Archive for January, 2009

Tomorrow’s homes will be smarter than today’s. It won’t be because they have electric curtains.

January 22, 2009

Recently, we stumbled on Onzo, a company that has been turning the ideas in Nudge about feedback and energy use into slick, innovative, energy-saving products. As the designer of in-home energy displays and smart energy meters, the London-based start-up has earned the unofficial title “the iPod of Cleantech.”

Feedback displays are potentially just the beginning of high-tech domicile choice architecture. In a guest post, Onzo founder and CEO Joel Hagan discusses automated technology in houses, how smart meters bode well for the future, and why a truly “smart home” is still far, far away.

By Joel Hagan

There’s a lot of talk about automating homes these days. Programmable broadband and home networks that heat, cool, and light rooms without any switch-flipping; refrigerators that can detect when their contents are running low and re-order online. This kind of automated gadgetry, intended to make our lives easier and nudge us to live greener and eat better, can make home builders, environmentalists, and high-tech whizzes starry-eyed about the possibility of “smart homes” popping up in neighborhoods soon.

Not so fast.

Continue reading the post here.

The endowment effect starts before the endowment

January 22, 2009

So reports Live Science:

A new study suggests that just fingering an item on a store shelf can create an attachment that makes you willing to pay more for it.

Previous studies have shown that many people begin to feel ownership of an item – that it “is theirs” – before they even buy it. But this study, conducted by researchers at Ohio State University, is the first to show “mine, mine, mine” feelings can begin in as little as 30 seconds after first touching an object.

In the name of scientific replication, the experimenters follow Richard Thaler’s classic design and used coffee mugs. They set up an auction in which a people could handle the mugs for varying lengths of time.

Participants in the study were shown an inexpensive coffee mug, and were allowed to hold it either for 10 seconds or 30 seconds. They were then allowed to bid for the mug in either a closed (where bids could not be seen) or open (where they could be seen) auction. The participants were told the retail value of the mug before bidding began ($3.95 in the closed auction; $4.95 in the open auction).

The study…found that on average, people who held the mug for longer bid more for it – $3.91 to $2.44 in the case of the open auction and $3.07 to $2.24 in the closed. In fact, people who held the mug for 30 seconds bid more than the retail price four out of seven times.

Behavioral economic theory aside, there are real practical lessons in here for auction choice architects and retailers of all stripes. Bottom line: Let people take the product home.

Full paper is here. Hat tip: Marginal Revolution

How behavioral economics could show up in the new stimulus package

January 20, 2009

The conventional wisdom of tax rebates has been to give them in one big chunk. It gets more money to people faster and cuts down on administrative costs. The problem is people don’t seem to spend the money. Why?

(B)ecause people don’t treat all windfalls as found money. Instead, in the words of the behavioral economist Richard Thaler, people put different windfalls in different “mental accounts,” which in turn influences what they do with the money…The key factor in these kinds of distinctions, Thaler’s work suggests, is whether people think of a windfall as wealth or as income. If they think of it as wealth, they’re more likely to save it, and if they think of it as income they’re more likely to spend it.

So what does this mean for making a rebate work? If you want people to spend the money, you don’t want to give them one big check, because that makes it more likely that they’ll think of it as an increase in their wealth and save it. Instead, you want to give them small amounts over time. And you want the rebate to show up as an increase in people’s take-home pay, because an increase in steady income is more likely to translate into an increase in spending. What can accomplish both of these goals? Reducing people’s withholding payments.

According to behavioral economics principles, the withholding, which is expected to be $500, could be handed out in small chunks, perhaps $50 at a time, rather than a single, large rebate.

That’s James Surowiecki in the New Yorker.

A nudge buried in credit card regulations

January 16, 2009

Jeff Sovern, of Public Citizen’s Consumer Law and Policy blog smartly picks up on a nudge in FDIC rules on credit card standards. Buried within Regulation Z is a requirement that the late payment warning must be located adjacent to the payment’s due date. The warning explicitly states what many people willfully choose to ignore: Failure to pay on time will result in penalties! (A mock credit card statement showing how this will look is here.) Placing this warning close to the payment amount “appears likely to increase its effectiveness,” without ordering smart consumer credit choices. Sovern continues:

I gather that this nudge, together with another, the nearby “Minimum Payment Warning,” which gives consumers information about how long it will take to pay off balances if they make only the minimum payments, are products of the 2005 bankruptcy legislation.

Hopefully, there will be a good academic paper on this subject soon. For more on the reasons behind the 2005 legislation, you can read Federal Reserve Baord Governor and subprime soothsayer Edward Gramlich’s congressional testimony. The imprints of behavioralism are all over it. The key passage:

The question is…how might the Board revise its rules under (the Truth in Lending Act (TILA)) in a way that will enable consumers to more effectively use disclosures about the key financial elements of a particular credit card over the life of the account? Simplifying the content of disclosures may be one way; finding ways to enhance consumers’ ability to notice and understand disclosures may be another. Reviewing the adequacy of TILA’s substantive protections is a third, and the ANPR asks questions about each of these areas. As the Regulation Z review proceeds, the Board will be grappling with the challenge of issuing clear and simple rules for creditors that both provide consumers with key information about complicated products (while avoiding so-called “information overload”) and provide consumers adequate substantive protections, consistent with TILA.

Got an idea for a nudge in medicine? It could lead to fame and fortune.*

January 15, 2009

Changemakers, an initiative of the social entrepreneurship non-profit Ashoka, has partnered with the Robert Wood Johnson Foundation to look for great nudges in medicine. Got an idea for the next medical checklist? The next smart pillbox?

dbh

The contest is officially open, and will remain that way until May 8, 2009. It has been designed with transparency in mind. All of the submissions will be available online for others to read and discuss. A panel of judges will select a group of 10-15 finalists. The competition’s community of readers will then vote (American Idol style) in late May for three winners, each of whom will receive $5,000 in seed money to put their nudge into practice. So far, the judges include Cornell’s Food and Brand Lab Director Brian Wansink, University of California-San Francisco Medical School pediatrics professor H. Carrie Chen, and the Robert Wood Johnson Foundation’s Pioneer Portfolio leader, Paul Tarini. Others may join later.

All the information you’ll need to enter is here.

*Fame and fortune not guaranteed, of course.

Where is Nudge being read now? Inside India’s Central Bank

January 15, 2009

Looks like Nudge has made it into the Indian Fed. Talking about global financial turmoil, Shyamala Gopinath, Deputy Governor at the Reserve Bank of India (the country’s Central Bank), cited the book in a speech last week, and asked if Indian financial policymakers could “take a cue” from behavioral economics and the concept of choice architecture.

Lastly, on the issue of selling of complex products, we have to collectively work towards a viable framework. What is the solution? In this context I would like to recount the application of a surprisingly simple idea to the realm of public policy that has received tremendous attention after being advocated by Richard Thaler and Cass Sunstein in their international bestseller “Nudge.”

Amol Agrawal, who first noticed this speech, is pleased by Gopinath’s question about the adaptability of choice architecture. Nudge enthusiasts everywhere may be able to find a new audience for their insights.

People are too smart for choice architecture sometimes II

January 13, 2009

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Via Dan Lockton’s Architectures of Control

A reader comes up with an ascetic nudge to help him get into college

January 13, 2009

Courtesy of Felipe Insunza, an economics student at São Paulo University in Brazil.

To be admitted to any Brazilian university, especially one of high quality, students must pass a difficult exam that covers all the subjects taught in high school. The test covers basic subjects like math, Portuguese, biology, chemistry, physics, English, history, and geography. But, there are also very specific themes like botany, zoology, genetic, Mesopotamian history, analytic geometry, and stoichiometry, that students have to understand in order to do well on the exam. The competition for admission is intense – 20 to 30 candidates for every vacancy. Three factors largely determine your score. Do you have a good memory? Do you have strong study habits? Are you able to control your emotions?

After a one year of study, I won a spot in the Economics graduation, reaching the first collocation among more than 2,000 competitors. Along the way, I developed a self-punishment nudge to help me study more consistently.

For each subject, I had to study I had a little notebook. There were 25 subjects. There were 5 classes each day. For each subject, I carried a notebook with me to school. When I came home I had to study the themes taught in all of my classes. I also had the notebooks for subjects that did not have a class that day. Each afternoon, I studied yesterday’s subjects and today’s. If I did not study a subject, I hauled that notebook to school the next day in my backpack – even if I did not have class.

Whenever I had a backache, I said to myself, “You have to study more.” I knew I would be tempted to procrastinate. People think it’s better to study today, but we tend to think that will be easier to do that tomorrow, so we postpone, and then regret. I think that with this nudge, I created a short run trade-off between pain and laziness. If you want to sleep all day long your spine will be upset with you the next day.

The strange power of the free test score report

January 12, 2009

Amanda Pallais, a Ph.D. Candidate in Economics at the Massachusetts Institute of Technology, is currently working on research about how small changes in how test score reports are sent to colleges can affect student behavior. Pallais kindly agreed to discuss her findings thus far in a guest post.

By Amanda Pallais

Picking the right colleges to apply to is a daunting challenge. Students must choose one of over 2^2,400 combinations of colleges (and that just includes four-year schools in the U.S.), while facing great uncertainty about the costs and benefits of attending each college. Even deciding how many schools to apply to is not easy. Students looking for a rule of thumb can find one in an unexpected place—the number of colleges to which they can send their standardized test scores for free.

I’ve been looking at one college entrance exam in particular, the ACT. The ACT is especially popular in the U.S. Midwest and more students actually take the ACT than the SAT each year. In the fall of 1997, the ACT Corporation increased the number of free score reports it provided from three to four; additional score reports still cost $6. While the difference in the cost of sending four score reports dropped by only $6, the student response was enormous.

As you can see from the two charts below, I find that before the change, over 70% of students sent their ACT scores to exactly three colleges, while less than 5% sent their scores to four. Afterwards, less than 10% of students sent three score reports and approximately 60% sent four. As a result, 23% of students sent an additional application. Over the same period, there was no similar change in the number of score reports sent by students taking the SAT.

Number of ACT Score Reports Sent

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Number of SAT Score Reports Sent

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What caused the large response to the fourth free score report? It was not the $6. If it were, students should be equally responsive to a $6 decrease in application fees. But I find there is no relationship between changes in a college’s application fees and in the number of applications it receives. Instead, students are likely reacting to an implicit rule of thumb about how many colleges to apply to. They may interpret the number of free score reports the ACT provides as an indication of the number of score reports it recommends sending. This is consistent with the results of other economists who have looked at choices of 401(k) and prescription drug plans.

The change in student behavior is not just an interesting artifact. It has real world consequences that can permanently affect these students. Sending an additional score report could have large benefits for low-income students in particular. I very conservatively estimate that by increasing the probability that a low-income student attends college and attends a selective college, sending an additional score report could increase her lifetime earnings by over $6,000. She might also be more likely to end up at a school that’s a better fit for her personally. All of this, because of a simple $6 change.

The paper that this post is based on is titled, “Why Not Apply? The Effect of Application Costs on College Applications for Low-Income Students.” The full version can be found here.