Readers may be familiar with the humorous series of beer commercials that feature a pitchman touted as “the most interesting man in the world” – a man whose face and fictional life just so happen to bear a striking resemblance to Ernest Hemingway’s). In this spot, he expounds on the power of a favorite Nudge subject, the bowl of nuts.
Archive for May, 2009
Newsweek asks whether certain people are wired to make poor financial decisions by simplifying complex problems. A study by some cognitive neuroscientists suggests yes, and says this group contains many extroverts who are 1) optimistic about their lives and 2) impulsive.
In the past, however, these optimistic simplifiers would have been better off because mortgages and even credit card rules were simpler, says Richard Thaler, a behavioral economist at the University of Chicago and the coauthor of Nudge: Improving Decisions About Health, Wealth, and Happiness. In the late-’70s/early-’80s, when the 30-year, fixed-rate mortgage was pretty much the only loan option, a “rule of thumb” worked well: You looked for one number, the annual percentage rate, decided if you could afford it and then signed on the dotted line (or walked away). “Once mortgages got very, very complicated,” Thaler says, “doing the correct analysis required having a Ph.D. in economics”-and simplifying under those circumstances became dangerous.
The target company’s 52-week high exhibits a strong anchoring effect on merger and acquisition decisions, according to three economists in the working paper, “The Psychology of Pricing in Mergers and Acquisitions.” A Wall Street Journal article on the paper is gated. The full paper can be downloaded here. A summary is below:
The 52-week high stock price is widely available and represents a salient price level to investors and managers. Empirically, we show that the target’s 52-week high exercises a strong effect on the bidder’s offer price. A number of bidders offer exactly this price, demonstrating its unique salience. The effect is difficult to square with alternative explanations and appears best explained in terms of the use of the 52-week high as a reference point by the target’s shareholders or as an anchor in negotiations with the bidder.
Our evidence suggests that bidders’ shareholders view bids driven by the target’s 52-week high as overpaying: They react especially negatively to the component of the offer price driven by the target’s 52-week high. Most important, perhaps, is the fact that psychological pricing has real effects. Bids that exceed the 52-week high discontinuously increase the probability of deal success and thus the distribution of capital across firms’ alternative investment policies.
Changing behavior by simply telling people what others do is an important lesson of Nudge. A major new research project at Kingston University, the University of West England, and Swansea, is putting this lesson to more rigorous empirical tests involving cell phones and exercise, smart meters and home energy usage, and facebook and “sustainable” lifestyle choices. Participants will be given information about their exercise, energy usage, and lifestyle choices in comparison to others in the group. Says the BBC:
The research, called the Charm Project, builds on the work of academics Richard Thaler and Cass Sunstein which implies that the way people are told about poor lifestyle choices influences how they react.
Instead of simply telling people to stop, it has been shown that it is more effective to reveal how one person’s behaviour ranks against their peers.
Adopting a less confrontational style can, claim Thaler and Sunstein, “nudge” people towards better choices.
An anonymous reader wrote into the Nudge blog with an interesting proposal based on the gambling self-ban programs. What about a self-ban program for guns? he wondered. Or at least a program that makes it more difficult for someone to purchase a gun by possibly requiring an affidavit signed by a nominated friend that the gun would be used for a legitimate purpose, or requiring a longer waiting period for those on the list.
The reader proposed aiming the program at people suffering from depression. The reader mentioned that he had purchased guns on two occasions, but had gotten rid of them before any harm could be done. People with anger management problems or those with children might also be a key audience for the program.
Addendum: Like the gambling self-ban program, this one would be completely voluntary.
Reader Kathi Rosen writes in with this terrific nudge related to the asparagus study.
Your story about the “you loved asparagus as a child” reminded me of a nudge I provided for my son lo these many years ago. He was three years and three months old. He was still in diapers. We had tried all sorts of methods to potty-train—-bribery, books, encouragement, praise…..nothing. When asked, he would just shake his head and say “I can’t know how to use the potty.” The doctor kept saying “when he’s ready”, but finally, I was more than ready. One morning, my son awoke bright and early. I said to him in an excited voice, “Guess what? While you were sleeping, you learned how to use the potty! You know how, now!” He looked at me for a few seconds, then exclaimed, “Oh, yeah, I do!” He ran to the potty and used it right away. And……he never needed another diaper or even had an accident from that moment on. Many difficult moments in child-rearing could have been avoided if I had only pondered the significance of this episode more fully.
Cognitive Daily points to an interesting new study with a strategy not recommended for parents interested in getting their kids to eat more greens. In grand psychology fashion, this experiment involves some serious manipulation. Participants were lied to about their actual preferences. Ahem, in the words of the study, the authors “planted the suggestion that subjects loved to eat asparagus as children.” (No pun appears to be intended with the verb choice “plant.”) These “new (false) beliefs” had an immediate effect for many, including “increased general liking of asparagus, greater desire to eat asparagus in a restaurant setting, and a willingness to pay more for asparagus in the grocery store.” But beware the unintended consequences when you tell your teenager why she loves asparagus so much.
Dave Munger sums up the experiment and the key result below:
Participants were told they’d be taking a survey about food preferences and personality. First, everyone was asked about their “food history,” with 24 questions about particular foods — all these questions except one were only there to distract from the key question, which asked them to rate how likely it was that they “loved asparagus the first time they tried it” on a scale of 1 to 8.
After taking a couple of other questionnaires, again, to distract from the primary goal of the study, they were asked how likely they were to order each of 32 dishes from a hypothetical restaurant menu, again on a scale of 1 to 8. Again, asparagus was one of the dishes.
One week later, all the students were brought back and given a phony analysis of their responses to the previous week’s survey. Here’s the key to the study: as part of this analysis, half the students were told that their responses indicated they “loved to eat cooked asparagus” as a young child, while the other half were not told anything about asparagus.
Then everyone was given the original two food preference questionnaires again (one about how much they liked foods during childhood, and another about what items they were likely to order in a restaurant today). Here are their ratings for the “loved asparagus the first time you tried it” question:
A full version of the paper is here.
Governing magazine reports on a traffic experiment by the Virginia Department of Transportation that uses zigzag markings on roadways to try and make motorists slow down for pedestrians.
VDOT got the idea to experiment with the zigzags from the U.K., where they are used as no-parking areas in order to give pedestrians a clear line of sight prior to crossing, and in Australia where they are used to warn drivers to slow down due to crossings they may not be able to see.
Nudge reader Rachel Volberg is a sociologist and head of Gemini Research, where she has looked at gambling addictions for more than 20 years. Naturally, she was most intrigued by the parts of Nudge about gambling self-ban programs, where problem gamblers ask states to put their names on a list that bars them from entering a casino. These programs, she explained, are much more widespread than just the three states mentioned in the book. Volberg kindly offered to share some thoughts about the effectiveness of these programs and how to improve them.
As a gambling researcher, I was struck by the mention of gambling self-bans in Chapter 16 of Nudge. In addition to the three states mentioned in the book—Illinois, Indiana and Missouri—self-exclusion programs (as they are generally called) have been introduced in other states, including Connecticut, Louisiana, Michigan, Mississippi, Nevada and New Jersey. Self-exclusion programs also operate in several European countries including the Netherlands and Switzerland (where the programs are mandatory rather than voluntary), in New Zealand, in all of the Canadian provinces and in several Australian states, most notably Queensland and Victoria.
Given their widespread adoption, shockingly little research has been done to evaluate the effectiveness of self-exclusion programs or to identify what works best. Policymakers have enthusiastically adopted these programs, but by getting too far ahead of the research, they risk trumpeting claims they cannot support.
Only 15 academic articles and government reports have been published on self-exclusion. The most thorough study was completed last year by the Responsible Gambling Council (RGC) of Ontario: this effort included a review of the available literature, a survey of all the Canadian self-exclusion programs, focus groups with individuals who had self-excluded, interviews with self-exclusion program administrators, and a two-day forum of international experts that included regulators, operators, service providers, researchers, and policy makers.
Despite the lack of empirical evidence, the RGC report identified some trends in the evolution of self-exclusion programs. Increasingly, the self-exclusion process is defined as one that provides assistance to individuals rather than punishes them for bad behavior. The notion that all self-exclusions should involve a compulsory lifetime ban has given way to the idea that self-excluders should be offered bans of varying length, from six months to several years. Better links are developing between gambling venues, where people typically register for a self-ban, and specialist treatment programs so that self-excluders who recognize that they have a gambling problem have a better chance of getting the help they need.
While self-exclusion programs are moving in new directions, there remains considerable room for improvement. Self-exclusion programs need to be promoted more aggressively so that gamblers will know that they exist. There also needs to be much better regulatory oversight of these programs and clear penalties for both operators and self-excluders who do not follow the rules.
There is a need for greater clarity about the responsibilities of operators to detect self-excluders and of self-excluders who often breach their agreements and then fault the operators for not preventing them from gambling. There is the question of whether, and how, self-exclusion bans can cover all of the gambling venues in a jurisdiction. Finally, there is the issue of how to better manage the process when a self-ban ends, perhaps with mandatory education or an active (rather than the usual passive) reinstatement process.
However, given the dearth of information that is available, perhaps what is really needed is a good feedback and disclosure system that would finally generate some data to tell policymakers, regulators, operators and gamblers themselves how well or poorly self-exclusion programs are doing. As a viable nudge, this one is still in the early stages.