Lecture 3 (Obstacles to Change Part 2) Flashcards
Outline what the bias bounded self-control is?
In many settings we find ourselves conflicted between:
Saving vs. using money
Relaxing vs. working out
Studying vs. partying
eating unhealthy vs. eating healthy.
Defining relative “wants” and “shoulds”
* Wants bring us more pleasure than shoulds at the time when the choice is enacted
* Shoulds are better for us in the long-run than
wants (ignoring pleasure “now”)
Now vs. later (present bias)
* People are more likely to choose want
options over should options the sooner
their choices will take effect (present-
bias)
Example: Watching videos on insta instead of sleeping. “If I must choose between watching bad TikToks
tonight and waking up rested tomorrow, then I choose to wake up rested”
She made up her mind that she would put the phone
down early tonight. As the day passed, the idea of
watching fun videos grew more and more pleasurable
in his mind. In bed that night, she scrolled through
hundreds of clips.
“I can try again tomorrow”.
Weakness of Will and Preference Reversals
* Our student assigns less value to insta in bed when it is a dozen hours
away and assigns more value to watching reels as bedtime draws
closer.
* Is this rational (in terms of classic economic rationality)? Yes it is, it is not irrational: we should value similar opportunities
more when they are near and less when they are far away
(discounting). Economic relevant example: 100 dollars today should be worth more to us than 100 dollars a
year from now.
That’s not why we judge the student weak-willed!
How Can we Explain Preference Reversals the insta example? (under bounded self-control)
If we were completely rational, we would discount all our opportunities at the same rate, and we would discount according to an exponential curve. So called “time Consistency”.
Insta example:
Assume exponential discounting, se figure 1
Red curve represents her
preference for waking up
fresh (a “larger, later”, or
“LL” reward).
Blue curve represents our
student’s preference for
watching insta (a
“smaller, sooner”, or “SS”
reward),
t1 is the point in time in the
morning when the student
first compares the two
options.
t2 is the time she starts
scrolling
t3 is the next morning.
At t1, the student finds watching reels that night to be less desirable
than the prospect of waking up fresh the next morning. As we move from t1 toward t2, the prospect of
watching reels grows
sharply in value. The prospect of waking up
fresh grows in value just as
quickly (constant ratio)
If the student discounted future rewards exponentially like this, she
would NOT suffer a preference reversal.
Assume hyperbolic function:
- What causes us to judge the student irrational (time
inconsistent) is that the apparent value of her future
opportunities do not all grow at the same rate over time. - The value of TikTok grows faster than the value of waking up
rested. And that causes her to suffer what is known in the
literature as a “preference reversal”.
Our student is vulnerable to preference reversals!
… she does not discount future rewards according to an
exponential function, but, rather, according to a hyperbolic function, Figure 2
Agents who discount
hyperbolically do not
discount at the same rate
over time.
The value assigned to a
future prospect grows quite
slowly at first, and then
quite rapidly as the
prospect draws near.
The present value of the SS reward will start spiking while the
present value of the LL reward is still just ramping up.
Outline the marshmallow test experiment and link it to one of the biases.
The test gave children the option to eat one marshmallow right now or wait and get two without knowing for how long they have to wait.
- This test exemplifies the idea that we have bounded self control, because the some children was able to wait and get a bigger reward. They did not apply to wants, but instead should going around the present bias gratification of eating the marshmallow at once.
- In the original study they found strong effects on later life
outcomes. This has been discussed extensively.
What is dynamic inconsistency?
Self-control:
We smoke more, eat more, and work less tomorrow than today we wish our
tomorrow selves to do.
=> Classic discounting model is wrong. So what? All models are!
But: it is wrong in a systematic direction, leading to misleading predictions
and wrong policy tools.
- When we think about what we would do in the future, we tend to make
well thought out plans
(we are all fantastic people in the future!) - But when the future finally arrives, we give in to temptation and abandon
the plans we had made
Health club and present bias, Della Vigna and Malmendier (2006)
Data from 3 health clubs over 3 years (8,000 people):
* Membership plan purchased
* Number of subsequent visits to the gym
Many people could save significantly by paying per visit
rather than buying unlimited membership plans
* Users forego an average of $600 over 3 years studied
* Suggests people anticipate doing what they “should” (exercising) in the future significantly more than they actually do what they “should”
What is Naive vs. Sophisticated self control?
- Naive: not aware of self-control problems
- Sophisticated: aware of self-control
problems and can take steps to resist
temptation (Odyssesus)
Externally (if naïve) vs. internally (if
sophisticated) imposed interventions
What is the bias other regarding preferences?
We conform to what others do and say. Affected by social norms.
But we are also influenced byd bad social norms.
Outline the elevator experiment, what bias are they looking at?
The experiment look at other regarding preferences bias, where we see people are affected by social norms.
The experiment is inside an elevator where all the people faces the back wall. Normal behavior would be facing the door. One person, Nadia, is getting in two the elevator together with the others, who alle are in on the experiment. Nadia starts facing the door, but because all the others face the backwall she slowly starts changing behavior. In the end going up to 5. floor she has moved all the way around facing the backwall like all the others. She is affected by the social norm.
A small photocopying shop has one employee who has
worked in the shop for six months and earns $9 per hour.
Business continues to be satisfactory, but a factory in the
area has closed and unemployment has increased. Other
small shops have now hired reliable workers at $7 an
hour to perform jobs similar to those done by the
photocopy employee.
The owner of the photocopy shop reduces the
employee’s wage to $7 per hour. Is this fair?
Yes (fair) or No (unfair)?
The current employee leaves, and the owner decides to
pay a replacement $7 per hour. Is this fair?
Yes (fair) or No (unfair)?
First case:
It would not be socially acceptable for the boss to reduce the employee´s wage to 7 dollars. On the other hand the market economist would think it would be fair to reduce the wage, because this is the wage which is the efficient in the market due to demand and supply of employment.
Second case:
Now it is socially acceptable for the boss to reduce the rate, because he has nothing social in between her and the employee. But for an economist it seems wrong for the employee to leave, because he can not get a better wage elsewhere and unemployment has increased.
Describe limited attention and give an example.
Faced with a lot of options or cognitive load our attention is limited.
Example with the shortfall about two women, who sits at a table an speak about a lot of things. Before we see the clip of the women the background voice will say that you should watch patiently and then he will ask you some questions about the clip afterwards. I tried to remember all of what was going on, spotting any odd things, but I did not see any of the 9 wrong editive mistakes. Example at one point the women wears a scarf the other the women don´t. I was completely blind to that because of my limited attention was filled up with different things.
Does limited attention affect when we have to choose? Even if it is an important choice?
yes ofc
example long menu´s vs short menus, everyone have tried that
Example with jam. Two companies, one has 24 types of jam and the other has 6. The 24 types company is more attractive, but the sales are shit, because people can not chose due to to many options. On the other hand the firm with 6 types sells really good!
yes to important as well
Describe reference dependent preferences and give an example
People face the bias reference dependent preferences, when their preferences are dependent on the reference. Their behavior will change giving the reference, therfore sensitive to framing.
Example from Khanemann and Tvensky , 1996, where two groups are facing a surgery. Group 1 gets told that “One month after the operation 90% of people were still alive”. Group 2 gets told that “One month after the operation 10% of people have died”. Then the authors look at how many choose the operation. From group 1 84% choose the operation, where it is only 50% in group 2. Peoples behavior change dependent on the way information is presented and its context.
What is some of biases under reference dependent preferences? Give an example.
For example loss aversion, where people will do a lot to not face a loss.
An example could be from Homonoff, Tatiana (2013), “can small incentive have large effects?”, where they look at the impact of taxes versus bonuses on disposable bag use.
When Washington, DC required retailers to charge $0.05 more to
customers for plastic bags:
* Some retailers charged $0.05 for plastic bags (“Tax”)
* Some gave you $0.05 off if you brought your own bag
(“Bonus”)
KEY RESULTS, figure 3:
1. Tax for plastic bags triples
% of shoppers who BYO bag
2. Bonus for BYO bag has no
effect
Sometimes people overreact to losses even if they are small. That we can use in policies.
Does our value of something depend on the reference point?
Yes indeed, do to the reference dependent preference bias. We value things dependent on the reference point. Fo example imagine a car and bike on sale. In both cases you save 6000 kr. but due to the higher value of the car (200.000 kr.) relative to the bike (12.000 kr.) then it feels like a higher value what you save on the car. The rational economist would say that it should not matter, because you save the same either way.
Describe the bias overconfidence and give an example.
We think we are better at doing things, than we actually are. We are overconfident.
examples:
They are better drivers than average
They are better looking than most
people
They are smarter than average
Their start-up is less likely to fail
Explain to me why biases describe behavior, but do not produce it.
We can think about biases as broad tendencies, not traits. Biases are a way of describing the particularly behavior, but not the reason why the person behave like this. To understand that we would have to look at individual heterogeneity, the context and evolutionary reasons.
