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Conference  Policy Challenges of Behavioral Science Lectures by prof. Barry Schwartz, prof. Robert Cialdini, prof. Max Bazerman, prof. Eldar Shafir, prof. David Laibson, prof. Zvi Bodie and prof. Henriette Prast The Hague, 11 February 2010 More information on www.wrr.nl
 
The Paradox of Choice Barry Schwartz February, 2010
The “Official Syllogism” ,[object Object],[object Object],[object Object]
285 Varieties of Cookies 75 Iced Teas 40 Toothpastes 230 Soups 175 Salad Dressings 275 Cereals
 
 
Phone Service and Gear
 
 
Healthcare ,[object Object]
Education
Investment
Marital and Family Arrangements
 
 
[object Object],YES!
What Too Much Choice Does: Paralysis ,[object Object],[object Object]
What Too Much Choice Does: Decision Quality
What Too Much Choice Does: Satisfaction ,[object Object],[object Object]
 
 
Opportunity Costs in the Lab (Tversky & Shafir,  Psych Sci , 1992) ,[object Object],[object Object],[object Object]
What Too Much Choice Does: Satisfaction ,[object Object],[object Object],[object Object]
 
Maximizing and Satisficing
 
 
Correlates of Maximization ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Career Decisions of College Seniors (Iyengar, Wells, & Schwartz,  Psych Science , 2006) ,[object Object],[object Object],[object Object],[object Object]
Maximizers ,[object Object],[object Object],[object Object]
Maximizers are... ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Maximizing as a Fool’s Errand ,[object Object]
How Can Choice Be Good and Bad?
 
 
 
What Can Be Done ,[object Object],[object Object],[object Object]
“ Libertarian Paternalism” (Sunstein & Thaler,  U. of Chicago Law Review , 2003; Thaler & Sunstein,  Nudge , 2008) ,[object Object]
The Power of Defaults (Johnson & Goldstein,  Science , 2003)
“ Libertarian Paternalism” (Sunstein & Thaler,  U. of Chicago Law Review , 2003; Thaler & Sunstein,  Nudge , 2008) ,[object Object],[object Object]
Choice and Well-Being ,[object Object],[object Object],[object Object]
 
The Power of Social Norms in Behavior Change Dr. Robert B. Cialdini Regents’ Professor of Psychology and Marketing Arizona State University
Contentions ,[object Object],[object Object]
The Descriptive Social Norm   (Consensus)   ,[object Object]
People follow the lead of: ,[object Object],[object Object]
Descriptive social norm (Consensus) If teenager is troubled If teenager has 3+ friends who smoke If teenager has 2 friends who smoke If teenager has a parent who smokes 14% 26% 1000% 2400% Increase in likelihood  of smoking
The Big Mistake ,[object Object],[object Object],[object Object],[object Object]
Implications ,[object Object]
[object Object],Descriptive social norm
Your heritage is being vandalized every day by theft  losses of petrified wood of 14 tons a year, mostly a small piece at a time.
7% 6% 5% 4% 3% 2% 1% 0% 8% Percentage of petrified wood theft. No-sign Control Lone Thief Descriptive Social Norm (3 Thieves)
[object Object],[object Object],[object Object],Descriptive Social Norm
Descriptive Social Norm ,[object Object],[object Object],[object Object]
  ,[object Object]
Typical Hotel Bathroom
 
40% 35% 30% 25% 45% Environmental Focus Cooperation Focus 42.5% 47.5% 37.5% 32.5% 27.5% Percentage of towel reuse Normative Focus
But is there an even more impactful  message that could be sent, knowing  what we know about the consensus principle?
We follow the lead of: ,[object Object],[object Object]
47.5% 42.5% 37.5% 32.5% 52.5% Environmental Focus Cooperation Focus  50% 55% 45% 40% 35% Normative Focus (1) Percentage of towel reuse Normative Focus (2)
[object Object],[object Object],[object Object],Two notable aspects of the data:
Descriptive Social Norms (Consensus) ,[object Object],[object Object]
14.5 14.0 13.5 13.0 12.5 Energy Conservation Appeal Saving Money Benefit to Society Environmental Protection Combined  Controls Energy Consumption (kilowatt hours consumed per day) Descriptive Norm Field Experiment
Descriptive Social Norm    ( Consensus)   How can we use this principle  to advance national environmental goals? One possibility would be to engage the private sector in the process.
OPOWER Report
OPOWER Results
OPOWER Results
Conclusions ,[object Object],[object Object]
Why Don’t We Create Wiser Policies?  A Behavioral Science Analysis Max H. Bazerman Harvard University Disclosure:  I have received consulting teaching fees from Chevron, BP, PWC, Deloite Touche, and Ernst and Young.
The U.S. has a Council of Economic Advisors,  but no Council of Psychological Advisors
The U.S. has a Council of Economic Advisors,  but no Council of Psychological Advisors This talk: Toward a broader social science analysis of failures of public policy making
[object Object],[object Object],[object Object],Bounded Ethicality  Chugh, Bazerman, and Banaji (2005)
Bounded Ethicality ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Boundedness in Noticing  the Ethicality of Others
Behavioral Science Conference WRR TIBER Netspar Ministry of Finance
Boundedness in Noticing the Ethicality of Others ,[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],Bounded Ethicality in Society
What is a rational policy change? Pareto efficiency? Near-Pareto efficiency (Stigletz, 1998): Policy changes that create large benefits for some and comparatively small losses for others, as well as changes that would hurt only a small, narrowly defined special-interest group—in many cases, a group that has already manipulated the political process to its advantage.
3 Stories of our failure to move toward Near-Pareto efficiency ,[object Object],[object Object],[object Object]
3 Stories of our failure to move toward Near-Pareto efficiency ,[object Object],[object Object],[object Object],[object Object],[object Object]
Tobacco – The failed history in the U.S. ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Tobacco – The failed history in the U.S. ,[object Object],[object Object],[object Object],[object Object]
Tobacco – Key Strategies ,[object Object],[object Object],[object Object]
The Failure of Auditor Independence ,[object Object],[object Object]
Chief Justice Warren Burger wrote on behalf of a unanimous U.S. Supreme Court (1984):  ,[object Object]
The Failure of Auditor Independence ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Which makes more sense? ,[object Object],[object Object]
Climate Change ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Behavioral Science Conference WRR TIBER Netspar Ministry of Finance
Behavioral Science Conference WRR TIBER Netspar Ministry of Finance
Climate Change ,[object Object],[object Object],[object Object]
Cognitive Explanations for Predictable Surprises ,[object Object],[object Object],[object Object],[object Object],[object Object]
Political Explanations for the Failure to Enact Wise Policies Distortion of policies and prevention of  meaningful campaign finance reform Overweighting of GM, Philip Morris, Final Four Accounting Firms, ExxonMobil, Etc. Underweighting of current citizens, and dramatic underweighting of future citizens
Strategies of Special Interest ,[object Object],[object Object],[object Object],[object Object]
Obfuscation Tobacco : They knew more than the government, hired skeptics, called for more research, and create a standard for evidence that they knew could not be achieved Auditing : Argued that no evidence existed about the effects of consulting, emphasized that their integrity was the solution Energy : Paid for “experts” to offer skepticism about climate change, while having ample knowledge that climate change existed
Shifting view of what is being challenged Tobacco : Cigarettes are good for you....No causal connection exists....to Cigarettes may be one of many factors that create illness....There is no evidence of second hand smoke affecting health and Of course, smokers knew the risk Auditing : Our reputations are your protection....Disclosure is the right solution Energy : Climate change does not exist....Climate change is not caused by humans....We shouldn’t act until we know that the benefit of action is justified
Encouraging Reasonable Doubt Tobacco : Create reasonable doubt, particularly by smokers who were customers, doctors, and legislators Auditing : No “smoking gun” versus “how would you create an independent auditing function” Energy : PR campaign to say that oil is addressing the issue, publicizing the doubt, and funding the skeptics
Status quo effects It works on an individual level And, it works on a national policy level Status quo effects interact with obfuscation, shifting views of the argument, and encouraging reasonable The result: We are too slow to overcome cognitive and political barriers to create wiser policies
Wise Policies Must… ,[object Object],[object Object],[object Object]
Behaviorally Informed Policy Design for the Poor Eldar Shafir Princeton University  Behavioral Science Challenges for Policy The Hague, February 11, 2010
How are preferences revealed? John Beshears, David Laibson, Brigitte Madrian Harvard University James Choi Yale University February 2010
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
$100 bills on the sidewalk Choi, Laibson, Madrian (2009) ,[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
Education and Disclosure Choi, Laibson, Madrian (2007) ,[object Object],[object Object],[object Object],[object Object],[object Object]
Data from Harvard Staff Control Treatment Fees salient 3% of Harvard staff in Control Treatment  put all $$$ in low-cost fund $494 $518 Fees from  random  allocation $431
Data from Harvard Staff Control Treatment Fees salient 3% of Harvard staff in Control Treatment  put all $$$ in low-cost fund 9% of Harvard staff in Fee Treatment  put all $$$ in low-cost fund $494 $518 Fees from  random  allocation $431
When are revealed preferences most likely to deviate from normative preferences? ,[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
1. Passive choice ,[object Object],03/02/10 How are preferences revealed?
Madrian and Shea (2001) Choi, Laibson, Madrian, Metrick (2004) Automatic enrollment Opt in Opt out
Employees enrolled under automatic enrollment cluster at default contribution rate. Fraction of Participants at different contribution rates: Default contribution rate under automatic enrollment
2. Complexity ,[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
2003 2004 2005 Simplification Beshears, Choi, Laibson, Madrian (2006)
3. Limited personal experience ,[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
03/02/10 How are preferences revealed? Agarwal, Driscoll, Gabaix, and Laibson (2006) Cash advance Late fee Limit fee
4. Third-party marketing ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
5. Intertemporal choice ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
Choosing fruit vs. chocolate Read and van Leeuwen (1998) Time Choosing Today Eating Next Week If you were  deciding  today , would you choose fruit or chocolate for  next week ?
Patient choices for the future: Time Choosing Today Eating Next Week Today , subjects typically choose fruit for  next week . 74% choose fruit
Impatient choices for today: Time Choosing and Eating Simultaneously If you were  deciding  today , would you choose fruit or chocolate for  today ?
Time Inconsistent Preferences : Time Choosing and Eating Simultaneously 70% choose  chocolate
The desire for instant gratification Read, Loewenstein & Kalyanaraman (1999) ,[object Object],[object Object],[object Object],[object Object],[object Object]
A Behavioral Approach to  Revealed Preference: ,[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
How can we measure normative preferences using behavioral data? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
1. Directly measure normative preferences and biases ,[object Object],03/02/10 How are preferences revealed?
Measuring time preferences Laibson, Repetto, and Tobacman (2009) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
Social Science Model ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
Results of simulations: ,[object Object],[object Object],03/02/10 How are preferences revealed?   Empirical  Simulated model %Visa:  68% 63% Visa/Y:  13% 17% MPC:  23% 31% f(W/Y):  2.6 2.7
2. Active Choices ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
401(k) participation rate increases under active decisions 03/02/10 How are preferences revealed? Active decision cohort Standard enrollment cohort
Active Choices in Health Care Beshears, Choi, Laibson, Madrian (2010) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
3. Asymptotic Choice ,[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
03/02/10 How are preferences revealed? Employees move slowly from an old match threshold to a new match threshold. Fraction of employees at 6% savings rate Fraction of employees at 8% savings rate Employer changes match threshold from 6% to 8%
4. Aggregated Revealed Preferences ,[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
5. Reported Preferences ,[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
Procrastination and Under-saving Choi, Laibson, Madrian, Metrick (2002) ,[object Object],[object Object],[object Object]
Typical breakdown among 100 employees Out of every 100 surveyed employees 68 self-report saving too little 24 plan to raise savings rate in next 2 months 3 actually follow through
Self-reports after a financial education seminar 03/02/10 How are preferences revealed? Seminar attendees Non-attendees Percent planning to make change Percent actually made change Percent actually  made  change “ Will enroll in 401(k)” 100% 14% 7%
Do workers like automatic enrollment? ,[object Object],[object Object]
6. Expert Opinion/Informed Preferences ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
Conclusion: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],03/02/10 How are preferences revealed?
Behaviorally Informed Policy Design for the Poor ,[object Object],[object Object],3.  Overview of ongoing work on scarcity 4.  Final remarks on regulation…
Alternative views of the human agent ,[object Object],[object Object],[object Object]
Milgram’s Obedience Studies “ Teachers” punish “learners’” (confederates’) errors with a shock generator…
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Behavioral research:  The importance of context and construal  (in  survey responses, language, perception, judgments, decisions, social / political life, etc…) A simple but profound fact: Decisions are not about objective states of the world,  but about our mental representations of those states  The Power of the Situation The Tendency to   Underestimate the Power of the Situation
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],X X
The Power of Defaults   Johnson & Goldstein,  Science,  2003
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
 
The Save More Tomorrow Plan (SMarT;  Benartzi & Thaler ) ,[object Object],[object Object],[object Object]
Results in First Implementation
What’s Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment  ( Bertrand, Karlan, Mullainathan, Shafir, Zinman;  Quarterly Journal of Economics,  forthcoming) ,[object Object],[object Object],[object Object],[object Object],[object Object],Behavioral (“Marketing”) Manipulations:  •  # of loan examples shown •  subtle peripheral cues; photos •  (promotions, reminders…) Some results: 1 vs. 4 examples: ~ 2.3 percent. points For males: female picture = ~ 4.5 points (Unwanted) promotion = ~ 4 points
Two Dominant Views of Poverty ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],An alternative : Neither rational nor pathological; just plain human, prone to nuanced construal, contextual factors (inherent to poverty), etc.
Rational Choice explanation: ,[object Object],Force coverage in poor areas; Subsidize accounts held by the poor; Offer financial incentives Policy Implications: Pathology explanation: Culture of poverty. deep distrust, misunderstand, lack of education, wrong “values”, myopia Financial education and training; Teach budgeting and planning Early interventions in children Policy Implications: The (poor) unbanked..  (25% of US households: unbanked or underbanked..) Behavioral explanation: “minor” situational factors?…
[object Object],[object Object],[object Object],[object Object],[object Object]
Subsidized bank accounts,  ( Bertrand, Mullainathan, & Shafir; Center for Economic Research & Shorebank; Providing low-fee bank accounts to poor) ,[object Object],[object Object],[object Object],[object Object],(Intervention -- ~10 pct. pts. -- has greater impact than choosing to be  there or not, ~8 pct. pts…)  ,[object Object],[object Object]
A poor ‘identity’ Identity salience in the context of welfare benefits programs  (EITC and local VITA sites) … Stopped to consider:    44%    58%  ( ns)  Of those, took the information:  36%   79%  p= .03. (Total take up:) 16%   46% Neutral   Affirmation Condition: (Crystal Hall, PU dissert., 2008)
The Context of Poverty General “lack of slack” means exhausted savings, mounting debt, making ends meet with current income.  Material hardship is high: within a 12-month period, 90 percent of low to moderate income households experience major illness or medical expense, eviction, utility shutoff, phone disconnection, not having enough to eat, or a bankruptcy filing.   [Detroit Area Household Financial Services study]  Inherent to poverty:  Scarcity Conditions of scarcity produce their own psychology.  This psychology, interacted with scarcity, yields particular behaviors.
Psychology of Scarcity ,[object Object],[object Object],[object Object],[object Object],[object Object]
Family Feud   Multiple rounds  High slack: 50 sec / rd (total 1000 sec) Low slack:15 sec / rd (total 300 sec) High interest loans..   (w. Anuj Shah)
 
 
No borrowing vs. high interest: P < .001 ( No borrowing vs. no interest: P < .09 )
Smoothing consumption  from windfalls
Rounds Completed
Points Earned Low slack windfalls: >20% loss of earnings;  Interaction: p< .05
Financial challenges in a NJ mall… ,[object Object],Several scenarios, e.g.: With Stroop and Raven’s tests in between:
P < .05  in both cases
P < .05 for Poor;  ns  for Rich
Irony of poverty context ,[object Object],[object Object]
Behaviorally Informed Regulation ( Barr, Mullainathan, & Shafir,  2008)   ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The firm & the individual ( Barr, Mullainathan, & Shafir,  2008)  Market neutral / wants to overcome consumer fallibility Market happy to exploit consumer fallibility com poun ding pro crastination Consumers misunderstand compounding in  savings      Banks would like to  reduce  this so as to increase savings base Consumers procrastinate in signing up for EITC     Tax filing companies would like to  reduce  this so as to increase number of customers Consumers misunderstand compounding in  borrowing     Banks would like to  exploit  this to increase borrowing Consumers procrastinate in returning rebates    Retailers would like to  exploit  this so as to increase revenues
Behaviorally informed regulation RULES SCORING Market neutral / wants to overcome consumer fallibility Market happy to exploit consumer fallibility ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Public education on saving Direct deposit/auto-save Licensing Opt-out mortgage (credit card, etc.) system Information debiasing  Tax incentives for savings plans for poor Penalties to make opt-out system “sticky” Ex post liability standard for truth in lending Broker fiduciary duty
To summarize: Context has big impact on behavior Context of the poor is particularly tough Need context design and regulation  (above & beyond financial education) to ameliorate outcomes for the poor...
Thank you…
Taxi fare when you first get in?…  (Boston South Station)
Tradeoffs: % who think about  what they’d not buy instead… (India)
Tradeoffs: % who think about  what they’d not buy instead… (US)
Percent willing to travel 45 mins to save $50:
Percent willing to travel 45 mins to save $50:
Willingness to travel to save $25…
The Suitcase Metaphor ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Money (the poor)  vs.  Time (you) Tradeoffs     If I buy this, what do  If I do this, what do    I  not  buy instead?  I not do instead? Temptation   Shouldn’t have    Shouldn’t have    bought…      committed… Error/Distraction   Failed to pay…   Failed to do…  Bad borrowing  Given what you owe,    what are you doing    spending?!   Given what you owe, what are you doing  schmoozing?!..  Even basic goods become “luxuries”  Even basic activities  turn into “luxuries” Affordability
Zvi Bodie, Norman and Adele Barron Professor of Management, Boston University, and Member of the Scientific Council of Netspar  and Henriette Prast, Professor of Personal Finance, Tilburg University, and Member of the Scientific Council for Government Policy, the Netherlands Behavioral science, junk science, and pension saving
Underlying Assumptions ,[object Object],[object Object],[object Object],[object Object],[object Object]
Behavioral insights (1) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Policy implication (1) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Behavioral insights (2) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Policy implication (2) ,[object Object],[object Object]
Increased relevance for NL ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Guarantees as the default option ,[object Object],[object Object],[object Object]
Rational pension for homo (f/m) sapiens ,[object Object],[object Object],[object Object],[object Object]
Design and production of personal pension contracts ,[object Object]
 
Institutional design ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Role for the government ,[object Object],[object Object]
Conclusions ,[object Object],[object Object]
Conclusions (2) ,[object Object],[object Object]
Behavioral policy challenges for the Netherlands Henriëtte Prast Professor of Personal Finance, Tilburg University Member Scientific Council for Government  Policy Netspar Fellow &TIBER Friend The Hague, February  11, 2010
Paul Samuelson (1915 – 2009) ,[object Object],[object Object]
Behavioral policy challenge ,[object Object],[object Object]
Behavioral policy implication (1) ,[object Object],[object Object]
Policy implication (2) ,[object Object],[object Object]
Policy implication (3) ,[object Object],[object Object],[object Object],[object Object]
Scientific Council Project ,[object Object],[object Object],[object Object]
Main Products 2009 ,[object Object],[object Object]
Main Products 2009 (2) ,[object Object],[object Object]
The Hague institutions that have actively expressed interest include ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Focus on three domains ,[object Object],[object Object],[object Object]
Why health related behavior (1) ,[object Object],[object Object],[object Object],[object Object]
Why health related behavior (2) ,[object Object],[object Object],[object Object],[object Object],[object Object]
Ab Klink  (ZNETWERK, maart 2009) ,[object Object]
Why prosocial behavior (1) ,[object Object],[object Object],[object Object],[object Object]
Why prosocial behavior (2) ,[object Object],[object Object],[object Object]
Meat the facts ,[object Object],[object Object],[object Object]
Why personal finance (1) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Why personal finance (2) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Non-neutrality – willpower problem ,[object Object],[object Object],[object Object]
Traditional policy ,[object Object],[object Object],[object Object],[object Object]
Stick examples  ,[object Object],[object Object],[object Object]
Carrot examples ,[object Object],[object Object],[object Object]
Priest examples ,[object Object],[object Object]
Teacher examples ,[object Object],[object Object],[object Object],[object Object],[object Object]
Behavioral challenges (1) ,[object Object],[object Object]
Cost of priest and teacher ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Take the stairs!
Get the message?
Don’t s ,[object Object],[object Object]
Do’s ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Food for thought ,[object Object],[object Object]
Some policy suggestions ,[object Object],[object Object],[object Object],[object Object],[object Object]
Some more policy suggestions ,[object Object],[object Object],[object Object],[object Object]
Some final policy suggestions ,[object Object],[object Object],[object Object],[object Object],[object Object]

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Behavioral Science Conference WRR TIBER Netspar Ministry of Finance

  • 1. Conference Policy Challenges of Behavioral Science Lectures by prof. Barry Schwartz, prof. Robert Cialdini, prof. Max Bazerman, prof. Eldar Shafir, prof. David Laibson, prof. Zvi Bodie and prof. Henriette Prast The Hague, 11 February 2010 More information on www.wrr.nl
  • 2.  
  • 3. The Paradox of Choice Barry Schwartz February, 2010
  • 4.
  • 5. 285 Varieties of Cookies 75 Iced Teas 40 Toothpastes 230 Soups 175 Salad Dressings 275 Cereals
  • 6.  
  • 7.  
  • 9.  
  • 10.  
  • 11.
  • 14. Marital and Family Arrangements
  • 15.  
  • 16.  
  • 17.
  • 18.
  • 19. What Too Much Choice Does: Decision Quality
  • 20.
  • 21.  
  • 22.  
  • 23.
  • 24.
  • 25.  
  • 27.  
  • 28.  
  • 29.
  • 30.
  • 31.
  • 32.
  • 33.
  • 34. How Can Choice Be Good and Bad?
  • 35.  
  • 36.  
  • 37.  
  • 38.
  • 39.
  • 40. The Power of Defaults (Johnson & Goldstein, Science , 2003)
  • 41.
  • 42.
  • 43.  
  • 44. The Power of Social Norms in Behavior Change Dr. Robert B. Cialdini Regents’ Professor of Psychology and Marketing Arizona State University
  • 45.
  • 46.
  • 47.
  • 48. Descriptive social norm (Consensus) If teenager is troubled If teenager has 3+ friends who smoke If teenager has 2 friends who smoke If teenager has a parent who smokes 14% 26% 1000% 2400% Increase in likelihood of smoking
  • 49.
  • 50.
  • 51.
  • 52. Your heritage is being vandalized every day by theft losses of petrified wood of 14 tons a year, mostly a small piece at a time.
  • 53. 7% 6% 5% 4% 3% 2% 1% 0% 8% Percentage of petrified wood theft. No-sign Control Lone Thief Descriptive Social Norm (3 Thieves)
  • 54.
  • 55.
  • 56.
  • 58.  
  • 59. 40% 35% 30% 25% 45% Environmental Focus Cooperation Focus 42.5% 47.5% 37.5% 32.5% 27.5% Percentage of towel reuse Normative Focus
  • 60. But is there an even more impactful message that could be sent, knowing what we know about the consensus principle?
  • 61.
  • 62. 47.5% 42.5% 37.5% 32.5% 52.5% Environmental Focus Cooperation Focus 50% 55% 45% 40% 35% Normative Focus (1) Percentage of towel reuse Normative Focus (2)
  • 63.
  • 64.
  • 65. 14.5 14.0 13.5 13.0 12.5 Energy Conservation Appeal Saving Money Benefit to Society Environmental Protection Combined Controls Energy Consumption (kilowatt hours consumed per day) Descriptive Norm Field Experiment
  • 66. Descriptive Social Norm ( Consensus) How can we use this principle to advance national environmental goals? One possibility would be to engage the private sector in the process.
  • 70.
  • 71. Why Don’t We Create Wiser Policies? A Behavioral Science Analysis Max H. Bazerman Harvard University Disclosure: I have received consulting teaching fees from Chevron, BP, PWC, Deloite Touche, and Ernst and Young.
  • 72. The U.S. has a Council of Economic Advisors, but no Council of Psychological Advisors
  • 73. The U.S. has a Council of Economic Advisors, but no Council of Psychological Advisors This talk: Toward a broader social science analysis of failures of public policy making
  • 74.
  • 75.
  • 76. Boundedness in Noticing the Ethicality of Others
  • 78.
  • 79.
  • 80. What is a rational policy change? Pareto efficiency? Near-Pareto efficiency (Stigletz, 1998): Policy changes that create large benefits for some and comparatively small losses for others, as well as changes that would hurt only a small, narrowly defined special-interest group—in many cases, a group that has already manipulated the political process to its advantage.
  • 81.
  • 82.
  • 83.
  • 84.
  • 85.
  • 86.
  • 87.
  • 88.
  • 89.
  • 90.
  • 93.
  • 94.
  • 95. Political Explanations for the Failure to Enact Wise Policies Distortion of policies and prevention of meaningful campaign finance reform Overweighting of GM, Philip Morris, Final Four Accounting Firms, ExxonMobil, Etc. Underweighting of current citizens, and dramatic underweighting of future citizens
  • 96.
  • 97. Obfuscation Tobacco : They knew more than the government, hired skeptics, called for more research, and create a standard for evidence that they knew could not be achieved Auditing : Argued that no evidence existed about the effects of consulting, emphasized that their integrity was the solution Energy : Paid for “experts” to offer skepticism about climate change, while having ample knowledge that climate change existed
  • 98. Shifting view of what is being challenged Tobacco : Cigarettes are good for you....No causal connection exists....to Cigarettes may be one of many factors that create illness....There is no evidence of second hand smoke affecting health and Of course, smokers knew the risk Auditing : Our reputations are your protection....Disclosure is the right solution Energy : Climate change does not exist....Climate change is not caused by humans....We shouldn’t act until we know that the benefit of action is justified
  • 99. Encouraging Reasonable Doubt Tobacco : Create reasonable doubt, particularly by smokers who were customers, doctors, and legislators Auditing : No “smoking gun” versus “how would you create an independent auditing function” Energy : PR campaign to say that oil is addressing the issue, publicizing the doubt, and funding the skeptics
  • 100. Status quo effects It works on an individual level And, it works on a national policy level Status quo effects interact with obfuscation, shifting views of the argument, and encouraging reasonable The result: We are too slow to overcome cognitive and political barriers to create wiser policies
  • 101.
  • 102. Behaviorally Informed Policy Design for the Poor Eldar Shafir Princeton University Behavioral Science Challenges for Policy The Hague, February 11, 2010
  • 103. How are preferences revealed? John Beshears, David Laibson, Brigitte Madrian Harvard University James Choi Yale University February 2010
  • 104.
  • 105.
  • 106.
  • 107.
  • 108. Data from Harvard Staff Control Treatment Fees salient 3% of Harvard staff in Control Treatment put all $$$ in low-cost fund $494 $518 Fees from random allocation $431
  • 109. Data from Harvard Staff Control Treatment Fees salient 3% of Harvard staff in Control Treatment put all $$$ in low-cost fund 9% of Harvard staff in Fee Treatment put all $$$ in low-cost fund $494 $518 Fees from random allocation $431
  • 110.
  • 111.
  • 112. Madrian and Shea (2001) Choi, Laibson, Madrian, Metrick (2004) Automatic enrollment Opt in Opt out
  • 113. Employees enrolled under automatic enrollment cluster at default contribution rate. Fraction of Participants at different contribution rates: Default contribution rate under automatic enrollment
  • 114.
  • 115. 2003 2004 2005 Simplification Beshears, Choi, Laibson, Madrian (2006)
  • 116.
  • 117. 03/02/10 How are preferences revealed? Agarwal, Driscoll, Gabaix, and Laibson (2006) Cash advance Late fee Limit fee
  • 118.
  • 119.
  • 120. Choosing fruit vs. chocolate Read and van Leeuwen (1998) Time Choosing Today Eating Next Week If you were deciding today , would you choose fruit or chocolate for next week ?
  • 121. Patient choices for the future: Time Choosing Today Eating Next Week Today , subjects typically choose fruit for next week . 74% choose fruit
  • 122. Impatient choices for today: Time Choosing and Eating Simultaneously If you were deciding today , would you choose fruit or chocolate for today ?
  • 123. Time Inconsistent Preferences : Time Choosing and Eating Simultaneously 70% choose chocolate
  • 124.
  • 125.
  • 126.
  • 127.
  • 128.
  • 129.
  • 130.
  • 131.
  • 132. 401(k) participation rate increases under active decisions 03/02/10 How are preferences revealed? Active decision cohort Standard enrollment cohort
  • 133.
  • 134.
  • 135. 03/02/10 How are preferences revealed? Employees move slowly from an old match threshold to a new match threshold. Fraction of employees at 6% savings rate Fraction of employees at 8% savings rate Employer changes match threshold from 6% to 8%
  • 136.
  • 137.
  • 138.
  • 139. Typical breakdown among 100 employees Out of every 100 surveyed employees 68 self-report saving too little 24 plan to raise savings rate in next 2 months 3 actually follow through
  • 140. Self-reports after a financial education seminar 03/02/10 How are preferences revealed? Seminar attendees Non-attendees Percent planning to make change Percent actually made change Percent actually made change “ Will enroll in 401(k)” 100% 14% 7%
  • 141.
  • 142.
  • 143.
  • 144.
  • 145.
  • 146. Milgram’s Obedience Studies “ Teachers” punish “learners’” (confederates’) errors with a shock generator…
  • 147.
  • 148.
  • 149. Behavioral research: The importance of context and construal (in survey responses, language, perception, judgments, decisions, social / political life, etc…) A simple but profound fact: Decisions are not about objective states of the world, but about our mental representations of those states The Power of the Situation The Tendency to Underestimate the Power of the Situation
  • 150.
  • 151. The Power of Defaults Johnson & Goldstein, Science, 2003
  • 152.
  • 153.  
  • 154.
  • 155. Results in First Implementation
  • 156.
  • 157.
  • 158.
  • 159.
  • 160.
  • 161. A poor ‘identity’ Identity salience in the context of welfare benefits programs (EITC and local VITA sites) … Stopped to consider: 44% 58% ( ns) Of those, took the information: 36% 79% p= .03. (Total take up:) 16% 46% Neutral Affirmation Condition: (Crystal Hall, PU dissert., 2008)
  • 162. The Context of Poverty General “lack of slack” means exhausted savings, mounting debt, making ends meet with current income. Material hardship is high: within a 12-month period, 90 percent of low to moderate income households experience major illness or medical expense, eviction, utility shutoff, phone disconnection, not having enough to eat, or a bankruptcy filing. [Detroit Area Household Financial Services study] Inherent to poverty: Scarcity Conditions of scarcity produce their own psychology. This psychology, interacted with scarcity, yields particular behaviors.
  • 163.
  • 164. Family Feud Multiple rounds High slack: 50 sec / rd (total 1000 sec) Low slack:15 sec / rd (total 300 sec) High interest loans.. (w. Anuj Shah)
  • 165.  
  • 166.  
  • 167. No borrowing vs. high interest: P < .001 ( No borrowing vs. no interest: P < .09 )
  • 168. Smoothing consumption from windfalls
  • 170. Points Earned Low slack windfalls: >20% loss of earnings; Interaction: p< .05
  • 171.
  • 172. P < .05 in both cases
  • 173. P < .05 for Poor; ns for Rich
  • 174.
  • 175.
  • 176. The firm & the individual ( Barr, Mullainathan, & Shafir, 2008) Market neutral / wants to overcome consumer fallibility Market happy to exploit consumer fallibility com poun ding pro crastination Consumers misunderstand compounding in savings  Banks would like to reduce this so as to increase savings base Consumers procrastinate in signing up for EITC  Tax filing companies would like to reduce this so as to increase number of customers Consumers misunderstand compounding in borrowing  Banks would like to exploit this to increase borrowing Consumers procrastinate in returning rebates  Retailers would like to exploit this so as to increase revenues
  • 177.
  • 178. To summarize: Context has big impact on behavior Context of the poor is particularly tough Need context design and regulation (above & beyond financial education) to ameliorate outcomes for the poor...
  • 180. Taxi fare when you first get in?… (Boston South Station)
  • 181. Tradeoffs: % who think about what they’d not buy instead… (India)
  • 182. Tradeoffs: % who think about what they’d not buy instead… (US)
  • 183. Percent willing to travel 45 mins to save $50:
  • 184. Percent willing to travel 45 mins to save $50:
  • 185. Willingness to travel to save $25…
  • 186.
  • 187. Money (the poor) vs. Time (you) Tradeoffs If I buy this, what do If I do this, what do I not buy instead? I not do instead? Temptation Shouldn’t have Shouldn’t have bought… committed… Error/Distraction Failed to pay… Failed to do… Bad borrowing Given what you owe, what are you doing spending?! Given what you owe, what are you doing schmoozing?!.. Even basic goods become “luxuries” Even basic activities turn into “luxuries” Affordability
  • 188. Zvi Bodie, Norman and Adele Barron Professor of Management, Boston University, and Member of the Scientific Council of Netspar and Henriette Prast, Professor of Personal Finance, Tilburg University, and Member of the Scientific Council for Government Policy, the Netherlands Behavioral science, junk science, and pension saving
  • 189.
  • 190.
  • 191.
  • 192.
  • 193.
  • 194.
  • 195.
  • 196.
  • 197.
  • 198.  
  • 199.
  • 200.
  • 201.
  • 202.
  • 203. Behavioral policy challenges for the Netherlands Henriëtte Prast Professor of Personal Finance, Tilburg University Member Scientific Council for Government Policy Netspar Fellow &TIBER Friend The Hague, February 11, 2010
  • 204.
  • 205.
  • 206.
  • 207.
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Editor's Notes

  1. And we sure have added choice
  2. To a world that looks like this
  3. Our argument was applied to a particular type of ethical challenge- conflicts of interest. We discussed the ways in which decision-makers fail to see easily visible information – that is, evidence of the conflict of interest – due to the strong psychological motivations to maintain a particular view of self. We described this failure to see ethical challenges, even when they are clearly visible to others, as bounded ethicality. Today, we are broadening this concept to that of bounded awareness, retaining the central idea.
  4. Ulric Neisser (1979) asked participants to observe a video of two visually superimposed groups of players passing basketballs. In the video, one group of players wears white shirts and the other group wears dark shirts. Study participants were instructed to count the number of passes between members of one of the two groups. The task is moderately difficult, and study participants had to give it their full attention. Only 21% of Neisser’s study participants reported seeing a woman who clearly and unexpectedly walked through the basketball court carrying an open umbrella. Our own experience using this video in the classroom is that even far fewer than 21% of students notice the woman. Yet when the video is shown again to demonstrate what most of the class missed, everyone sees the woman. Essentially, by focusing on one task, people miss very obvious information in their visual world. Simons and Chabris (1999) replicated this effect with a more contemporary video in which a person in a gorilla costume walks through a basketball game, thumping his chest, and is clearly and comically visible for more than five seconds. Simons provides a series of such demonstrations on a video that is available at www.viscog.com . Our naïve observation of the videos is that the common failure to see the obvious is amazing, far exceeding conventional assumptions about our visual awareness. Investigating the relationship between perception and attention, Mack and Rock (1998) demonstrate that people have a broad tendency to not see what they are looking at directly when they are focused on a different issue. This failure, known as “inattentional blindness,” is nicely summarized in Mack and Rock (1998) and in the work of Daniel Simons (Simons, 2000; Simons &amp; Chabris, 1999; Simons &amp; Levin, 2003). Mack (2003) suggests the implications of inattentional blindness for the airplane pilot who, attending to his controls, fails to see another airplane in his runway. Similarly, many car accidents undoubtedly result from drivers focusing on matters other than driving, such as talking on their cell phones. Psychologists are conducting interesting research that connects inattentional blindness to neural regions in the brain (C. M. Moore &amp; Egeth, 1997), and that identifies key independent variables that affect the probability of not seeing the obvious (Mack, 2003). Here, we ask whether inattentional blindness generalizes from the visual world to the broader array of information that is readily available in the environment, yet overlooked by most decision-makers, including negotiators. For guidance, we consider behavioral decision research on the related issues of focalism and the focusing bias.
  5. Our argument was applied to a particular type of ethical challenge- conflicts of interest. We discussed the ways in which decision-makers fail to see easily visible information – that is, evidence of the conflict of interest – due to the strong psychological motivations to maintain a particular view of self. We described this failure to see ethical challenges, even when they are clearly visible to others, as bounded ethicality. Today, we are broadening this concept to that of bounded awareness, retaining the central idea.
  6. - Shafir Feb 11, 2010
  7. - Shafir Feb 11, 2010
  8. WWS312/PSY321 Intro 9/17/09 pilot studies…
  9. - Shafir Feb 11, 2010
  10. - Shafir Feb 11, 2010
  11. - Shafir Feb 11, 2010 Us today… Abu Ghreib A very recent lesson about human behavior / nature… Which is hard fully to appreciate.
  12. - Shafir Feb 11, 2010 And the importance of understanding construal… You help soldiers in Abu Ghreib: Not through ethical training, but the design of better contexts…
  13. - Shafir Feb 11, 2010
  14. - Shafir Feb 11, 2010 Laibson &amp; Colleagues: almost twice as many save when automatic enrolled as opposed to not, even 4 years later!! 401(k) enrollment: Madrian &amp; Shea (2001): If want to enroll, call number..; vs. If don’t do anything - automatically enrolled (money market fund; at 2% savings rate) 38% vs. 86% (Libertarian Paternalism..) No child left behind… Bank of America - default minimum payment…
  15. Financial education … - Shafir Feb 11, 2010
  16. - Shafir Feb 11, 2010
  17. - Shafir Feb 11, 2010 Retirement savings – save twice as much as those who got no advise, or declined it…
  18. - Shafir Feb 11, 2010
  19. - Shafir Feb 11, 2010 Other nudges / contextual features – whether intentional or not, conscious or not – can have substantial impact…
  20. - Shafir Feb 11, 2010
  21. - Shafir Feb 11, 2010 Large subsidies, Costly education, Change in values and “culture” behavioral insights may provide a different view… minor situational details can have a large impact
  22. Dec. 15, 2009 Channel Factors (Lewin) Rather than needing education, further subsidies, change of values…
  23. - Shafir Feb 11, 2010 Time management issues, etc. Contrast w. rational choice; cultural norms; distrust… After all is said &amp; done: a minor situational nuance… Cf. “Save More Tomorrow” (Benartzi &amp; Thaler)
  24. - Shafir Feb 11, 2010 The context of social welfare benefits programs… And personal identity: incompetent, ineffective, resigned..
  25. Capitalism/Poverty-Chicago Context of poverty = high material hardship Oct. 29
  26. - Shafir Feb 11, 2010 Attention and coding/bracketing…
  27. Simulation of low vs high slack…(among otherwise NON poor) JDM-Chicago
  28. Poor borrow a bit less absolutely but more relatively AND do not differentiate much between interest rates… JDM-Chicago
  29. Windfall rounds were randomized, shown evenly distributed for ease of understanding For each condition, the MINIMUM number of rounds is shown (if people exit rounds early, then there will be more rounds)
  30. Raw data shown, but if you compare the relative decrement in performance within each slack condition, then the interaction is significant.
  31. Studies on depletion, cognitive load,.. Poor are not different; but their context is, which renders their state worse..
  32. Disclosure vs. Product regulation
  33. Relationship to firms – nontrivial… SMaRT – Save More Tomorrow
  34. Since can’t really control: Change Scoring! (reasonable man standards ex post...) Scoring will alter profit calculus - firm wants to abide by “juries” scoring decisions…(Administrative judges; consumer finance judges.) Scoring: instead of telling you what to do; changing your outcomes (profits, etc..) Vanilla options – Mortgages (30 yr, fixed rate, standard LTV minima…), credit card, etc. Opt-out, alternative offers require heightened disclosures &amp; suitability protections
  35. Dec. 15, 2009
  36. - Shafir Feb 11, 2010
  37. - Shafir Feb 11, 2010 What do the poor know?.. Temptations may not scale with income…
  38. - Shafir Feb 11, 2010 Self-reports (adhering to our theory)… does not scale with income
  39. - Shafir Feb 11, 2010 Tradeoff thinking, etc.: Time for us…who are time poor.
  40. - Shafir Feb 11, 2010
  41. - Shafir Feb 11, 2010
  42. Capitalism/Poverty-Chicago South Station Boston (Poor: better economists..) Oct. 29
  43. - Shafir Feb 11, 2010
  44. - Shafir Feb 11, 2010 My parking violations…
  45. The Hague, February 11, 2010
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