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Intro:
Intro jingle
I’m Michelle and I am a rising senior from New Jersey and I will be your main host for today. On the 6th episode of our podcast, I’ll be discussing the field of behavioral economics, which is an intersection between psychology and economics. Sit tight because this episode is very dense and packed with a lot of info and research!
Topic 1: Basic Concepts Behavioral Economics
First off all, what does the term “behavioral economics” even mean?
A quick Google search: “Behavioral economics (BE) studies the effects of psychological, cognitive, emotional, cultural, and social factors on the decisions of individuals and institutions and how those decisions vary from those implied by classical economic theory.”
Let’s unpack that: economic theory → basically, economic theory dictates outcomes in an ideal world in which humans make careful decisions as a result of weighing the costs and benefits informed by existing preferences; ultimately, humans would ideally always be making optimal decisions
But we all know that is quite far from the truth → psychology helps in explaining and alluding to some nuanced patterns in human behavior
Prior to the work of Daniel Kahneman (Con-a-man) & Amos Tversky (Tuh-versky), 2 men that I will dive into more depth later, the rational choice theory proposed by economist Gary S. Becker prevailed in this developing field
Becker, in his 1976 book, The Economic Approach to Human Behavior, famously outlined the concepts that became the pillar of this rational choice theory
The theory assumes that human have stable preferences and engage in maximizing behavior → basically assumes that humans are rational beings at all times making the most optimal choices
A few years later, in 1979, Amos Tversky and Daniel Kahneman published some papers that appeared to undermine the popular ideas about human behavior long held by mainstream economics
Tversky and Kahneman proposed the prospect theory: decisions are not always optimal
Humans’ willingness to take risks in decision-making is influenced by the way in which the choices are framed → everything depends on context!
Example that illustrates this concept of context-dependence:
Ask: Which of the following would you prefer?
A) A certain win of $250
B) A 25% chance to win $1000 and a 75% chance to win nothing?
How about this one:
C) A certain loss of $750
D) A 75% chance to lose $1000 and a 25% chance to lose nothing?
Well, Tversky & Kahneman’s research shows that the responses differ depending on how the choices are framed as a either a gain or a loss
When faced with the first type of decision, the majority of people will choose the riskless alternative A, while for the second problem, people are more likely to choose the riskier option, D, because we dislike losses more than we like an equivalent gain
Idea: giving something up is more painful than the pleasure we derive from receiving something, in this case, money
Later on, as a continuation of Tversky’s and Kahneman’s research, economist Richard Thaler, who was inspired by their research, furthered the field of BE. Thaler is often referred to as the founder of behavioral economics.
Coined the concept of mental accounting in 1985: people think of value in relative rather than absolute terms → distort the options we have laid out in front of us
Also stated: humans derive pleasure not just from object’s value but also the quality of the deal, going back to context-dependence, and emphasized the idea of transaction utility → how much pleasure do we derive from the transaction itself?
Perhaps most importantly: humans are susceptible to the sunk cost fallacy - we fail to fully consider the opportunity costs (tradeoffs we make for one choice over another)
Related concept to mental accounting: human dislike spending money due to the pain associated with paying → humans are loss verse → plays an important role in self-regulation
We don’t have to time to explore other interesting concepts in depth but the following are summaries of some prominent topics in the field of BE that I encourage you to explore:
Overchoice: choice overload; having too much choices available can result in unhappiness, decision fatigue, going with the default options, or choice deferral (avoid making decision altogether)
Limited information: experience, good info, and prompt feedback are essential in making good decisions → limited info is a deterrent in nudging people to make better choices
Dan Ariely’s popular book, Predictably Irrational explores boundedly rational choices → limits in our thinking processes (fascinating and captivating TED speaker)
Prices and value perception: anchoring → process whereby a numeric value provides a non-conscious reference point that influences subsequent value perceptions
Zero price effect: when a product is advertised as free, consumers perceive it as intrinsically more valuable
Price as an indicator of quality (which is not always accurate)
Decisions are the result of less deliberative, linear, and controlled processes than we would like to believe
In summation, behavioral economics makes use of psychological experimentation to develop theories about decision making; the field has also been able to identify a range of biases as a result of the way people think and feel
The field that is the result of the intersection between psychology and economics is changing the way economist view people’s perceptions of value and expressed preferences
Contrary to general economic theories: according to BE, people are not always self-interested, benefit- maximizing, and cost-minimizing individuals with stable preferences
Our thought processes are impacted by insufficient knowledge, feedback, and processing capability → involve a gray area of uncertainty and impacts the context in which the way we make decisions
Check out behavioraleconomics.com for more explanation of concepts in this field!
In the next segment, I will be talking about the concept of game theory - a fascinating aspect of behavioral economics
Topic 2: Game Theory - A Beautiful Mind
One of the major and fascinating concepts in behavioral economics is game theory — a mathematical approach to modeling behavior by analyzing the strategic decisions made by the interacting players or firms
In layman terms: study of coming up with the winning strategy in a game of choices, especially when you don’t know what your competitors are doing
Dr. John Nash was a pioneer in game theory and made many contributions to the field
The original inventor of game theory was the mathematician John von Neumann
But Dr. Nash extended this analysis beyond zero-sum and black/white win/lose games to more complex situations in which all players could also gain or all lose and everything in between
The central concept of game theory includes Nash equilibrium, which loosely be defined as a stable state in which no player / firm can gain an advantage through a unilateral change in strategy given that other players do not change what they are doing
The film, “A Beautiful Mind,” which is loosely based on Dr. Nash’s life, tries to explain this concept of game theory in a specific scene in which Russell Crowe, played by Dr. Nash, is at a bar with 3 friends, and they are captivated by by the stereotypical beautiful blond woman who walks in with four other brunettes
In this scene, while Dr. Nash’s friends discuss which one of them could and should successfully woo the blonde woman in their sight → Dr. Nash concludes that they should in fact do the opposite of the expected: ignore her
The following quote explains his rationale: “If we all go for the blonde, we block each other and not a single one of us is going to get her. So then we go for her friends, but they will all give us the cold shoulder because nobody likes to be the second choice. But what if no one goes to the blonde? We don’t get in each other’s way and we don’t insult the other girls. That’s the only way we win.”
While this episode is not based in fact, it succinctly illustrates some aspects of game theory. However, it is not an example of the aforementioned state of Nash equilibrium
The Nash equilibrium is also present in the Prisoner’s Dilemma
Two people working together in a crime are arrested and offered a deal: if you confess and testify against your accomplice, they will be let off and the other guy with get 10 years behind the bars. If both are quiet, both will get 5 years as prosecutors cannot prove the more serious charges. If both confess, they both get 8 year prison sentences.
At first glance, keeping quiet seems like the best strategy
However, application of game theory and the Nash equilibrium say something different → both are likely to confess because if they don’t and the other happens (which they don’t know) they may get 10 years which is worse than 8
Commentary: It’s so interesting to hear our three dimensional actions being boiled down to a two dimensional, abstract concept. Maybe I’m giving humanity a little too much credit by saying this, but I always thought human behavior was unpredictable, for the most part at least. There’s too many external factors to consider to logically connect an action to a thought or to psychology, but from Michelle’s very nice, extensive compilation of research I am thankful to be reading on script ahaha, our actions being driven by game theory or something either analogous or similar to it, is very convincing and somewhat reassuring? but also worrisome. Reassuring in the sense we (humans, people) are very similar, if not the same, psychologically and our behavior is predictable, and therefore preventative measures or expectations are on par with how someone will actually behave. Maybe someone may not find reassurance in that, I apologize. But also worrisome in the sense at our roots is self-interest and distrust. Especially the concept of Nash equilibrium, where we will essentially pick the option where we will have the better situation, regardless of what the other person chooses. Even though there’s a more favorable outcome, we fall back on a safety net of our making. But, thank you Michelle for such a concise and objective explanation!
With various behavioral economics concept in mind, in the final segment, I will be exploring real-world applications of this quickly evolving field
Topic 3: Relevance today - Sustainability & COVID-19
Contact tracing: disrupts chains of communicable disease transmission by asking cases to identify contacts
According to a study conducted by faculty at the University of Pennsylvania, behavioral economics can be utilized to enhance tracing’s effectiveness and people’s compliance with control measures such as isolation and quarantine
COVID-19 presents challenges for contract tracing
First, while the median incubation period for COVID-19 is 6 days, the range is much longer, with the recommended quarantine period extending to 14 days from the time of exposure
Second: COVID-19 currently has no treatment so contacts are asked to quarantine, not for their benefit, but to reduce exposure to others
Third: within household transmission is a significant source of new infections, suggesting the importance of isolating each case not just from the public, but also from household members
Fourth: transmission is possible in the absence of symptoms; thus, asymptomatic contacts must adhere to quarantine even without the “cue” of feeling unwell
Last: currently available tests may have low sensitivity (high rates of false negatives), so quarantine cannot safely be terminated early upon receipt of a negative test result
In addition, there are structural and behavioral barriers to interrupting chains of transmission
Behavioral economics offers a set of models and strategies that recognize that humans do not always make rational decisions based upon a thorough analysis of all potential outcomes and assessment of all alternatives; instead, they are influenced by a variety of psychological, social, cognitive, and emotional factors
Behavioral economics reminds us that cases and contacts will not always follow necessary infection control recommendations even if they understand and accept their value → BE also helps us find strategies that increase adherence to control measures
To be more specific: 6 steps of contact tracing → behavioral strategies might improve effectiveness at each step
Make contact with cases
Factors contributing to success: Informing cases during test result notif that they will be called for contact tracing, having contact tracing team members identify themselves as reps of health system, having health system’s name appear on caller ID
Additional behavioral experiments: needed identifying optimal timing of contact, how best to identify the contact tracing team, mode of contact
Public messaging to normalize response to contact tracing calls
Most ppl exhibit conditional cooperation / willingness to cooperate for the greater good as long as they know others are doing so
More inclined to participate if it is not described as an act but as part of a socially desirable personal characteristic
Imperative to establish social norms that support participation in contact tracing as a collective responsibility
Elicit contact information from cases
Accurate recall is universally difficult due to the constraints of human memory
Penn Covid-19 Contact Tracing team protocol: specifies that the team member who conducts the initial case interview cannot also speak to that case’s contacts. This ensures that the tracer notifying the contacts is unaware of the case’s identity. This is explained to cases to increase their willingness to disclose potentially sensitive information
Hopkins Covid-10 Contact Tracing team: instructs those doing case investigation to also follow up with contacts, which may be more efficient and represents an opportunity to contrast the outcomes of these two approaches.
“Behavioral experiments could also help health professionals in finding the best protocol for prompting contact recall.
For example, in terms of reporting accuracy and completeness, does a standard prompt such as “I would like you to think about everyone you may have come into close contact with during the 2 days prior to when you started feeling ill” perform better than “Tell me the people you have interacted with the most in the 2 days prior to when you started feeling ill”?
Priming techniques may also help cases remember relevant interactions. For example, the contact tracer could ask the case to pull out their phone and look through their calendar, receipts, step counts, or other digital footprints to encourage accurate recall.
It’s clear that technology can be helpful here. This can be as simple as asking the case to share contact phone numbers or email addresses electronically to minimize data errors and reduce perceived effort of tracing.
Steps 3 - 6 (similar strategies can be implemented in these following steps)
provide guidance to cases
Reach contacts
Provide guidance to contact
Follow up and support monitor symptoms and adherence to recommendations or to escalate for clinical intervention
Contact tracers create individualized and catered recommendations to cases and contacts based on CDC and health department guidance and testing protocols.
Insights from behavioral economics actually illuminate certain effective strategies for this step. For example, making recommendations personal and salient can increase compliance. Tracers can prompt the case, “Who among your friends and family is in a high-risk category?” and then share that isolating will help protect that person.
Reinforcing the collective nature of pandemic response may be influential: “We are all in this together, and this is what you can do.”
Also, emphasizing the fact that the majority of people involved in this process comply may establish overall increased adherence to this protocol. Rather than stating that 10% of the population is not following recommendations, emphasize that “90% of positive cases are staying home and keeping our community safe.” Such descriptive norms may be very powerful in influencing behavior, as individuals generally want to do what others do. Of course, professional conduct requires giving accurate information. Currently, the true proportion of the population adhering to recommendations is unknown. But nonetheless, this notion is helpful in creating a better adherence strategy.
The use of persuasive narratives that describe successes of contact tracing in preventing disease transmission or failures with tragic consequences by not complying may also help in reshaping incorrect misconceptions and aid in overcoming motivational barriers associated with contact tracing.
⇒ behavioral insights may be key to breaking chains of transmission
Comment: There’s so many little nuances that change our perception of the guidelines and manners of the “Covid Era.” Behavioral economics was something I read on SAT passages throughout the summer while prepping for the test. Not something I genuinely expected to become interested in, nor something I expected to have such a drastic influence on our perception of virtually anything, but not only perception, but also our behaviors, actions. The relevance of behavioral economics today, right now is just startling, especially because we have to comply with more rules than usual and not everyone is open to doing so, so we’re seeing more of it in action. I wonder how extensively researched and more predictable we may be in the future, for better or for worse.
Lastly - Climate change → is also a psychological and behavioral challenge in addition to being a technological & political one
Advocates for climate change action often think they just need to convince people it’s happening by providing facts and figures
Research conducted by the Cultural Cognitive Project at Yale Law School led by Dan Kahan found that people can understand the science but still not want to respond to climate change, if this could drive a wedge between them and their cultural group or values.
Demonstrates that climate change isn’t just a debate to be had - it challenges our thinking, which is usually dominated by predictable mental biases and fast, automatic responses → stating the facts won’t cut it for the nonbelievers
Specific mental Barriers in climate change and sustainability :
Risk we aren’t accustomed to worrying about → gradual and slowly occurring / hidden
Behaviors we want aren’t yet established as strong social norms
We see any behavioral switch to do with climate change as loss rather than benefit for the earth’s future
We get very little feedback on our behavior → unaware of how our actions contribute to emissions
Changing what we eat - by tapping into social norms and substitution
Consider the carbon footprint of our meals - consuming less red meat, local foods
Changing how we travel - by making low-carbon options more attractive
Public transport, electric vehicles, walking/cycling (active transport)
Game-ifying public transport - In Singapore, where behavioral insights are being used to shape public policy, the government launched the Travel Smart program to promote public transport and off-peak travel
According to Alta Planning + Design, a consulting firm, Passengers earn reward points each they travel on the train / off-peak
Redeemable for money / entry into a lottery
Idea: reward consumers for making desirable green travel choices
Targeting people at the right time- longitudinal research of about 20,000 UK residents show that eco-minded people are more likely to shift from driving to other modes of green transport when they have recently moved houses
Easier to establish a virtuous new habit when all your routines are up in the air
Changing how we consume energy - using the power of feedback
Renewable sources of energy
Cut energy usage
Behavioural scientists know that humans respond to real-time feedback. Information can be a surprisingly useful motivator, and it’s often more cost-effective for consumers than a tax — especially on a non-luxury good like electricity.
Technology - track real time usage → info → smart meter → things we can look forward to in the future
BE is at the forefront of changing the world on a bigger scale - sounds grandiose and banal, but I think this intersection of psych and econ is truly fascinating because the data and principles of this field can be applied to tackle any global problem imo
Outro:
In the 6th episode of “A POP of Psych,” we delved deep into the field of behavioral economics
Introduced some prominent concepts and economists responsible for pioneering the field
Discussed game theory and an example in A Beautiful Mind, a movie about the life of Dr. John Nash
Perhaps most importantly: applications to our world today → contact tracing in the midst of COVID-19 as well as encouraging sustainable behavior in the midst of looming climate change
Thanks for tuning in and check out the script and resources used on our website, linked in the description.
We’ll be back next week with another informative and engaging episode! ++
https://www.behavioraleconomics.com/