Session1: Experimentation Randomization: Random assignment of subjects ensures that there are no inherent differences between the groups answering the different questions. The differences in behavior can be attributed solely to the different questions. Experimental Manipulation: To learn what difference something makes in people's behavior, we vary that one thing between subjects. Key Takeaways: - Choice architecture is an important component of many environment - Small and seemingly irrelevant features can improve outcomes - Behav econ is uniquely suited to exploring the psychology of tradeoffs Session2: Libertarian Paternalism A process in which a Choice Architect designs an economic environment with the explicit intent of helping individuals making suboptimal decisions (as judged by themselves), while not significantly harming individuals whose behavior is already optimal (as judged by themselves). Examples: Default Options for Retirement Savings: Many employers automatically enroll employees in retirement savings plans, but allow them to opt-out if they choose. This nudge takes advantage of inertia, encouraging people to save for retirement without forcing them to do so. Traffic Light Placement: Placing healthier food options at eye level in grocery stores or changing the order of items on a menu to highlight healthier choices subtly nudges people towards more nutritious selections. Smoking Warnings: Graphic warning labels on cigarette packages inform consumers about the health risks of smoking without banning the product. Energy Consumption Feedback: Providing households with regular feedback on their energy usage nudges them to conserve energy without imposing restrictions. Calorie Labeling: Requiring restaurants to display calorie counts on their menus provides information to consumers, influencing their choices without prohibiting high-calorie options. Session3: Nestle's Maggi Pricing and Repositioning a Recalled Product. Risk-averse behaviour in gain Risk-loving behaviour in loss Our brains make relative comparisons, not absolute. - Brightness, loudness, temperature...all relative. - So are many of our experiences. We find comparative judgments much easier to make. - It's easy to tell which of two buckets of water is warmer. - It's hard to tell their absolute temperature. Evaluations of economic outcomes are heavily influenced by comparisons. If absolute consumption is what makes people happy... - We should be happier than people 100 years ago. (e.g. electricity, indoor plumbing, entertainment) Loss Aversion: For the consumption of something particular, people dislike losses relative to their reference point more than they like same-sized gains. The inclusion of loss aversion is one of the most important properties of reference-dependent utility. Determining the optimal strategy is part art, part science. - How is the customer framing the product? - What is setting their reference point? - What outcomes will induce a loss sensation? Session4: Powerball -- Somebody's Gotta Win. Linearity in Probabilities (LiP): Utility is weighted by the probability of the outcome. Therefore, if the probability of the outcome doubles then the expected utility also doubles. The Certainty Effect. Psychologically, there is a big premium on removing all risk (100% chance vs. 95% chance). - This effect leads to over-valuing sure things. - Or, alternatively, under-valuing near-sure things - Also, people seem to overweight small probabilities. Prospect theory modifies expected utility in two ways: - Preferences are subject to reference-dependence. ● Defined by gains and losses from some comparison. - Perceptions of probabilities are non-linear. ● Particularly skewed at the extremes. Probability Weighting Function Session5: Evive Health and Workplace Influenza Vaccinations. Free-rider problem: a classic market failure that occurs when the costs and benefits to individuals are not wholly privatized (i.e. there is an externality present). The simulation's problem: all community members can receive a return, regardless of their own contribution Behavioural economics gives us the Internality. - The long-run consequences (good or bad) that are not fully considered when one makes a decision. - One imposes an internality on themself, according to their own preferences. Session6: Selling CFLs at Wal-Mart. Consumer Surplus: consumer valuation (willingness to pay) - price paid Moral Hazard among renters/roommates. - An (incomplete) contract isn't able to align individual actions with their costs. This is a classic problem in economics. - Moral hazard is an economic and financial concept that refers to a situation where one party is encouraged to take excessive risks because it does not have to bear the full consequences of those risks. It typically occurs in situations where one party is protected from the negative outcomes of their actions, often by a third party or by insurance. Dynamic Consistency: The action a person thinks they should take in the future always coincides with the action that they actually prefer once the time comes. Examples: If today we wish ourselves to work on a problem set tomorrow, then tomorrow we prefer to work on the problem set immediately. Present Bias: in actuality, people have a strong tendency to over-value immediate gratification, relative to their own long-term preferences. If so, then dynamic consistency no longer holds. Intertemporal choice problems can lead to: - Dynamic inconsistency: making choices that do not align with one's own long-run preferences. - A consequence of Present Bias. - Leads to adverse market outcomes. Session7: Fyre Festival: Dousing the Flame Ego utility: Utility that is derived from beliefs about one’s traits and abilities. - Entrepreneurs think their business is less likely to fail. Ego utility can grow as: - The trait becomes more important. - Feedback on trait becomes more ambiguous. - One believes they have more control. - One is perceived to be an expert. Key Takeaways. Managerial hubris can be the result of: - Ego Utility, which stems from the beliefs about one’s traits and abilities. Motivates unreasonable optimism. Can cause motivated reasoning. principal-agent problem: When one party (the principal) delegates authority or decision-making responsibilities to another party (the agent) and there is a misalignment of interests or goals between the two parties. This misalignment can lead to conflicts and problems because the agent may not always act in the best interests of the principal. Session8: Daily Bread Food Bank. Social preferences: The degree and nature of how individuals care about the outcomes of others. The ultimatum game reveals distributional preferences. Warm glow giving: The psychological incentive to act in selfless ways in order to achieve a sense of joy and satisfaction. Also referred to as impure altruism. Key Takeaways: Distributional Preferences: The Ultimatum Game reflects how individuals value resource allocation for themselves and others. Warm Glow Giving: Psychological incentive driving selfless actions for joy and satisfaction, essential in understanding donation motivations. Behavioral Tendencies in Non-profits: Leveraging warm glow giving can enhance fundraising strategies and organizational objectives. Session9: Guest Speaker Session10: WSB and the Impact of Social Dynamics on Economic Biases. Rational herding: In a social learning environment, it is often rational for an individual to ignore their private information and follow the herd (i.e. adopt the beliefs and actions of those they observe). Motivated Reasoning A cognitive process in which justification is provided for the individual's preferred outcome, despite the presence of contradictory evidence. Key Takeaways. Incorrect information cascades can be the result of: Rational Herding. A rational means of synthesizing various information. Motivated Reasoning. A behavioural means of supporting a preferred outcome. Either can lead groups to incorrect beliefs despite many individuals being presented with correct information.
