Nudge v final
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From "Nudge", a seminar explaining students in statistics what libertarian paternalism is and why it does matter
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Nudge v final
- 1. Nudge (on the architecture of choices) MAURO MEANTI HAWASSA UNIVERSITY, MARCH 2105 Based on the work of R.H Thaler and C.R. Sunstein : «Nudge»
- 2. Agenda Introducing the concept Libertarian Paternalism Human Biases and Blunders How do we work? Two cognitive systems Rules of Thumb Overconfidence Status Quo bias Framing Humans make mistakes Self control strategies Conformity strategies When to Nudge How to Nudge Defaults Expect Error Give feedback Understand mappings Structure complex choices Incentives Examples
- 3. Caroline and the school cafeteria system How do you present the food? Rearranging the way food is presented changes the consumption of a category by 25% How do you use this power? Make the children best off Use a random criteria Try to not to influence the choices Maximise suppliers who bribe you Maximise profits
- 4. Caroline is a choice architect Organize the context in which people make decisons Who design the ballots A doctor who describes alternatives A parent describing educational choices to her children A real architect – designing spaces Restroom designers
- 5. Libertarian Paternalism Libertarian Freedom of choice should never be in doubt Architects should preserve or increment the number of choices Paternalism Architects can influence people’s behaviors to make their lives better (as judged by people themselves) Nudge Alters people behavior in a predictable way Does not limit options Does not significantly change the economic incentives
- 6. The Homo Ecomomicus objections Everyone will make the right decisions for himself In abstract, yes Concretely, humans are predictably wrong: Planning fallacy Status quo bias Perception issues The more the choices, the better Choices are better than “one size fits all” But people not always can make the right choice (as in “better for themselves”) Lack of experience Lack of information Lack of feedback Influencing people choices is unavoidable Influencing choices does not equal coercion Freedom of choice is the ultimate safeguard
- 8. Two cognitive systems Automatic (Impulsive) Uncontrolled Effortless Associative Fast Unconscious Skilled Reflective Controlled Effortful Deductive Slow Self-aware Rule-following
- 9. Are you awake? A coffee and a book cost 1100 Birr in total. The book cost 1000 Birr more than the coffee. How much does the coffee cost? If it takes 5 machines 5 minutes to make 5 coffee, how long would it take 100 machines to make 100 coffee?
- 10. Rules of thumb Heuristics Anchoring Availability Representativeness
- 11. Rules of thumb: Anchoring Heuristics Anchoring Availability Representativeness Anchoring How many habitants in Awasa Write down the 3 last digits of your phone number. Now answer: When did Attila invaded Europe? Answer two questions: How happy are you? Do you have a boy(girl)friend? Anchors are nudges! Suggest a starting point for people thought process: the more you ask for, the more you tend to get Give an offer of either: $100, $250, $1000, $5000 Give an offer of either: $50, $75, $100, $150
- 12. Rules of thumb: Availability Heuristics Anchoring Availability Representativeness Availability Availability of news: homicides vs suicides Availability of experience: people buy flood insurances AFTER the flood happens Use availability to nudge!
- 13. Rules of thumb: Representativeness Heuristics Anchoring Availability Representativeness Representativeness When people are asked: “ how likely A belongs to category B” they answer based on their stereotype of B Linda is 30, single, smart. She has a major in statistics. As a student she was very concerned with issues of discrimination and social justice. Ranks, in order of probability, amongst this futures for Linda: Bank teller Bank teller active in the feminist movement Other London bombing mystery
- 14. Optimism and Overconfidence Know yourself! In which decile you expect to fall in this class? 94% of professors believe they are above average www2.nea.org/he/heta06/iamages/2006pg7.pdf At marriage, people gives themselves ~0% chances of divorcing May make people fail sensible preventive steps
- 15. Gains vs Losses People are loss averse Heads you win $X Tail you lose $100 How much does X have to be for you to take a bet? Loss aversion produce inertia, people want to stick to what they have, even if a change would be in their interest
- 16. Status quo Bias Stick with the existing Why students always sits the same place? Half the participants a pension fund plan never change their asset allocation. This is generated by lack of attention This is why “free for three months” marketing promotions work If renewal is automatic and cancelation requires an action…. Likelihood of renewal is much higher The power of the default Loss aversion + lack of attention imply that the “default” option attracts a very high market share In addition, often the default option may be seen as “endorsed” by the default setter
- 17. Framing Formulation matters Of 100 patients who have this operation, 90 are alive after 5 years Of 100 patients who have this operation, 10 are dead after 5 years The Automatic System gets VERY scared (this also works with the doctors themselves) Framing is a nudge (a) if you use energy conservation methods, you will save $350 (b) if you don’t use energy conservation, you will lose $350 Framing, exploited together with the loss aversion, may be a powerful nudge
- 18. Humans are fallible People choices are influenced in ways that are not explained by the standard economic framework People can be nudged Rules of thumbs Overconfidence Loss aversion Status quo bias Framing
- 19. More human fallabilities Temptation You can be in two states: cold and hot Something is “tempting” if we consume more of it when we are hot vs when we are cold Sometimes is good, often gives us troubles There is a “hot-cold empathy gap” since we underestimate the effect of arousal Mindless choosing The popcorn experiment The experiment of tomato soup Large packages are a form of choice architecture, they work as nudges Lack of self-control and mindless choosing combined spell BIG issues. Obesity, smoking , alcoholism all derive from this combination Same for economic matters – people lack of saving Procrastination We have all said “ I will do it tomorrow”
- 20. Social Influences: we like to conform Information and Peer Pressure The Asch experiment: You are given a very easy task Everybody around you gives what seem to be the wrong answer What will you say? If the task is difficult, the conformity effect increases Answers also become very sensitive to “confidently expressed” nudges Collective conservativism: The tendency of groups to stick to established patterns even if new needs arise Pluralistic ignorance: Following a tradition not because we like it but merely because we think that most other people like it The spotlight effect People believe that others closely pay attention to them So they conform to what they think people expect
- 21. Does conformity affect choices? Socially Music downloads Elections Instrumental usage of polls US primaries Economically All the bubbles of the word are driven by conformity thinking Helped by media Helped by speculators
- 22. How to use conformity for nudging Tax Compliance (Minnesota) 4 different groups were told 4 different stories: 1. Your taxes will go to fund good things (education…) 2. You will be jailed if you do not pay taxes 3. We will help you to file you tax return if you are not sure how to do 4. More than 90% of your state co-citizens already paid their taxes Guess which one had an impact? Energy Saving (California) Tell users how much energy they consume against the average in their neighborhood Above-average users decreased significantly but…. Below-average users increased significantly Then they added a emotional nudge to the bill And that corrected the negative impact
- 23. When to nudge The Golden Rule: Offer nudges that are most likely to help and least likely to inflict harm People will need nudges for decisions that are difficult and rare, for which they do not get prompt feedback and when is difficult to translate the terms in something easy to understand Categories of difficult choices Benefit now – cost later Smoking, drinking, eating chocolate cookies Pay the price now, benefit later Diet, exercise, brush teeth Save money for retirement Degree of difficulty Pick a mortgage, chose an insurance Frequency Choose a college, find a spouse, buy a house Feedback You only get feedback on the options you select, not on the one you reject Translating choices into experience Easy for choosing an ice-cream or a movie Hard for a retirement fund: too many variables involved
- 24. How to nudge?
- 25. First, a quick test
- 26. YELLOW
- 27. BLUE
- 28. ORANGE
- 29. PINK
- 30. GREEN
- 31. BLACK
- 33. YELLOW
- 34. BLUE
- 35. ORANGE
- 36. PINK
- 37. GREEN
- 38. BLACK
- 40. So, … how to nudge? 6 Principles Defaults Expect Error Give feedback Understand mappings Structure complex choices Incentives
- 41. Defaults: the path of least resistance Inertia+Status quo bias We expect a large number of people to end up with the “do nothing” option If the default option comes with a suggestion that is “normal” or “recommended” will drive more people to it Examples and impact Automatic renewal for magazine subscriptions Downloading/installing software Data usage consensus Defaults are (almost) unavoidable There is always the choice to force an option to be chosen (required choice) When choice is complicated and difficult, this is not the right approach
- 42. Expect Error (and accommodate it) Provide error tolerance Insert your card / ticket Automobiles Gas tank cap Headlights Help avoiding errors Take your pills Attach your file Right fuel? Look to the right!
- 43. Give feedback Tell people when they are doing well Digital Cameras fake “shutter click” Don’t overdo with warnings Repeated and continuous warnings tend to be ignored Get creative with feedback Painting a ceiling: the magic pink paint that becomes white when dry
- 44. Understand Mapping (1) Mapping and Ice Cream 10 different fruit flavors All made with fruit and water Easy to map the relation between choice and your experience If you do not know how lychee tastes, ask for a sample! Mapping a disease treatment Doctor diagnosis prostate cancer Gives your three options Surgery Radiation Watchful watching Extremely difficult to map the relation between the choice and the experience Doctor may have a bias Normally you are asked to chose in a split second
- 45. Understand Mapping (2) Other complex mapping decisions How many megapixels should my camera have Buy a cellular phone plan Choose a credit card, or a mortgage, or an insurance How to make the mapping easier Translate the megapixel in “largest print size” Regulate complex plans via a RECAP policy RECAP: Record, Evaluate, Compare Alternative Prices Standardize by law all components of a complex decision (NOT THEIR COST) Make them available in a spreadsheet format Issue to each customer a yearly recap of her usage according to that format That would make extremely easy to compare what the impact of choosing a different plan would be for any user
- 46. Structure Complex Choices Strategies for choices Few, well-understood alternatives: chose between three offices Examine all attributes of each Make trade-off when necessary “Compensatory” strategy Many alternatives: chose an apartment in a big city First, do an elimination process Second, move to a compensatory strategy Elimination/simplification processes can be suboptimal, but they are necessary A good choice architecture must provide a good structure for choice Examples Small ice-cream cart Order does not matter if you offer 3 flavors Ice-cream shop If you offer 20, you group: fruit, creams, chocolats Paint store Catalogs of thousand hues Alphabetical? Use the paint wheel Easier if you see them From big data: collaborative filtering Use the judgment of people “similar to you” to help picking books/movies…. But sometimes an architect may want to nudge people in a different direction
- 47. Incentives The Economy IS important Four key questions per each choice architecture: Who uses it Who choses Who pays Who profits Conflicts of interest may affect the way the market works Friends out to lunch Healthcare systems Salience: make the incentive visible Does the choosers notice the incentives they faces? Buying a car (or not) People tend to compare only cost of operating the car and cost of public transportation They forget the opportunity cost of putting money into the purchase Saving energy: A) increase the energy bill B) show on the thermostat how much more $ you are spending
- 48. 6 principles Defaults Expect Error Give feedback Understand mappings Structure complex choices Incentives Using those nudges, choice architects can improve the outcomes for their people
- 49. Example: donating organs Explicit vs Implicit Consent (Johnson/Goldstein research) 3 samples of population were asked the same question: do you want to be a donor or not The first sample had a default of not being a donor, the second to be a donor, the third had no default Changing and choosing was extremely simple, one click on a box When participants had to “opt in”, the percentual of donors was 41% When participants had top “opt out” the percentual of donors was 82% When participants were forced to chose, the percentual of donors was 79% The concrete steps needed fails allow the “status quo” resistance to prevail. Even if the step was a simple click Germany (opt-in) has 12% of donors, Austria (opt opt-out) has 99% donors Mandated choice Some states introduced the concept of mandated choice. If paired with exploiting the “social norm” nudge it may prove very impactful
- 50. A program in the Philippines For six months, the “would-be” non-smoker opens a bank account and puts on it every month the money she normally spend in cigarettes. The government matches part of the money If she stops putting the money, the money in the deposit goes to charity After 6 months, she passes a medical test. If she is nicotine-free, she gets her money back (plus the incentive), otherwise it goes to charity This program exploits the incentive nudge and the “aversion to lose” fallacy Example: Quit Smoking
- 51. The Globe Is a globe wirelessly connected to the home energy meter. You keep it in the living room It becomes red when the energy consumption is above the average Can save up to 25% of the energy bill Is based on the feedback nudge Energy Reports Don’t only show your consumption but compares it with the consumption of the most efficient neighbors Make the cost of the inefficiency evident: “THIS MONTH IT COSTS YOU $128” Provides practical advice on how to match the efficient neighbors Uses social compliance, feedback and loss-aversion Examples: saving energy
- 52. Summing up Small features of social situations can have massive effects on people behaviors Nudges are everywhere, even if we do not see them Choice Architecture (both good an bad) is pervasive and unavoidable Choice Architects can preserve freedom of choice while also nudging people in directions that will improve their lives
Notas del editor
- Libertarian Paternalism means that people are “free to chose” Nudges are not mandates. Putting fruit at eyes level is a nudge. Banning junk food is NOT The whole theme applies both to public an private sectors. Employeers are important choice architects
- Planning fallacy: contractors. Dissertations Status quo bias: cellphone configuration We will show how the right default option can save lives. Default options are a typical example of nudges Choosing between different medical treatemnts Choosing between fruit and ice-cream (long-term effect slow, feedback poor)
- Legs and orientation create the illusion that the tops are different.
- Ducking when a ball is throw to you, smile when seeing a cute toddler = Automatic Using R: reflective Speaking English + reflective Cursing in Italian: automatic
- Cognitive reflection test
- When we make judgements, we use simple rules of thumbs to help us. Those lead us to systematic biases, emerging from the interplay betweem the Automatic System and the Reflective system.
- Addis: 3.100 Awasa: 225 Shashemene 120 Negele 45 Process is called: Anchoring and adjusting. But the adjustment is always insufficient Attila invaded in 411 In that order, correlation is 0.11 Reverte the order, correlation is .62
- Here the Automatic system tells us “ she can not be JUST a bank teller, read the description!!! Same happens for cancer clsuters
- Less than 5% self-assess “below median: >50% says “top 20%” Second marriage is the triumph of hope vs experience! Lotteries are successful bcause unrealistic optimsim
- Framing works because people tend to be somewhat mindless passive decision makers. Their reflective system does not do the work required to check and see whether reframing the question would produce a different answer. One reason of that is they do not know what they could do with the resulting contradiction
- Examples: Go for dessert Another glass of wine Busying something at a deparment store
- When others give the wrong answer, your
- Tax complaincer. The Minnesota example. After the tax compliance , remember, as an example, that if you want to discourage poll astension, you should NOT lament the large number of people who fail to vote Same example then Minnesota but for non-drinking campaigns: 70% of Etiopian university student have less than 3 alcoholic drinks a week
- Extended warranty example : Cell phone costs 200$. They offer extended warranty for the second year of its life for 20$ Chances of the phone to break in year two are 1%. So value is 2$. If users have less than a fully rational belief, firms have incentive to exploiut it vs eradicate it
- Those doors are bad architecture because they violate a simple psychological principle with a fancy name: stimulus response compatibility. Don Norman’s wonderful book The Design of Everyday Things (1990) Norman’s basic lesson is that designers need to keep in mind that the users of their objects are Humans who are confronted every day with myriad choices and cues. The goal of this chapter is to develop the same idea for choice architects. If you indirectly influence the choices other people make, you are a choice architect. And since the choices you are influencing are going to be made by Humans, you will want your architecture to reflect a good understanding of how humans behave. In particular, you will want to ensure that the Automatic System doesn’t get all confused. In this chapter, we offer some basic principles of good (and bad) choice architecture.
- Software downloading – some options are chosen in your favor, some not really Examples on unavoidable choice. Good for simple yes/no decisions more than for complex ones. Software configuration. Menu
- Post completion error. When you have finished your main task, you forget things related to previous steps. Gas tank cap, but also ATMs Pills: Once a day is better than once very to days and better than twice a day Once a week – do it on Sunday Birth control pills. Days 1-21 ans 22-28
- Give feedback is somehow a variation of the Error theme, feedback is extremely useful to prevent errors
- How can you decide to risk a one-third chance of incontince in change of increasing my life expectance by 3.2 years? First, I do not know the trade-off, second, I can not imagine my life as incontinent
- Consider, for example, Jane, who has just been offered a job at a company located in large city far from where she is living now. Compare two choices she faces: which office to select and which apartment to rent. Suppose Jane is offered a choice of three available offices in her workplace. A reasonable strategy for her to follow would be to look at all three offices , note the ways they differ, and then make some decisions about the importance of such attributes as size, view, neighbors, and distance to the nearest rest room. This is described in the choice literature as a “compensatory” strategy, since a high value for one attribute (big office) can compensate for a low value for another (loud neighbor). Obviously, the same strategy cannot be used to pick an apartment. In a large city like Los Angeles, thousands of apartments are available. If Jane ever wants to start working, she will not be able to visit each apartment and evaluate them all. Instead, she is likely to simplify the task in some way. 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 thiss tandard. 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.
- The patient receives the health care services that are chosen by his physician and paid for by the insurance company, with everyone from equipment manufacturers to drug companies to malpractice lawyers taking a piece of the action. Those with different pieces have different incentives, and the results may not be ideal for either patients or doctors.