Behavioural Economics

4,530 views
4,325 views

Published on

Slides from a short course for 6th form students in behavioural economics

Published in: Education
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
4,530
On SlideShare
0
From Embeds
0
Number of Embeds
1,775
Actions
Shares
0
Downloads
155
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Behavioural Economics

  1. 1. Behavioural Economics Economics Options Course Autumn 2012
  2. 2. The surprising power ofFree: Time Out magazinetriples the readership itpredicted when going free
  3. 3. Students who use cash topay for lunch tend to makehealthier choices
  4. 4. Econs v Humans• ECONS • HUMANS• Super-smart • Flawed• Rational • Biases in behaviour• Well defined preferences • Social animals• Self-interested / selfish • Emotional – hot and cold states• Utility maximizers • Not driven purely by a need to maximise their welfare • Lack of self-control - at the heart of many undesirable behaviours, such as overeating, overspending, and even overworking
  5. 5. Messenger Ego Incentives SocialAffectation Norms Behavioural Choices Commitment Defaults Priming Salience
  6. 6. Messenger Ego Incentives SocialAffectation Norms Behavioural Choices Commitment Defaults Priming Salience
  7. 7. Beware the Messengers and Gurus• We can be heavily influenced by who communicates information to us• Expert bias – Expert witnesses in trials and in the media – The God complex and poor decision making• Media as the Messenger – e.g. The Daily Mail Project• Impact of peer effects and social networks
  8. 8. As of February 2012, there have beenseventy-nine known deaths since January2007, though police have found noevidence to link the cases together. Of 25people who killed themselves betweenJanuary 2007 and February 2009, all butone died from hanging
  9. 9. Messenger Ego Incentives SocialAffectation Norms Behavioural Choices Commitment Defaults Priming Salience
  10. 10. Incentives Matter! Incentives Magnitude Risk Type Timing Framing Attitudes Non Pay off Pay off in Financial Monetary now future Rewards Penalties Reciprocity StatusExtrinsic Intrinsic
  11. 11. Which do you prefer?£10 TODAY
  12. 12. Which do you prefer?£10 TODAY £12 TOMORROW
  13. 13. Which do you prefer? £10 IN A WEEK’S TIME
  14. 14. Which do you prefer?£12 IN 8 DAYS £10 IN A WEEK’S TIME TIME
  15. 15. Immediate pay offs
  16. 16. Messenger Ego Incentives SocialAffectation Norms Behavioural Choices Commitment Defaults Priming Salience
  17. 17. Social Norms
  18. 18. Messenger Ego Incentives SocialAffectation Norms Behavioural Choices Commitment Defaults Priming Salience
  19. 19. Defaults Opt Out (France) Standard Organ practices Donation Natural order Opt In (UK) Non-working householdsDefault Menu choicesChoice Software settings Convenience Friday nights GP prescriptions
  20. 20. Networks & Linkages The preferences of agents are not fixed, they evolve in many ways. Specifically, they can be altered directly by the behaviour of other agents We are dealing in general with systems of interacting agents which are out of equilibrium – complex systems Paul Ormerod
  21. 21. Messenger Ego Incentives SocialAffectation Norms Behavioural Choices Commitment Defaults Priming Salience
  22. 22. Salience Our attention is drawn to what is novel and seems relevant to us
  23. 23. Errors that affect you personally can completelychange the rule of thumb that you use when driving– i.e. The risk of being caught by a speed camera
  24. 24. Messenger Ego Incentives SocialAffectation Norms Behavioural Choices Commitment Defaults Priming Salience
  25. 25. Priming Behaviour affected by exposure to Sights Words Sensations Touch Smell Subliminal Images Objects messages
  26. 26. PrimingPriming explains how our recentexperience influences ourthoughts, feelings and behaviour.Small changes to the context ofan experience can change theway we respond
  27. 27. Complete the word
  28. 28. 1/ Was Gandhi younger than 60 when he died? (Yes or No?)2/ Estimate Gandhi‟s age when he died (in years)
  29. 29. A: The Price of a London Hotel Room a) Do you think the price of this room is less than or more than £250 per night (answer: Less / More) b) How much would you expect to pay for a night in this London hotel (write your answer in £s)
  30. 30. Complete the word
  31. 31. 1/ Was Gandhi younger than 115 when he died? (Yes or No)2/ Estimate Gandhi‟s age when he died (in years)
  32. 32. B: The Price of a London Hotel Room a) Do you think the price of this room is less than or more than £70 per night (answer: Less / More) b) How much would you expect to pay for a night in this London hotel (write your answer in £s)
  33. 33. 1/ Was Gandhi youngerthan 85 when he died? 2/ Estimate Gandhi‟s age when he died (in years)Gandhi died at the age of 78
  34. 34. 1/ Was Gandhi younger than X when he died? 2/ Estimate Gandhi‟s age when he died (in years)Gandhi died at the age of 78
  35. 35. Framing the cost of high street credit Which has most effect? Showing therepayment total or representative APR %?
  36. 36. Anchoring with charitable giving
  37. 37. Less effective?
  38. 38. More effective?
  39. 39. Social Persuasion: Facebook and organ donation (2012)Facebook‟s donor-registration strategy allows people to announce to theirfriends what they have done, encouraging them to become donors, too.Studies have shown how information about people‟s decisions to perform apublic good can persuade others to follow suit
  40. 40. Dominos andElectronic Pennies
  41. 41. New York Taxis – Framing Tips!During payment, theuser is presentedwith three defaultbuttons for tipping:20%, 25%, and30%. When cabswere cash only, theaverage tip wasroughly 10%. Afterthe introduction ofthis system, the tippercentage jumpedto 22%.
  42. 42. Priming knowledge about price can have strong behavioural effects
  43. 43. Messenger Ego Incentives SocialAffectation Norms Behavioural Choices Commitment Defaults Priming Salience
  44. 44. Nudging to change behaviour
  45. 45. Commitment
  46. 46. Commitment to change behaviour
  47. 47. Messenger Ego Incentives SocialAffectation Norms Behavioural Choices Commitment Defaults Priming Salience
  48. 48. Affect• Emotional associations can powerfully shape our actions• All perceptions contain some emotion• How best to create an emotional reaction to perhaps bring about behavioural change?• Should some messages be presented in a counter- intuitive way to influence our emotions and choices?• Human desire for reciprocity widely seen as strong and potentially very important in nudging social and economic behaviours
  49. 49. Messenger Ego Incentives SocialAffectation Norms Behavioural Choices Commitment Defaults Priming Salience
  50. 50. Self imageEgo Self esteem Self-fulfilling expectationswe act in ways that make us feelbetter about ourselves Self-attribution bias Group identification
  51. 51. Behaviours• Cognitive – heuristics, mental rules of thumb that make decisions easier• Chemical – the brain prefers actions with positive outcomes that release a feel good hit• Social – acting as others do is easier and feels good
  52. 52. Visual perception and mental effort• Priming, framing and anchoring provide ways in which smart marketing can change perceptions and influence the choices we make.• We are all prone to visual illusions• Subliminal messages can have powerful effects• We tend to baulk at tasks that take intense mental effort – system 2 runs low!
  53. 53. Rationality and tricks of the mind
  54. 54. Loss aversion• Emotional and perceptual asymmetries between losses and gains – Losses loom larger than gains – People go out of their way to avoid losses, but they would not bother to go out of their way to gain something – Diminished sensitivity to larger losses• Linked to the endowment effect – People try to keep something that they consider is „theirs‟, even when it is quite arbitrarily given
  55. 55. Starbucks and Cutting Waste
  56. 56. Starbucks and Cutting Waste1/ Charge customers 10 cents for every paper cup theyuse i.e. List price $1.50 rises to $1.602/ Bring a reusable travel mug and get a 10 centdiscount on any Starbucks beverage, anytime List priceof $1.60 falls to $1.50 if a reusable mug is used
  57. 57. The Endowment Effect Back in the 1950s, when the focal practice of baking was displaced by the advent of cake mix, Betty Crocker learned quickly that it was good business to make the mix not quite complete. The baker felt better about her cake if she was required to add an egg to the mix
  58. 58. IKEA and the Endowment EffectIKEA customers areloyal to their self-assembled furniturebecause there is apiece of them in it
  59. 59. Heuristics• Heuristics are experience-based techniques that we apply to solving problems – Educated guesses – Rules of thumb• Main heuristics are – Availability – Anchoring – Representativeness / similarity – Cognitive biases • Loss aversion • Status quo
  60. 60. Availability heuristic• False estimation of risk• Predicted frequency / likelihood of an event based on how easily an example can be brought to mind (saliency)• Fear often exaggerates the likely danger• Come up with some examples
  61. 61. Consider these two scenarios• A massive flood somewhere in North America next year, in which more than 1,000 people drown
  62. 62. Consider these two scenarios• A massive flood • An earthquake in somewhere in North California sometime America next year, in next year, causing a which more than flood in which more 1,000 people drown than 1,000 people drown
  63. 63. Consider these two scenarios• A massive flood • An earthquake in somewhere in North California sometime America next year, in next year, causing a which more than flood in which more 1,000 people drown than 1,000 people drown
  64. 64. Availability heuristic
  65. 65. Availability Heuristic
  66. 66. The Availability Heuristic• Which has more? – 1) Words that begin with the letter "R" – 2) Words that have the letter "R“ in the third position
  67. 67. The Availability Heuristic• Which has more? – 1) Words that begin with the letter “K" – 2) Words that have the letter “K“ in the third position
  68. 68. Availability heuristic• Which has more? – Words that begin with the letter "R" or "K" – Words that have the letter "R" or "K" in the third position• Answer – Words that have the letter "R" or "K" in the third position are more common. – There are three times as many words that have the letter "K" in the third position
  69. 69. Hyperbolic discounting and the zero price bias• Which would you rather • Which would you rather have? have?• 50% off a new £20 shirt • Receive a free £10 gift if you pay in cash certificate• 1.3% off a new £750 • Pay £7 for a £20 gift sofa certificate• £10 off the price of a £80 air ticket if you book online
  70. 70. Default behaviour• Default – Sometimes known as status-quo bias – Which aspects of your life are default? – Default settings can become sticky • Computers and screensavers / sleep mode • TV schedules – watching one programme after another • Choices made in the supermarket
  71. 71. Bounded behaviour• Bounded behaviour – People have limited time and capacity to weigh all relevant benefits and costs of a decision. – Added complexity can distort choice• Bounded will-power – We tend to have more self-control “in the future” than now• Bounded self-interest – We are often keen to engage in co-operative behaviour for the common interest and the common good
  72. 72. Which sequence of eight babies born in a local hospital is most likely?
  73. 73. In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake?
  74. 74. Maternity Wards• A town is served by two hospitals. In the larger hospital, about 45 babies are born each day, and 15 in the smaller hospital. You know that roughly 50% of babies born are boys, though may be higher or lower on a particular day. Over one year each hospital recorded the days on which more than 70% of babies born were boys.• Which hospital recorded more such days? – LARGE or – SMALLER
  75. 75. Names for Children• Mary‟s Father has 5 daughters.• The first four are called:• Sante• Senti• Sinto• Sontu• What do you think the fifth one is called?
  76. 76. Balls• A baseball and bat together cost $11. The bat costs $10 more than the ball. How much does the ball cost?• Write down your answer.
  77. 77. Personality Disorder?• Geoff is shy and withdrawn, invariably helpful, but with little interest in people. He is meek and tidy, and has a need for order and structure, and a passion for detail.• Geoff is most likely to be?• 1. A Sheep Farmer• 2. A Salesman• 3. An Airline Pilot• 4. A Librarian• 5. A Novelist

×