How behavioural economics can
improve your life
October, 2013
Frances Woolley
Carleton University
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Outline
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•
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“traditional” versus behavioural economics
Some PSYC 1000
Resisting temptation
Libertarian paternalism
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The great insight of economics
People aren’t stupid
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The great insight of behavioural
economics
People aren’t that smart,
either
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How a non-economist makes driving
safer…
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How an economist makes driving safer
http://offsettingbehaviour.blogspot.ca/2009/04/in-which-masthead-is-explained-and.html
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How a behavioural economist makes
driving safer
• http://www.youtube.com/watch?v=vJG698U2
Mvo
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Cognitive ability – e.g. attention – is a
limited resource
• People economize on use of brain power
• Pay attention selectively, to what seems important,
relevant
– flip side of ability to focus, concentrate on one thing
• Awareness of limitations helps counter-act them
– As a driver, realize you’re not as good as you think you are
• Give drivers feedback on their actual behaviour, e.g. cameras showing
near-misses
– As cyclist or pedestrian, understand you are invisible to
inattentive drivers
• Make eye contact
• Get in their way – drivers see what is in main flow of traffic, not what
is on side of road
• Take evasive action
Further reading: Chabris and Simons, The Invisible Gorilla
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In general:
Humans have two operating systems
• Homo economicus
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–
–
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Conscious
Rational – uses logic, deduction
Deliberative
Slow
– “The planner”
– “System 2” in psychological
literature
Further reading: Thaler and Sunstein
Nudge
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And…
Homer economicus
• Intuitive, fast
• Makes decisions
quickly, easily
• Uses association
• “The do-er”
• “System 1”
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Traditional v. behavioural economics
• Economics models choices of planner
• But much of day-to-day behaviour is governed by
doer
People are fallible, subject to bias
• Knowing biases means
– Less likely to make mistakes
– Use them to your advantage
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Source: http://xkcd.com/862/
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Why do we succumb to temptation?
For lots more on mindless eating, see http://mindlesseating.org/
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Mindlessness
• Do things without thinking – e.g. check
stumbleupon, reddit, etc.
• Why?
– “Timer wasters” give immediate, easy rewards
• That’s what doer wants
– Studying gives short-term pain for long-term gain
• That’s what planner wants
– self-control and discipline, like attention, is hard work
• Only have so much self-control
– So how can planner make doer actually study?
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Strategy 1: Impose external constraints
on Doer
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For more, see http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/04/a-day-in-th
Strategy 2: Take advantage of Doer’s
need for instant gratification
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Strategy 3: Take advantage of Doer’s
loss aversion
• Loss aversion: People hate losing stuff more
than they like gaining stuff
– Our brains seem to process losses and gains
differently (for a good discussion, see
http://webuser.bus.umich.edu/srick/LossesGainsB
rains.pdf)
• Different parts of the brain?
• For some reason, losses trigger more intense reaction?
– Imagine a utility function that is kinked at the
current endowment point.
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“Libertarian paternalism”
Libertarian paternalism (Thaler and Sunstein,
2003) “An approach that preserves freedom of
choice but that authorizes both private and
public institutions to steer people in directions
that will promote their welfare.”
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Examples of libertarian paternalist
“nudges”
• When arranging food in the university cafeteria,
place healthy options front and centre
– Doer opts for what is readily available, salient, what
everyone else is doing.
• Ban sodas larger than 16 oz
– Doer can’t be bothered to get up and order a second
soda
• Make people have to opt out of retirement
savings plans, rather than opt in
– Status quo bias: people stick with default option.
Related to loss aversion.
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Discussion
• Some amount of “choice architecture” is inevitable
– E.g. designing income tax returns
• signature has to go somewhere
• People are more honest when they sign form at top, before
they fill it out, than at end, after they’ve completed it
– Vital to know and discuss implications of design choices
• But what does “promote their welfare” mean
– E.g. Lone parent earning $30K per year
• Will probably qualify for Guaranteed Income Supplement (GIS)
in retirement
• RRSP savings reduce GIS, so have 80% of more effective
marginal tax rate
• Who really benefits by encouraging that person to save?
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Fundamental methodological
challenges
Methodology:
• Mainstream economics: Deductive
• Behavioural economics: Inductive
Basis for normative judgments:
• ECON 4200: “welfare”=utility as revealed by
people’s choices
• Behavioural economics: breaks the link between
choices, preferences and well-being
– Then what?
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Can behavioural economics really
make your life better?
Calculated by Frances Woolley from 2009-10 Canadian Community Health Survey
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