Archive for October, 2008

Are opt-in bank recapitalization plans working?

October 31, 2008

Mostly Economics points to this passage from Euro Intelligence that says not in Germany.

The money market is still frozen…the biggest mistake of the German plan had been the voluntary nature of bank rescues, which has led to the perverse situation that so far only one state-owned bank, BayernLB, has asked for new funds. Lucas Zeise says the German government made the mistake to ask the banks to co-draft the rescue plan, rather than forcing banks into recapitalisation, as the British and French have done.

Restaurant menu choice architecture

October 31, 2008

Rory Sutherland passes along this snapshot from Lisbon, Portugal, of a restaurant menu that nudges diners toward a wine selection. Even tourists with only a crude working knowledge of Portuguese should be able to figure out the suggested wine. (The wines are on the bottom row.) Of course, anyone can still easily order across colors.

If behavioral economists devised financial regulations…

October 29, 2008

From a new paper by Eldar Shafir, Michael Barr, Sendhil Mullainathan. Some of the highlights are below. OK, so they aren’t all behavioral economists. Mullainathan is. Barr is a law professor and Shafir is a psychology professor.

1. Full information disclosure to debias home mortgage borrowers.

Useful information that Shafir, Barr, and Mullainathan have in mind includes disclosing the borrower’s credit score, and the borrower’s qualifications for the all of the lender’s mortgage products.

2. A new standard for truth in lending.

We propose that policy makers consider shifting away from sole reliance on a rules based, ex ante regulatory structure for disclosure embodied in (the Truth in Lending Act) and toward integration of an ex-post, standards-based disclosure requirement as well.

3. A “sticky” opt-out home mortgage system.

We propose that a default be established with increased liability exposure for deviations that harm consumers…In our model, lenders would be required to offer eligible borrowers a standard mortgage (or set of mortgages), such as a fixed rate, self-amortizing 30 year mortgage loan, according to reasonable underwriting standards.

4. Restructuring the relationship between brokers and borrowers.

An alternative approach to addressing the problem of market incentives to exploit behavioral biases would be to focus directly on restructuring brokers’ duties to borrowers and reforming compensation schemes that provide incentives to brokers to mislead borrowers. Mortgage brokers have dominated the subprime market.

5. Using framing and salience to improve credit card disclosures.

See something like RECAP, proposed in Nudge.

6. An opt-out payment plan for credit cards.

Consumers would be required automatically to make the payment necessary to pay off their existing balance over a relatively short period of time unless the customer affirmatively opted-out of such a payment plan and chose an alternative payment plan with a longer (or shorter) payment term.

7. An opt-out credit card.

Consumers would be offered credit cards that meet the definition of “safe.” They could opt for another kind of credit card, but only after meaningful disclosure. And credit card firms would face increased liability risk if the disclosure is found to have been unreasonable.

8. Regulation of credit card late fees.

Under our proposal, firms could deter consumers from paying late or going over their credit card limits with whatever fees they deemed appropriate, but the bulk of such fees would be placed in a public trust to be used for financial education and assistance to troubled borrowers…Firm incentives to over-charge for late payments and over-limit borrowing would be removed, while firms would retain incentives appropriately to deter these consumer failures.

9. A tax credit for banks offering safe and affordable accounts.

Market forces weaken or break down entirely with respect to encouraging saving for low income households. This is simply because the administrative costs of collecting small value deposits are high in relation to banks’ potential earnings on the relatively small amounts saved, unless the bank can charge high fees; with sufficiently high fees, however, it is not clear that utilizing a bank account makes economic sense for LMI households.

10. An opt-out bank account for tax refunds.

Low-income households without bank accounts would have their tax refunds automatically deposited into a new account, similar to something like the SAFE-T account that residents could draw on. (H&R Block offers a similar product.)

Watch a video about the paper, sponsored by the New America foundation, below:

What can Barry Manilow teach us about a current controversy over polling precinct attire?

October 27, 2008

This election season you may have noticed the sartorial squabble over polling precinct dress codes that started with an Obama t-shirt in Pennsylvania. While the dispute led to a court fight, the campaigns, to be safe, are dissuading voters from wearing clothing that features Obama-Biden and McCain-Palin references. We don’t want to weigh in on the subtleties of election law and what constitutes electioneering. Instead, we want to raise a simpler question: How many people are even going to notice a McCain or Obama t-shirt?

There’s a wonderful study with direct bearing on this current controversy: The “Barry Manilow” experiment (which we mention in Nudge). One version of the experiment worked as follows. When a student arrived to participate, she was asked to put on a t-shirt with a picture of Barry Manilow prominently displayed on the front, and sent to a room where another group of students were busy filling out questionnaires (Barry Manilow was thought to be the least hip, most embarrassing performer a college student could plaster on a shirt – hey, it was the 1990s.) After a minute, the student with the Barry Manilow t-shirt was asked to leave the room with the experiment supervisor. The other students were asked to identify who was on the shirt. How many could? Barely one-fifth. And to show this wasn’t just a Barry Manilow phenomenon, similar results were found with shirts featuring Martin Luther King, Jerry Seinfeld, and Bob Marley.

Skeptics may claim that the experiment featured a picture of Barry Manilow, while most political t-shirts feature candidate names. And being asked to recall a picture and turn it into a name (might be) more difficult than simply noticing the name itself. But it’s also worth questioning how many people will have a chance to see the shirts on other people. After all, lines are the norm at polling locations, which means you spend much more time staring at the backs of shirts, not the fronts of them. What the Barry Manilow experiment cautions is that even when someone turns around, wearing something she thinks is so obvious everyone will see it, lots of people won’t even notice.

More commitment strategies – for humans and birds!

October 27, 2008

From Yale psychologist Paul Bloom:

As I write this article, I’m using a program that disables my network connections for a selected amount of time and does not allow me to switch them back on, thereby forcing me to actually write instead of checking my e-mail or reading blogs. A harsher (and more expensive) method, advised by the author of a self-help book, is to remove your Internet cable and FedEx it to yourself—guaranteeing a day without online distractions.

Even pigeons can craft commitment strategies.

Ainslie conducted an experiment in which he placed pigeons in front of a glowing red key. If they pecked it immediately, they got a small reward right away, but if they waited until the key went dark, they got a larger one. They almost always went for the quick reward—really, it’s hard for a pigeon to restrain itself. But there was a wrinkle: the key glowed green for several seconds before turning red. Pecking the key while it was green would prevent it from turning red and providing the option of the small, quick reward. Some of the pigeons learned to use the green key to help themselves hold out for the big reward, just as a person might put temptation out of reach.

Read the rest of the article, “First Person Plural,” here.

An Esquire writer tries to live like homo economicus

October 24, 2008

It doesn’t work out so well.

The writer is A. J. Jacobs. His brother-in-law, behavioral economist Eric Schoenberg of Columbia Business School, offers a phrase for humans who refuse to see themselves as average or mediocre at anything:

He said I was suffering from the Lake Wobegon Effect: Our brains are delusively cocky. We all think we’re better-looking, smarter, and more virtuous than we are. (It’s named for Garrison Keillor’s town, where “all the children are above average.”)

Jacobs writes his own newspaper headlines to compensate for the availability bias that prevents him from remembering much more than what he’s read recently.

Today, there’s an article about salmonella. Eight hundred people have gotten sick from salmonella, possibly from tainted tomatoes–which later will turn out not to be the case. I’m a paranoid bastard, so I would normally purge our house of anything tomato-related: the pint of cherry tomatoes, the ketchup bottles, the Esquire cover of Andy Warhol in tomato soup. Salmonella would climb onto my list of Top Ten Worries.

Instead, I take my first countermeasures. I ask my wife for the newspaper, find a Sharpie, and scribble under the headline: “Meanwhile, millions of people ate tomatoes and did NOT get sick. But thousands did die from obesity.”

Jacobs, familiar with the human tendency to eat whatever is in front of them, tries to fool himself eating cereal.

I pour my MultiGrain Cheerios into a bowl, then cover the bowl with a napkin. I’m not going to let my brain see what’s inside the bowl. That’d be too tempting. I’ll just eat till I feel full. It’s a time-consuming process trying to negotiate the spoon around the napkin. Which is probably a good thing, since it’s healthier to eat slowly.

He realizes he’s been brushing with Crest for 30 years because of the “yeah whatever” heuristic.

That’s not good enough. I need a fully rational toothpaste. I need, first, to expand my dental-hygiene horizons. I go to the drugstore and buy a sample platter of forty tubes of toothpaste…I go home and spend eighty minutes brushing. Pepsodent Smooth Mint. Colgate Luminous Crystal Clean Mint. Aquafresh Extreme Clean Whitening Mint Experience. I never realized how much I hate mint.

Read the rest here.

Social norms in Louisville, Kentucky

October 24, 2008

From the News and Tribune:

Perhaps you have seen the billboards on Interstate 64 saying things like, “78 percent of Portland youth have never tried alcohol!” They come from the Portland Now Prevention Partnership’s (PNPP) social norms campaign. This campaign is designed to contradict the notion that all young people are using alcohol, tobacco, or drugs. Since young people are greatly influenced by what they think their peers are doing, the PNPP wanted to be sure that they are getting accurate information.

Are you complying now?

October 22, 2008

New Hampshire public radio reports on a Nudge-like project at MIT to cut medical costs and improve patient compliance for tuberculosis drugs. Tuberculosis is an expensive disease to treat because 1) Patients must take drugs for six months or risk boosting the spread of drug-resistant strains, and 2) because health care workers are often assigned to patients to ensure they follow their regimens.

MIT has combined technology with free cell phone minutes to boost compliance.

Each day, patients take a urine test using filter paper produced by a timed-release dispenser. The paper reacts to metabolites of the TB drug isoniazid. If the metabolites are present, the filter paper displays a code which the patient texts directly to a database. Those who miss fewer than five of their pills each month receive free call time for their cellphones.

A behavioral economic approach to the financial crisis

October 21, 2008

In response to the financial crisis, a number of countries have sought to boost liquidity and confidence by guaranteeing bank debt and consumer deposits. Eagle-eyed Amol Agrawal notices that New Zealand did so with a behavioral economics twist: It used an opt-in strategy for participation in the government program. (Australia used a similar approach.) Agrawal argues that the opt-in strategy is a signal to investors about the relative health of the New Zealand banking system.

(New Zealand’s Ministry of Finance) believes its financial system is safe and hence has used opt-in. In fact, (the New Zealand government) is trying to signal the same to the markets. If the risks from financial system were higher, it would have instead used a opt-out strategy.

That may true, but the opt-in approach is also a signal about the relative health of individual banks. Contrast it with the U.S. FDIC program to guarantee bank debt, which was “voluntary” in name only – at least for the nine major banks that initially participated. The U.S. government’s argument against true voluntary participation was that banks that did take part would be considered weak by investors and other lending institutions. New Zealand banks that choose to opt-in will face this very dilemma. So while New Zealand sought to showcase the health of its financial system at the expense of a few weak banks, the U.S. sought to shelter the extent of the damage to its financial system at the risk of undermining some of its strongest performers (ie. Wells Fargo and JPMorgan Chase).

So far, the New Zealand government has not announced which banks are participating in its opt-in program, but stay tuned.


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