1. Inventors don't think they'll get rich, inventors hope they'll get rich.Inventors aren't stupid. They know most ideas don't work out. They know most businesses fail. They proceed despite contrary evidence. Hope is the foundational motive.Society feasts on the creations of struggling inventors. Inventors understand this and participate willingly. It's the Micheal Jordan effect: superstars inspire millions of highly motivated dreamers who produce products and benefit society for (almost) free.2. Inventors are risk averse.Inventors believe they will eventually succeed if they can control thei
Understanding behavior isn't a way to justify government intervention.
In Chapter 17 of his new book, "Misbehaving," behavioral economics founder Richard Thaler describes a conference that was held at the University of Chicago in 1985 solely for the purpose of debating the value of the new field. That’s a pretty remarkable event -- new areas of economics research usually get lots of buzz, but a special conference like that is rare. It shows that behavioral econ didn’t just generate excitement; it also generated a sense of threat.
The threat was that of a paradigm shift. This term, coined by philosopher Thomas Kuhn, refers to the dread moment when scientists learn that up is down, black is white and everything they thought they understood about the world is wrong. Kuhn said that paradigm shifts happen when enough “anomalies” are found in the existing theory that a reconsideration becomes unavoidable. It's probably not a coincidence that Chapter 18 of Thaler’s book is called “Anomalies.”
The fear of a paradigm shift also explains the strong negative reactions to Thaler’s new book among certain tradition-minded economists. For example, John Cochrane, Thaler’s colleague at Univerisyt of Chicago’s Booth Business School, recently delivered along blast against behavioral econ on his blog:
Men with shorter index finger than ring finger said to be more masculinisedThis means they will make more effort to impress women, says studyExplanation is that they've been exposed to more testosterone in the wombAnd women with longer index fingers to ring said to be more feminised - taking more care over their appearance
Daniel Kahneman is the very definition of unassuming: a small, softly spoken man in his 80s, his face and manners mild, his demeanour that of a cautious observer rather than someone who calls the shots. We meet in a quiet spot off the lobby of a London hotel. Even then I have trouble catching every word; his accent hovers between French and Israeli and his delivery is quiet, imbued with a slightly strained patience, helpful but cautious.
And yet this is a man whose experimental findings have shifted our understanding of thought on its axis – someone described by Steven Pinker as “the world’s most influential living psychologist”. With his long-time collaborator Amos Tversky, who died in 1996, he delineated the biases that warp our judgment, from figuring out if we can trust a prospective babysitter to buying and selling shares. In 2002 he was awarded the Nobel prize in economics, a testament to the boundary-busting nature of his research.
Investor behaviour often deviates from logic and reason, and investors display many behaviour biases that influence their investment decision-making processes. The authors describe some common behavioural biases and suggest how to mitigate them.
I have always been passionate about using evidence to create more effective public services and influence for the better the decisions people make in their everyday lives.
In my first public intervention as Cabinet Secretary, I talked about the benefits to the nation’s health of the evidence-based work of the National Institute for Health and Care Excellence (NICE). And I asked a question: if NICE makes sense for medicine, why don’t we have a NICE for the other public services? This was only partly rhetorical.
Four years on, we have seven What Works Centres along the lines of NICE, operating across the policy spectrum, from crime to wellbeing, to help establish more effective policies, both in impact and cost.
Abstract: Since Marx and Weber, social scientists have attempted to understand the impact or lack thereof of religion on two core domains of political life: whether religion influences attitudes about wealth accumulation, inequality and redistribution; and whether religion dampens or inspires political participation. However, the effect of religious ideas on these domains is difficult to identify, at the very least because citizens often select into religious associations whose messages they find appealing. We shed light on this issue through an experiment in Nairobi, Kenya. Focusing on the effects of two important contemporary Christian messages, we find evidence that exposure to religious messages can reduce egalitarianism in complex distribution decisions, compared to exposure to secular messages. We also find that exposure to self-affirmation messages—both religious and secular—can be politically empowering and motivate activism. We discuss implications of these findings for political mobilization and policy preferences in Sub-Saharan Africa, as well as for the study of religion and politics more generally.
Abstract: Standard economic theory assumes that individual risk taking decisions are independent from the social context. Recent experimental evidence however shows that the income of peers has a systematic impact on observed degrees of risk aversion. In particular, subjects strive for balance in the sense that they take higher risks if this gives them the chance to break even with their peers. The present paper is, to the best of our knowledge, the first systematic analysis of income inequality and risk taking. We perform a real effort field experiment where inequality is introduced to different wage rates. After the effort phase subjects can invest (part of) their salary into a risky asset. Besides the above mentioned possibility of higher risk taking of low-wage individuals to break even with high-wage individuals, risk taking can be influenced by an income effect consistent with e.g. decreasing absolute risk aversion and a house money effect of high- wage individuals. Our results show that the dominant impact of inequality on risk taking is what can be termed a social house money effect: high-wage individuals take higher risks than low- wage individuals only if they are aware of the inequality in wages
Abstract: We study the effects of voluntary participation on public good provision. Voluntary participation may foster cooperation through two mechanisms: an entry mechanism, which leads to assortative selection of interaction partners, or an exit mechanism, whereby the opportunity to leave the partnership can be used as a means to resist exploitation by free-riders. We examine the relative effectiveness of these two mechanisms in a one-shot, two-person public goods game experiment. We find that voluntary participation has a positive effect on public good provision through the exit mechanism, but we do not find evidence of a positive effect of entry. Assortative selection of interaction partners seems to play a minor role in our setting, whereas the threat of costly exit is a powerful force to discipline free-riding.
Prior information about features of a stimulus is a strong modulator of perception. For instance, the prospect of more intense pain leads to an increased perception of pain, whereas the expectation of analgesia reduces pain, as shown in placebo analgesia and expectancy modulations during drug administration  . This influence is commonly assumed to be rooted in altered sensory processing and expectancy-related modulations in the spinal cord  , are often taken as evidence for this notion. Contemporary models of perception, however, suggest that prior information can also modulate perception by biasing perceptual decision-making — the inferential process underlying perception in which prior information is used to interpret sensory information. In this type of bias, the information is already present in the system before the stimulus is observed  . Computational models can distinguish between changes in sensory processing and altered decision-making as they result in different response times for incorrect choices in a perceptual decision-making task ( Figure S1 A,B)  . Using a drift-diffusion model, we investigated the influence of both processes in two independent experiments. The results of both experiments strongly suggest that these changes in pain perception are predominantly based on altered perceptual decision-making.
Comparison of children in 12 countries reveals the most aggressive, and why.
Children who expect others to be aggressive are more aggressive themselves, new international research concludes.
Professor Kenneth A. Dodge, who led the study, said:
“When a child infers that he or she is being threatened by someone else and makes an attribution that the other person is acting with hostile intent, then that child is likely to react with aggression.
This study shows that this pattern is universal in every one of the 12 cultural groups studied worldwide.”
The research compared 1,299 children in the US, Italy, Jordan, Kenya Thailand, China — 12 countries in all.
Children were given scenarios to read involving common situations that could be interpreted ambiguously.
In today’s global, tightly integrated economy, extreme market drops are often created, or at least exacerbated, by investors’ collective trading behaviour. Often, irrationality is the underlying cause. Behavioural finance has discovered several psychological biases that prompt investors to act in, well, not particularly rational ways. One of the strongest psychological biases is Loss Aversion. Loss Aversion is the tendency that, in the Investors' minds, potential losses appear significantly larger than potential gains.
“Investor Behavior: An Overview” is the introduction chapter for the book Investor Behavior: The Psychology of Financial Planning and Investing edited by H. Kent Baker and Victor Ricciardi that presents a historical perspective of investor psychology
Each week I'll take a quick look at three real-world nudges. This week I look at Greece's referendum ballot design, a helpful reminder from Porter Airlines, and stairs that push individuals to exercise.
On July 5, Greece's public voted on bailout conditions proposed by the EU and the IMF. The ballot placed a 'No' before a 'Yes,' which is largely unprecedented for a referendum. ABBC article quoted an expert on electoral reform, stating that the format of the ballot is "unusual." Could placing the 'No' first actually affect the way individuals voted?
There's no way to know, since it wasn't tested in this context (missed opportunity for behavioralists!), but the Greek public ended up voting ‘No’ with 61% of the vote. Read about the behavioral implications of this ballot’s design from Jon Jachimowicz and Sam McNerney here.
And for some more nefarious uses of nudging in ballot design, check out Chile’s 1978 referendum on the approval of its President’s policies ('yes' is higher and coupled with Chile’s flag), or Germany’s 1938 ballot on unification of Austria and Germany and approval of Hitler (which provided a large 'yes' and a small 'no').
The Update Report covers the past two years of the Behavioural Insights Team’s work.
The report contains many new results, including:
Raising the pass rate for ethnic minority applicants to the police on a key exam from 40 to 60 percent, closing the gap with white applicants entirely, by prompting applicants to think about why the job was important to ‘you and your community’.Reducing the drop-out rate from Further Education course by a third, by sending encouraging texts such as at the end of half-term breaks.Doubling the completed application rates to join the Army Reserve by sending an email from a serving officer talking about their experiences.Increasing the payment rates by the top 1 percent of tax-debtors by 43 percent without further prompts, by highlighting the impact on public services of non-payment.
It’s been an exciting period for the team. We’ve managed to expand the breadth and scale of our work (having now run more than 100 trials across almost every area of policy). But the core of what we do remains the same as when we started life in No10 5 years ago: making public services more cost-effective and easier for citizens to use; improving outcomes by introducing a more realistic model of human behaviour to policy; and wherever possible, enabling people to make ‘better choices for themselves’.
Abstract: We examine decision making in the context of one sided matching: where individuals simultaneously submit several applications to vacancies, each match has an exogenous probability of forming, but each applicant can only fill one vacancy. In these environments individuals choose among interdependent, rival, uncertain outcomes. We design an experiment that has individuals choose a varying number of interdependent lotteries from a fixed set. We find that: 1) with few choices, subjects make safer and riskier choices, 2) subjects behave in a manner inconsistent with expected utility maximizing behavior. We discuss these findings in the context of college application decisions.
Abstract: Are people willing to sacrifice resources to save one’s and others’ face? In a laboratory experiment, we study whether individuals forego resources to avoid the public exposure of the least performer in their group. We show that a majority of individuals are willing to pay to preserve not only their self- but also other group members’ image. This behavior is frequent even in the absence of group identity. When group identity is more salient, individuals help regardless of whether the least performer is an in-group or an out-group. This suggests that saving others’ face is a strong social norm.
Abstract: Betrayal aversion has been operationalized as the evidence that subjects demand a higher risk premium to take social risks compared to natural risks. This evidence has been first shown by Bohnet and Zeckhauser (2004) using an adaptation of the Becker â€“ DeGroot â€“ Marshak mechanism (BDM, Becker et al. (1964)). We compare their implementation of the BDM mechanism with a new version designed to facilitate subjectsâ€™ comprehension. We find that, although the two versions produce different distributions of values, the size of betrayal aversion, measured as an average treatment difference between social and natural risk settings, is not different across the two versions. We further show that our implementation is preferable to use in practice as it reduces substantially subjectsâ€™ mistakes and hence the likelihood of noisy valuations.
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