feelings, mischief, and strong will of the Doer, who is exposed to the temptations that come with arousal. Recent research in neuroeconomics (yes, there really is such a field) has found evidence consistent with this two-system conception of self-control. Some parts of the brain get tempted, and other parts are prepared to enable us to resist temptation by assessing how we should react to the temptation.1 Sometimes the two parts of the brain can be in severe conflict—a kind of battle that one or the other is bound to lose.The doer is S1 while the planner is S2.
When self-control problems and mindless choosing are combined, the result is a series of bad outcomes for real people.
David’s inner Planner knew that he needed to stop procrastinating and get his thesis done, but his Doer was involved in many other more exciting projects and always put off the drudgery of writing up the thesis. (Thinking about new ideas is usually more fun than writing up old ones.).This seems to indicate that doer (S1) is a P and planner (S2) is J. It doesn't match with what I had figured earlier. That P is S2 and J is S1.
Mental accounting matters precisely because the accounts are treated as nonfungible. True, the mason jars used by Dustin Hoffman (and his parents’ generation) have largely disappeared. But many households continue to designate accounts for various uses: children’s education, vacations, retirement, and so forth. In many cases these are literally different accounts, as opposed to entries in a ledger. The sanctity of these accounts can lead to seemingly bizarre behavior, such as simultaneously borrowing and lending at very different rates. David Gross and Nick Souleles (2002) found that the typical household in their sample had more than $5,000 in liquid assets (typically in savings accounts earning less than 5 percent a year) and nearly $3,000 in credit card balances, carrying a typical interest rate of 18 percent or more.
The academic effort of college students is influenced by their peers, so much so that the random assignments of first-year students to dormitories or roommates can have big consequences for their grades and hence on their future prospects. (Maybe parents should worry less about which college their kids go to and more about which roommate they get.)
It is almost as if people can be nudged into identifying a picture of a dog as a cat as long as other people before them have done so. Why, exactly, do people sometimes ignore the evidence of their own senses? We have already sketched the two answers. The first involves the information conveyed by people’s answers; the second involves peer pressure and the desire not to face the disapproval of the group. ..Remarkably, recent brain-imaging work has suggested that when people conform in Asch-like settings, they actually see the situation as everyone else does... Sometimes people will go along with the group even when they think, or know, that everyone else has blundered. Unanimous groups are able to provide the strongest nudges—even when the question is an easy one, and people ought to know that everyone else is wrong
There is an important clue here about how seemingly similar groups, cities, and even nations can converge on very different beliefs and actions simply because of modest and even arbitrary variations in starting points...The clear lesson here is that consistent and unwavering people, in the private or public sector, can move groups and practices in their preferred direction...More remarkable still, the group’s judgments became thoroughly internalized, so that people would adhere to them even when reporting on their own...In a series of experiments, people using Sherif’s basic method have shown that an arbitrary “tradition,” in the form of some judgment about the distance, can become entrenched over time, so that many people follow it notwithstanding its original arbitrariness.All this tradition and nudge is about S1 at work, not S2.
An important problem here is “pluralistic ignorance”—that is, ignorance, on the part of all or most, about what other people think. We may follow a practice or a tradition not because we like it, or even think it defensible, but merely because we think that most other people like it. Many social practices persist for this reason, and a small shock, or nudge, can dislodge them.
The moral is that people are paying less attention to you than you believe. If you have a stain on your shirt, don’t worry, they probably won’t notice. But in part because people do think that everyone has their eyes fixed on them, they conform to what they think people expect.
Most strikingly, the success of songs was quite unpredictable, and the songs that did well or poorly in the control group, where people did not see other people’s judgments, could perform very differently in the “social influence worlds.” In those worlds, most songs could become popular or unpopular, with much depending on the choices of the first downloaders. The identical songcould be a hit or a failure simply because other people, at the start, were seen to choose to have downloaded it or not.
Small interventions and even coincidences, at a key stage, can produce large variations in the outcome. Today’s hot singer is probably indistinguishable from dozens and even hundreds of equally talented performers whose names you’ve never heard. We can go further. Most of today’s governors are hard to distinguish from dozens or even hundreds of politicians whose candidacies badly fizzled.
A few weeks before the Iowa caucuses, Kerry’s campaign seemed dead, but then he unexpectedly won Iowa, then New Hampshire, and then primary after primary. How did this happen? . . . When everyoneis looking to someone else for an opinion—trying, for example, to pick the Democratic candidate they think everyone else will pick—it’s possible that whatever information other people might have gets lost, and instead we get a cascade of imitation that, like a stampeding herd, can start for no apparent reason and subsequently go in any direction with equal likelihood. . . . We think of ourselves as autonomous individuals, each driven by our internal abilities and desires and therefore solely responsible for our own behavior, particularly when it comes to voting. No voter ever admits—even to herself—that she chose Kerry because he won New Hampshire.This example shows absence of free-will.
If you want to nudge people into socially desirable behavior, do not, by any means, let them know that their current actions are better than the social norm.
When they were merely told that their energy use was below average, they felt that they had some “room” to increase consumption, but when the informational message was combined with an emotional nudge, they didn’t adjust their use upward.
Priming refers to the somewhat mysterious workings of the Automatic System of the brain. Research shows that subtle influences can increase the ease with which certain information comes to mind.
But social scientists have discovered an odd fact: when they measure people’s intentions, they affect people’s conduct.
It turns out that if you ask people, the day before the election, whether they intend to vote, you can increase the probability of their voting by as much as 25 percent!
Those given iced coffee are more likely to see other people as more selfish, less sociable, and, well, colder than those who are given hot coffee. This, too, happens quite unconsciously. The three social influences that we have emphasized—information, peer pressure, and priming—can easily be enlisted by private and public nudgers. As we will see, both business and governments can use the power of social influence to promote many good (and bad) causes.
people will need nudges for decisions that are difficult and rare, for which they do not get prompt feedback, and when they have trouble translating aspects of the situation into terms that they can easily understand.
Self-control issues are most likely to arise when choices and their consequences are separated in time.Wowowow.
Unfortunately, some of life’s most important decisions do not come with many opportunities to practice. Most students choose a college only once. Outside of Hollywood, most of us choose a spouse, well, not more than two or three times. Few of us get to try many different careers...Generally, the higher the stakes, the less often we are able to practice.
Suppose instead you were putting the golf balls but not getting to see where they were going. In that environment, you could putt all day and never get any better. Alas, many of life’s choices are like practicing putting without being able to see where the balls end up, and for one simple reason: the situation is not structured to provide good feedback. For example, we usually get feedback only on the options we select, not the ones we reject.
Two of the best restaurants in Chicago (Alinea and Charlie Trotter’s) give their diners the fewest choices. At Alinea diners just decide whether they want fifteen very small plates or twenty-five tiny ones. At Charlie Trotter’s, the diner is asked only whether to limit the dining to vegetables or not. (In both, one is asked about dietary restrictions and allergies.) The benefit of having so little choice is that the chef is authorized to cook you things you would never have thought to order.WOWOWOW
Take the problem of choosing a mutual fund for your retirement portfolio. What an investor needs to know is how a choice between those funds affects her spending power during retirement under various scenarios—something even an expert armed with a good software package and complete knowledge of the portfolios held by each fund can have trouble analyzing.
For irrational consumers to be protected there has to be competition... Consider the case of extended warranties on small appliances, typically a bad deal for consumers. To take a specific hypothetical example, suppose that a cell phone costs two hundred dollars. The cell phone has a free warranty for the first year, but the cell phone company offers, for twenty dollars, an extended warranty for the second year of the phone’s life. After that the consumer plans to buy a new phone. Suppose that the chance that the phone will break during the second year is 1 percent, so on average consumers will get two dollars’ worth of benefits from having this policy—but the price of the extended warranty is twenty dollars in order to include a normal profit to the insurer and a kickback (er, commission) to the salesperson at the cell phone store... If consumers have a less than fully rational belief, firms often have more incentive to cater to that belief than to eradicate it.
Flat plates [on doors] say “push me” and big handles say “pull me,” so don’t expect people to push big handles!
My pill(s) every morning, when I wake up.” Taking the pill becomes a habit, and habits are controlled by the Automatic System.
One strategy to use is what Amos Tversky (1972) called “elimination by aspects.” Someone using this strategy first decides what aspect is most important (say, commuting distance), establishes a cutoff level (say, no more than a thirty-minute commute), then eliminates all the alternatives that do not come up to this standard. The process is repeated, attribute by attribute (no more than $1,500 per month; at least two bedrooms; dogs permitted), until either a choice is made or the set is narrowed down enough to switch over to a compensatory evaluation of the “finalists.” When people are using a simplifying strategy of this kind, alternatives that do not meet the minimum cutoff scores may be eliminated even if they are fabulous on all other dimensions. So, for example, an apartment that is a thirty-five-minute commute will not be considered even if it has a dynamite view and costs two hundred dollars a month less than any of the alternatives.
Customers looking for a movie to rent [on Netflix] can easily search movies by actor, director, genre, and more, and if they rate the movies they have watched, they can also get recommendations based on the preferences of other movie lovers with similar tastes, a method called “collaborative filtering.”...Collaborative filtering is an effort to solve a problem of choice architecture. If you know what people like you tend to like, you might well be comfortable in selecting products you don’t know, because people like you tend to like them.
Structuring choice sometimes means helping people to learn, so they can later make better choices on their own.
Suppose in this light that government wants to increase energy conservation. Increases in the price of electricity will surely have an effect; making the increases salient will have a greater effect. Cost-disclosing thermostats might have a greater impact than (modest) price increases designed to decrease use of electricity.
Your Social Security check depends on the amount you have paid in taxes and the number of years you have worked. The payouts are even adjusted for inflation, so you know exactly what you will be paid (unless Congress changes its mind, as it is entitled to do; the Constitution does not protect your right to Social Security benefits).
For what it is worth, many employees say that they “should” be saving more. In one study, 68 percent of 401(k) participants said that their savings rate is “too low,” 31 percent said that their savings rate is “about right,” and only 1 percent said their savings rate is “too high.” Economists tend to belittle such statements, and partly for good reason. It is easy to say that you “should” be doing many good things—dieting, exercising, spending more time with your children—and people’s actions may tell us more than their words. After all, few of the participants who say they should be saving more make any changes in their behavior. But such statements are not meaningless or random. Many people announce an intention to eat less and exercise more next year, but few say they hope to smoke more next year or watch more sitcom reruns. We interpret the statement “I should be saving (or dieting, or exercising) more” to imply that people would be open to strategies that would help them achieve these goals. In other words, they are open to a nudge. They might even be grateful for one.Wow. Very nicely put. The author has differentiated between a nice-to-achieve-goal and a non-goal.
One study finds that the more options in the plan, the lower the participation rates.10 This finding should not be surprising. With more options, the process becomes more confusing and difficult, and some people will refuse to choose at all.The following is an amazingly cute description of our preference to diverisfy:
Naïve diversification apparently starts young. Consider the following clever experiment conducted by Daniel Read and George Loewenstein on Halloween night. The “subjects” were trick-or-treaters. In one condition, the children approached two adjacent houses and were offered a choice between the same two candy bars (Three Musketeers and Milky Way) at each house. In the other condition, they approached a single house, where they were asked to “choose whichever two candy bars you like.” Large piles of both candies were displayed to ensure that the children would not think it was rude to take two of the same. The two conditions produced quite different results. In the house with both kinds of candy, every child selected one of each candy. In contrast, only 48 percent of the children picked one of each candy when they were choosing in sequence in two houses.
In a revealing study, university employees were asked how they would invest their retirement money if they had just two funds to choose from.5 In one condition, one of the funds invested entirely in stocks, the other in bonds. Most of the participants chose to invest their money half and half, achieving an asset allocation of 50 percent stocks. Another group was told that one fund invested entirely in stocks and the other “balanced” fund invested half in stocks and half in bonds. People in this group could have also have invested 50 percent of their money in stocks by putting all their money in the balanced fund. Instead, they followed the 1/n rule and divided their money evenly between the two funds—ending up with mostly stocks. People in a third group were given a choice between a balanced fund and a bond fund. Well, you can guess what they did.
They found that the more stock funds the plan offered, the greater was the percentage of participants’ money invested in stocks.The above seems to contradict the authors' own belief that when Humans were given more options they get more confused and avoid choosing.
individual investors tend to be trend followers, rather than good forecasters, in their asset-allocation decisions...The more choices you give people, the more help you need to provide.
Framing matters: people are more likely to engage in self-examinations for skin and breast cancer if they are told not about the reduced risk if they do so but about the increased risk if they fail to do so.
McFadden’s team members gave seniors a break. They tried to give them a reasonable chance of making a good choice. Seniors didn’t have to worry about pharmacy networks and prior authorization. They were offered only four options. To make the choice even easier, a person’s particular economic circumstances were also thrown out the window. The four plans offered were worth the same amount of money. They differed only in the level of protection provided as drug bills rose. Even in this simplified environment, a high percentage of seniors made poor choices among the four available plans, because they failed to connect their choices to their actual health, prescription use, and attitude toward risk. In all, nearly two-thirds of enrollees failed to choose the plan that minimized their out-of-pocket costs.
Suppose that each of us needs a kidney, and each has a sibling who is willing to donate but does not have the same blood type (which is essential). If Sunstein’s sister was a match for Thaler and Thaler’s brother was a match for Sunstein, then a trade could be set up. Much work is now being done in an effort to orchestrate such matches, using techniques similar to those we discuss below involving school choice. A question to ponder: Why is it socially acceptable for Sunstein and Thaler to arrange this trade but unacceptable for Sunstein to offer to buy Thaler’s brother a new car in exchange for his kidney?
Using an online survey, the researchers asked people, in different ways, whether they would be willing to be donors. In the explicit consent condition, participants were told that they had just moved to a new state where the default was not to be an organ donor, and they were given the option of confirming or changing that status. In the presumed consent version, the wording was identical but the default was to be a donor. In the third, neutral, condition, there was no mention of a default—they just had to choose. Under all three conditions, the response was entered literally with one click. As you will now expect, the default mattered—a lot. When participants had to opt in to being an organ donor, only 42 percent did so. But when they had to opt out, 82 percent agreed to be donors. Surprisingly, almost as many people (79 percent) agreed to be donors in the neutral condition
Recall that people like to do what most people think it is right to do; recall too that people like to do what most people actually do.Ayn Rand's Atlas Shrugged and Richard Thaler's book (Nudges) make an interesting comparison. The former imagines human beings being Econs with enormous thinking power and restraint while Thaler assumes human beings are largely Humans. And Thaler is "righter" than Rand! I shudder to think of Ayn Rand's response when she is told that different default options result in different behaviors or different choices being taken. No wonder she didn't get any (Nobel) prize. Her notions were more theoretical - meant for Econs and kinda unfit for Human consumption. And we know Econs are fictitious beings.
This unanticipated consequence suggested that all by themselves, disclosure requirements might be able to produce significant emissions reductions... In 1998 Los Angeles County introduced hygiene quality grade cards that had to be displayed in restaurant windows. The researchers found that the grade cards caused the restaurant health inspection scores to improve, consumers’ sensitivity to hygiene in restaurants to increase, and hospitalizations for food-borne illnesses to decrease.
The rate you pay depends on the deductible you choose. If you elect a small deductible, such as one hundred dollars, you will pay a much higher rate than if you pick a large deductible, such as one thousand dollars. (Hint: always take the largest deductible you can. It will save you a lot of money over the long run.)This is interesting. That a high deductible policy is better.
For the moment, just notice that it isn’t always to your advantage to be forced to buy the right to sue. Suppose, for example, that people had the right to sue their hairdressers if a haircut went badly wrong, and that the cost of this insurance raised the price of haircuts by $50 after someone who had received a particularly gruesome haircut won a $17 million judgment. Would you be interested in saving $50 per haircut to give up the right to sue if you got a bad one?
One factor that influences a patient’s decision to sue is whether the doctor apologized for the mishap and admitted fault. If an apology prevents a lawsuit, then the deterrent effect of the right to sue is further reduced.
Marital stability is usually good for children (though children can also benefit from the end of a bad marriage).
Many of the examples and thoughts of Thaler and Kahnemann seem so alike. pg within pdf 216 now.
Books recommended by authors:
- The Design of Everyday Things - wonderful book by Don Norman.
Additional reading:
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