the clever and the not so clever

Just finished reading Nudge by Thaler and Sunstein, the behavioural economists.
It’s one of those biz books that are great for first 80 pages and then sits in the bottom of your school bag for the next 6 weeks. However, there are some interesting insights, so here are a few of the things I found interesting and worth archiving here to refer back to later. Before doing so, the image below (from their blog) kind of sums it up.

Human decision making has two main systems, automatic and reflective.
 Automatic is fast, intuitive and doesn’t really involve much ‘thinking’. The reflective system is more considered and conscious (what’s 13 multiplied by 12 will require most of us to use our reflective system to calculate the answer).

Human’s are busy and so rely on ‘rules of thumb’ to aid quick decision-making, and although these are very helpful, their use can also lead to systematic bias. Back in the early 70s, the Israeli psychologists Tversky and Kahneman looked at this area and identified three heuristics or rules of thumb.

1. Anchoring – people use fixed or known data to assist in assessment of a new decision. For example, what’s the population of city X? If you know the population of City Y we then adjust our estimate for X by comparing the two cities. You can then influence decision by changing the context of the anchor or the way the question is phrased and this can have a significant impact on the outcome. E.g. by seeding different information in advance or re framing the question.
2. Accessibility – how common is something or what’s the likelihood of it happening. “Vivid and easily imaginable causes of death (e.g. tornadoes often receive inflated estimates of probability, and less-vivid causes like asthma attacks receive low estimates even if the occur with far great frequency. In this example, by a factor of 20.
3. Representativeness or Similarity – how likely is it that A belongs to category B. “We think a 6″ 8′ African-American man is more likely to be a professional basketball player than a 5″ 6′ Jewish guy because there are lots of tall black basketball players and not many short ones. Sometimes stereotypes are right!”

Choices depend, in part, on the way in which problems are “framed”. This is important for public policy.
 Excellent example cited. “(a) If you user energy conservation methods you will save $350 per year. (b) If you do not use energy conservation methods, you will lose $350 per year. Framing the problem as a ‘loss’ as in (b) will be far more effective. [I thought this was interesting because you regularly see Government’s and Utilities with the exact intent framing the question as in (a). Consumers are lazy, they won’t use their reflective system on this type of decision – they’ll just use their automatic system and decide if the saving is worth is or not. Humans are loss aware; framing things in terms of losses is twice as effective as framing in terms of gains so Government and Utilities would be far more effective flipping the way they frame these questions in their advertisements.

Nudges can work by stimulating your reflective system. Good example of this are the decreasing raised lines as you approach a road junction – as you drive over them the little ‘bumps’ nudge you by awakening your conscious and thereby you decide to adjust your speed accordingly.

Mental Accounting – Money is fungible, individual units are capable of mutually substitution – ‘money has no labels’. Policy makers trying to encourage people to save more need to be conscious of this. Christmas savings clubs are a costly self control strategy (as people forgo interest payments etc..) but effective. Having a ‘rainy day’ account is a effective way to save as you need to segment money.

Following the herd – As humans, we often try to conform. One reason why people spend so much time trying to conform is due to the ‘Spotlight Effect’ – we think people will notice if we don’t conform and standout from the crows. An experiment to test this sent a student wearing a non-conforming Barry Manilow t-shirt in to a room of students – when the students were interviewed after wards only 20% actually noticed the guy with the silly t-shirt. People seek conformity because of this illusion. Other examples of this exist like online music stores, where people will be attracted to download popular tracks as it is an easier decision and part of their conformity desire.

Example Nudges.

Thaler and Sustein suggest a dozen nudges in the book some of the ones I liked are shown below

• Give more/ save more tomorrow – have systems whereby your contribution changes according to a salary change.
• Automatic Tax Return – your tax return is sent to you pre-completed, therefore requiring you to approve and sign or adjust and return. Studies in this area have forecast significant cost savings
• Quit Smoking schemes – deposit money each day you don’t smoke. After 6 months of non smoking you collect your money. If you break the commitment, then your savings are donated to charity.

Other examples can be found on the Nudge blog