Behavioral Science Conference WRR TIBER Netspar Ministry of Finance


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Invitational Conference on Behavioral Science WRR, Netspar (Network for Studies on Pensions, Aging and Retirement), TIBER (Tilburg Institute for Behavioral Economics Research) and the Ministry of Finance

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  • Beleidsmakers willen burgers in staat stellen hun keuzes weloverwogen te maken. Ook willen ze op sommige terreinen mensen aansporen hun gedrag te veranderen - in het belang van de burger zelf nu en in de toekomst, en in het belang van de wereld hier en elders. Ze steunen hierbij vaak op het rationele keuzemodel. Misschien niet omdat ze denken dat dit model klopt, maar bij een verondersteld 'gebrek aan beter'. Op de conferentie 'Policy challenges of behavioral science research', werd duidelijk hoe en waarom mensen systematisch, en dus voorspelbaar, afwijken van het rationele keuzemodel. De conferentie was georganiseerd door de WRR in samenwerking met het Tilburg Institute for Behavioral Economics Research (TIBER), het eveneens Tilburgse NETSPAR en het Ministerie van Financiën.
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Behavioral Science Conference WRR TIBER Netspar Ministry of Finance

  1. 1. Conference Policy Challenges of Behavioral Science Lectures by prof. Barry Schwartz, prof. Robert Cialdini, prof. Max Bazerman, prof. Eldar Shafir, prof. David Laibson, prof. Zvi Bodie and prof. Henriette Prast The Hague, 11 February 2010 More information on
  2. 3. The Paradox of Choice Barry Schwartz February, 2010
  3. 4. The “Official Syllogism” <ul><li>More freedom means more well being </li></ul><ul><li>More choice means more freedom </li></ul><ul><li>More choice means more well being </li></ul>
  4. 5. 285 Varieties of Cookies 75 Iced Teas 40 Toothpastes 230 Soups 175 Salad Dressings 275 Cereals
  5. 8. Phone Service and Gear
  6. 11. Healthcare <ul><li>The doctrine of “patient autonomy” </li></ul>
  7. 12. Education
  8. 13. Investment
  9. 14. Marital and Family Arrangements
  10. 17. <ul><li>Is this good news or bad news? </li></ul>YES!
  11. 18. What Too Much Choice Does: Paralysis <ul><li>Buying jam </li></ul><ul><li>Retirement investing </li></ul>
  12. 19. What Too Much Choice Does: Decision Quality
  13. 20. What Too Much Choice Does: Satisfaction <ul><li>1. Regret and anticipated regret </li></ul><ul><li>2. Opportunity costs </li></ul>
  14. 23. Opportunity Costs in the Lab (Tversky & Shafir, Psych Sci , 1992) <ul><li>Offer participants $2 or a good pen: 75% choose pen </li></ul><ul><li>Offer participants $2, or 1 good pen, or 2 cheaper pens: </li></ul><ul><li> 45% choose either pen </li></ul>
  15. 24. What Too Much Choice Does: Satisfaction <ul><li>1. Regret and anticipated regret </li></ul><ul><li>2. Opportunity costs </li></ul><ul><li>3. Escalation of expectations </li></ul>
  16. 26. Maximizing and Satisficing
  17. 29. Correlates of Maximization <ul><li>Negative </li></ul><ul><li>Happiness </li></ul><ul><li>Optimism </li></ul><ul><li>Satisfaction with life </li></ul><ul><li>Self esteem </li></ul><ul><li>Positive </li></ul><ul><li>Regret </li></ul><ul><li>Perfectionism </li></ul><ul><li>Depression </li></ul>
  18. 30. Career Decisions of College Seniors (Iyengar, Wells, & Schwartz, Psych Science , 2006) <ul><li>1. Difficulty of decision </li></ul><ul><li>2. Desired number of options </li></ul><ul><li>3. How they did </li></ul><ul><li>4. How they felt </li></ul>
  19. 31. Maximizers <ul><li>Consider more jobs </li></ul><ul><li>Want more options </li></ul><ul><li>Get $7K more in starting salary </li></ul>
  20. 32. Maximizers are... <ul><li>More : Pessimistic Anxious Stressed Worried Tired Overwhelmed Depressed Regretful Disappointed </li></ul><ul><li>Less : </li></ul><ul><li>Content </li></ul><ul><li>Optimistic </li></ul><ul><li>Elated </li></ul><ul><li>Excited </li></ul><ul><li>Happy </li></ul>
  21. 33. Maximizing as a Fool’s Errand <ul><li>Principle of the “flat maximum” (Von Winterfeldt & Edwards) </li></ul>
  22. 34. How Can Choice Be Good and Bad?
  23. 38. What Can Be Done <ul><li>Find the “sweet spot” </li></ul><ul><li>Separate the “principal” and the “agent” </li></ul><ul><li>Pay attention to “choice architecture” </li></ul>
  24. 39. “ Libertarian Paternalism” (Sunstein & Thaler, U. of Chicago Law Review , 2003; Thaler & Sunstein, Nudge , 2008) <ul><li>Organ donation </li></ul>
  25. 40. The Power of Defaults (Johnson & Goldstein, Science , 2003)
  26. 41. “ Libertarian Paternalism” (Sunstein & Thaler, U. of Chicago Law Review , 2003; Thaler & Sunstein, Nudge , 2008) <ul><li>Organ donation </li></ul><ul><li>401(k) </li></ul>
  27. 42. Choice and Well-Being <ul><li>Income as a proxy for choice set size </li></ul><ul><li>Some people have too little choice and some have too much </li></ul><ul><li>Income redistribution may make everyone better off </li></ul>
  28. 44. The Power of Social Norms in Behavior Change Dr. Robert B. Cialdini Regents’ Professor of Psychology and Marketing Arizona State University
  29. 45. Contentions <ul><li>Government decision-makers can rely too much on economic factors (e.g., financial benefits or penalties) and legal factors (e.g., regulations or laws) when seeking to motivate citizens toward policy goals. </li></ul><ul><li>They would be well advised to also consider what is known about social psychological motivators such as social norms. </li></ul>
  30. 46. The Descriptive Social Norm (Consensus) <ul><li>People are likely to follow the lead of multiple, comparable others </li></ul>
  31. 47. People follow the lead of: <ul><li>Many others </li></ul><ul><li>Similar others </li></ul>
  32. 48. Descriptive social norm (Consensus) If teenager is troubled If teenager has 3+ friends who smoke If teenager has 2 friends who smoke If teenager has a parent who smokes 14% 26% 1000% 2400% Increase in likelihood of smoking
  33. 49. The Big Mistake <ul><li>To mobilize corrective action against a social problem that is large or growing, government communicators often decry it as regrettably frequent. </li></ul><ul><ul><ul><li>Drinking & Driving Tax Fraud </li></ul></ul></ul><ul><ul><ul><li>Teen Suicide Teen Pregnancy </li></ul></ul></ul><ul><ul><ul><li>Highway Speeding Voter Apathy </li></ul></ul></ul>
  34. 50. Implications <ul><li>Within the statement “Look at all the people who are doing this undesirable thing” lurks the powerful and undercutting normative message “Look at all the people who are doing this undesirable thing.” </li></ul>
  35. 51. <ul><li>Petrified Forest Study </li></ul>Descriptive social norm
  36. 52. Your heritage is being vandalized every day by theft losses of petrified wood of 14 tons a year, mostly a small piece at a time.
  37. 53. 7% 6% 5% 4% 3% 2% 1% 0% 8% Percentage of petrified wood theft. No-sign Control Lone Thief Descriptive Social Norm (3 Thieves)
  38. 54. <ul><li>Interim Conclusion </li></ul><ul><ul><li>For policy makers, describing a problem as widespread may be the right strategy when seeking funding / resources / staffing from purse-holders. </li></ul></ul><ul><ul><li>It is important, however, not to generalize this approach to messages sent to citizens, who may interpret such descriptions as legitimizing the undesirable activity. </li></ul></ul>Descriptive Social Norm
  39. 55. Descriptive Social Norm <ul><li>Does this conclusion mean that we should never use the descriptive norm to manage socially undesirable behavior? </li></ul><ul><li>No. </li></ul><ul><li>When the undesirable behavior is not the norm, evidence of what most others are doing is precisely what should be communicated. </li></ul>
  40. 56. <ul><li>The Towel Reuse Study </li></ul>
  41. 57. Typical Hotel Bathroom
  42. 59. 40% 35% 30% 25% 45% Environmental Focus Cooperation Focus 42.5% 47.5% 37.5% 32.5% 27.5% Percentage of towel reuse Normative Focus
  43. 60. But is there an even more impactful message that could be sent, knowing what we know about the consensus principle?
  44. 61. We follow the lead of: <ul><li>Many others </li></ul><ul><li>Similar others </li></ul>
  45. 62. 47.5% 42.5% 37.5% 32.5% 52.5% Environmental Focus Cooperation Focus 50% 55% 45% 40% 35% Normative Focus (1) Percentage of towel reuse Normative Focus (2)
  46. 63. <ul><li>The most successful of the communications </li></ul><ul><ul><li>was one that we have never seen employed by any hotel management, </li></ul></ul><ul><ul><li>yet was costless to the organization. </li></ul></ul>Two notable aspects of the data:
  47. 64. Descriptive Social Norms (Consensus) <ul><li>But, is there any evidence that normative information about the actions of similar others would work with everyday energy decisions, such as household energy usage choices? </li></ul><ul><li>Yes, there is. </li></ul>
  48. 65. 14.5 14.0 13.5 13.0 12.5 Energy Conservation Appeal Saving Money Benefit to Society Environmental Protection Combined Controls Energy Consumption (kilowatt hours consumed per day) Descriptive Norm Field Experiment
  49. 66. Descriptive Social Norm ( Consensus) How can we use this principle to advance national environmental goals? One possibility would be to engage the private sector in the process.
  50. 67. OPOWER Report
  51. 68. OPOWER Results
  52. 69. OPOWER Results
  53. 70. Conclusions <ul><li>Government decision-makers can focus too often on economic or legal factors when seeking to motivate citizens toward public policy goals. </li></ul><ul><li>They would be well advised to also consider what is known about social psychological motivators such as social norms, as well as multiple other such motivators not reviewed here. </li></ul>
  54. 71. Why Don’t We Create Wiser Policies? A Behavioral Science Analysis Max H. Bazerman Harvard University Disclosure: I have received consulting teaching fees from Chevron, BP, PWC, Deloite Touche, and Ernst and Young.
  55. 72. The U.S. has a Council of Economic Advisors, but no Council of Psychological Advisors
  56. 73. The U.S. has a Council of Economic Advisors, but no Council of Psychological Advisors This talk: Toward a broader social science analysis of failures of public policy making
  57. 74. <ul><li>Bounded ethicality refers to the systematic and predictable ways in which humans act unethically beyond their own awareness. </li></ul><ul><li>Or </li></ul><ul><li>Why Do Good People Engage in Bad Behavior? </li></ul>Bounded Ethicality Chugh, Bazerman, and Banaji (2005)
  58. 75. Bounded Ethicality <ul><li>Implicit Attitudes (lots of work by Banaji, Greenwald et al.) </li></ul><ul><li>In-group/Out-group Biases (Messick op-ed) </li></ul><ul><li>Discounting the Future (Wade-Benzoni, 1999, 2002) </li></ul><ul><li>Overclaiming Credit ( Ross and Sicoly, 1979; Caruso, Epley, and Bazerman, 2006; Epley, Caruso, and Bazerman, 2006) </li></ul><ul><li>Moral Disengagement: (Bandura, 1986, 1990; Paharia and Deshpande, 2009; Shu, Gino, and Bazerman, 2009) </li></ul><ul><li>Greater Unethical Behavior under a Loss Frame than under a Gain Frame (Kern and Chugh, 2009) </li></ul>
  59. 76. Boundedness in Noticing the Ethicality of Others
  60. 77.
  61. 78. Boundedness in Noticing the Ethicality of Others <ul><li>We are busy (Neisser, 1979) </li></ul><ul><li>Motivated bounded awareness (Chugh and Bazerman, 2007; Moore, Tanlu, Tetlock, and Bazerman, 2006) </li></ul><ul><li>Outcome bias in judging ethics (Baron and Hershey, 1988; Gino, Moore, and Bazerman, 2009) </li></ul><ul><li>Slippery slope (Gino and Bazerman, 2009) </li></ul><ul><li>Indirect blindness in judging unethical behavior (Paharia, Kassam, Greene, and Bazerman, 2009; Coffman, in preparation) </li></ul>
  62. 79. <ul><li>Why Do Good Societies Engage in Bad Behavior? </li></ul>Bounded Ethicality in Society
  63. 80. What is a rational policy change? Pareto efficiency? Near-Pareto efficiency (Stigletz, 1998): Policy changes that create large benefits for some and comparatively small losses for others, as well as changes that would hurt only a small, narrowly defined special-interest group—in many cases, a group that has already manipulated the political process to its advantage.
  64. 81. 3 Stories of our failure to move toward Near-Pareto efficiency <ul><li>Tobacco </li></ul><ul><li>Auditing </li></ul><ul><li>Energy (Climate Change) </li></ul>
  65. 82. 3 Stories of our failure to move toward Near-Pareto efficiency <ul><li>Tobacco </li></ul><ul><li>Auditing </li></ul><ul><li>Energy (Climate Change) </li></ul><ul><li>-My stories will be U.S. based </li></ul><ul><li>-Comments will be made on The Netherlands </li></ul>
  66. 83. Tobacco – The failed history in the U.S. <ul><li>Tobacco use dates back at least to the Mayans – 1st Century BC </li></ul><ul><li>Big boom in smoking came with the branding of cigarettes in the mid to late 1800s, and the 1880 invention of the Bonsack cigarette-rolling machine </li></ul><ul><li>First quantitative analysis linking cigarettes and lung cancer – 1929 </li></ul><ul><ul><ul><li>-controversy over causation </li></ul></ul></ul><ul><li>By the early 1950s, the evidence was quite overwhelming, and fraud by the cigarette industry was rampant </li></ul><ul><li>1957: British Medical Research Council formally blamed tobacco for the growth of lung cancer in society </li></ul>
  67. 84. Tobacco – The failed history in the U.S. <ul><li>1964: U.S. Surgeon General publicly concludes that smoking is causally related to lung cancer </li></ul><ul><li>1960s: The AMA sides with tobacco and calls for more research– “weirdest lobbying alliance in legislative history” (Pearson and Anderson) </li></ul><ul><li>1981: Japanese second-hand smoke study, and the beginning of (insufficient) changes in the U.S. </li></ul><ul><li>2005: Tobacco industry effectively corrupts the largest civil litigation in the history of the world through Bush’s DOJ </li></ul>
  68. 85. Tobacco – Key Strategies <ul><li>Target (often illegally) underage smokers </li></ul><ul><li>Mislead the public about the nature of the risks </li></ul><ul><li>Understand additiction, while keeping the public from understanding addiction </li></ul>
  69. 86. The Failure of Auditor Independence <ul><li>The reason for auditing as an institution </li></ul><ul><li>The threats to auditor independence </li></ul>
  70. 87. Chief Justice Warren Burger wrote on behalf of a unanimous U.S. Supreme Court (1984): <ul><li>By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This “public watchdog” function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust. </li></ul>
  71. 88. The Failure of Auditor Independence <ul><li>The reason for auditing as an institution </li></ul><ul><li>The threats to auditor independence </li></ul><ul><li>Bazerman, Morgan, and Loewenstein (1997) </li></ul><ul><li>SEC calls in 2000 </li></ul><ul><li>The changes made in 2002 (SOX) were weak – focusing on disclosure </li></ul><ul><li>Tie to rating agencies </li></ul>
  72. 89. Which makes more sense? <ul><li>In order to maintain auditor independence, auditors are prohibited from establishing durable long-term cooperative partnerships with their clients, from providing non-audit services to their clients, and from taking jobs with their clients. </li></ul><ul><li>Start by creating a variety of incentives that lead auditors to want to please their clients, and then try to identify a complex set of legislative and professional incentives to counteract the corrupting influences creating by the desire to please the client. </li></ul>
  73. 90. Climate Change <ul><li>First noted in the media in 1930s </li></ul><ul><li>High probability of disastrous future consequences </li></ul><ul><li>Millions (8 million in Bangladesh alone) will be forced to relocate </li></ul><ul><li>The Maldives will go under water </li></ul><ul><li>Significant effect on The Netherlands </li></ul><ul><li>Southern Florida will be under water </li></ul>
  74. 91.
  75. 92.
  76. 93. Climate Change <ul><li>There is a broad scientific consensus that climate changes exists, that it is affected by human activity, and the problem is important enough to merit more attention by policy makers than it is currently receiving </li></ul><ul><li>There are skeptics in the scientific community, most of whom are paid by special interests </li></ul><ul><li>We are acting far slower than a rational analysis would dictate, assuming reasonable value is placed on future generations </li></ul>
  77. 94. Cognitive Explanations for Predictable Surprises <ul><li>Positive Illusions </li></ul><ul><li>Overly Discounting the Future </li></ul><ul><li>Don’t Fix It If We Can’t Tell It’s Broken </li></ul><ul><li>The Status Quo </li></ul><ul><li>Bounded Awareness </li></ul>
  78. 95. Political Explanations for the Failure to Enact Wise Policies Distortion of policies and prevention of meaningful campaign finance reform Overweighting of GM, Philip Morris, Final Four Accounting Firms, ExxonMobil, Etc. Underweighting of current citizens, and dramatic underweighting of future citizens
  79. 96. Strategies of Special Interest <ul><li>Obfuscation </li></ul><ul><li>Shifting view of what is being challenged </li></ul><ul><li>Encouraging Reasonable Doubt </li></ul><ul><li>Status quo effects </li></ul>
  80. 97. Obfuscation Tobacco : They knew more than the government, hired skeptics, called for more research, and create a standard for evidence that they knew could not be achieved Auditing : Argued that no evidence existed about the effects of consulting, emphasized that their integrity was the solution Energy : Paid for “experts” to offer skepticism about climate change, while having ample knowledge that climate change existed
  81. 98. Shifting view of what is being challenged Tobacco : Cigarettes are good for you....No causal connection Cigarettes may be one of many factors that create illness....There is no evidence of second hand smoke affecting health and Of course, smokers knew the risk Auditing : Our reputations are your protection....Disclosure is the right solution Energy : Climate change does not exist....Climate change is not caused by humans....We shouldn’t act until we know that the benefit of action is justified
  82. 99. Encouraging Reasonable Doubt Tobacco : Create reasonable doubt, particularly by smokers who were customers, doctors, and legislators Auditing : No “smoking gun” versus “how would you create an independent auditing function” Energy : PR campaign to say that oil is addressing the issue, publicizing the doubt, and funding the skeptics
  83. 100. Status quo effects It works on an individual level And, it works on a national policy level Status quo effects interact with obfuscation, shifting views of the argument, and encouraging reasonable The result: We are too slow to overcome cognitive and political barriers to create wiser policies
  84. 101. Wise Policies Must… <ul><li>Understand the dysfunctional role of special interest groups </li></ul><ul><li>Create electoral systems that reduce the impact of special interest groups </li></ul><ul><li>Understand how special interest groups contort the policy making process in order to convey the wisdom of Near-Pareto efficient changes </li></ul>
  85. 102. Behaviorally Informed Policy Design for the Poor Eldar Shafir Princeton University Behavioral Science Challenges for Policy The Hague, February 11, 2010
  86. 103. How are preferences revealed? John Beshears, David Laibson, Brigitte Madrian Harvard University James Choi Yale University February 2010
  87. 104. <ul><li>Revealed preferences: </li></ul><ul><ul><li>The choices that a person actually makes </li></ul></ul><ul><ul><li>E.g., A heroin addict takes heroin (revealing a taste for heroin) </li></ul></ul><ul><li>Normative preferences: </li></ul><ul><ul><li>The choices that she should make </li></ul></ul><ul><ul><li>E.g., A heroin addict should quit </li></ul></ul>03/02/10 How are preferences revealed?
  88. 105. <ul><li>Economists say that people know their true preferences and that people’s choices “reveal” their true preferences </li></ul><ul><li>In other words, economists say that: </li></ul><ul><li>Revealed Preferences = Normative Preferences </li></ul><ul><li>“What We Do” = “What We Should Do” </li></ul><ul><li>I’ll argue that we often don’t do what we should. </li></ul><ul><li>And I’ll show how to identify normative preferences now that we can’t rely on revealed preferences as our guide. </li></ul>03/02/10 How are preferences revealed?
  89. 106. $100 bills on the sidewalk Choi, Laibson, Madrian (2009) <ul><li>Employers match employee contributions to retirement plan </li></ul><ul><li>Particularly appealing if employee is over 59½ years old </li></ul><ul><ul><li>Can withdraw money from account without penalty </li></ul></ul><ul><li>On average, half of employees over 59½ years old are not fully exploiting their employer match </li></ul><ul><li>Educational intervention has no effect </li></ul>03/02/10 How are preferences revealed?
  90. 107. Education and Disclosure Choi, Laibson, Madrian (2007) <ul><li>Experimental study with 400 subjects </li></ul><ul><li>Subjects are Harvard staff members </li></ul><ul><li>Subjects read prospectuses of four S&P 500 index funds </li></ul><ul><li>Subjects allocate $10,000 across the four index funds </li></ul><ul><li>Subjects get to keep their gains net of fees </li></ul>
  91. 108. Data from Harvard Staff Control Treatment Fees salient 3% of Harvard staff in Control Treatment put all $$$ in low-cost fund $494 $518 Fees from random allocation $431
  92. 109. Data from Harvard Staff Control Treatment Fees salient 3% of Harvard staff in Control Treatment put all $$$ in low-cost fund 9% of Harvard staff in Fee Treatment put all $$$ in low-cost fund $494 $518 Fees from random allocation $431
  93. 110. When are revealed preferences most likely to deviate from normative preferences? <ul><li>Passive choice: </li></ul><ul><li>Complexity: </li></ul><ul><li>Limited personal experience: </li></ul><ul><li>Third-party marketing: </li></ul><ul><li>Inter-temporal choice: </li></ul>03/02/10 How are preferences revealed?
  94. 111. 1. Passive choice <ul><li>Decision-makers have an overwhelming tendency to adopt defaults. </li></ul>03/02/10 How are preferences revealed?
  95. 112. Madrian and Shea (2001) Choi, Laibson, Madrian, Metrick (2004) Automatic enrollment Opt in Opt out
  96. 113. Employees enrolled under automatic enrollment cluster at default contribution rate. Fraction of Participants at different contribution rates: Default contribution rate under automatic enrollment
  97. 114. 2. Complexity <ul><li>Three channels of distortion: </li></ul><ul><li>Complexity delays choice, increasing the fraction of consumers who adopt default options (O’Donoghue and Rabin, 2004). </li></ul><ul><li>Complexity biases choice, since people tend to avoid complex options (Shafir and Tversky, 1994; Iyengar and Kamenica, 2006). </li></ul><ul><li>Complexity adds noise to choice, since complex options are not as transparent and well-understood as simple options. Hence, some consumers will choose a complex option because they misestimate its value (Gabaix, Laibson, and Li, 2006). </li></ul>03/02/10 How are preferences revealed?
  98. 115. 2003 2004 2005 Simplification Beshears, Choi, Laibson, Madrian (2006)
  99. 116. 3. Limited personal experience <ul><li>People learn primarily through direct personal experience, not through indirect passive channels. </li></ul><ul><li>For example, the lessons of Enron, Worldcom, and Global Crossing were not heeded by workers outside of these firms (Choi et al 2005). </li></ul><ul><ul><li>Even new workers at other firms failed to avoid employer stock. </li></ul></ul><ul><ul><li>Even new workers at other Houston firms failed to avoid from employer stock. </li></ul></ul>03/02/10 How are preferences revealed?
  100. 117. 03/02/10 How are preferences revealed? Agarwal, Driscoll, Gabaix, and Laibson (2006) Cash advance Late fee Limit fee
  101. 118. 4. Third-party marketing <ul><li>Explicit Persuasion </li></ul><ul><li>Implicit Persuasion </li></ul><ul><ul><li>Shrouding (Gabaix and Laibson, 2006) </li></ul></ul><ul><li>Examples of shrouded attributes: </li></ul><ul><ul><li>Cost of printer ink </li></ul></ul><ul><ul><li>Bank account fees </li></ul></ul><ul><ul><li>Credit card fees </li></ul></ul><ul><ul><li>Mutual fund fees </li></ul></ul>03/02/10 How are preferences revealed?
  102. 119. 5. Intertemporal choice <ul><li>Which set of preferences is valid? </li></ul><ul><ul><li>Today’s decision to exercise tomorrow? </li></ul></ul><ul><ul><li>Or my decision tomorrow, not to exercise after all? </li></ul></ul><ul><li>Good intentions inconsistent with subsequent actions </li></ul><ul><ul><li>Diet </li></ul></ul><ul><ul><li>Savings </li></ul></ul><ul><ul><li>Human capital investment </li></ul></ul><ul><ul><li>Safe sex </li></ul></ul><ul><ul><li>Medical adherence </li></ul></ul>03/02/10 How are preferences revealed?
  103. 120. Choosing fruit vs. chocolate Read and van Leeuwen (1998) Time Choosing Today Eating Next Week If you were deciding today , would you choose fruit or chocolate for next week ?
  104. 121. Patient choices for the future: Time Choosing Today Eating Next Week Today , subjects typically choose fruit for next week . 74% choose fruit
  105. 122. Impatient choices for today: Time Choosing and Eating Simultaneously If you were deciding today , would you choose fruit or chocolate for today ?
  106. 123. Time Inconsistent Preferences : Time Choosing and Eating Simultaneously 70% choose chocolate
  107. 124. The desire for instant gratification Read, Loewenstein & Kalyanaraman (1999) <ul><li>Choose among 24 movie videos </li></ul><ul><li>Some are “low brow”: Four Weddings and a Funeral </li></ul><ul><li>Some are “high brow”: Schindler’s List </li></ul><ul><li>Picking for tonight: 66% of subjects choose low brow. </li></ul><ul><li>Picking for night two weeks away: 29% choose low brow. </li></ul>
  108. 125. A Behavioral Approach to Revealed Preference: <ul><li>Choices partially reveal both normative preferences and decision-making biases. </li></ul><ul><li>For example, when an employee takes five years to enroll in a pension plan: </li></ul><ul><li>a legitimate (normative) preference for saving </li></ul><ul><li>a tendency to procrastinate </li></ul>03/02/10 How are preferences revealed?
  109. 126. How can we measure normative preferences using behavioral data? <ul><li>Directly measure normative preferences and biases </li></ul><ul><li>Active choices </li></ul><ul><li>Asymptotic choice </li></ul><ul><li>Aggregated revealed preferences </li></ul><ul><li>Reported preferences </li></ul><ul><li>Expert opinion/informed preferences </li></ul>03/02/10 How are preferences revealed?
  110. 127. 1. Directly measure normative preferences and biases <ul><li>Estimate a social science model that includes both normative preferences and psychological biases </li></ul>03/02/10 How are preferences revealed?
  111. 128. Measuring time preferences Laibson, Repetto, and Tobacman (2009) <ul><li>Start with several facts about US consumers: </li></ul><ul><ul><li>Substantial illiquid retirement wealth: W/Y = 3.9. </li></ul></ul><ul><ul><li>Extensive credit card borrowing in US: </li></ul></ul><ul><ul><ul><li>68% don’t pay their credit card in full </li></ul></ul></ul><ul><ul><ul><li>Average credit card interest rate is 14% </li></ul></ul></ul><ul><ul><ul><li>Credit card debt averages 13% of annual income </li></ul></ul></ul><ul><ul><li>Consumption and income move together: </li></ul></ul><ul><ul><ul><li>When income rises a dollar, consumption rises 25 cents (i.e. consumption tracks income) </li></ul></ul></ul>03/02/10 How are preferences revealed?
  112. 129. Social Science Model <ul><li>Households have shocks to income (e.g., unemployment) </li></ul><ul><li>Lifecycle variation in labor supply (e.g. retirement) </li></ul><ul><li>Social Security system </li></ul><ul><li>Life-cycle variation in household dependents </li></ul><ul><li>Bequests </li></ul><ul><li>Illiquid asset </li></ul><ul><li>Liquid asset </li></ul><ul><li>Credit card debt </li></ul><ul><li>Present bias: care about today much more than tomorrow </li></ul>03/02/10 How are preferences revealed?
  113. 130. Results of simulations: <ul><li>Present bias: I care about today 30% more than I care about events in the near future. </li></ul><ul><li>Normative preferences: I discount 4% every year </li></ul>03/02/10 How are preferences revealed? Empirical Simulated model %Visa: 68% 63% Visa/Y: 13% 17% MPC: 23% 31% f(W/Y): 2.6 2.7
  114. 131. 2. Active Choices <ul><li>If passivity, inertia, and procrastination are problems, then forcing agents to make active choices will reveal their normative preferences. </li></ul><ul><li>Tools for active decision-making: </li></ul><ul><ul><li>Deadlines </li></ul></ul><ul><ul><li>Forced choices (with compliance incentives) </li></ul></ul><ul><ul><li>Tied choices </li></ul></ul><ul><li>At least for savings behavior, Choi et al (2006) find that active savings choices produce savings rates that are identical after three months to the savings rates that would normally take workers three years to converge to. </li></ul>03/02/10 How are preferences revealed?
  115. 132. 401(k) participation rate increases under active decisions 03/02/10 How are preferences revealed? Active decision cohort Standard enrollment cohort
  116. 133. Active Choices in Health Care Beshears, Choi, Laibson, Madrian (2010) <ul><li>15% of patients with chronic conditions have arranged for home delivery of their medications </li></ul><ul><li>Home delivery: </li></ul><ul><ul><li>Reduces costs </li></ul></ul><ul><ul><li>Improves quality control </li></ul></ul><ul><ul><li>Increases rate of adoption of generic substitutes </li></ul></ul><ul><ul><li>Increases adherence to prescriptions </li></ul></ul><ul><li>Communication campaigns haven’t succeeded in pushing this adoption rate higher </li></ul><ul><li>But an active choice intervention raised adoption to 42%, saving the study company and its employees $5 million in the first year of the study </li></ul>03/02/10 How are preferences revealed?
  117. 134. 3. Asymptotic Choice <ul><li>In standard 401(k) plans, short-run passivity gives way to long-run action. </li></ul><ul><li>At six months of tenure, enrollment rates range from 20%-50%. </li></ul><ul><li>At four years of tenure, enrollment rates range from 50%-80%. </li></ul>03/02/10 How are preferences revealed?
  118. 135. 03/02/10 How are preferences revealed? Employees move slowly from an old match threshold to a new match threshold. Fraction of employees at 6% savings rate Fraction of employees at 8% savings rate Employer changes match threshold from 6% to 8%
  119. 136. 4. Aggregated Revealed Preferences <ul><li>Median and average savings rates and asset allocations are quite sensible. </li></ul><ul><li>For example, the dollar weighted average allocation to equities is 68% (Investment Company Institute 2006). </li></ul><ul><li>At TIAA-CREF, the dollar weighted average allocation to equities is 58%. </li></ul><ul><li>However, individual portfolios vary widely. </li></ul><ul><li>Benartzi and Thaler (2002) find that most retirement plan participants prefer the median asset allocation to their own asset allocation. </li></ul>03/02/10 How are preferences revealed?
  120. 137. 5. Reported Preferences <ul><li>Reported preferences have the liability that talk is cheap and often designed to please the interviewer. </li></ul><ul><li>On the other hand, reported preferences can express long-term goals that may be undermined by short-term self-defeating behaviors (like procrastination or inertia). </li></ul><ul><li>Reported preferences also enable us to engage a host of well-being measures, including life satisfaction measures and moment based measures. </li></ul>03/02/10 How are preferences revealed?
  121. 138. Procrastination and Under-saving Choi, Laibson, Madrian, Metrick (2002) <ul><li>Survey </li></ul><ul><li>Mailed to a random sample of employees </li></ul><ul><li>Matched to administrative data on actual savings behavior </li></ul>
  122. 139. Typical breakdown among 100 employees Out of every 100 surveyed employees 68 self-report saving too little 24 plan to raise savings rate in next 2 months 3 actually follow through
  123. 140. Self-reports after a financial education seminar 03/02/10 How are preferences revealed? Seminar attendees Non-attendees Percent planning to make change Percent actually made change Percent actually made change “ Will enroll in 401(k)” 100% 14% 7%
  124. 141. Do workers like automatic enrollment? <ul><li>97% of employees in auto-enrollment firms approve of auto-enrollment. </li></ul><ul><li>Even among workers who opt out of automatic enrollment, approval is 79%. </li></ul>
  125. 142. 6. Expert Opinion/Informed Preferences <ul><li>Naturally, we may wish to place special emphasis on the views of experts or “educated” consumers. </li></ul><ul><li>Examples include: </li></ul><ul><ul><li>Expert systems (like ESPlanner, Financial Systems) </li></ul></ul><ul><ul><li>Expert advisors (CFP, CFA, financial economists) </li></ul></ul><ul><ul><li>Normative models (lifecycle asset allocation models) </li></ul></ul><ul><ul><li>Trained consumers </li></ul></ul>03/02/10 How are preferences revealed?
  126. 143. Conclusion: <ul><li>Choices reveal both normative preferences and decision-making biases. Hence, revealed preferences are not the same as normative preferences. </li></ul><ul><li>Tools for measuring normative preferences </li></ul><ul><ul><li>Direct estimation of normative preferences and biases </li></ul></ul><ul><ul><li>Active decisions </li></ul></ul><ul><ul><li>Asymptotic choice </li></ul></ul><ul><ul><li>Aggregated revealed preferences </li></ul></ul><ul><ul><li>Reported preferences </li></ul></ul><ul><ul><li>Expert opinion/informed preferences </li></ul></ul>03/02/10 How are preferences revealed?
  127. 144. Behaviorally Informed Policy Design for the Poor <ul><li>Fundamental behavioral lessons (Psych 101 Express..) </li></ul><ul><li>Policy applications, esp. in context of poverty </li></ul>3. Overview of ongoing work on scarcity 4. Final remarks on regulation…
  128. 145. Alternative views of the human agent <ul><li>the rational agent model </li></ul><ul><li>folk / intuitive psychology </li></ul><ul><li>research-based psychology </li></ul>
  129. 146. Milgram’s Obedience Studies “ Teachers” punish “learners’” (confederates’) errors with a shock generator…
  130. 147. <ul><li>Voltage increased with each incorrect answer, from 15 volts (“mild shock”), to 375 volts (“Danger: severe shock”), to 450 volts (“ XXX ”) </li></ul><ul><li>75, 90, 105 volts: grunts </li></ul><ul><li>150 volts: “Get me out of here! I told you I had heart trouble. </li></ul><ul><li>My heart’s starting to bother me now. I refuse to go on!” … </li></ul><ul><li>270 volts: screams of agony … </li></ul><ul><li>330 volts: silence </li></ul><ul><li>Prods: “please continue” </li></ul><ul><li>“ the experiment requires </li></ul><ul><li>that you continue” </li></ul><ul><li>“ it is absolutely essential </li></ul><ul><li>that you continue” </li></ul><ul><li>“ you must go on”… </li></ul>
  131. 148. <ul><li>At what point will the “teacher” refuse to obey? </li></ul><ul><li>Milgram asked psychiatrists, students, and other adults for their predictions: </li></ul><ul><ul><ul><li>everyone predicted disobedience </li></ul></ul></ul><ul><ul><ul><li>average prediction: 135 volts </li></ul></ul></ul><ul><ul><ul><li>no one predicted they would go beyond 300 volts </li></ul></ul></ul><ul><ul><ul><li>psychiatrists predicted 1/1000 would go to 450 volts </li></ul></ul></ul><ul><li>Instead: </li></ul><ul><ul><ul><li>Every participant obeyed up to 300 volts! </li></ul></ul></ul><ul><ul><ul><li>65% went all the way to 450 volts! </li></ul></ul></ul>
  132. 149. Behavioral research: The importance of context and construal (in survey responses, language, perception, judgments, decisions, social / political life, etc…) A simple but profound fact: Decisions are not about objective states of the world, but about our mental representations of those states The Power of the Situation The Tendency to Underestimate the Power of the Situation
  133. 150. <ul><ul><li>Please estimate the average number of hours you watch television per week: </li></ul></ul><ul><ul><ul><ul><li> ____ ____ ____ ____ ____ ____ </li></ul></ul></ul></ul><ul><ul><ul><ul><li> 1-4 5-8 9-12 13-16 17-20 More </li></ul></ul></ul></ul><ul><ul><li> than 20 </li></ul></ul><ul><ul><li>Please estimate the average number of hours you watch television per week: </li></ul></ul><ul><ul><ul><ul><li>____ ____ ____ ____ ____ ____ </li></ul></ul></ul></ul><ul><ul><ul><ul><li>1-2 3-4 5-6 7-8 9-10 More </li></ul></ul></ul></ul><ul><ul><li> than 10 </li></ul></ul>X X
  134. 151. The Power of Defaults Johnson & Goldstein, Science, 2003
  135. 152. <ul><li>Intention versus action   </li></ul><ul><li>Informational, educational, consciousness- </li></ul><ul><li>raising campaigns, can alter intention. </li></ul><ul><li>The design of helpful access, clever decision- </li></ul><ul><li>aids, insightful contexts, (or bad access, mis- </li></ul><ul><li>guided context) can alter action. </li></ul>
  136. 154. The Save More Tomorrow Plan (SMarT; Benartzi & Thaler ) <ul><li>People pre-commit to saving more in the future. </li></ul><ul><li>Saving increases are synchronized with salary increases. </li></ul><ul><li>People remain in the plan unless they drop out. </li></ul>
  137. 155. Results in First Implementation
  138. 156. What’s Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment ( Bertrand, Karlan, Mullainathan, Shafir, Zinman; Quarterly Journal of Economics, forthcoming) <ul><ul><li>South African lender (Experienced clients, </li></ul></ul><ul><ul><li>real & substantial payoffs, etc.) </li></ul></ul><ul><ul><li>- Customers receive a letter offering loan </li></ul></ul><ul><ul><li>Randomized interest rates </li></ul></ul><ul><li> 3.25%-11.75% (monthly) </li></ul>Behavioral (“Marketing”) Manipulations: • # of loan examples shown • subtle peripheral cues; photos • (promotions, reminders…) Some results: 1 vs. 4 examples: ~ 2.3 percent. points For males: female picture = ~ 4.5 points (Unwanted) promotion = ~ 4 points
  139. 157. Two Dominant Views of Poverty <ul><li>Rational Choice view </li></ul><ul><ul><li>Consistent, calculating, well-defined preferences, willpower.. </li></ul></ul><ul><ul><li>Behavior: calculated adaptation to prevailing circumstances </li></ul></ul><ul><li>Pathology view </li></ul><ul><ul><li>Psychological pathologies specific to the poor </li></ul></ul><ul><ul><li>Impatient, no planning, uninformed </li></ul></ul><ul><ul><li>Behaviors endemic to “culture of poverty” </li></ul></ul>An alternative : Neither rational nor pathological; just plain human, prone to nuanced construal, contextual factors (inherent to poverty), etc.
  140. 158. Rational Choice explanation: <ul><li>High costs of accessing financial services: Banks are far, expensive; avoid serving the poor </li></ul>Force coverage in poor areas; Subsidize accounts held by the poor; Offer financial incentives Policy Implications: Pathology explanation: Culture of poverty. deep distrust, misunderstand, lack of education, wrong “values”, myopia Financial education and training; Teach budgeting and planning Early interventions in children Policy Implications: The (poor) unbanked.. (25% of US households: unbanked or underbanked..) Behavioral explanation: “minor” situational factors?…
  141. 159. <ul><li>What if Unbanked due to (among other things)?: </li></ul><ul><ul><li>Nuisances (sneers from teller, babies in tow..), Unfamiliarity, Conscious violation of social norms, Mismatched “identity” </li></ul></ul><ul><li>Federal Reserve Bank (2000) asked un-banked why no </li></ul><ul><li>checking account. Among top reasons: Do not like dealing with banks. </li></ul><ul><ul><li>Policy analyst / economic theorist: “You’ve got to be kidding! Trivial given the huge advantages. Brief aversive experience vs. lifetime of benefits!?!” </li></ul></ul>
  142. 160. Subsidized bank accounts, ( Bertrand, Mullainathan, & Shafir; Center for Economic Research & Shorebank; Providing low-fee bank accounts to poor) <ul><ul><li>Follow-up surveys: 90% reported intending to; but forgot, misplaced relevant forms, etc… </li></ul></ul><ul><ul><li>Standard (2-hr) workshop; If workshop participant interested in FA: </li></ul></ul><ul><ul><ul><li>Referral letter to take to the bank, OR </li></ul></ul></ul><ul><ul><ul><li>Sign up on site w. bank representative present at workshop </li></ul></ul></ul>(Intervention -- ~10 pct. pts. -- has greater impact than choosing to be there or not, ~8 pct. pts…) <ul><ul><li>Presence of a bank rep.: significantly increased opening / keeping an account; decreased check cashing & borrowing from family. </li></ul></ul><ul><ul><li>Prior program proved of limited effectiveness (<50% take-up) </li></ul></ul>
  143. 161. A poor ‘identity’ Identity salience in the context of welfare benefits programs (EITC and local VITA sites) … Stopped to consider: 44% 58% ( ns) Of those, took the information: 36% 79% p= .03. (Total take up:) 16% 46% Neutral Affirmation Condition: (Crystal Hall, PU dissert., 2008)
  144. 162. The Context of Poverty General “lack of slack” means exhausted savings, mounting debt, making ends meet with current income. Material hardship is high: within a 12-month period, 90 percent of low to moderate income households experience major illness or medical expense, eviction, utility shutoff, phone disconnection, not having enough to eat, or a bankruptcy filing. [Detroit Area Household Financial Services study] Inherent to poverty: Scarcity Conditions of scarcity produce their own psychology. This psychology, interacted with scarcity, yields particular behaviors.
  145. 163. Psychology of Scarcity <ul><li>Greater attentiveness to item size (prices..) </li></ul><ul><li>Perpetually forced to make tradeoffs </li></ul><ul><li>Horizon shortening </li></ul><ul><li>Cognitive depletion </li></ul><ul><li>… . </li></ul>
  146. 164. Family Feud Multiple rounds High slack: 50 sec / rd (total 1000 sec) Low slack:15 sec / rd (total 300 sec) High interest loans.. (w. Anuj Shah)
  147. 167. No borrowing vs. high interest: P < .001 ( No borrowing vs. no interest: P < .09 )
  148. 168. Smoothing consumption from windfalls
  149. 169. Rounds Completed
  150. 170. Points Earned Low slack windfalls: >20% loss of earnings; Interaction: p< .05
  151. 171. Financial challenges in a NJ mall… <ul><li>Imagine that your car...requires an expensive [ Hard : $3,000; Easy : $300] service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision? Financially, would it be an easy or a difficult decision for you to make? </li></ul>Several scenarios, e.g.: With Stroop and Raven’s tests in between:
  152. 172. P < .05 in both cases
  153. 173. P < .05 for Poor; ns for Rich
  154. 174. Irony of poverty context <ul><li>Recurring scarcity poses major decision-making challenges. As economic resources become depleted, so do cognitive resources. </li></ul><ul><li>Scarcity calls for good decisions at the very time one is least able to make them. </li></ul>
  155. 175. Behaviorally Informed Regulation ( Barr, Mullainathan, & Shafir, 2008) <ul><li>Fallible consumers </li></ul><ul><ul><li>choose bad mortgages, funds w. excessive fees, ignore late fees & APR’s, focus on free gifts, teaser rates, etc. </li></ul></ul><ul><li>Behavioral economics: lenders compete on non-rational push factors (cf. rational model…). </li></ul><ul><li>Firms set their contexts to maximize profits </li></ul><ul><li>Imperfect regulators who can observe only some parts of the context </li></ul><ul><ul><li>Directly regulating context can be ineffective; e.g. exactly what is disclosed </li></ul></ul>
  156. 176. The firm & the individual ( Barr, Mullainathan, & Shafir, 2008) Market neutral / wants to overcome consumer fallibility Market happy to exploit consumer fallibility com poun ding pro crastination Consumers misunderstand compounding in savings  Banks would like to reduce this so as to increase savings base Consumers procrastinate in signing up for EITC  Tax filing companies would like to reduce this so as to increase number of customers Consumers misunderstand compounding in borrowing  Banks would like to exploit this to increase borrowing Consumers procrastinate in returning rebates  Retailers would like to exploit this so as to increase revenues
  157. 177. Behaviorally informed regulation RULES SCORING Market neutral / wants to overcome consumer fallibility Market happy to exploit consumer fallibility <ul><li>Benefits </li></ul><ul><ul><li>Reduces reliance on simple non-understanding </li></ul></ul><ul><ul><li>Reduces “evasion through compliance” </li></ul></ul><ul><ul><li>Puts incentives on lenders to disclose appropriately </li></ul></ul><ul><li>Risks </li></ul><ul><ul><li>Uncertainty raises costs of lending for complex products that might benefit some (many?) borrowers </li></ul></ul>Public education on saving Direct deposit/auto-save Licensing Opt-out mortgage (credit card, etc.) system Information debiasing Tax incentives for savings plans for poor Penalties to make opt-out system “sticky” Ex post liability standard for truth in lending Broker fiduciary duty
  158. 178. To summarize: Context has big impact on behavior Context of the poor is particularly tough Need context design and regulation (above & beyond financial education) to ameliorate outcomes for the poor...
  159. 179. Thank you…
  160. 180. Taxi fare when you first get in?… (Boston South Station)
  161. 181. Tradeoffs: % who think about what they’d not buy instead… (India)
  162. 182. Tradeoffs: % who think about what they’d not buy instead… (US)
  163. 183. Percent willing to travel 45 mins to save $50:
  164. 184. Percent willing to travel 45 mins to save $50:
  165. 185. Willingness to travel to save $25…
  166. 186. The Suitcase Metaphor <ul><li>Slack makes it easier to pack </li></ul><ul><li>Slack reduces cognitive effort </li></ul><ul><li>Bigger suitcase means slack is “cheaper” </li></ul><ul><li>Easier to maintain slack in large suitcase - what is given up is less important </li></ul><ul><li>Problem complexity higher when suitcase is small </li></ul><ul><li>Larger suitcase is easier, requires less vigilance, less concern w. temptation; greater margin for error. Smaller suitcase: more complicated packing... </li></ul><ul><li>A consequence: Error </li></ul><ul><li>And consequences of mishaps (misfortunes & mistakes) are greater without slack. Temptation looks like a graver error. </li></ul><ul><li>Lack of slack -> Incompetence </li></ul><ul><li>The large suitcase person (typically with greater slack) </li></ul><ul><li>will appear more competent, a better packer. </li></ul>
  167. 187. Money (the poor) vs. Time (you) Tradeoffs If I buy this, what do If I do this, what do I not buy instead? I not do instead? Temptation Shouldn’t have Shouldn’t have bought… committed… Error/Distraction Failed to pay… Failed to do… Bad borrowing Given what you owe, what are you doing spending?! Given what you owe, what are you doing schmoozing?!.. Even basic goods become “luxuries” Even basic activities turn into “luxuries” Affordability
  168. 188. Zvi Bodie, Norman and Adele Barron Professor of Management, Boston University, and Member of the Scientific Council of Netspar and Henriette Prast, Professor of Personal Finance, Tilburg University, and Member of the Scientific Council for Government Policy, the Netherlands Behavioral science, junk science, and pension saving
  169. 189. Underlying Assumptions <ul><li>The primary function of a pension system is to provide retirement income security. </li></ul><ul><li>Citizens in industrialized societies expect their government to provide a social “safety net.” </li></ul><ul><li>Paradox of power: Government cannot credibly commit to refrain from bailing out large pension plans that “fail”. </li></ul><ul><li>Thus, even in the absence of explicit guarantees, there is an implicit one </li></ul><ul><ul><li>Dutch AOW is a case in point </li></ul></ul>
  170. 190. Behavioral insights (1) <ul><li>Even if people know what is good for them, they do not always act on it </li></ul><ul><ul><li>Saving: </li></ul></ul><ul><ul><ul><li>Lack of self control </li></ul></ul></ul><ul><ul><ul><li>Procrastination </li></ul></ul></ul><ul><ul><li>Investing: </li></ul></ul><ul><ul><ul><li>Status quo bias </li></ul></ul></ul><ul><ul><ul><li>Extremeness aversion </li></ul></ul></ul>
  171. 191. Policy implication (1) <ul><li>Information and education are not enough </li></ul><ul><li>B ehavioral insights may expand the scope of paternalistic regulation </li></ul><ul><ul><li>To the extent that people predictably harm their own best interests, paternalism may prove useful </li></ul></ul><ul><ul><ul><li>for more groups </li></ul></ul></ul><ul><ul><ul><li>in more areas – retirement saving and investing </li></ul></ul></ul><ul><ul><li>T o the extent that paternalism prevents people from behaving in their own best interests, old style paternalism may prove costly </li></ul></ul>
  172. 192. Behavioral insights (2) <ul><li>People have systematic and hence predictable biases in decision making </li></ul><ul><ul><li>Default sensitivity: people tend to choose not to choose (silent consent) </li></ul></ul><ul><ul><ul><li>Organ donation </li></ul></ul></ul><ul><ul><ul><li>Electronic patient dossier </li></ul></ul></ul><ul><ul><ul><li>Pension plan enrollment </li></ul></ul></ul><ul><ul><ul><li>Pension plan saving rate </li></ul></ul></ul><ul><ul><ul><li>Pension plan portfolio </li></ul></ul></ul>
  173. 193. Policy implication (2) <ul><li>These systemic biases in decision making could be used to help people make choices that are in their own best interest without limiting consumer sovereignty: we can try to have our cake and eat it </li></ul><ul><ul><li>maternalism </li></ul></ul>
  174. 194. Increased relevance for NL <ul><li>First layer (AOW) is becoming less generous </li></ul><ul><ul><li>Age increase from 65 to 66 in 2020, 67 in 2025 </li></ul></ul><ul><ul><li>Debate on sustainability is not over yet </li></ul></ul><ul><li>Pension risk in second layer has been shifted to employee </li></ul><ul><ul><li>Individual becomes more responsible for saving enough </li></ul></ul><ul><ul><li>Even “nominal guarantee” not guaranteed, but depending on asset markets </li></ul></ul>
  175. 195. Guarantees as the default option <ul><li>A guarantee transfers investment risk from consumers to producers, who typically have far greater knowledge and skill in handling it. </li></ul><ul><li>It increases trust, and therefore results in lower marketing costs. </li></ul><ul><li>It makes it more transparent to consumers what they are buying, and therefore reduces the need for costly financial “education.” </li></ul>
  176. 196. Rational pension for homo (f/m) sapiens <ul><li>Reflecting best practies </li></ul><ul><li>Semi-tailored </li></ul><ul><li>Group defaults </li></ul><ul><li>Limited additional choice </li></ul>
  177. 197. Design and production of personal pension contracts <ul><li>As in other industries, there are producers and consumers. Producers know the technology and provide guaranteed contracts to consumers. </li></ul>
  178. 199. Institutional design <ul><li>Trust is very important – agency issues </li></ul><ul><li>Economies of scale </li></ul><ul><li>Who would be the trusted party in the Netherlands? </li></ul><ul><ul><li>Employer </li></ul></ul><ul><ul><li>Pension fund </li></ul></ul><ul><ul><li>Trade union </li></ul></ul>
  179. 200. Role for the government <ul><li>Complete markets by issuing long-dated inflation-indexed debt/consumption-indexed bonds (Merton, 2000) </li></ul><ul><li>Pricing is done by markets </li></ul>
  180. 201. Conclusions <ul><li>Current policy focus on transparency and education may be counterproductive: “comply and do not innovate” </li></ul><ul><li>People should be supplied maternalistically with pension products that guarantee a standard of living </li></ul>
  181. 202. Conclusions (2) <ul><li>People should be supplied paternalistically with pension products that deliver the output they prefer </li></ul><ul><li>These products should be rational from the perspective of science </li></ul>
  182. 203. Behavioral policy challenges for the Netherlands Henriëtte Prast Professor of Personal Finance, Tilburg University Member Scientific Council for Government Policy Netspar Fellow &TIBER Friend The Hague, February 11, 2010
  183. 204. Paul Samuelson (1915 – 2009) <ul><li>“ God must love those common folk that behavioral scientists write about, because She created so many of them” </li></ul><ul><li>( </li></ul>
  184. 205. Behavioral policy challenge <ul><li>Main policy implication is not that people do not behave according to rational choice model…. </li></ul><ul><li>..but that people systematically and predictably deviate from this model </li></ul>
  185. 206. Behavioral policy implication (1) <ul><ul><li>Motives for intervention </li></ul></ul><ul><ul><li>More groups than “idiots, minors and women” may benefit from paternalism </li></ul></ul>
  186. 207. Policy implication (2) <ul><ul><li>Methods of intervention </li></ul></ul><ul><ul><ul><li>Other ways to paternalistically influence behavior </li></ul></ul></ul>
  187. 208. Policy implication (3) <ul><li>Traditional policy may be counterproductive </li></ul><ul><ul><li>Information may reduce effort (smoking) </li></ul></ul><ul><ul><li>Information may increase consumption (calories) </li></ul></ul><ul><ul><li>Defaults establish social norm </li></ul></ul>
  188. 209. Scientific Council Project <ul><li>Behavioral science implications for policies in the Netherlands that aim at affecting individual behavior: don’ts and do’s </li></ul><ul><ul><li>Evaluation of current policy </li></ul></ul><ul><ul><li>Potential for alternative policy </li></ul></ul>
  189. 210. Main Products 2009 <ul><li>WRR lecture by Richard Thaler, Nov 26,on </li></ul><ul><li>“ The Government as Choice Architect” </li></ul>
  190. 211. Main Products 2009 (2) <ul><li>The Human Decision Maker (in Dutch): survey of literature by Dutch academic experts including TIBER’s Potters, Stapel and Zeelenberg </li></ul><ul><li> </li></ul>
  191. 212. The Hague institutions that have actively expressed interest include <ul><li>Ministry of Finance </li></ul><ul><li>Ministry of SZW </li></ul><ul><li>Ministry of LNV </li></ul><ul><li>Ministry of VROM </li></ul><ul><li>Ministry of VWS </li></ul><ul><li>Ministry of BZ </li></ul><ul><li>PBL, SCP, RGO, ZonMw, Nationale Ombudsman, Academy of Government Communication, …. </li></ul>
  192. 213. Focus on three domains <ul><li>Health related behavior </li></ul><ul><li>Prosocial behavior (including use of natural resources) </li></ul><ul><li>Financial behavior </li></ul>
  193. 214. Why health related behavior (1) <ul><li>Theoretical relevance: </li></ul><ul><ul><li>Intertemporal choice </li></ul></ul><ul><ul><li>Immediate gratification and willpower issue </li></ul></ul><ul><ul><ul><li>Dieting industry: “paying not to consume” </li></ul></ul></ul>
  194. 215. Why health related behavior (2) <ul><li>Policy relevance </li></ul><ul><ul><li>Huge problems related to behavior: </li></ul></ul><ul><ul><ul><li>Obesity </li></ul></ul></ul><ul><ul><ul><li>“ Diabesity” </li></ul></ul></ul><ul><ul><li>Concern about policy interfering with life style </li></ul></ul>
  195. 216. Ab Klink (ZNETWERK, maart 2009) <ul><li>“ Wat wel lastig is, is de preventieportefeuille. Die heeft al snel te maken met de leefstijl van mensen. …Via voorlichting kun en mag je mensen wel bewust maken, maar keuzes over eten, bewegen, drinken en roken blijven terecht altijd een keuze van mensen..” </li></ul>
  196. 217. Why prosocial behavior (1) <ul><li>Theoretical relevance </li></ul><ul><ul><li>Intertemporal dimension </li></ul></ul><ul><ul><li>Crowding out of intrinsic motivation </li></ul></ul><ul><ul><li>Bounded ethicality </li></ul></ul>
  197. 218. Why prosocial behavior (2) <ul><li>Policy relevance </li></ul><ul><ul><li>Use of resources: environment, food crisis </li></ul></ul><ul><ul><li>Concern about civic duties </li></ul></ul>
  198. 219. Meat the facts <ul><li>Environment Planning Bureau: </li></ul><ul><ul><li>Meatless day = CO 2 emission reduced by 0.65 megaton </li></ul></ul><ul><ul><li>Meatless week = CO 2 emission reduced by 3.5 procent </li></ul></ul>
  199. 220. Why personal finance (1) <ul><li>Theoretical relevance: </li></ul><ul><ul><li>Intertemporal choice </li></ul></ul><ul><ul><li>Immediate gratification and willpower issue </li></ul></ul><ul><ul><li>Biased decision making </li></ul></ul><ul><ul><ul><li>Sensitivity for defaults </li></ul></ul></ul><ul><ul><ul><li>Sensitivity for labels and framing </li></ul></ul></ul>
  200. 221. Why personal finance (2) <ul><li>Policy relevance: </li></ul><ul><ul><li>Deregulation and liberalization </li></ul></ul><ul><ul><li>Demographics </li></ul></ul><ul><ul><li>Risk shift and technological innovation </li></ul></ul><ul><ul><ul><li>Increasing possibilities and complexity </li></ul></ul></ul><ul><ul><ul><li>Non-neutrality </li></ul></ul></ul>
  201. 222. Non-neutrality – willpower problem <ul><li>1950: </li></ul><ul><li>2009: </li></ul><ul><li>20??: </li></ul>
  202. 223. Traditional policy <ul><li>Stick: legal prohibitions and obligations </li></ul><ul><li>Carrot: taxes and subsidies </li></ul><ul><li>Priest: warnings and persuasion campaigns </li></ul><ul><li>Teacher: education, information, transparency </li></ul>
  203. 224. Stick examples <ul><li>Ban on 100 Watt fluorescent light bulbs September 2009; on all others Sep 2011 </li></ul><ul><li>Mandatory home isolation in Amsterdam West </li></ul><ul><li>Ban on terrace heating in Amsterdam </li></ul>
  204. 225. Carrot examples <ul><li>Subsidy for home isolation </li></ul><ul><li>Fiscal incentive for purchase green car </li></ul><ul><li>Proposal for meat tax </li></ul>
  205. 226. Priest examples <ul><li>“ Geldlenenkostgeld” </li></ul><ul><li>Civic duties campaign 2009 </li></ul>
  206. 227. Teacher examples <ul><li>Smoking kills </li></ul><ul><li>Indexation label </li></ul><ul><li>Uniform pension overview </li></ul><ul><li>Financial information leaflet </li></ul><ul><li>Calories info </li></ul>
  207. 228. Behavioral challenges (1) <ul><li>Does it make sense to inform people if lack of willpower is at the heart of the problem? </li></ul><ul><li>Does this “no harm in trying” policy really do no harm? </li></ul>
  208. 229. Cost of priest and teacher <ul><li>Monetary: </li></ul><ul><ul><ul><li>health-related behavior 45 mln </li></ul></ul></ul><ul><ul><ul><li>use of resources 230 mln </li></ul></ul></ul><ul><li>Psychological: </li></ul><ul><ul><li>Obese suffer from stigmatization (De Beaufort) </li></ul></ul><ul><ul><li>Cynical citizens if priest /teacher does not walk his talk(?) </li></ul></ul>
  209. 230. Take the stairs!
  210. 231. Get the message?
  211. 232. Don’t s <ul><li>Don’t expect too much from information and persuasion if will power problems are important </li></ul><ul><li>Don’t think that there’s no harm in trying – there may be! </li></ul>
  212. 233. Do’s <ul><li>Offer commitment mechanisms </li></ul><ul><ul><li>Weekly instead of monthly wage </li></ul></ul><ul><li>Set good defaults </li></ul><ul><ul><li>Pensions for self employed </li></ul></ul><ul><li>Consider mandatory active choice </li></ul><ul><ul><li>Organ donation </li></ul></ul>
  213. 234. Food for thought <ul><li>City of Rotterdam: </li></ul><ul><li>If you do not want an arranged marriage, please fill in the form </li></ul>
  214. 235. Some policy suggestions <ul><li>Prosocial behavior: </li></ul><ul><ul><li>Delay-reward: everyone over 18 gets 1000 euro for each year that he does not have driver’s license </li></ul></ul><ul><ul><ul><li>Use of present-bias/immediate gratification </li></ul></ul></ul><ul><ul><li>All government lunches and dinners: </li></ul></ul><ul><ul><ul><li>vegetarian = default, meat = a dietary request </li></ul></ul></ul>
  215. 236. Some more policy suggestions <ul><li>Financial behavior </li></ul><ul><ul><li>Weekly wage payment as default, monthly on request </li></ul></ul><ul><ul><li>Employees receive UPO in green, orange or red envelope depending on replacement ratio </li></ul></ul><ul><ul><ul><li>Red envelope: if we don’t hear from you, we assume that you want to save ..more for retirement (default = saving) </li></ul></ul></ul>
  216. 237. Some final policy suggestions <ul><li>Health related behavior </li></ul><ul><ul><li>Ban on escalator in public domain </li></ul></ul><ul><ul><li>Mandatory box-checking on all public forms before form can be submitted: </li></ul></ul><ul><ul><ul><li>□ YES I want to be an organ donor </li></ul></ul></ul><ul><ul><ul><li>□ NO I do not want to be an organ donor </li></ul></ul></ul>