Archive for the ‘Behavior Eco/Fin’ Category

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.

Hmm.

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…

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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:

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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:

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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:

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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.

Hmm..

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:

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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.

 

Nudging the city and residents of Cape Town to save water

March 5, 2018

Profs. Leila Harris, Jiaying Zhao and  Martine Visser write on the nudging strategies used by cape town citizens to save water:

The nudges are those well documented in behavoral literature

  • social norms- highlight water usage with respect to neighbour
  • Real-time feedback – A dashboard showing daily water levels at dams
  • Social recognition: recognise water saving efforts by giving awards
  • Cooperation: Encourage reciprocity

Major Indian cities could be in near future be doing similar things as well. Infact, we need to be pushed now..

The Applied Theory of Bossing People Around: Richard Thaler’s prize isn’t noble….

February 13, 2018

Prof Deirdre McCloskey critiques (stinker actullay) the 2017 economics Prize to Prof Thaler:

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Thaler has more slides thanking collaborators/friends than the Prize lecture…

January 3, 2018

Though it has been nearly a month since Prof Thaler gave the 2017 Prize lecture. I just revisited the lecture slides which are so unlike any lecture in economics one can ever get.

But then what was more interesting was Prof Thaler putting a slideshow of collaborators/friends on the website. It has about 50 slides whereas his Prize lecture is about 43 slides.

I have seen this for the first time and is a great gesture by Prof Thaler. It is in a way tribute to his own philosophy where he shows humans are overconfident while assessing themselves. He shows his award is due to support/discussions with several friends and collaborators.

 

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..

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.

 


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