Tag: thaler

Icing Without The Cake

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My daughter much prefers eating the icing to eating the cake itself, and who can blame her? But, Tim Harford points out in a typically excellent column, that approach doesn’t take you very far in the field of applied behavioral economics.

Would we really have excellent universal pensions, a fit and healthy population, and a low-carbon economy, if only we hadn’t been distracted by Nudge? Of course not. But behavioural science is all too good at producing perfect icing for the policy cake; practitioners must never forget the cake itself.

https://timharford.com/2022/06/has-nudge-tempted-us-away-from-systemic-solutions/

The point of the column, and the academic paper it speaks about, is very simple: nudges are a complement to economic policies, they aren’t a substitute. And while behavioral economics, and nudges, are truly important, and relatively cheaper, they aren’t magic wands that will substitute for the time tested policies that economic theory will present.

And that is hard to disagree with!

The paper that Tim Harford refers to in his article is called “The i-frame and the s-frame: How focusing on the individual-level solutions has led behavioral public policy astray“. I’ll cover this paper and some of the points raised in it in greater detail tomorrow, but in today’s blog post, I want to cover an older paper written by them.

The paper in question is called “Putting nudges in perspective” and has also been written by George Loewenstein and Nick Chater. The paper (it’s a very accessible, short paper, please do read it) isn’t a mea culpa, nor does it excoriate behavioral economics and the power of nudges. But it does caution us, the readers, of the limits of behavioral economics and worries if the field has become a little too overrated.

First, some definitions and background. What is a nudge? Here is Thaler and Sunstein’s original definition:

Any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge,
the intervention must be easy and cheap to avoid.

Thaler, R. H. and C. R. Sunstein (2008), Nudge: Improving Decisions About Health, Wealth, and
Happiness, New Haven, CT: Yale University Press.

Please read the book to get multiple examples of what nudges are, how they have been developed and used. It is an excellent book to read, full of great ideas. And again, Loewenstein and Chater don’t mean to suggest that there is anything wrong about the idea or the way it has been deployed. As I said, they worry about excessive dependence on the idea of nudges.

In fact, they have a useful framework in the paper, which is worth looking at in greater detail:

https://www.cmu.edu/dietrich/sds/docs/loewenstein/putting_nudges_in_perspective.pdf

What is the type of problem you’re looking to solve? That’s given along the rows of this table. And what solutions might work for these problems? Those are given along the columns. And the point of the paper is that we’ve been focusing far too much on “I” and not been thinking about whether it really is the best solution, as compared to alternatives “A” through “H”.

To use just one example: smoking. Why is smoking a problem? Broadly speaking, for two reasons. First, smoking harms the smoker, and while one might expect the smoker to be aware of this, they might well end up misestimating the risks, or they might end up preferring the immediate pleasure and ignore the long term consequences, or think that they might be able to shake the habit anytime they wish. But also, and this is the second reason, second-hand smoking is an externality that can/should be addressed.

Now, if you think about it in terms of the table above, the authors say that this means that the problem belongs to row 3 (an internality) but also to row 1 (an externality). And to the extent that you agree that tobacco companies are likely to create marketing campaigns designed to exploit the behavioral biases of their potential and current consumers, you might think that it will fall in row 2 as well.

What of the solution? Well, in a problem such as this one, the optimal response might be one in which we marry a traditional economic policy response (taxes on cigarettes) with a behavioral response (graphic advertising on tobacco packets). Just one, of either sort, may not be enough, and in fact, there is a case to be made for more than one policy response from each of the two sets. In other words, the optimal policy response most likely lies in column B-E-H, rather than A-D-G or C-F-I.

But beware:

The question of how different interventions aggregate is interesting and important. On the one hand, as perhaps illustrated by the case of smoking, it is possible that different interventions aimed at the same problem can have a super-additive effect. This could occur if, for example, a multifaceted response is more likely to result in a change in norms, or if there is some kind of threshold of apathy or complacency that needs to be exceeded for people to change their behaviour. On the other hand, multiple interventions, especially if aimed at different target behaviours, could potentially divide individuals’ attention and lead to fatigue, resentment and possibly even a consequent backlash from intervention-weary individuals.

https://www.cmu.edu/dietrich/sds/docs/loewenstein/putting_nudges_in_perspective.pdf

Bottomline: behavioral economics does have a role to play in policy-making, but it isn’t a question of either using traditional economic ideas or using behavioral economics ideas. As the authors note, behavioral problems may have as an optimal solution traditional economic solutions, and vice versa.

Or, you might say – and old timers will have been waiting for this – the truth lies somewhere in the middle!

In tomorrow’s blogpost, we’ll take a look at Loewenstein and Chater’s latest paper on the topic.

Demystifying Sociology

Ashish4 Comments

Economics can be baffling, especially to students who learn it in only the theoretical sense. If, for example, your worldview is formed by going through micro/macro classes alone, reality can often be confusing.

Does identity—one’s concept of self—influence economic behavior in the labor market? I investigate this question in rural India, focusing on the effect of caste identity on labor supply. In a field experiment, casual laborers belonging to different castes choose whether to take up various real job offers. All offers involve working on a default manufacturing task and an additional task. The additional task changes across offers, is performed in private, and differs in its association with specific castes. Workers’ average take-up rate of offers is 23 percentage points lower if offers involve working on tasks that are associated with castes that rank higher than their own. This gap increases to 47 pp if the castes associated with the relevant offers rank lower than workers’ own in the caste hierarchy. Responses to job offers are invariant to whether or not workers’ choices are publicized, suggesting that the role of identity itself—rather than social image—is paramount. Using a supplementary experiment, I show that 43% of workers refuse to spend ten minutes working on tasks associated with other castes, even when offered ten times their daily wage. This paper’s findings indicate that identity may be an important constraint on labor supply, contributing to misallocation of talent in the economy.

Oh, S. (2019). Does Identity Affect Labor Supply?. Job Marker Paper, Columbia University.

To make the point clearer: microeconomics teaches you that if you are offered ten times your daily wage to do a task for ten minutes, well, duh, you should take it. Reality (well, ok, this paper) teaches you you’d be wrong 43% of the time. At which point, you should begin to ask why.

Sociology gets a bad rap for being an ultra boring field, and there is, one has to admit, some truth to the charge. There are many Dave Barry columns that deserve multiple readings, but this particular one is particularly funny (and relevant):

For sheer lack of intelligibility, sociology is far and away the number one subject. I sat through hundreds of hours of sociology courses, and read gobs of sociology writing, and I never once heard or read a coherent statement. This is because sociologists want to be considered scientists, so they spend most of their time translating simple, obvious observations into scientific-sounding code. If you plan to major in sociology, you’ll have to learn to do the same thing. For example, suppose you have observed that children cry when they fall down. You should write: “Methodological observation of the sociometrical behavior tendencies of prematurated isolates indicates that a casual relationship exists between groundward tropism and lachrimatory, or ‘crying,’ behavior forms.” If you can keep this up for fifty or sixty pages, you will get a large government grant.

http://www.xent.com/FoRK-archive/summer96/0342.html

The column is particularly funny because it is particularly true – not just about sociology, but about college in general. Please read the whole thing.

Anyways, back to sociology: yes, boring af, but also helps us economists get a better grip on reality, by pointing out that the world often doesn’t work the way our models would like it to. Thaler* puts this maddening behavior on part of the world down to what he calls Supposedly Irrelevant Factors (SIF’s) (slide 6, if you can’t be bothered to go through the whole thing, although you really should.)

So what is sociology? Here’s the English definition:

Sociology is the study of human behavior. Sociology refers to social behavior, society, patterns of social relationships, social interaction, and culture that surrounds everyday life.

https://en.wikipedia.org/wiki/Sociology

… and click here if you want the definition of sociology by a sociologist (consider yourself warned). It is, in essence, a field of enquiry that asks what explains the behavior of people in a society, and also if living in society itself influences how people will behave.

Economic sociology, a subset of sociology, is “the sociological perspective applied to economic phenomena”**. And the reason it is a field of study worth exploring in its own right is because it helps us make sense of potentially baffling results such as the one Suanna Oh came up with.

Read the paper, please (section 6.3 for those of you who are curious about whether the author has really thought things through) – and while you’re at it, learn more about economic sociology. I’m trying to learn more myself, and will keep you guys updated as we go along.

*Yes, that’s from behavioral economics, but the point holds over here too, and is more than mildly relted.

** Smelser, N. J., & Swedberg, R. (Eds.). (2010). The handbook of economic sociology. Princeton university press.

Etc: Links for 29th Nov, 2019

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  1. “When the British actor Jonathan Routh published the first edition of his Good Loo Guide (“Where to Go in London”) in 1965, he singled out the device for mention every time he found one. Only five toilets, out of more than a hundred, held hand dryers – of the pedal-operated kind that, in the 1965 movie Help!, inhale the jacket sleeves of Ringo Starr and Paul McCartney. Mostly, Routh encountered towels of cloth or paper, and quite often, he had to pay to use these products. (“Do loos ever advertise their attractions?” he wondered, while extolling the virtues of the splendid restrooms of Hyde Park in the 1968 update. “Has anyone ever seen an ad saying ‘Just arrived – new free electric hand-drier at the so-and-so loos.’”) Even in the third and final edition of the guide, released in 1987, I counted more instances of electric razors, armchairs and pre-pasted disposable toothbrushes than of hand dryers.”
    ..
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    The excellent, excellent Samanth Subramanian in this lovely article about (of all things) paper towels and hand driers. Yes, really. What’s more, Samanth won the Financial/Economic story of the year award for this write-up. Read the book by clicking on his name here, also read Following Fish, and definitely read this article itself. Congratulations, Samanth!
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  2. “And which book takes the very top prize for best of the year? You can’t compare the Alter to the others, so I will opt for Eric Kaufmann’s Whiteshift and also Pekka Hämäläinen’s Lakota America, with Julia Lovell on Maoism and Alain Bertaud on cities as the runner-ups. But again a strong year all around.”
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    Tyler Cowen’s list of books he found worth his time in 2019. As he would say, self-recommending.
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  3. “So what’s a desperate founder to do? Smith impulsively flew to Las Vegas and played blackjack with the last of the company money .Amazingly, when he came back the next week, he had turned the remaining $5,000 into $27,000 – just enough for the company to stay in operation for another week.

    In the book “Changing How the World Does Business: FedEx’s Incredible Journey to Success – The Inside Story,” Roger Frock, a former senior vice president of operations at FedEx, describes the scene when he found out what Smith did. “I said, ‘You mean you took our last $5,000 – how could you do that? [Smith] shrugged his shoulders and said, ‘What difference does it make? Without the funds for the fuel companies, we couldn’t have flown anyway.'””
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    A lovely story about how Fedex came back from the dead.
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  4. “The money of the world’s mega-wealthy, though, is heading there in ever-larger volumes. In the past decade, hundreds of billions of dollars have poured out of traditional offshore jurisdictions such as Switzerland and Jersey, and into a small number of American states: Delaware, Nevada, Wyoming – and, above all, South Dakota. “To some, South Dakota is a ‘fly-over’ state,” the chief justice of the state’s supreme court said in a speech to the legislature in January. “While many people may find a way to ‘fly over’ South Dakota, somehow their dollars find a way to land here.””
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    Oh hey, Tiebout. Whassup.
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  5. “Behavioral finance is finance. That individual human beings can sometimes do silly things, for reasons to do with either nature or nurture, is not under dispute. That they may make these same mistakes in the aggregate is no longer heretical. That is the gift of those that have been “misbehaving” by attacking hallowed, efficient market doctrine. Economists now can consider potential irrationality versus a standard model of profit-maximizing utility without being disinvited to (those wild and crazy) economist parties. Economists can now suggest that cognitive biases can affect asset prices without threatening their tenure.”
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    The term may be overrated – the logic isn’t: in defense of behavioral finance.

Lunch With FT: Richard Thaler

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“One thing for sure is Remain is a horrible name. It’s weak. Whereas Leave is strong.”

Richard Thaler is by now a household name – well, I think so at any rate, and this interview that he gave to Tim Harford (who should be a household name!) is worth reading in its entirety. You’ll need to sign in/register, I think – sorry about that.

Quick update: we’re conducting a workshop on behavioral economics for undergrad students at GIPE this week, and I’ll post nuggets such as these along the way.

Links for 5th March, 2019

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  1. “Using a neural network trained on widely available weather forecasts and historical turbine data, we configured the DeepMind system to predict wind power output 36 hours ahead of actual generation. Based on these predictions, our model recommends how to make optimal hourly delivery commitments to the power grid a full day in advance. This is important, because energy sources that can be scheduled (i.e. can deliver a set amount of electricity at a set time) are often more valuable to the grid.”
    The big problem with renewable energy is its utter unpredictability – which is why we will always struggle to move to a world that uses renewable energy as a primary source. Unless, of course, we figure out how to make great batteries. But in the meantime, anything that helps us predict the pattern of availability of wind and solar power is great news.
  2. “Still, people do break Google’s protection. CAPTCHAs are an ongoing arms race that neither side will ever win. The AI technology which makes Google’s approach so hard to fool is the same technology that is adapted to fool it.Just wait until that AI is convincing enough to fool you.
    Sweet dreams, human.”
    Ever clicked on the “I’m a human” button and wondered why it seemed like such a stupid idea. Well, uh, not stupid. Not stupid at all.
  3. “This further tells us that people are buying and selling homes. It’s just that the builders are not a part of this transaction.”
    This is a very short excerpt, but especially for Indians, this article is well worth reading (and Vivek Kaul is well worth following!). Home loans are going up every year, but unsold inventory is also going up every year? What gives?
  4. “All of economics is meant to be about people’s behavior. So, what is behavioral economics, and how does it differ from the rest of economics?”
    An essay about behavioral economics and its many applications, written by two people who are more familiar with the field than almost anybody else. There isn’t much here for people who are already familiar with the field – but if you are new to behavioral economics, this is an excellent introduction.
  5. “Two landmark events helped pushed along the proliferation of Sichuan cuisine in New York. In 2005, the peppercorn ban was lifted, though imported peppercorns still had to be heat treated and were thus less potent than they might have been. (This restriction was finally lifted in 2018.) ”
    I was in New York in 2007, and knew nothing of how to try new food, and it is a major source of regret. Especially when I read articles like these.

A five part series on behavioral economics

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This week’s posts were going to be about podcasts that I listen to, but I’ll push that out to next week.

I and a colleague of mine at the Gokhale Institute (which is where I work) are running a five day seminar at the Institute on behavioral economics. This one is for undergraduate students only, but based on how this one turns out, we might do a couple more through the year. But for that reason, I figured we might take a look at behavioral economics is, and explore work being done in this area, and why it matters.

In this post, I’ll give you an overview of behavioral economics, and in the five subsequent posts that follow, I’ll detail what we spoke about in each session.

First things first: behavioral economics really is a tautology, because economics is the study of choice, and we make our choices given what we know and given what we feel.

The trouble is, modern economic theory (most, but not all of it) would tend to say that what we feel ought not to matter, and in fact doesn’t actually matter in the real world. Except we’ve all demolished a big fat bowl of ice-cream because we’re feeling blue, the diet be damned. We’ve all bought items on sale on Amazon, when we clearly had no need for them. And we’ve all chosen to play a game on the phone over completing a task at hand, and hang the consequences. I could go on (and not just where individuals are concerned, but firms and governments too!), but you get the picture.

We’re all predictably irrational.

In a sense, behavioral economics is about the first word in that link. As a social scientist, it’s not much use to say that we’re irrational. That’s akin to saying that there’s nothing that we can say, do or predict about the choices that all of us make.

But predictably  irrational? Ah, how exactly? If our irrationality can actually be modeled, then perhaps we could understand how and why we make the choices we do. Even better, maybe we could push people towards eating more salads and less ice-cream. Although you should note that there are some people in my tribe who don’t necessarily think this to be a good idea.

Still, the study of

a) whether we think “rationally” or not, and…

b) if not, then can we think systematically about how we are “irrational” and why…

c) and can we use our findings from this exercise to make people, institutions and therefore societies behave differently (and hopefully better)…

…is the study of behavioral economics.

And the five day version (duly expanded) of this is what Savita Kulkarni and I will be talking about at Gokhale Institute over the course of the next five days. And I’ll keep you guys updated as we go along.