Archive for the ‘Behavior Eco/Fin’ Category

How shops use tricks to get you spending..

November 17, 2017

Nice piece by Prof. Cathrine Jansson-Boyd of Anglia Ruskin University. One knows most of these tricks but still get tricked..

In the business of shops and selling, times are tough. Retail sales indicate that shops are are struggling to persuade customers to part with their cash.

But there are some innovative methods which retailers are using to address the challenge of enticing and engaging consumers. And it’s not just about slashing prices and Black Fridays. Many well-known businesses make use of psychology to connect with customers and increase sales.

Here are some of the tricks they have up their shop sleeves.

Read on..

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Learning mental accounting from Salman Khan and a 5 year old!

November 10, 2017

On 7 nov 2017, Prof Betsey Stevenson tweeted:

Then on 8 Nov 2017, Archit Puri picks a Salman Khan movie to give us similar lessons:

Salman, as usual, has some economics lessons for us. In a scene from the movie (see image below), he separates his money into different accounts. He does this by putting his cash in multiple earthen pots which are labeled with a spending objective. You can see that there is one for his sister’s marriage and another for his grandmother’s medical expenses.

Hosuefull economics….amazing as always….

Behavioural economics is also useful in macroeconomics

November 3, 2017

Paul De Grauwe and Yuemei Ji have a piece:

Need to read this carefully…

How to and not to nudge in organisations…

October 27, 2017

Prf Francesco Gino of HBS has two pieces. One on how to nudge and  other on how not to nudge using example from Uber. She also links to this older NYT piece which shows how Uber messed up while nudging.

Nudging for safe driving/ improving road safety….

October 26, 2017

Nice post by UK’s Nudge unit team: Simon Ruda, Monica Wills Silva and Handan Wieshmann.

They point how a simple nudge (an award winning one as well) led to safer driving:

Key to improving road safety is understanding what causes serious and fatal collisions. In work with East Sussex County Council, using cutting edge data science techniques to analyse more than a decade’s worth of data, we found that 10 per cent of all collisions, and 7 per cent of those that result in a death or serious injury, are caused by people who have at least one speeding conviction.

Despite the death toll, and despite previous brushes with the criminal justice system, it seems people continue to drive dangerously; disregarding road safety rules and failing to comply with speed limits. In the West Midlands area alone, there were more than 60,000 traffic offences in 2015.

As well as posing a risk to life, these offences create costs for criminal justice agencies, especially when drivers have to be prosecuted for non-payment of fines.

In 2015, we partnered with West Midlands Police to tackle the problem of dangerous driving.

We focused on adapting an existing point of contact with speeding drivers – the Notice of Intended Prosecution received after being caught speeding. We identified two areas for improvement:

  • making it easier for drivers to comply with the sanction: simplifying the communication in the letter
  • convincing drivers of the legitimacy of speeding limits so they are less likely to reoffend: explaining why speed limits exist and the dangerous consequences of breaking them

Following a clustered randomised control trial over 19 weeks, with a cohort of 15,346 drivers, we found that the intervention reduced reoffending by 20 per cent within six months of an individual’s offence in the West Midlands alone.

These results are in addition to the increased payment rate and speed previously reported, which reduced eligibility for prosecution by 41.3 per cent. Using police and Home Office data, we estimated the intervention will save the criminal justice system £1.5 million per year in the West Midlands alone – as well as reducing the numbers hurt or killed on our roads.

This trial, which won first place at Nudge Awards’ Nudge for Good category this summer, demonstrates the impact of small, low cost, changes to existing process and communications. It is a classic nudge, applied to a hard to shift behaviour. We think this approach – making the rationale behind laws more salient – is a useful tool for law enforcement, which we hope to test in other domains.

Back in 1896, witnesses to Bridget Driscoll’s death said that Arthur Edsel, the driver of the vehicle that killed her, was travelling at a reckless pace. And in present day East Sussex, our findings were very similar: that a driver being careless, reckless or in a hurry was the most common recorded factor of collisions resulting in deaths or serious injuries. A century has passed and some things have changed little.

Fortunately, now, we have new tools and techniques at our disposal to make our roads safer for the next century.

Always interesting to read about such stuff…

If demonetisation was a nudge towards digital payments, what is a hammer?

October 23, 2017

Just read this piece in Mint which is unbelievable given all the evidence we now have. Above all the author says it was a nudge towards digital payments! Really? Then what is a hammer? The debates over demonetisation will continue for along time given the move but calling it a nudge is just shocking. Nudge is just a gentle push and demonetisation was anything but that.

Given the Riksbank Prize to Prof Thaler for his nudge theory, we are seeing a lot of articles connecting his ideas to policies in India etc. But history suggests neither nudge is a novel idea nor policy can be connected to nudges.

But then even Prof Thaler supported demonetisation was announced only to take back his words soon thereafter. He was rebuked sharply by Prof Nirvikar Singh in this piece. It was highly unfortunate for likes of Prof Thaler to just advocate a policy without looking at ground realities. Would he have supported a similar move in US?

History of nudging: Before Prof Thaler there was Dr. T.M.A. Pai

October 16, 2017

My recent piece in Mint titled as Before Thaler there was Pai. Have just added Prof and Dr against their names to make a clearer distinction. The piece shows how Dr T.M.A. Pai was an early nudger to encourage financial savings amidst people and mobilise deposits for his bank.

Two key ideas.

First, behavioral economics is as old as it gets. Entrepreneurs etc have always struggled to figure human behavior and then design products accordingly. If one digs deeper into this kind of product history, one is likely to see some or the other form of nudging. If economists have woken up late to the subject it does not mean these ideas were not understood and not implemented.

Second, is of course the constant lament of this blog on how ignorant we are of our business and financial history.  It is a pity how Dr. TMA Pai’s several achievements in banking have been just forgotten. The Mint piece just highlights one of them.

 

Learning endowment effect from Amitabh-Shashi starrer Deewar…

October 10, 2017

Nobel mania is going to continue for sometime now. Given it is on behavioral economics which is thought to be simpler to understand compared to other stream of economics, expect many more articles. So good time to learn and unlearn.

Amit Varma of Housefull economics in his entertaining column points to lessons of behavioral economics from the  Amitabh Bachchan-Shashi Kapoor movie Deewar.

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Why Government ‘Nudges’ motivate good citizen behavior..

July 20, 2017

Article in HBSWK on Governments nudging:

Most governments aren’t subtle when they want citizens to do something. The United States spends close to $1 billion annually on advertising–trying to convince citizens to do everything from taking flu prevention shots to reporting unattended suitcases at the airport. But now agencies are finding that subtle “nudges” can motivate behavior much better than ads, fines, or deadlines.

Nudges, or small changes to the context in which decisions are made, are the subject of a new analysis by Harvard Business School Associate Professor John Beshears and colleagues, recently published in the journal Psychological Science. The paper, Should Governments Invest More in Nudges? answers its own question with a resounding “Yes.”

“We suspected that nudges on an impact-per-cost basis would be superior to traditional approaches such as a financial incentive or an educational campaign,” says Beshears. “But we were surprised to see the extent to which it is true.”

According to behavioral scientists, nudges are dollar for dollar a hugely cost-effective way of causing people to change behavior and do the kinds of things that government wants them to do, like save for retirement—which are both for the good of society and for their own good.

The idea is to make nudges complementary to existing incentives and try motivate System1 thinking:

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Why India’s Metro stations remain clean and most other places dirty?

July 6, 2017

Biju Dominic of First Mile (a choice architecture firm) has a nice piece:

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Nudging to make pass-books issued by Indian banks more transparent and readable…

July 4, 2017

Vivina Vishwanathan of Valueresearch points to how RBI has asked banks to provide more information on the passbooks:

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Mixing behavioral economics with ethnography…

June 15, 2017

Interesting post by UK’s Behavioral Insights Team. I am also wondering what took so long for behavioral studies to use insights from ethnography.

BIT is  trying to streamline the procurement system in Government hospitals. While engaging in the study, they used ethnography to study behaviors more deeply:

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A new journal on behavioral public policy..

June 6, 2017

Given plethora of economics and public policy journals, one thought a journal on behavioral public policy will already be there. But this one has just started by Cambridge University Press

The first edition was released in May 2017 and looks really promising with articles from who’s and who.

The initiative was was announced in Sep 2016:

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How much did Plato know about behavioural economics and cognitive biases?

May 30, 2017

Pretty much everything. Nick Romeo in this essay explains how behavioral patterns and human biases have intrigued thinkers for a while. Just that they did not call it behavioral economics:

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Mainstreaming behavioral economics…

May 25, 2017

Profs. Beryl Chang and Fabrizio Ghisellin say we need to simplify behavioral economics:

At the moment, behavioural economics suffers from confusing definitions, unanswered questions and conceptual gaps that need to be filled. It is reminiscent of a person who needs a diet both for a detox and a weight loss.

We need a ‘vertical’ streamlining process that will:

  • Clarify core issues: What is the ‘correct’ definition of rationality? When an alleged bias, such as loss aversion, is found to be part of human nature as designed by evolutionary processes, can it still be considered a ‘distortion’?
  • Fill existing conceptual gaps: behavioural economics deals abundantly with biases, but how are expectations formed? Are expectations ‘rational’?
  • And most importantly, generate a tractable reduced form for behavioural economics models. Today we have hundreds of different behavioural factors. They should eventually be translated into a smaller set of primitive factors.

In order to establish behavioural economics’ status, we hardly need the ‘discovery’ of yet another behavioural bias. At this stage, we need parsimony and an effort to synthesise what already exists into a general mainstream model as an alternative to conventional models.

They cite an example from Mullainathan and Thaler:

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Unique ‘Twitter satyagraha’ against HDFC Bank completes 50 days: Why did the bank choose the wrong nudge?

March 23, 2017

A very interesting article. It talks about yet another person protesting on another Indian bank’s practices.

Instead of the usual protests, he wrote series of Tweets everyday for the last 50 days asking the bank to say sorry:

Bengaluru-based communications professional Karthik Srinivasan has started a unique protest to express his displeasure with what he calls an unethical programme by HDFC Bank. A popular handle on Twitter and known blogger, Srinivasan has just completed 50 days of his so-called ‘Twitter satyagraha’ against the bank’s opt-out programme for preferred customers.

The core problem is that default choice was made as opt-out:

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When dealing with financial services, one’s default attitude should be distrust and suspicion

March 15, 2017

An interesting post by Dhirendra Kumar of Valueresearch. It is nice when people who belong to financial services warn people to be careful while dealing in finance. After all, financial services business is full of tricks and games around other people’s money. It is for no reason that finance was always treated with suspicion for ages and those who dealt in money highly despised. Despite changing attitude of society towards finance , most financial players contineu to complicate things and missell their products.

He says usually the default option for most activities should be open and trusting. But in finance default should be the opposite which is ironical as finance is all about trust:

Those who have a positive attitude towards what life brings them are more likely to be successful and happy. Or at least, that’s a common belief. There’s more. When you meet someone new, it’s better to assume the best about them since most people are honest and sincere. Generally, things will work out better if your default attitude is open and trusting.

Unfortunately, this is not true while choosing and buying financial services. As a rule, you should assume that everyone who is trying to sell any financial service to you is either hiding something or is actively lying. This maybe only 90 or 95 per cent true but it’s better to assume the worst to protect yourself. The only way to make the right choices when you save, invest and insure yourself is to educate yourself independently, and make your decisions yourselves without having to depend at all on what a salesperson is telling you. Decades of interacting with the customers of financial services and observing how these industries work has left me with the strong belief that when it comes to dealing with them, distrust and suspicion should be the default attitude.

Why should this be the case? Why is buying financial services different from buying, say a jacket or a shoe or a car. There are many reasons for this and while some are to do with specific issues with the way business and regulations are conducted in India, there is a much deeper reason that is fundamental to financial services.

This reason is that the input, product and output of a financial service business is all the same stuff–money, and the only way they can earn more is by ensuring you get less of it. Think about that carefully.

Best way out is to educate yourself:

This has a really important implication: for a given type of financial service, and a given competence with which it is run, the only way the provider can make more money is to give you less of it. If the provider wants more of anything, be it profits or salaries for employees, or more dividends for the owners, then that has to come from reducing what you get. If it wants to increase sales by paying more commissions to agents then that too is paid for by reducing your returns. EVERYTHING comes out of your pocket.

Don’t think that is some esoteric, conceptual model of financial services. This is what drives every interaction you have with your bank, insurance company, stockbroker, mutual fund, and those who are trying to sell you their services. And don’t count on regulators to protect you. In general, India’s financial regulators are always well behind the curve in stopping the malpractices that are rife in all these products.

The only way to protect yourself is to educate yourself with information and knowledge that is not tainted by actually being generated by the same people, and to always be suspicious of everyone who is selling a financial product, and have distrust as your default posture. I know it sounds terrible, but that’s the way things are.

Actually it is sad to see such an article from one of the major spokesperson of financial world.

Doves, hawks … and pigeons: How bevaioral biases influence central bankers decisions..

January 4, 2017

Donato Masciandaro of Bocconi University has a piece showing how behavioral biases impacts decision of central bank officials:

…what happens if we assume that psychological drivers can influence the decisions of the central bankers? In a recent paper, my co-author Carlo Favaretto and I simulated a monetary policy setting with three different kinds of central bankers (Favaretto and Masciandaro 2016).

The members of an MPC (i.e. central bankers) can be split into three groups – doves, pigeons, and hawks – depending on their monetary conservativeness. In the monetary policy literature, a specific jargon has been coined: a “dove” is a policymaker who likes to implement active monetary policies, including inflationary ones, while a “hawk” is a policymaker who dislikes them (Chappell et al.  1993, Jung 2013, Jung and Kiss 2012, Jung and Latsos 2014, Eijjfinger et al. 2013a, 2013b, Neuenkirch and Neumeier 2013, Wilson 2014, Eijffinger et al. 2015); “pigeons” fall in the middle. Throughout time, the dovish/hawkish attitude has become one of the main focuses of the analysis of monetary policy board decisions.

 The model introduces sequentially the assumptions that each central banker is a high-ranking bureaucrat – i.e. a career-concerned agent – with his/her conservativeness, that a monetary policy committee formulates monetary policy decisions by voting with a simple majority rule, and finally that loss aversion characterises the behaviour of the central bankers – i.e. for every monetary policy choice, losses loom larger than gains, and both are evaluated with respect to the status quo.

The framework shows that, given the three types of central bankers, the introduction of loss aversion in individual behaviour influences the monetary policy stance under three different, but convergent, points of view. First of all, a moderation effect can emerge, i.e. the number of pigeons increases.  At the same time, a hysteresis effect can also become relevant: both doves and hawks soften their stances. Finally, a smoothing effect tends to stabilise the number of pigeons. The three effects consistently trigger greater interest rate inertia, which is independent of both the existence of frictions and the absence or presence of certain features of central bank governance.

Loss aversion can explain delays and lags in changing the monetary policy stance, including the fear of lift-off after a recession. Needless to say, the behavioural motivation doesn’t rule out the other motivations already stressed in the literature.

No owls?

It is surprising to see it take so long for such literature to emerge…

When behavioural economics meets randomised control trials: Examples from Canadian public policy

December 7, 2016

Robert French and Philip Oreopoulos have a nice post on the topic.

They point to how Ontario in Canada has started a behavioral unit which is slowly moving along on behavioral insights:

Although initially slow to warm to the trend, Canada is witnessing behavioural economics play an increasingly important role in its policy formulation (French and Oreopoulos, forthcoming). Agencies promoting the application of behavioural economics to public policy have now been established at both the federal and provincial level, covering a broad array of policy issues. A particularly notable feature of these agencies is the emphasis they place on rigorously testing their prospective behavioural interventions through randomised control trials. While not unique to the Canadian agencies, we believe this feature is worth highlighting. Many of the country’s behavioural interventions have occurred within an existing policy framework in which small tweaks to the status quo – influenced by behavioural economics – have had a marked impact on policy outcomes. Using randomised control trials to determine how best to tweak existing policy has been critical to the success of these interventions to date.3

One of the first explicit Canadian behavioural interventions to this effect involved promoting organ donation registration rates in the Province of Ontario. While much has been written about the power of default options affecting organ donation registration rates (e.g. Li et al. 2013, Johnson and Goldstein 2003), changing Ontario’s current opt-out default policy to one of presumed consent remains publicly unappealing.4,5 Instead, the province sought to promote organ donation registration through a behavioural intervention that operated within the province’s opt-out default policy framework. The intervention was designed with assistance from the province’s recently established Behavioural Insights Unit (BIU) – a government agency established to design and test behavioural interventions in the province.

Currently, when conducting a health card, driver’s licence, or photo card transaction at a provincial service-centre, Ontarians are asked by customer service representatives whether they would like to register as a donor and are provided with a registration form. The BIU’s intervention sought to raise registration rates by increasing the salience and simplicity of the registration process through altering the content of the registration form as well as the time at which potential donors received the form during their visit to a provincial service-centre. The intervention also included variations in nudge statements present on the registrations forms.6 This simple trial was considered a remarkable success by the Ontario government, as organ donation registration rates increased by up to 143% during the trial (Treasury Board Secretariat 2016).

In another experiment, they have shifted the signature box in income tax from bottom to top. This is being done in a randomised setting thus mixing the two fields:

The BIU’s attempt to mimic a randomised control trial while testing a behaviourally based intervention within an existing policy framework is emblematic of many other recent initiatives in Canadian public policy. One particularly interesting example involves Canada’s Revenue Agency (CRA) testing the impact of moving the signature box on personal income tax returns – where filers agree in writing that information provided is complete and accurate – to the beginning of the form. This intervention – based upon previous research suggesting that people are more truthful after they have been prompted to think about honesty (e.g. Shu et al. 2012) – was conducted in two Canadian cities wherein paper tax returns containing the altered signature block were distributed among some of its citizens. The CRA is currently comparing the amount of income reported (especially in areas more susceptible to dishonest disclosure) between the treatment and control groups, and pending differences between the two groups may roll out this intervention more extensively in the future. This example is especially interesting since it is a quintessential example of how combining insights from behavioural economics and rigorously testing such insights can affect dramatic change through public policy. Even a marginal difference in reported income across the two groups could garner substantial savings for the government if this costless intervention were implemented nation-wide.

Nice bit.

 

Indore Patna Express Accident: Indian Railways thinking of changing default option for passenger insurance..

November 21, 2016

What a tragedy on early Sunday morning (20 Nov 2016). It was just shocking to see the pictures.

One just realises the importance of insurance when such accidents happen. The Government had started this really laudable insurance scheme which costs just 0.92 paisa to safeguard passengers. However, due to ignorance and discounting of the accident only 126 of the 429 passengers had availed of the insurance. Those who did will get additional Rs 10 lakhs in case of permanent injuries and so on (detailed conditions here).

The question is why is it that so few opted for the insurance in this train? I am sure same would be the case across most journeys. The problem is default choice. The question railways asks is whether you want insurance or not. The railways is thinking of changing this default question.

 

Indian express explains:

The accident Indore-Patna Express met on Sunday will be the first real test of the recently-launched optional travel insurance scheme for train passengers. Thanks to the scheme, the family of the insured deceased will now get Rs 10 lakh over and above other compensation announced. Railways is now mulling a proposal to make the travel insurance default for each e-ticket booked unless a passenger opts out, sources said.

By Sunday evening, representatives of three insurance companies, ICICI Lombard, Royal Sundaram and Shriram, were on their way to the mishap spot, sources in the Indian Railway Catering and Tourism corporation (IRCTC), which anchors the scheme for Railways, said. They will assess the total payout in claims, which will be in crores.

This is where defaults in choice selection matters and is straight from behavioral economics toolkit.

So far default is “Do you want to buy insurance?” If yes then you tick the box and  0.92 paisa is added to the fare per passenger.

Now the railways is thinking of changing the default to ” You are being charged for 0.92 paisa for insurance? Do you want to opt out of the scheme?” If yes, then you cancel the tick and the amount is deducted from the fare.

If possible, the railways should not wait and add a choice on booked tickets as well. People who book should be asked to keep the really small change and pay the Ticket examiner. This is a time when change is in shortage but people will produce it to safeguard  against this rare but huge risk. (This suggestion is coming as the blogger is guilty of not availing the insurance as well…)


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