Archive for the ‘Behavior Eco/Fin’ Category

A Review of Nudges: Definitions, Justifications, Effectiveness

January 7, 2021

Luca Congiu  and Ivan Moscati of University of Insubria (Italy) in this research piece:

In an influential book published in 2008, Thaler and Sunstein suggested a novel approach to policy making based on the notion of a ‘nudge.’ Roughly speaking, a nudge is defined as an aspect of the decisional context that steers people’s decisions by acting on their cognitive biases. The book generated an intense debate, over the course of which concerns were raised about: (1) the exact definition of nudges, (2) their ethical justifiability, and (3) their effectiveness. In this paper, we review the nudge literature by focusing on these three concerns.


We are all Behavioral, More or Less: A Taxonomy of Consumer Decision Making

November 30, 2020

Victor Stango & Jonathan Zinman in this new NBER paper:

What explains the differences between rising stock markets and declining economic prospects?

July 10, 2020

Prof Robert Shiller in this Proj Synd piece:

The performance of stock markets, especially in the United States, during the coronavirus pandemic seems to defy logic. With cratering demand dragging down investment and employment, what could possibly be keeping share prices afloat?

The more economic fundamentals and market outcomes diverge, the deeper the mystery becomes, until one considers possible explanations based on crowd psychology, the virality of ideas, and the dynamics of narrative epidemics. After all, stock-market movements are driven largely by investors’ assessments of other investors’ evolving reaction to the news, rather than the news itself.

That is because most people have no way to evaluate the significance of economic or scientific news. Especially when mistrust of news media is high, they tend to rely on how people they know respond to news. This process of evaluation takes time, which is why stock markets do not respond to news suddenly and completely, as conventional theory would suggest. The news starts a new trend in markets, but it is sufficiently ambiguous that most smart money has difficulty profiting from it.

Using prospect theory to explain 22 stock market anomalies

May 18, 2020

Nicholas Barberis, Lawrence Jin and Baolian Wang in this new NBER paper:

We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 22 prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors’ prior gains and losses, and makes quantitative predictions about an asset’s average return based on empirical estimates of its volatility, skewness, and past capital gain. We find that the model is helpful for thinking about a majority of the 22 anomalies.


Bank of England/Financial Times Schools blog competition results: Behavioral economics reaches schools!

May 11, 2020

Bankunderground blog announced the results.

The winner is South Wilts Grammar School. The winners wrote on using behavioral economics to reduce disposable coffee cups.

One sees people carrying their bags in shopping stores to avoid paying extra for the plastic bag at the store. Why don;t we see something similar for coffee at cafes?

To help save the planet and gain a competitive edge, cafes should obey a basic rule of behavioural economics by switching from offering discounts for customers who bring their own cups in favour of charging more for disposable ones.

Consider the astronomical success of the introduction of a 5p charge on plastic bags by British supermarkets. Volumes plummeted by over 86 per cent — an unexpectedly high proportion when the majority of consumers would not even pick up a 5p coin if they saw it lying in the street.

Yet there has been a muted response to the more substantial discounts offered to consumers bringing re-usable cups to cafes for their morning coffee — of up to 50p at Pret A Manger. Up to 55 per cent of shoppers remember to carry their reusable grocery bags to save just 5p, while fewer than 2 per cent of coffee drinkers bring their own cup.

Given that they could save up to ten times as much, why are consumers responding to two seemingly similar scenarios in profoundly different ways? I put it down to the behavioural economics theory of ‘loss aversion’.

Loss aversion arises when the cost associated with giving something up is perceived as greater than the benefit that would accrue from the acquisition of the same thing. This behavioural concept is clearly evident in how consumers react to bringing a re-usable bag or a re-usable cup.

There are many instances in which suppliers offer monetary incentives to promote environmental practices even when it may be significantly more effective to introduce a fine. Just a tweak of policy can often have a disproportionately positive effect.

So to encourage the use of re-usable cups, scrap the discount and introduce a small charge for those who demand disposables. This would play to consumers’ tendency to go to greater lengths to avoid a loss than to seek an equivalent gain.

Starbucks is the first large coffee chain to have rolled out a charge (of 5p) on their paper cups. Given a fantastic consumer response — with three times more people now bringing their own cup — it is baffling why other businesses are not taking the same approach. 

One possibility is that they worry the practice may make them less price competitive: charging 5p for a cup amounts to raising the price of the product for the majority. However, if businesses like Starbucks are transparent about the environmental benefits of the 5p charge, as many supermarkets have been, it could actually increase competitiveness by attracting the rapidly growing number of environmentally conscious consumers. Tackling climate change may begin at the level of the individual. But if businesses can nudge their customers to consume sustainably then by applying behavioural economic theories such as loss aversion, we will have a significantly greater chance of controlling waste before it takes an irreversible toll on the environment.

This is really interesting. Behavioral economics reaches schools!

Does the new income tax structure pass the nudge smell test?

February 5, 2020

My new piece on the Budget 2020. I apply Thaler/Sunstein’s nudge principles on the new income tax structure.

On some aspects the new system passes the nudge test on others it does not..

Between nudge and sludge are lessons for India

October 31, 2019

Nice Mint piece by Puja Mehra differentiating between nudge and sludge:

  • Sludge is excessive or unjustified friction such as paperwork burden that slows or halts a behaviour or action. It makes life difficult to navigate and can be frustrating
  • The nudge philosophy is that the chosen option makes choosers better off as judged by themselves

Sludge often has costs far in excess of benefits and can hurt the most vulnerable members of society. Sunstein says firms, universities and government agencies should regularly conduct sludge audits to catalogue the costs of sludge and decide when and how to reduce it. The streamlined passport issuing service in India, designed to speed up processes, may have followed an informal kind of sludge audit.


Niti Aayog looking to establish India’s nudge unit..

July 19, 2019

Interesting development.

Niti Aayog is looking to hire behavioral economists/researchers to establish India’s nudge unit…

Before Thaler and Economic Survey, there was TMA Pai/Syndicate Bank

July 4, 2019

In the Economic Survey 2018-19 tabled today, there is a chapter on how Indian government is using behavioral economics/nudging to improve public policy.

Replugging (yet again) an old piece to show how How Dr T.M.A Pai nudged many decades before via Syndicate Bank, the bank he owed and developed over the years. Dr. Pai designed a savings product named Pigmy Deposits in 1928 which was nudged people into savings. It was based on similar principles developed much later by Prof Richard Thaler in 1990s.

The Economic Survey chapter discusses savings products designed elsewhere which resemble today’s Pigmy deposits but miss including Pigmy deposits in the list.

The application of behavioural insights to retail investor protection

April 5, 2019

Interesting report by IOSCO (HT: Regulation Asia)

Building on that important research, this report provides a literature review and reports on the results of a survey of IOSCO C8 jurisdictions focusing on how behavioural insights could be, and are being, used to respond to the following questions relevant to retail investor protection (the “Topic Areas”):

• Disclosure design: How can we apply behavioural insights to the presentation of disclosures to optimize retail investors’ absorption of essential information and resulting behaviour, and to what extent does the answer to this question vary for different segments of retail investors and different product types?
• Online interfaces: Many entities provide online interfaces primarily directed at attracting investments from retail investors. What design features, such as layout, reminders, and warnings, can online interfaces incorporate to help investors make informed investment decisions?
• Timeliness of information: When are retail investors most receptive to relevant disclosure or educational content (e.g., when the investor begins a new job or is about to make key decisions about retirement)?

This report acknowledges that, while behaviourally-informed measures in these areas have the potential to promote informed investor decision-making, their potential comes with limits. 

Disclosure and information, no matter how well-designed and no matter how well-timed their delivery, may not be sufficient on their own to achieve comprehensive retail investor protection. Standards of conduct imposed on the investment professionals on whom retail investors rely to recommend and manage their investments, as well as the regulation of investment products sold to retail investors, will continue to be part of the comprehensive set of measures employed by regulators to further retail investor protection.


Insights from behavioral economics for India’s policy issues

December 7, 2018

Prof Ashima Goyal of IGIDR in this paper looks at behavioral constraints in policy and behavioral strategies for reform:

A long day of intense and enthusiastic debate among a Panchayat of wise elders has generated valuable insights. One of the learning points repeatedly touched on through the day is the importance of coordination across regulators, government departments and policies. Moreover, Bibek Debroy in his talk extended it to the citizen—how can the citizen help the government achieve its tasks.

Criticisms made, however, point to the question of why policy has not been able to deliver— why is it India has under-performed in so many dimensions? From the macroeconomic perspective, higher growth and some reduction in poverty has been associated with a lot of volatility. Growth has not yet crossed the threshold above which it becomes self-sustaining. Participants of this symposium were long associated with policy. There is an old saying that India has good economists but poor policy. Post liberalization, however, there is more optimism—it is agreed India has excellent potential but the question is when is it going to be realized?

It may be helpful to try a fresh approach. This year the Nobel Prize was given for behavioral economics. It is useful to examine behavioral constraints in policy making, and in achieving the required coordination. First we will apply psychological concepts to understand policy inadequacies, and then go on to see how general reforms or better coordination can be achieved using psychological trigger strategies.


Behavioral constraints:

  • Over-reaction post 2008 crisis leading to high stimulus.
  • Once bitten twice shy: The overreaction led to over cautiousness
  • Wanting to do everything best before growth leads to losses in output.
  • Copying from others like inflation targeting (ouch!) without looking at India specific issues.
  • Interpreting rules too rigidly: Flexible Inflation targeting has become strict inflation targeting. Some discretion is important.
  • Narrow vision where policymakers miss the connections in the economy
  • Excess weight to foreign reputation and external risks
  • Economists in Delhi are more pessimistic than those in Mumbai. (what about other cities?)
  • Do not see any change by focusing on lower growth rates..
  • Optimism and assuming 9% growth is ours..

Likewise there is a list of behavioral strategies for reform.

One may disagree with the arguments posed, but it is nevertheless an interesting and lighter way to assess Indian policy…

How to spot a nudge gone rogue

October 17, 2018

Dee Gill has a useful post on the topic:

Even the most popular and proven nudges sometimes fail spectacularly, prompting the targeted individuals to do exactly the opposite of what the nudgers intended. These damaging anomalies — nudges that inadvertently lead to a drop in retirement savings rates or to higher energy consumption, for example — often look very much like the successful nudges documented repeatedly in workplace and government settings worldwide. What makes these seemingly reliable tactics backfire?

A recent article in Behavioral Science & Policy teases out several triggers that can make a good nudge go bad. With examples from dozens of nudge studies, UCLA Anderson’s Job Krijnen and Craig Fox, along with University of Utah’s David Tannenbaum, explain how to recognize potential nudge catastrophes, in which programs to steer people toward specific decisions might go off the rails. The authors explain their research and that of other experts in the field.

Certain choice presentations, the researchers find, inadvertently prompt decision makers to dwell on a few specific questions: What do these people want me to choose, and why? What will others think of me if I take that choice?

These internal musings can be dangerous for choice presenters, according to the paper, titled “Choice Architecture 2.0: Behavioral Policy as an Implicit Social Interaction.” Sometimes people don’t make the choice intended by the nudge.

The researchers offer a checklist to help choice presenters identify situations likely to heighten these concerns. Recognizing the red flags and making what are often small changes in the choice presentation may keep a worthy nudge from becoming a spectacular failure.

For instance, the Dutch nudge for organ donations went rogue:

When the Netherlands wanted to increase organ donation in 2016, the country’s lower house of Parliament passed a bill changing the way citizens gave consent to donate. Rather than sign up for the program, as they had before, all citizens would be presumed donors at death unless they explicitly opted out.

The lawmakers were surprised when this worked badly.

The change the bill proposed — making the desired choice the default option — is a tried-and-true tactic used by governments, employers and marketers hoping to influence individual decisions. A nudge, such as a do-nothing option when every other possibility requires action, makes it easier for individuals to make decisions that align with their goals and preferences. Several European countries have nudged their way to stellar organ donation rates by assuming consent unless otherwise stated.

The Dutch, however, rebelled. With the new law to go into effect in 2020, the number of citizens refusing to donate broke records. An annual donor sign-up drive staged shortly after the bill passed registered almost six times as many signatures for non-donors as donors. The legislature eventually tamped down the backlash with some crucial adjustments to the bill. But the implications for people in the business of this sort of persuasion were troubling: A sure-fire nudge, one that had seemingly worked elsewhere, had gone rogue for the Dutch.

This happened as Dutch saw a wrong message behind the default design:

With this checklist of red flags, the Dutch organ donation nudge looks particularly risky. There was an overt change in the choice presentation, complete with a lot of press explaining the intentions of the change. The subject could hardly have been more personal and, as such, was likely to be intensely important to many. Many people apparently did not trust the government to recommend the best decision for them.

The 2.0 researchers do not focus on how the Dutch, or any nudger, can fix the potential problems their prescribed audits find. The different circumstances of each project will determine the specific actions needed. The Dutch got appeasement in part by allowing individuals to put the decision to donate or not onto their surviving relatives. Time will tell if the Dutch nudge encountered only a temporary backlash and, with the adjustment, will become successful.

An audit for social sensemaking can give choice architects a heads up that a project needs more thought — or perhaps a really good pilot test — before a potentially regrettable nudge is unleashed.

Nudge 2.0 is a nice name…

Why Corporate Finance is a misnomer and how behavioral corporate finance can help…

October 15, 2018

Interesting paper by Prof Ulrike Malmendier of UC Berkeley.

She starts the paper with this emphatic statement:

The field of Corporate Finance might well be the area of economic research with the most misleading name (followed by Behavioral Economics as a close second). Many of the research papers identified as “Corporate Finance” deal neither with corporations nor with financing decisions. In this chapter
of the Handbook, I first conceptualize the breadth and boundaries of Corporate Finance research, and then present the advances that have resulted from applying insights from psychology. I illustrate how the behavioral toolbox has allowed for progress on long-standing puzzles regarding corporate
investment, mergers and acquisitions, and corporate financing choices.

She says much of corporate finance is too narrow and fails to include topics which are relevant today:


10 years of Nudge: Interviews of Richard Thaler and Cass Sunstein

September 27, 2018

One never really tires reading about behavioral stuff.

As nudge the book completed 10 years, here are interviews of the authors: Prof Thaler’s and Cass Sunstein’s.

Sunstein on what kept the duo going? They just loved each other’s company and laughed together. As simple and effective as that:

Like Kahneman and Tversky, you and Richard Thaler have had a rich professional partnership and friendship. Why do you think you worked so well together? And what have been a couple of your favorite moments from your collaboration?

We had, and continue to have, a lot of fun! We laugh together a lot. That is maybe the secret sauce. We also have complementary backgrounds. My focus is on law and public policy, with a keen interest in behavioral economics. He’s the most important figure behind behavioral economics, with a keen interest in law and public policy. That’s a perfect mix, I think.

One favorite moment was a lunch in which Thaler arrived, all excited about an idea he had, called “choice architecture.” I was skeptical and asked a ton of questions. I worried: Our book is about libertarian paternalism, which is clear and crisp (I thought!)—what’s this choice architecture stuff? By the end of the lunch, he persuaded me, and we were off to the races. (I remember this as if it were yesterday.)

Another favorite moment was a workshop we did at the University of Chicago Law School, involving a paper we wrote together with Christine Jolls (now at Yale). Thaler was the main presenter. I have never seen such hostility in a workshop. People were very angry at us. It got ugly. No one who was there will ever forget it. But it’s a favorite moment, still, because Thaler kept his cool throughout, and keep asking, in response to rude questions, about what the evidence actually said.

In general: we had lunch together a lot, just the two of us, at a little Hyde Park restaurant. Even if we never produced anything, those would be precious memories. (We talked just last night, and that was great, too.)

🙂 More power to both of them…

Prof Thaler:


Nudge Turns 10: A Special Issue on Behavioral Science in Public Policy

September 10, 2018

Apart from Lehman’s 10 years, Nudge too turns 10 (HT: Prof Jeemol Unni of Ahmedabad University):

In 2008, Thaler, along with Cass Sunstein, published the book Nudge, detailing how policymakers could redesign policies to “nudge” citizens toward better behavior and choices. In its wake flowered the world of nudge units, marrying the science of choice architecture with public policy. Since 2008, these units, and researchers and policymakers with an eye for applying behavioral science in government, have influenced everything from tax policy to retirement savings, from energy consumption to environmental responsibility.

It’s been 10 years since Richard Thaler and Cass Sunstein published Nudge, the right time, we think, for a look back at how far we’ve come and where we could go. Over the next three weeks, we’ll publish a series of pieces that examines how behavioral science has informed and influenced the world of public policy, as well as what science has learned from the world of policy.

Some of these pieces weigh the successes and shortcomings of how nudges, and behavioral science more generally, have been implemented around the world. Others assess the relationship, sometimes positive and sometimes tense, between academia and applied work. Still others reflect on the field’s methods and offer suggestions for improved practices. All help us think about how behavioral science might help improve our future in the decades to come.

Interesting bit of pieces there. Worth a dekho….

Enhancing central bank communications with behavioural insights

August 20, 2018

A superb collaborative paper by researchers at Bank of England and Behavioral insights Team.

They try and understand whether simplifying the message in BoE’s Inflation Report leads to more people reading and understanding the analysis. Not surprisingly, simplifying helps a great deal:


Richard Thaler and the Rise of Behavioral Economics

August 6, 2018

Prof Nicholas Barberis of Yale Univ pays tribute to Prof Richard Thaler’s work in this paper. It is also one of the best summaries of both Thaler’s work and behavioral economics.

In the end Prof Barberis concludes hoping beh eco becomes a more integrated discipline and not a seperate subject as it is today:

In his talks and writings, Thaler has often noted his wish for “the end” of behavioral
economics. His hope is that economics will reach a point where there is no need for separate
courses or conferences in behavioral economics. Rather, the ideas of behavioral economics
will be fully integrated into existing courses on financial economics, labor economics, macroeconomics,
and so on; moreover, all research economists will be familiar with these ideas and
will apply them as appropriate in their work. While there is some way to go before this goal
is reached, the underlying vision is starting to be realized. More and more often, researchers
who do not identify particularly as behavioral economists are nonetheless incorporating behavioral
ideas into their analyses. The end of behavioral economics is in sight, and Richard
Thaler is surely heartened to know it.


The next big idea of macroeconomics: Linking human psychology with debt markets?

July 31, 2018

Noah Smith in this piece wonders how come the 2008 crisis has not led to any new  thinking/development in macroeconomics.

Macroeconomics tends to advance—or, at least, to change—one crisis at a time. The Great Depression discredited the idea that economies were basically self-correcting, and the following decades saw the development of Keynesian theory and the use of fiscal stimulus. The stagflation of the 1970s led to the development of real business cycle models, which saw recessions as the efficient working of the economy, and central bank meddling as likely only to cause inflation. The painful recessions of the early 1980s saw a shift to so-called New Keynesian models, in which monetary policy is the central stabilizing force in the economy.

The housing bubble that peaked in 2006, the financial crisis of 2008, and the Great Recession that followed constitute another crisis. So far, however, it has produced mostly evolution, rather than revolution, in economists’ conception of the business cycle. The bubble and the following crisis convinced macroeconomists that recessions often emanate from the financial sector—an idea that had often been resisted or overlooked before. There was immediately a flurry of activity, as economists hastened to shoehorn finance into their standard models. Some now believe that the addition of finance will allow New Keynesian models to forecast crises before they happen; others are, understandably, sceptical.

For instance this paper by Jordi Galli says New Keynesian Macro, which was the dominant framework before crisis, is working fine even post-crisis with modifications.

Smith points to this paper (slides discussed in Nobel Symposium as well) by Pedero Bordalo, Nicola Gennaoli, and Andrei Shleifer which could be the next big thing to look at in macro:


Behavioural Government: Using behavioural science to improve how governments make decisions

July 18, 2018

UK’s Behavioral Insights Team has a new publication:

Governments are increasingly using behavioural insights to design, enhance and reassess their policies and services. Applying these insights means governments adopt a more realistic view of human behaviour than they have done in the past – and may achieve better outcomes as a result.

However, elected and unelected government officials are themselves influenced by the same heuristics and biases that they try to address in others. This report explores how this happens – and how these biases can be addressed or mitigated. To do this, we focus on three core activities of policymaking: noticing, deliberating and executing.

Just read a few pages and like most behavioral research, one is surprised with all these biases and illusions..

Nudging Air Conditioner settings at 24 degrees to check power wastage

June 25, 2018

This is an interesting nudge from Indian government.

It wants Air Conditioners to have default temperature set at 24 degrees.

Soon air-conditioners (ACs) sold in the country could come with a default setting of 24 degrees Celsius and will allow temperature setting between 24 and 26 degrees only as part of a campaign to promote greater efficiency in electricity consumption for cooling.

The ACs will also have labels indicating the optimum temperature setting that is best suited for savings in power bill and health of consumers. To begin with, the power ministry intends to issue an advisory to all commercial and public establishments such as airports, hotels, shopping malls as well as manufacturers to keep temperature setting at 24 degrees.

Based on the public feedback and a six-month awareness campaign, the ministry may consider making these measures mandatory. According to a ministry statement, these were decided at a meeting with AC manufacturers on Friday.

“Every degree increase in the AC temperature setting results in a saving of 6% of electricity consumed. Normal human body temperature is approximately 36-37 degree Celsius but large number of commercial establishments, hotels and offices maintain temperature around 18-21 degree. This is not only uncomfortable but is unhealthy,” the statement quoted power minister R K Singh saying at the meeting.


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