Archive for July, 2009

Strange human behavior: When all that’s left is the bank vault

July 31, 2009

Reader David Campbell sends along a fascinating story about human habits and attention. Safe to say, no econ would make this mistake.

Several years ago, Campbell consulted on a highway widening project in Atlanta. To make room for the new lanes, a bank branch had to be demolished.

Approximately 90 days prior to the demolition of the branch location, all the customers who banked at that location were notified in writing as to what would be occurring and were advised as to the location of a nearby branch that would be handling their accounts. Several large notices were also posted at the branch containing the same information. Follow-up written notices were also sent to the customers 60 days and 30 days prior to the closing. All the branch officers and tellers were constantly reminding people of the upcoming event.

Finally the day of closing arrived. The last customer left the bank, the doors were locked and a large sign at the entrance to the parking lot clearly stated that fact. The next day the wrecking crew moved in and began the demolition. Case Closed? WRONG!

Roughly 45 days after the closing I received a call from the officer of the bank I had been working with. I could almost see the tears in his eyes, he was laughing so hard when he said, “David, I know you aren’t going to believe me, but I promise that I’m not making this up.”

Apparently, about ten days after the bank was demolished and all the bank signs and other identification had been removed from the site, the bank started receiving a trickle of calls from its customers complaining that something was wrong with their accounts. As time moved on the situation worsened, but it wasn’t until someone actually went out to the site that now contained a non-existent building was the problem solved.

The only thing that remained on the site was the bank vault. The vault had been duly cleaned out at the time of closing, but the structure itself could not be removed by conventional means and required that it be jack hammered apart. The rear wall of the vault also housed the drop box for the night depository. Although the depository was checked and cleaned out at the time of closing, it never occurred to anyone to seal the depository slot. For approximately 45 days the carefully trained employees of nearby businesses had been doing as instructed and were dropping the day’s cash receipts into the night depository.

The building was gone. The bank signs were gone. Most of the parking lot was gone. The sidewalks and drive-thru lines were gone. To make a deposit required that a person park his car and walk about 30 feet over a dirt path. When the bank official opened the night depository box, he found over $250,000 in cash. Fortunately it never occurred to the local bank robbers that people could be that dumb. The bank vault door had been removed in the demolition as had all the bank security systems, and the night depository inside the vault could be opened with a crow bar.

Campbell asks fellow Nudge readers: Can anyone top this story?

Thaler responds to Posner about the benefits of consumer protection nudges like plain vanilla mortgages

July 29, 2009

In his inaugural Economic View column, Richard Thaler proposed plain vanilla mortgages as a nudge to protect some consumers from falling into the trap of buying more exotic mortgages with low teaser rates and other tempting payment plans. Last week, in an op-ed, Richard Posner questioned the value of such a product, and the new consumer financial protection agency that would be tasked with designing and implementing it, by pointing out the cognitive limitations of behavioral economists, government bureaucrats, and anyone else acting as a choice architect. Thaler has now responded (via Paul Solman of PBS):

The administration has not stipulated how many types of plain vanilla mortgages there would be, but the research on which this proposal is based makes it clear that it is reasonable to assume that there would be at least a fixed-rate and some type of adjustable-rate mortgage in the mix. (For my take on this proposal see my recent NYT column, linked above). Nonetheless, Posner writes as if there would be only one plain vanilla mortgage. This is seriously misleading. An analogy would be to say that we would not want the Consumer Product Safety Commission to regulate the production of cribs because they might decide only to allow pink cribs and some people might like blue ones. Of course the agency would not do that; it would only make sure that whatever color crib you bought would not kill your child.

Posner does not stop at mischaracterizing the proposal. He launches a second line of attack based on the following logic. 1) Behavioral economists such as Thaler have endorsed this plan. 2) Thaler has been known to make mistakes. 3) Therefore, he should not be in the business of helping consumers avoid mistakes. Of all the evidence readily available that I am not perfect, he concentrates on the fact that I have written about the well-known puzzle in economics that the difference in returns between equities and bonds (the “equity premium”) has, in the past, seemed to be too large. With the market now down, presumably he thinks this writing makes me look foolish. I plead guilty to joining the hundreds of other economists (most of whom are not behavioral economists) who have written about this historical puzzle. And, as Posner suggests, for many years I did advocate that young investors should consider putting all their money in stocks, and I followed that advice myself until 2000 when the level of the stock market bubble got so ridiculously high that I switched half of my retirement portfolio into treasury inflation-protected bonds (TIPS). But of course, I am not a perfect forecaster. I, like most people, did not get out of stocks last summer. And, I certainly plead guilty to being imperfect. For a long list of particulars, contact my wife.

Read Thaler’s full comments here.

Assorted links

July 23, 2009

1) The outdoor retailer REI has a new iPhone app called “Bike Your Drive” that works like the feedback displays in cars. Besides standard data on average speed and distance traveled, it also tells you how many calories you’ve burned, the amount of carbon you’ve offset (compared to driving), and how much money you’ve saved on gas.

2) Jo Brodie loves Nudge, but thinks the layout of the dozen nudges chapter (which can be found on the blog) unnecessarily wastes paper.

It takes up nine pages, one is entirely blank and the first page has only the text “PART V: EXTENSIONS AND OBJECTIONS” on it (which I think could fit on page 3). My suggested nudge: once a file has gone to the printers, reformat it before loading it as a PDF on to a website.

3) Per Capita, an Australian think tank, goes all in with a new paper arguing for a choice architectural approach to policy making. The five key tools are:

1. Setting the default option in a set of choices
2. Offering ‘self-contracting’ to support commitment
3. Presenting and organising information
4. Designing physical spaces to guide behaviour
5. Supporting the development of social norms

4) Bob Nease over at the Center for Cost-Effective Consumerism says the following is a perfect dinner party nudge:

Using a lottery to boost saving

July 21, 2009

Using a lottery as an incentive is becoming an increasingly popular strategy for choice architects. Harvard Business School finance professor Peter Tufano has come up with a saving program that tries to capitalize on the human tendency to overestimate tiny probabilities. The Wall Street Journal reports on the idea, which is called “Save to Win.”

Launched earlier this year for members of eight credit unions in Michigan, it is a cross between a certificate of deposit and a raffle ticket. Members who put $25 or more into a Save to Win one-year CD are entered into a monthly “savings raffle” for prizes up to $400, plus one annual drawing for a $100,000 jackpot. Only Michigan residents are eligible to participate.

This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.

Hat tip: Christopher Daggett

Addendum: Liam Delaney at the Geary Behavioural Economics blog say this reminds him of Prize Bonds.

Embracing the efficient market hypothesis can be a bit like stepping out on “the Ledge”

July 20, 2009

If Chicago were, say, the world of finance, the efficient market hypothesis would be the Willis Tower. That’s the old Sears Tower, for those who don’t know. As a hulking steel pillar looming over its surroundings, the theory claims that a financial asset’s price reflects every bit of available information related to its value. It is the foundation by which lots of economists tell regular investors they can’t possibly beat the market. After all, how can you figure out a better value for an asset when all the information about it is already wrapped into the current price?

In the world of the EMH, as it is known, bubbles are nothing to seriously worry about because prices cannot deviate from proper valuations for too long. But in the wake of last fall’s stock market collapse, fully embracing the efficient market hypothesis can be a scary proposition – a bit like stepping out on “the Ledge” at the Willis Tower. (An absolute must if you’re in Chicago, by the way.) The events of the past year have sparked a rich debate between behavioral economists and EMH-ers over the the EMH’s validity that is nicely chronicled in this week’s Economist.

“In some ways, we behavioural economists have won by default, because we have been less arrogant,” says Richard Thaler of the University of Chicago, one of the pioneers of behavioural finance. Those who denied that prices could get out of line, or ever have bubbles, “look foolish”. (Myron) Scholes, however, insists that the efficient-market paradigm is not dead: “To say something has failed you have to have something to replace it, and so far we don’t have a new paradigm to replace efficient markets.” The trouble with behavioural economics, he adds, is that “it really hasn’t shown in aggregate how it affects prices.”

Yet EMH-ers and behaviouralists are increasingly asking the same questions and drawing on each other’s ideas. For instance, Mr Thaler concedes that in some ways the events of the past couple of years have strengthened the EMH. The hypothesis has two parts, he says: the “no-free-lunch part and the price-is-right part, and if anything the first part has been strengthened as we have learned that some investment strategies are riskier than they look and it really is difficult to beat the market.” The idea that the market price is the right price, however, has been badly dented.

Read the full piece here.

Subliminal messaging may not qualify as an Thaler-Sunstein approved nudge, but it can nudge you

July 17, 2009

Worries about subliminal messages are a common topic of debate by Nudge objectors. The general rule on handling the subliminal problem is to rely on what John Rawls called the publicity principle: If the choice architect cannot defend a nudge publicly, it should not be implemented. This rule pretty much rules out subliminal messaging. But for those who are just trying to manipulate behavior, there is recent evidence that split-second images will have a stronger impact than 30-second television commercials. Why would that be? Because when a television commercial airs, your guard is up, and you are ready to thwart any advertiser’s persuasive messaging. Split-second images hit you when your guard is down, and are more easily absorbed without you realizing it.

The Situationist links to an interesting study by a pair of Duke researchers who placed hidden Apple and IBM logos inside computer screens of subjects as they undertook a series of tasks.

(Afterwards) the participants then completed a task designed to evaluate how creative they were, listing all of the uses for a brick that they could imagine beyond building a wall.

People who were exposed to the Apple logo generated significantly more unusual uses for the brick compared with those who were primed with the IBM logo, the researchers said. In addition, the unusual uses the Apple-primed participants generated were rated as more creative by independent judges.

“This is the first clear evidence that subliminal brand exposures can cause people to act in very specific ways,” said Gráinne Fitzsimons. “We’ve performed tests where we’ve offered people $100 to tell us what logo was being flashed on screen, and none of them could do it. But even this imperceptible exposure is enough to spark changes in behavior.”

A YouTube video is here.

Can a pair of pants prevent bribery?

July 8, 2009

From Schneier on Security:

Nepal’s anti-corruption authority has come up with a novel solution to rampant bribe-taking at the country’s only international airport — the pocketless trouser.

The authority said it was issuing the new, bribe-proof garment to all airport officials after uncovering widespread corruption at Kathmandu’s Tribhuvan International Airport.

Hat tip: Ana Nelson

Richard Thaler debuts a new column in the New York Times

July 7, 2009

Richard Thaler has begun a regular rotation in the Sunday New York Times as an Economic View columnist. This past Sunday, he made the case for “plain vanilla” mortgages as the default option when buying a home.

Once upon a time, choosing a mortgage was easy. Nearly all mortgages were of the 30-year, fixed-rate variety, required a 20-percent down payment and were devoid of tricky features like balloon payments, teaser rates and prepayment penalties.

Sensible regulation was easy in this environment. Congress passed what’s known as the Truth in Lending Act, which required lenders to report interest rates in a uniform way, using the now-ubiquitous annual percentage rate. Picking the best mortgage was no more complicated that finding the lowest A.P.R.

Fast forward to 2008, and the world of mortgage shopping had become a much more complicated place.

Read the column here, and look for his columns in the future.