Bounded Rationality and Beyond
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News on the effects of bounded rationality in economics and business, relationships and politics
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When Smaller is Bette The Effect of Bank Size on Small-Business Lendin

Research by Raghuram Rajan

According to new research, small banks have a comparative advantage in the arena of small-business lending because they are better able to collect and act on so-called "soft information" than large banks. 

Due to changes in technology and the ongoing consolidation of the commercial banking industry over the past thirty years, the relationship between banks and borrowers has been growing more distant and impersonal. These changes raise questions not only about whether large banks will behave differently than the smaller banks they are displacing, but about the differences between large and small organizations as a whole.

One reason to believe that large organizations may behave differently than small organizations is that they may have different abilities to process hard and soft information. Hard information, such as audited earnings, is easily captured on paper. Soft information-intangible factors such as a potential client's strength of character-is difficult to communicate.

The study "Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks," by Raghuram Rajan, a professor at the University of Chicago Graduate School of Business, Allen N. Berger and Nathan H. Miller of the Board of Governors of the Federal Reserve System, Mitchell A. Peterson of Northwestern University, and Jeremy C. Stein of Harvard University examines whether large banks do as well as small banks in small-business lending, an activity that relies heavily on collecting soft information about borrowers.

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Fooled by Experience

Fooled by Experience | Bounded Rationality and Beyond | Scoop.it

What you think you’ve learned may be wrong. A guide to figuring out the real lessons.

We rely on the weight of experience to make judgments and decisions. We interpret the past—what we’ve seen and what we’ve been told—to chart a course for the future, secure in the wisdom of our insights. After all, didn’t our ability to make sense of what we’ve been through get us where we are now? It’s reasonable that we go back to the same well to make new decisions.

It could also be a mistake.

Experience seems like a reliable guide, yet sometimes it fools us instead of making us wiser.

The problem is that we view the past through numerous filters that distort our perceptions. As a result, our interpretations of experience are biased, and the judgments and decisions we base on those interpretations can be misguided. Even so, we persist in believing that we have gleaned the correct insights from our own experience and from the accounts of other people.

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Helping Doctors and Patient Make Sense of Health Statistics

SUMMARY Many doctors, patients, journalists, and politicians alike do not understand what health statistics mean or draw wrong conclusions without noticing. Collective statistical illiteracy refers to the widespread inability to understand the meaning of numbers. For instance, many citizens are unaware that higher survival rates with cancer screening do not imply longer life, or that the statement that mammography screening reduces the risk of dying from breast cancer by 25% in fact means that 1 less woman out of 1,000 will die of the disease. We provide evidence that statistical illiteracy (a) is common to patients, journalists, and physicians; (b) is created by nontransparent framing of information that is sometimes an unintentional result of lack of understanding but can also be a result of intentional efforts to manipulate or persuade people; and (c) can have serious consequences for health. The causes of statistical illiteracy should not be attributed to cognitive biases alone, but to the emotional nature of the doctor–patient relationship and conflicts of interest in the healthcare system. The classic doctor–patient relation is based on (the physician’s) paternalism and (the patient’s) trust in authority, which make statistical literacy seem unnecessary; so does the traditional combination of determinism (physicians who seek causes, not chances) and the illusion of certainty (patients who seek certainty when there is none). We show that information pamphlets, Web sites, leaflets distributed to doctors by the pharmaceutical industry, and even medical journals often report evidence in nontransparent forms that suggest big benefits of featured interventions and small harms. Without understanding the numbers involved, the public is susceptible to political and commercial manipulation of their anxieties and hopes, which undermines the goals of informed consent and shared decision making.

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Leaders as Decision Architects

Leaders as Decision Architects | Bounded Rationality and Beyond | Scoop.it

All employees, from CEOs to frontline workers, commit preventable mistakes: We underestimate how long it will take to finish a task, overlook or ignore information that reveals a flaw in our planning, or fail to take advantage of company benefits that are in our best interests. It’s extraordinarily difficult to rewire the human brain to undo the patterns that lead to such mistakes. But there is another approach: Alter the environment in which decisions are made so that people are more likely to make choices that lead to good outcomes.Leaders can do this by acting as architects. Drawing on our extensive research in the consulting, software, entertainment, health care, pharmaceutical, manufacturing, banking, retail, and food industries and on the basic principles of behavioral economics, we have developed an approach for structuring work to encourage good decision making.

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Joseph Soares's curator insight, May 15, 2015 1:43 PM

Because Leadership matters.

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Democracy Does Not Live by Tech Alone

Democracy Does Not Live by Tech Alone | Bounded Rationality and Beyond | Scoop.it

Enthusiasm for reforming our democracies has been gaining momentum. From the pages of Foreign Policy to the colorfulcriticisms of comedian Russell Brand, it is evident that a long-overdue public conversation on this topic is finally getting started.

There is no lack of proposals. For example, in their recent Foreign Policypiece, John Boik and colleagues focus on decentralized, emergent, tech-driven solutions such as participatory budgeting, local currency systems, and open government. They are confident that such innovations have a good chance of “spreading virally” and bringing about major change. Internet-based solutions, in particular, have captured our collective imagination. From Pia Mancini’s blockbuster TED presentation to New Scientist‘s recent coverage of “digital democracy,” we’re eager to believe that smartphone apps and novel online platforms hold the key to reinventing our way of governance. This seems only natural: after all, the same technologies have already radically reconfigured large swaths of our daily lives.

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Encode your own time | Amy Coats

Encode your own time | Amy Coats | Bounded Rationality and Beyond | Scoop.it

Amy Coats: We, and the world around us, may have a more important role in determining our inner sense of time than we thought. 

Those split second decisions, made almost without thinking. When to put your foot on the pedal when you’re at the red light. When to check how those sausages are doing. Remembering to grab your lunch from the fridge seconds before you leave the house. Or – too often – 20 minutes after. And those carefully considered ones. Do I just finish this paragraph before I make a cup of tea? Or do I wait until the boss is clear of the kitchen?

Timing, that is our perception and estimation of time, is key in determining how we behave and in the decisions we make. New findings suggest that time in the brain is relative, not absolute. This means that your brain ‘encodes’ your sense of time depending on what happens to you, and not by the second, minute or hour. And this in turn determines how you behave.

Alas, you could be forgiven for feeling that the units of time common to everyone worldwide, except perhaps the odd Amazonian tribe, are pretty well ingrained. My partner and I will often make a quick bet on what time it is before we check our phone (all sigh!/rejoice! [delete as appropriate], the dwindling watch-less generation). And we’re both pretty good at getting to within 5 or 10 minutes, even if we haven’t known the exact time all day. He’s normally better at it, perhaps because he’s male? Perhaps it tends to fly/drag for me because I’m having more/less fun? Perhaps that’s another story.

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Are We Heading Towards a Corporate Tax System Fit for the 21st Century? by Michael P. Devereux, John Vella :: SSRN

Are We Heading Towards a Corporate Tax System Fit for the 21st Century? by Michael P. Devereux, John Vella :: SSRN | Bounded Rationality and Beyond | Scoop.it
Abstract:      
The most significant problems with the existing system for taxing the profit of multinational companies stem from two related sources. First, the underlying “1920s compromise” for allocating the rights to tax profit between countries is both inappropriate and increasingly hard to implement in a modern economic setting. Second, because the system is based on taxing mobile activities, it invites countries to compete with each other to attract economic activity and to favour “domestic” companies. The OECD Base Erosion and Profit Shifting (BEPS) initiative essentially seeks to close loopholes rather than to re-examine these fundamental problems. As a consequence, it is unlikely to generate a stable long-run tax system. We critically examine the principle guiding the OECD’s reform proposals in its BEPS initiative and outline some more fundamental alternative reforms. 

 

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Some Reflections on the OECD and the Sources of International Tax Principles by Hugh J. Ault :: SSRN

Some Reflections on the OECD and the Sources of International Tax Principles by Hugh J. Ault :: SSRN | Bounded Rationality and Beyond | Scoop.it
Abstract:      
The article of Hugh J. Ault is the revised text of a lecture held on May 2, 2013, at the Max Planck Institute for Tax Law and Public Finance. It focuses on the OECD's work on the definition of Permanent Establishment, the transfer pricing treatment of Intangibles and the recently announced project on base erosion and profit shifting ("BEPS"). After describing these positive law developments, Ault relates to more basic questions of how principles of international tax law, and particular the normative claims to taxing rights, are estabilshed. 

 

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What’s the Point of a Professor?

What’s the Point of a Professor? | Bounded Rationality and Beyond | Scoop.it
We used to be mentors and moral authorities. You can’t become a moral authority if you rarely challenge students in class and engage them beyond it. If we professors do not do that, the course is not an induction of eager minds into an enlarging vision. It is a requirement to fulfill. Only our assistance with assignments matters. When it comes to students, we shall have only one authority: the grades we give. We become not a fearsome mind or a moral light, a role model or inspiration. We become accreditors..
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Fresh insights counter voter apathy

Fresh insights counter voter apathy | Bounded Rationality and Beyond | Scoop.it

Sometimes a short advert or article can really bring home the need to act in a way that no amount of lecturing or blanket coverage can.

While watching some re-runs of the Big Bang Theory this past weekend on E4 I noticed an interesting advert during the ad break…
yes I am actually one of those people who pays attention to the adverts rather than leaving the room, and it usually just means that I can pay that little bit more attention to my knitting to check I didn’t make any mistakes, but I digress… So this advert came on the screen saying that E4 will go off air on 7th May, so that we’re not too distracted by the TV to turn up to vote. It essentially said that “since there is no telly to watch on the 7th you may as well go and vote”.

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Basic Images for the Brain Science of Conscious Cognition. (BJ Baars)

Cognitive neuroscience has built up a solid scientific literature since about 1990, especially due to revolutionary advances in brain recording techniques, and clarification of the kinds of experimental techniques that bear directly on conscious
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How I overcame my fear of cold calling

How I overcame my fear of cold calling | Bounded Rationality and Beyond | Scoop.it
The place to start with any behaviour change situation is to break it down.

It just doesn’t come easily to me, calling people and interrupting their day. Whether it’s my introverted nature or star sign, I have always had a mental block against cold calling – a problem when you are running a business and need to spread the word.

Pretty clearly I needed to change my behaviour. Putting aside “doctors make the worst patients and teachers the worse students”, I became my very own case study of how to change behaviour. Here’s how I did it.

 Behaviour change model

The place to start with any behaviour change situation is to break it down into four questions:

1. What’s the current behaviour? i.e. Not cold calling

2. What’s the desired behaviour? i.e. Cold calling six businesses a week over across at least three days

3. What are the barriers to change?

4. What are the enablers of change?

This is the model I developed and use with clients to get to the heart of the problem and design solutions.

 
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Tools of behavioral finance can complement regulation

Tools of behavioral finance can complement regulation | Bounded Rationality and Beyond | Scoop.it

he following are remarks given by Thomas M. Selman, executive vice president for regulatory policy for the Financial Industry Regulatory Authority Inc., at the LIMRA/LOMA 2015 Regulatory Compliance Exchange in Arlington, Va., on March 18.

On March 30, 1980, the rock-and-roll band Van Halen held a concert in the gymnasium of the University of Southern Colorado as part of its “Party "til You Die Tour.” Following the concert, the university hosted a dinner for Van Halen, with linens and silverware. According to university officials, the band “proceeded to act like a bunch of animals. They ate the lasagna with their hands, threw the food around the room, smashed the food on the walls and each other.” The carpet, drapes and paint in the dining room had to be refurbished. The band's dressing room also was damaged. The university subsequently banned most campus concerts.

Later reports revealed that Van Halen trashed the dining and dressing rooms because of brown M&Ms. Van Halen's contract demanded a variety of munchies, including M&Ms, with the following proviso: “WARNING: ABSOLUTELY NO BROWN ONES.” The university had overlooked this clause and served brown M&Ms. For this indignity the band destroyed university property.

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Save More Tommoro A Simple Plan to Increase Retirement Savin Research by Richard H. Thaler

The Save More Tomorrow plan allows employees to allocate a portion of their future salary increases toward retirement savings. 

In the past decade, there has been a rapid shift among employers from defined benefit plans to defined contribution plans. As a result, employees now bear much more responsibility for their retirement savings.

Under defined benefit pension plans, retirement benefits depend on how long an employee has worked at a given company and his or her salary by the time they retire. Firms using these plans are essentially doing the saving for their employees. Under defined contribution plans, which are much easier for companies to administer, employees must take the initiative to join. Retirement benefits depend on how much the employee decides to contribute and how he or she chooses to invest that money.

While defined contribution plans such as 401(k) plans offer increased flexibility for those who enroll, studies have found that some employees at firms that only offer defined contribution plans contribute little or nothing to the plans.

 
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Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy?

Abstract

We evaluate the out-of-sample performance of the sample-based mean-variance model, and its extensions designed to reduce estimation error, relative to the naive 1/N portfolio. Of the 14 models we evaluate across seven empirical datasets, none is consistently better than the 1/N rule in terms of Sharpe ratio, certainty-equivalent return, or turnover, which indicates that, out of sample, the gain from optimal diversification is more than offset by estimation error. Based on parameters calibrated to the US equity market, our analytical results and simulations show that the estimation window needed for the sample-based mean-variance strategy and its extensions to outperform the 1/N benchmark is around 3000 months for a portfolio with 25 assets and about 6000 months for a portfolio with 50 assets. This suggests that there are still many “miles to go” before the gains promised by optimal portfolio choice can actually be realized out of sample.

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From “Economic Man” to Behavioral Economics

From “Economic Man” to Behavioral Economics | Bounded Rationality and Beyond | Scoop.it

A short history of modern decision making.


When we make decisions, we make mistakes. We all know this from personal experience, of course. But just in case we didn’t, a seemingly unending stream of experimental evidence in recent years has documented the human penchant for error. This line of research—dubbed heuristics and biases, although you may be more familiar with its offshoot, behavioral economics—has become the dominant academic approach to understanding decisions. Its practitioners have had a major influence on business, government, and financial markets. Their books—Predictably Irrational; Thinking, Fast and Slow; and Nudge, to name three of the most important—have suffused popular culture.

So far, so good. This research has been enormously informative and valuable. Our world, and our understanding of decision making, would be much poorer without it.

It is not, however, the only useful way to think about making decisions. Even if you restrict your view to the academic discussion, there are three distinct schools of thought. Although heuristics and biases is currently dominant, for the past half century it has interacted with and sometimes battled with the other two, one of which has a formal name—decision analysis—and the other of which can perhaps best be characterized as demonstrating that we humans aren’t as dumb as we look.

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Frontiers | Dynamic Optimization and Conformity in Health Behavior and Life Enjoyment over the Life Cycle | Frontiers in Behavioral Neuroscience

This article examines individual and social influences on investments in health and enjoyment from immediate consumption. Our lab experiment mimics the problem of health investment over a lifetime (Grossman 1972a, 1972b). Incentives to find the appropriate expenditures on life enjoyment and health are given by making in each period come period a function of previous health investments. In order to model social effects in the experiment, we randomly assigned individuals to chat/observation groups. Groups were permitted to freely chat between repeated lifetimes. Two treatments were employed: In the Independent-rewards treatment, an individual’s rewards from investments in life enjoyment depend only on his choice and in the Interdependent-rewards treatment; rewards not only depend on an individual’s choices but also on their similarity to the choices of the others in their group, generating a premium on conformity. The principal hypothesis is that gains from conformity increase variance in health behavior among groups and can lead to suboptimal performance. We tested three predictions and each was supported by the data: the Interdependent-rewards treatment 1) decreased within-group variance, 2) increased between-group variance, and 3) increased the likelihood of behavior far from the optimum with respect to the dynamic problem. 
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What is a Complex Adaptive Economy? - Kieran D. Kelly

What is a Complex Adaptive Economy? - Kieran D. Kelly | Bounded Rationality and Beyond | Scoop.it

The Economy as a Complex Adaptive System self-organizing a "Complex Equilibrium" driven by the "Invisible Hand" of Competitive Innovation. 

The Complex Adaptive Economy is an economy operating in two dimensions —“Trade” and “Complexity”.

Trade is the dimension that gets the most press, for it is the short-term dimension of GDP numbers and current economic activity; but complexity is in fact the more important dimension for it is the long-term dimension of progress and future innovation — the dimension that both, makes life in this economy more interesting and diverse, and increases the economy’s international competitiveness, all through the work of the “Invisible Hand”!

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Steve Quartz: the neuroscientist who studies what's 'cool' and why

Steve Quartz: the neuroscientist who studies what's 'cool' and why | Bounded Rationality and Beyond | Scoop.it

We think of cool as ephemeral, a moving target. But a California neuroscientist and author of a new book on ‘neuromarketing’ says he’s got it down to a science.

Quartz is the director of the Social Cognitive Neuroscience Laboratory at the California Institute of Technology. So when asked to describe what the lab does, he did not deliver a “cool” answer, but rather a precise one: it is, he said, “concerned with all the dimensions of decision making, from simple gambles and risk assessment right up to very complex reasoning and the nature of moral behaviour”.

He wrote the book with his colleague Anette Asp, with whom he has long done research on “neuroeconomics” and “neuromarketing”. Those fields use imaging techniques to look at the ways our brains process the emotions and responses we have to brands and products. The results, as Quartz and Asp posit in the book, reflect primal instincts we have around ideas of status. Their technique gives results that are much more accurate about what the kids are into, these days, than traditional marketing focus groups have ever been able to give us.

 
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“Irrationally Yours” Reader Response

“Irrationally Yours” Reader Response | Bounded Rationality and Beyond | Scoop.it
Please enjoy the first of a series of reviews of my upcoming book "Irrationally Yours" that I will be posting for you. Watch it here: https://vimeo.com/127289358 "Irrationally Yours" is based on my "Ask Ariely" advice column in the Wall Street Journal, and is illustrated by cartoonist William Haefeli (who you will surely recognize from The New Yorker).…
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This is your brain on coupons

This is your brain on coupons | Bounded Rationality and Beyond | Scoop.it

Is your husband worth more than $10? According to a new study, the answer may not be quite so clear to your brain.

Today, the Mountain View, CA-based Web site Coupons.com and noted neurologist Dr. Paul Zak announced the findings of a study that explores the brain’s response to receiving a coupon. In one case, a woman who received a $10 coupon experienced a higher count of the hormone that has been connected to feeling love and trust than another woman experienced before her wedding ceremony.

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What is Complexity Theory? - Kieran D. Kelly

What is Complexity Theory? - Kieran D. Kelly | Bounded Rationality and Beyond | Scoop.it
Spontaneous Order & Complexity does not arise in defiance of The Second Law of Thermodynamics but with the help of it!... Complexity is Coarse Entropy!...

Complexity arises from the ubiquitous “Interplay of Symmetry-Breaking and Entropy” in driven-damped systems — Emergent Complexity is a form of “Coarse Damping”!

Damping is a term used in engineering to describe the elimination unwanted vibrations and fluctuations in a system.  Damping usually involves the external dissipation of excessive energy.

Complexity however is not about the external dissipation energy; on the contrary it is about the internal distribution of energy.  Complexity is about the internal dissymmetry/imbalance of parts, within a system, which pulls the system as a whole spontaneously to a “complex structural equilibrium”.  Complexity is a “Coarse” form of damping to“thermal equilibrium”.  Complexity is Coarse Uniformity!  Complexity is Coarse Symmetry!

 
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The impact of business regulatory reforms on economic growth

I investigate the link between business regulatory reforms and economic growth in 172 countries. I create a 5 year dataset on business regulatory reforms from the World Bank’s Doing Business reports. Then, I test the hypothesis that business
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Does Facebook drive political polarization? Data science and research - Journalist's Resource

Does Facebook drive political polarization? Data science and research - Journalist's Resource | Bounded Rationality and Beyond | Scoop.it

Questions about how social media platforms may drive users into “filter bubbles” — increasingly like-minded communities whose views are reinforced and become more extreme — have been swirling for several years now. As the debate has developed in popular discourse, scholars and data scientists have continued to make insights on what is often referred to in the academic literature as online “homophily,” or colloquially as the “birds of a feather flock together” phenomenon.

In 2013, researchers at Carnegie Mellon University, Stanford and Microsoft Research analyzed anonymized browsing data from more than 1.2 million Web users and concluded that fears over an increasingly personalized Internet could be overblown: Only a “relatively small amount of online news consumption is driven by the more polarized channels, social and search, and opinion pieces — which are typically the focus of laboratory studies — constitute just 6% of consumption relating to world or national news…. [W]e find that individuals typically consume descriptive reporting, and do so by directly visiting a handful of their preferred news outlets.” Further, while social channels and search can lead to “higher segregation” and filter bubbles, those methods of news discovery can also be “associated with higher exposure to opposing perspectives, in contrast to filter-bubble fears.”

- See more at: http://journalistsresource.org/studies/society/social-media/facebook-political-polarization-data-science-research#sthash.XVhXOF6m.dpuf

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Lisa Epstein's curator insight, May 14, 2015 2:50 PM

This is politically driven, but I believe it can be applied to any sort of news information on Facebook. The criticism starts with the Facebook algorithm, saying that the algorithm makes it so people can never see opposing viewpoints. But the article says that individual choice plays a larger role in the things we see than the Facebook algorithm. So it is not Facebook's fault that we often don't see many opposing views, but more like the birds of a feather saying. We tend to like those who share our same beliefs. Which is something I can definitely agree with. 

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The role of behavioral economic incentive design and demographic characteristics in financial incentive-based approaches to changing health behavio... - PubMed - NCBI

The role of behavioral economic incentive design and demographic characteristics in financial incentive-based approaches to changing health behavio... - PubMed - NCBI | Bounded Rationality and Beyond | Scoop.it
Abstract

Objective . To evaluate the use of behavioral economics to design financial incentives to promote health behavior change and to explore associations with demographic characteristics. Data Source . Studies performed by the Center for Health Incentives and Behavioral Economics at the University of Pennsylvania published between January 2006 and March 2014. Study Inclusion and Exclusion Criteria . Randomized, controlled trials with available participant-level data. Studies that did not use financial incentives to promote health behavior change were excluded. Data Extraction . Participant-level data from seven studies were pooled. Data Synthesis . Meta-analysis on the pooled sample using a random-effects model with interaction terms to examine treatment effects and whether they varied by incentive structure or demographic characteristics. Results . The pooled study sample comprised 1403 participants, of whom 35% were female, 70% were white, 24% were black, and the mean age was 48 years (standard deviation 11.2 years). In the fully adjusted model, participants offered financial incentives had higher odds of behavior change (odds ratio [OR]: 3.96; p < .01) when compared to control. There were no significant interactions between financial incentives and gender, age, race, income, or education. When further adjusting for incentive structure, blacks had higher odds than whites of achieving behavior change (OR: 1.67; p < .05) with a conditional payment. Compared to lower-income participants, higher-income participants had lower odds of behavior change (OR: 0.46; p = .01) with a regret lottery. Conclusion . Financial incentives designed using concepts from behavioral economics were effective for promoting health behavior change. There were no large and consistent relationships between the effectiveness of financial incentives and observable demographic characteristics. Second-order examinations of incentive structure suggest potential relationships among the effectiveness of financial incentives, incentive structure, and the demographic characteristics of race and income.

 

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