Three reasons why a little extra optimism is a good thing

February 12, 2010

Cade Massey in Qn:

There is a fairly widely held belief among some researchers that some optimism is good. It’s a little bit like red wine: In moderate amounts, it’s good for you.

There are a number of reasons why it might be good to be optimistically biased. For example, if people are by nature a little too risk-averse, a little optimism helps counterbalance that, gets them to take a few risks they might not otherwise.

Another reason is that there is, in economic-speak, positive utility from having positive expectations, in and of itself. Setting aside any decision making that you do based on the expectations, just consider how it feels to walk through life believing that your favorite football team is going to win this weekend, that your relationship is going to work out, that your financial investments are going to pay off. If you’re thinking things are generally good, you’re going to be happier; if you’re thinking things are bad, you’re going to be unhappy.

Now, that has to be offset against what happens once these things are realized: after the game is over or the investment is complete or the relationship is over. If you have been positively biased all along, then you’re going to be more disappointed in the end than you would have been if you hadn’t been positively biased.

Now, are those two things equal? If those two things are equal, then there’s no net positive to optimism. But here’s something we know to be true: people adapt to bad news much more readily than they expect they will. So it could well be the case that those things are asymmetric. That there’s more utility to be gained or lost ahead of an event than after an event. The disappointment isn’t as big a deal as we think it is. And if that’s the case, it’s nice to have a little optimism because it feels better.

A third reason is that there can be a self-fulfilling nature to positive expectations. If you have positive expectations for somebody, they actually perform better. And if that’s the way the world works, a little positive bias is a good thing.

Assorted links

February 12, 2010

1) The behavioral economics explanation for why more poker hands played means less money won.

2) Waiters who compliment customers get three percent bigger tips, on average.

3) Why were adjustable-rate mortgage applications where so misleading during the housing bubble? Because lenders showed post-teaser interest rates that equaled the rates were at the date of the loan closing. In an era of cheap money, this disclosure made loans look really cheap.

4) A version of the Google Powermeter for your exercise and sleep schedule. Hat tip: Mary Zhu.

5) Are you a British Gas customer? Have you gotten EnergySmart yet? Hat tip: Lukasz Walasek.

6) Video of a U.K. panel on nudging.

Let’s move

February 11, 2010

First Lady Michelle Obama is leading the new government initiative “Let’s Move” to reduce obesity in kids. Let’s Move is a comprehensive effort to combine healthier decision making about food and exercise with environments that help make those decisions easier.

As part of the initiative, a number of nudges will be used, including

1) Consumer friendly labels that take into account the actual sizes Americans now eat and are visible on the front of food packages.

2) Tax incentives to encourage grocers to open stores in what are known as “food deserts” — areas without access to fresh fruits and vegetables.

3) A collaboration with the American Academy of Pediatrics to encourage doctors to monitor children’s body mass index.

4) A national goal of having kids exercise for an hour a day.

Learn more about Let’s Move.

If you’re selling a house, ask your realtor to list it as a range

February 11, 2010

Says Psychology Today.

One advantage is obvious: Buyers scanning listings online usually set a minimum and maximum price. These are round numbers (often chosen from a menu on the listing site). In the example above, a buyer whose maximum price was $1 million would see a house listed at “$999,000 to $1,194,876,” but not a house listed at a single price higher than a million. (Of course, this depends on listing sites being able to handle price ranges.)

Another advantage of this trick is simple confusion. Just about everyone knows that a listing price of $X typically signals that the seller is willing to accept a good deal less than $X. In this market, few sane buyers are going to offer list price. Having two prices upsets this comfortable strategy. Do you offer the low price of the range? Less than the low price? Or do you make an offer somewhere in the range? Maybe you really, really want the house and want to make a preemptive offer. Do you offer the high price?

This suggestion still doesn’t get around the problem inherent in the behavioral economics diagnosis of the current housing market. Loss averse sellers don’t want to sell a property for less than they paid for it, or less than what they think it’s worth based on peak bubble prices. Whether she picks a range or a single price, the seller has to overcome the psychological hurdle or realizing that the value today isn’t the value yesterday.

Lessons from fan appreciation night

February 10, 2010

The origins of economics

February 9, 2010

Richard Thaler, speaking recently at a World Economic Forum panel.

“Let’s go back to Adam Smith,” Mr. Thaler suggested on a high-profile panel on Rebuilding Economics. “No, actually, let’s go back to Adam.”

“When it was just the demand for apples, the model still worked pretty well,” he said. “But today we have Apple and the iPhone pricing strategy.”

“Adam could deal with apples — as long as there were no serpents and women,” Mr. Thaler added. “When you add serpents and women, you get self-control problems that the model cannot deal with.”

Is Oscar voting tilted against Avatar?

February 9, 2010

The Academy of Motion Picture Arts and Sciences has adopted a new voting system for the 2010 race, and an article in this week’s New Yorker argues that it’s likely to harm Avatar’s chances. (Hat tip: Kare Anderson)

Instead of a simple ballot system where the movie with the most votes wins, the Academy is using a what is known as an instant-runoff system. It works like this: Voters rank the ten nominees in order of preference from 1 to 10. If no movie gets a majority of first place votes (which isn’t likely to happen, especially in early rounds), the last-place movie is dropped and the second choices on each of its ballots are redistributed to the other nine movies. This process continues until one movie finally has a majority of first choices.

Continue reading the post here.

The bank as lottery idea gains momentum in Michigan

February 7, 2010

Anne Stuhldreher follows up on the results of Save to Win in the Washington Post.

More than 11,000 Michigan residents opened accounts through the contest, saving $8.6 million throughout 2009. People can open the accounts — they’re like certificates of deposit — with as little as $25. They need to keep their money in for at least a year and can make deposits as small as $1 as often as they like.

More than half of the participants said they hadn’t saved regularly before opening their accounts. About 60 percent admitted they played the lottery during the past six months. And 44 percent earned less than $40,000.

With banks acting like lotteries, maybe it’s time for lotteries to act like banks. For people who can’t give up the thrill of a scratch off game, state lotteries could sell a, say, $5 ticket where $4.50 would be sent to a bank account. Seven other Michigan credit unions have adopted the model. One manager explained that the lottery style bank account proved more successful than a short-term CD with a 10 percent interest rate!

“We were very surprised,” Hubbard said. “It’s a breathtaking penetration rate, especially for a new product and one focused on saving, since that’s something our members don’t do.”

Keep the change is good for you, great for Bank of America

February 5, 2010

Readers have been interested in Bank of America’s Keep the Change program, which began in 2005, as a vehicle for boosting savings, and possibly charitable donations. There’s no charity option yet, but what about the savings benefits to participants? A 2008 Peter Tufano and Daniel Schneider paper has some answers.

Bank of America attributes 1.8 million new savings accounts to the Keep the Change program…and as of April 2007, its 4.3 million program participants had saved approximately $400 million collectively or about $93 on average – a steady rise from average savings of $30 in April 2006 and $67 in October of 2006.

How much has KTC benefited BofA?

Bank reports indicate that the program is a valuable customer acquisition tool, bringing in 1.8 million new savings accounts and 1.3 million new checking accounts over 19 months of program operation…The program has the potential to increase debit card use, can reduce bank costs associated with processing paper checks, and generate incremental interchange revenues from each debit card transaction…While the deposits generated by Keep the Change pale relative to Bank of America’s total assets of $1.46 trillion, the funds currently earn an interest rate of just 0.20 percent in the bank’s regular savings account permitting the bank to profit from the net interest margin.


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