Dick Thaler reflects on nuts to nudges--The economist as story teller

Some Thaler stories, from the horse's mouth

Behavioral economics from nuts to ‘nudges’
A bowl of cashews led to a research breakthrough
by Richard H. Thaler

"People think in stories, or at least I do. My research in the field now known as behavioral economics started from real-life stories I observed while I was a graduate student at the University of Rochester. Economists often sneer at anecdotal data, and I had less than that—a collection of anecdotes without a hint of data. Yet each story captured something about human behavior that seemed inconsistent with the economic theory I was struggling to master in graduate school. Here are a few examples:..."

The open culture of academic economics

I'll be delivering the Presidential Address at the American Economic Association meetings in Philadelphia today, with a paper to follow later this year. I plan to talk and write about marketplaces, which I think are understudied parts of markets. And I think that market design has a bright future, both as a kind of engineering economics that can help people in very concrete ways, and as a way to shed new light on markets and how they work.

But I'm also finding this a moment to take a look backward as well as forward. Personally, looking backward fills me with feelings of gratitude: not only to my family and to my teachers and advisers, to my wonderful students and coauthors; but also to the profession of economics and all of you economists who made me welcome, although economics isn’t a subject in which I ever received any degree.

During my professional career I have participated in at least three academic insurrections, which brought game theory into economics, and experimental and behavioral economics, and most recently market design.  There have been other revolutions as well, in econometrics and computation and access to large linked data sets among others. And these revolutions have come about largely because economists are on the whole enthusiastic about finding new ways to explore the large swath of human behavior that makes up economics.

I hasten to add that this welcoming of new ideas isn't magical, or even immediately apparent. Like raising children, it's a slow process while it's going on, but it becomes clear in retrospect how fast it actually is. Paper by paper (referee report by referee report) academic economics can feel pretty conservative and resistant to change. But when you look at things at the time scale of decades, economics has opened up to new ideas very fast.

We've also been welcoming to intellectual immigrants: to people as well as ideas. I'm hardly alone among economists of my generation who don't have degrees in economics. A bunch of us rode in on the wave that brought game theory into economics. Not every discipline is as open to new ideas or new people.  This openness is something to treasure, gratefully and vigilantly.

Looking ahead, I hope we can continue to nurture this openness to both ideas and people.  Exciting things are happening in other disciplines (computer science, biology...), and there's plenty of room for cross fertilization between disciplines, as well among the diverse points of view and diverse people already "inside" economics.

Economics is still an early-stage science, so it's an exciting time to be an economist. There's lots of progress we still need to make, it's important for the world that we do so, and there are some indications of fruitful paths to follow.  I'm looking forward with substantial optimism.

Congratulations to Dick Thaler: 2017 Nobel Prize in Economics

Bounded rationality, bounded self control, and bounded selfishness are recognized today by the 2017 Nobel Prize in Economics, awarded to Dick Thaler.

(Some pedants will object to that sentence: there is no Dick Thaler, his correct name is Richard...:)

Congratulations, Dick. 

Bob Slonim of Australia

Here's an announcement from down under, where Bob Slonim  will be heading the Australian Federal government's Behavioural Economics Team.

"The Behavioural Economics Team of the Australian Government will soon be led by an American professor from an Australian university, replacing its current chief, who is an Australian professor at a university in the United States.

Harvard professor Michael Hiscox ... didn’t give up his position when he came home to Australia to set up and run the Prime Minister’s nudge unit in 2016, and now he is going back to his post in Boston for six months.

He will be replaced by University of Sydney economics professor Robert Slonim, a pioneer of experimental economics who came to Sydney from the US in 2008.

Robert Slonim

Slonim was the keynote speaker at a behavioural economics workshop hosted by BETA last November. He co-edits the Journal of the Economic Science Association and sits on the editorial advisory board of the Journal of Risk and Uncertainty."

A skeptical look at "nudges" in the Atlantic (which reminds me of Loewenstein's 2010 op-ed in the NY Times)

In the Atlantic, a recent complaint about the tendency to over-promote the efficacy of"nudges" as inexpensive solutions to big problems:

Why 'Nudges' Hardly Help by Frank Pasquale

"...the nudge is really a fudge—a way of avoiding the thornier issues at stake..."
**********

I think the promises and perils of relying on nudges as primary tools of policy were set forth elegantly in a 2010 NY Times op-ed by George Loewenstein and Peter Ubel, who spoke of the relative magnitudes of the effects of nudges compared to e.g. changes in price:

Economics Behaving Badly

 "Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks."

Loewenstein, of course, is one of the founding giants of behavioral economics.

Alcott and Kessler on behavior and welfare changes from 'nudges"

An NBER working paper:

The Welfare Effects of Nudges: A Case Study of Energy Use Social Comparisons
Hunt Allcott, Judd B. Kessler
NBER Working Paper No. 21671
Issued in October 2015

Abstract:
"Nudge"-style interventions are typically evaluated on the basis of their effects on behavior, not social welfare. We use a field experiment to measure the welfare effects of one especially policy-relevant intervention, home energy conservation reports. We measure consumer welfare by sending introductory reports and using an incentive-compatible multiple price list to determine willingness-to-pay to continue the program. We combine this with estimates of implementation costs and externality reductions to carry out a comprehensive welfare evaluation. We find that this nudge increases social welfare, although traditional program evaluation approaches overstate welfare gains by a factor of five. To exploit significant individual-level heterogeneity in welfare gains, we develop a simple machine learning algorithm to optimally target the nudge; this would more than double the welfare gains. Our results highlight that nudges, even those that are highly effective at changing behavior, need to be evaluated based on their welfare implications.

12th International Naturalistic Decision Making Conference--June 9-12

12th International Naturalistic Decision Making Conference  (I'm scheduled to speak Wednesday morning...to human factors engineers)

Naturalistic Decision Making (NDM) research emerged in the 1980s and studies how people make decisions in "real-world settings." In particular, it focuses on peoples' level of expertise in diverse professional domains and analyzes how experience allows people to rapidly categorize situations to make effective decisions. And because situations can often include dynamic, uncertain, and rapidly-changing conditions, with the ultimate decision having significant consequences, NDM research seeks to help people understand how to make the best decisions possible.

NDM methods emphasize descriptive studies conducted in field and operational workplace settings. Research findings have been used to improve performance, revise doctrine and process, develop training that is focused on decision requirements, and design information technologies to support decision making and related cognitive functions.

Examples of topics include:

• Methods to study and support rapid decision making
• Designing visualizations and user interfaces to improve sense making
• Assessing cultural competence
• Designing more effective human-computer planning systems
• Bringing evidence-based decision making to bear in civilian and government agencies
• Decision making under stress
• Aiding police in the detection of imminent terrorist attacks

Applications to areas such as cyber space, intelligence, healthcare, aviation, and sports will be discussed at the conference.

Registration

Registration for the conference includes access to all of the presentation sessions at the conference (see Agenda Overview & Program Outline below). It also includes a continental breakfast and boxed lunch each day, along with two conference receptions on 9 & 11 June. Because of limited available seating, only the first 136 to register will receive the added bonus of a conference banquet and speakers. Spouses can attend the banquet for an additional separate fee.

There will be two optional events at this year's conference.

• 11 June: there will be a Social Recognition Prime Dinner at Seasons 52 restaurant in the Tysons Corner shopping mall attached to the conference hotel. The dinner will include 4-course dinner, wine, and beverages. An option to charge this separately is available on the registration site. Spouses are welcomed.
• 12 June: three half-day tutorial alternatives.

Agenda Overview

Distinguished invited speakers:

• Dr. Alvin Roth, winner of the Nobel Memorial Prize in Economic Sciences in 2012, applies economic theory to solutions for "real-world" problems.
• Dr. Gary A. Klein is a senior scientist at MacroCognition LLC, who pioneered the field of naturalistic decision making.
• Dr. Judith Orasanu, Principal Investigator/Team Lead for Distributed Team Decision Making, NASA, Systems Safety Research Branch, Ames Research Center, was a founder of the NDM community of interest.
• Mr. John Willison, Director, Command, Power, & Integration, U.S. Army RDECOM CERDEC. Mr. Willison is responsible for leading the technical program for all Army Battle Command Systems.
• Dr. David Woods a full professor in Integrated Systems Engineering at the Ohio State University, focuses on the foundations and practice of Cognitive Systems Engineering.
• Professor Tom Ormerod, Head of Psychology at the University of Sussex, is a cognitive psychologist who has studied naturalistic decision-making for over thirty years.
• Dr. Marvin Cohen is a principal investigator at Perceptronics Solutions on projects directed toward the understanding and training of critical thinking and leadership.
• Commander Joseph Cohn, PhD. is the Deputy Director, ASD/R&E Human Performance Training and BioSystems (HPT&B) Directorate.
• COL Matthew Hepburn, Marine Corps, USA, is the DARPA program manager for the Strategic Social Interaction Modules program (SSIM).

If you have questions or wish to submit a poster, please contact the NDM Committee.

Harvard Magazine celebrates Sendhil Mullainathan

The Science of Scarcity

 “To put it bluntly,” says Mullainathan, “if I made you poor tomorrow, you’d probably start behaving in many of the same ways we associate with poor people.” And just like many poor people, he adds, you’d likely get stuck in the scarcity trap.

Cass Sunstein in Harvard Magazine

Harvard Magazine has a nice long article about Cass Sunstein, who, when he's not thinking about choice architecture and nudges, also thinks about the Constitution: The Legal Olympian. Cass Sunstein and the modern regulatory state

"A central part of his argument is that debate about the Constitution’s meaning should expand to legislative, regulatory, and other democratic bodies, because “court-centeredness is a continuing problem for constitutional thought in the United States. It has helped to weaken the sense of responsibility of other officials and indeed ordinary citizens….”"

Peter Singer on charitable giving

In the Washington Post: Heartwarming causes are nice, but let’s give to charity with our heads

"You’d have to be a real spoilsport not to feel good about Batkid. If the sight of 20,000 people joining in last month to help the Make-A-Wish Foundation and the city of San Francisco fulfill the superhero fantasies of a 5-year-old — and not just any 5-year-old, but one who has been battling a life-threatening disease — doesn’t warm your heart, you must be numb to basic human emotions.

Yet we can still ask if these emotions are the best guide to what we ought to do. According to Make-A-Wish, the average cost of realizing the wish of a child with a life-threatening illness is $7,500. That sum, if donated to the Against Malaria Foundation and used to provide bed nets to families in malaria-prone regions, could save the lives of at least two or three children (and that’s a conservative estimate). If donated to the Fistula Foundation, it could pay for surgeries for approximately 17 young mothers who, without that assistance, will be unable to prevent their bodily wastes from leaking through their vaginas and hence are likely to be outcasts for the rest of their lives. If donated to the Seva Foundation to treat trachoma and other common causes of blindness in developing countries, it could protect 100 children from losing their sight as they grow older."

Dmitry Taubinsky (job market candidate), on attention

Among the economists I'm engaged with on the job market this year is Dmitry Taubinsky. He studies attention as a scarce resource, so you shouldn't forget to think about hiring him.  His job market paper is

From Intentions to Actions: A Model and Experimental Evidence of Inattentive Choice

Abstract:  A growing body of evidence suggests that people's inattention may be a signi ficant friction in domains of behavior ranging from medical compliance, to financial decisions, to residential energy use. In this paper, I present a psychologically grounded model of inattentive choice and investigate its implications for dynamic decisions. The model explains seemingly puzzling patterns of consumer behavior, makes novel predictions that I con rm in two experiments, and generates a rich set of market implications. Applied to repeated actions, the model provides an attention-based foundation for the formation of "good" habits in domains such as exercise or energy use. The model explains the recent evidence on the intertemporal spillover effects of temporary incentives, and makes testable predictions about when attention-focusing cues, such as reminders, will dampen or amplify the effects of incentives. Consistent with these predictions, the first experiment reported in this paper shows that while temporary interruptions to daily routines decrease subsequent performance of the behavior, reminders have the largest impact after an interruption. Applied to tasks that must be completed by a deadline, the model identifies when longer deadlines will make people less likely to complete a task. But additionally, the model leads to new comparative statics, tested in the second experiment reported in this paper, about how reminders can eliminate the potentially perverse effect of longer deadlines. Finally, I apply the model to study market interactions between sophisticated firms and inattentive consumers: the model predicts how firms will take advantage of consumer's inattention through sales strategies such as rebates, and also leads to a dynamic theory of how firms use reminder advertisements to steer the behavior of inattentive consumers.

Jerusalem School in Economic Theory: Decision Making: June 10-19 2013

The 24th Jerusalem School in Economic Theory

Decision Making

Lecturers

Maya Bar-Hillel	Hebrew University
Itzhak Gilboa	Tel Aviv University
Daniel Kahneman	Princeton University
David Laibson	Harvard Universit
Mark Machina	University of California, San Diego
Eric Maskin	Harvard Universit
Wolfgang Pesendorfer	Princeton University
Ariel Rubinstein	Tel Aviv University
Eyal  Winter	Hebrew University

 Decision making is at the heart of economics: production, exchange, and consumption are all the result of choices made by individual agents. For over sixty years, the benchmark framework for studying agents' decisions whose consequences are uncertain has been the expected utility model. But anomalies from experimental work in psychology and behavioral economics have led to revisions of expected utility and of utility theory more generally. The Summer School will explore both the standard model and some of the most important alternatives

Here's the program (Manny Yaari speaks about Newcomb's paradox on the last day, although he's not listed as one of the 'lecturers'...)

Muriel Niederle is blogging about experimental and behavioral economics

Here's her first post, posted from Stockholm:

Experimental Economics Coming of Age

Alex Peysakhovich defends his Ph.D. dissertation

Alex (tieless in suit), David Laibson, Drew Fudenberg, Uma Karmaker and me (via  Skype)

Skyping the post-defense champagne

Alex Peysakhovich defended his dissertation on Friday at Harvard; I skyped in from California. Alex is a man of many projects: the one he spent the most time talking about at his defense is this one:

"When Punishment Doesn't Pay: 'Cold Glow' and Decisions to Punish" (with  Aurelie Ouss).

Alex is a behavioral economist who is always looking to expand his horizons, and he'll be doing a postdoc this coming year with Dave Rand and Martin Nowak. Look for Alex (and Aurelie) on the market next year.

Welcome to the club, Alex.

Spring School in Behavioral Econ at UCSD in March

Uri Gneezy writes to announce the

Spring School in Behavioral Economics

March 15 to March 21, 2013, San Diego

The Choice Lab at the Norwegian School of Economics (NHH) and the Rady School of Management at UC San Diego will host a spring school in behavioral economics. The goal of this spring school is to introduce graduate students to new and exciting research in the field. This is a great opportunity for graduate students to expand their behavioral skills and learn what behavioral economics research is about. Topics include social preferences, (psychological) games, incentives, charitable giving and behavioral interventions.

The Summer School is comprised of a series of 10 half day lectures. The lectures will be delivered by Jim Andreoni, Alexander Cappelen, Martin Dufwenberg, Armin Falk, Uri Gneezy, Theo Offerman, Bertil Tungodden, Lise Vesterlund and Angelino Viceisza. A strong emphasis is given to informal interactions, and students will also be given the opportunity to present their work.

We will cover participants’ costs during the workshop, including housing and most meals. Unfortunately, we do not have funds to cover travel costs. About twenty five participants will be invited.

To apply, please send your curriculum vitae and a short (up to 1000 words) statement of research interest, all in one pdf file to rady.spring.school@gmail.com. We will also need a letter of recommendation to be sent to the same email address. The deadline for applications is Monday, December 31, 2012.

Alexander, Bertil and Uri

Uri Gneezy | The Epstein/Atkinson Chair in Behavioral Economics
Rady School of Management, UC san Diego | 9500 Gilman Drive #0553 La Jolla CA 92093, USA
Tel: 858-534-4312 | Fax: 858-534-0745 | http://management.ucsd.edu/faculty/directory/gneezy/

30 years of the ultimatum game

Come celebrate in Cologne at the 2012 ESA European Conference, Sept. 12-15.

"In 1982 Güth, Schmittberger, and Schwarze published their seminal paper on the ultimatum game. The experiments were conducted at the University of Cologne. We will celebrate this 30th anniversary and invite submissions of papers that review insights from the ultimatum game and/or deal with new results. "

They also encourage submissions concerning "Bounded Ethicality."

The Keynote speakers are
• Max Bazerman (Harvard Business School)
• Urs Fischbacher (University of Konstanz)
• Werner Güth (Max Planck Institute of Economics, Jena)

Cass Sunstein on the regulator as market designer

Here's his essay: Empirically Informed Regulation
It was written while Sunstein was Administrator, Office of Information and Regulatory Affairs, Office of Management and Budget, Executive Office of the President. It focuses on what he sees as the lessons from behavioral economics.

"In recent years, a number of social scientists have been incorporating empirical findings about human behavior into economic models. These findings offer useful insights for thinking about regulation and its likely consequences. They also offer some suggestions about the appropriate design of effective, low-cost, choice-preserving approaches to regulatory problems, including disclosure requirements, default rules, and simplification.

"A general lesson is that small, inexpensive policy initiatives can have large and highly beneficial effects.  The purpose of this Essay is to explore relevant evidence, to catalogue recent practices and reforms, and to discuss some implications for regulatory policy. And while the primary focus is on small, inexpensive regulatory initiatives, there is a still more general theme, which involves the importance of ensuring that regulations have strong empirical foundations, both through careful analysis in advance and through retrospective review of what works and what does not."

Individual Rationality (now also in Romanian)

I'll be lecturing on models of individual choice today, which reminds me that not too long ago I received the following email from Alexandra Seremina:

"I've made a translation of 'Individual Rationality as a Useful Approximation: 
Comments on Tversky's "Rational Theory and Constructive Choice"'
page to Romanian. It is available at:
http://www.azoft.com/people/seremina/edu/individual-rationality.html
" Profesorul Tversky prezintă o scurtă descriere a a creterii permanente de  dovezi experimentale, la care el a fost unul dintre cei mai influenţi contribuabili... "

And here are the opening paragraphs (in English):

"Professor Tversky presents a quick overview of an ever growing body of experimental evidence, to which he has been one of the most influential contributors. This evidence demonstrates that human behavior deviates in systematic ways from the idealized behavior attributed to expected utility maximizers in particular, and to "rational economic man" in general. One of the most striking things about this substantial body of evidence is that, starting at least as early as the work of Allais [1953] and May [1954], it has been collected over the same period of years in which expected utility theory has come to be the dominant model of individual behavior in the economics literature. This adds force to the question Tversky raises in his concluding remarks: what accounts for economists' "reluctance to depart from the rational model, despite considerable contradictory evidence"?

"I'll attempt to outline a two-track answer to this question.

"First, I'll argue that there are quite defensible reasons for a reluctance to abandon theories of rationality in favor of psychological theories. In particular, I think most economists view the rational model as a useful approximation, rather than as a precise description of human behavior. Experimental demonstrations that people deviate from the model do not strike at the heart of the belief that the approximation is a useful one, since all approximations are false at some level of detail. In view of this, some kinds of evidence, and alternative models, are likely to be more successful than others in attacking the central role of rationality assumptions in the economic literature.

"Second, I'll note that, in fact, there is a growing attempt by economists to move away from an overdependence on idealized models of hyper-rationality."

Designing retirement plan default options

One of the big successes of behavioral economics has been in disseminating that decision making and information gathering are costly, so that default options matter. The WSJ seems to have taken the empirical lesson of behavioral economics to heart (even if not always on its editorial page) and reports a study of the effects of default settings.

401(k) Law Suppresses Saving for Retirement

"A 2006 law designed to boost employees' retirement-savings is having the opposite effect for some people.
"Under the law, companies are allowed to automatically enroll workers in their 401(k) plans, rather than require employees to sign up on their own. The measure was intended to encourage more people to bulk up their retirement nest eggs—a key goal in a country where millions of people aren't saving enough.

But an analysis done for The Wall Street Journal shows about 40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily, the Employee Benefit Research Institute found. The nonprofit performed a complex computer simulation of savings patterns drawing on data from more than 20 million 401(k) participants.

The problem: More than two-thirds of companies set contribution rates at 3% of salary or less, unless an employee chooses otherwise. That's far below the 5% to 10% rates participants typically elect when left to their own devices, the researchers said.

"Automatic enrollment is a double-edged sword," said Brigitte Madrian, a professor at Harvard University who is an expert on 401(k)s. "On the one hand, there's more participation. On the other hand, lots of employees are stuck at whatever default the employer selects.

""The total annual amount being put into 401(k) plans has increased by 13% since 2006, to an estimated $284.5 billion this year, according to consulting firm Cerulli Associates. That is largely because the rule has successfully prodded millions of people who wouldn't have saved a penny for retirement to start saving something.

"But for the 40% of new workers who would have picked a higher savings rate than the company assigned to them, billions of dollars in potential retirement savings will be left on the table, said Pamela Hess, director of retirement research at Aon Hewitt. The human-resources consulting and outsourcing company serves as a record-keeper for $296.8 billion in 401(k) plans.
...
"The Pension Protection Act of 2006, which was designed to shore up the pension system, also encouraged wider adoption of auto-enrollment in 401(k) plans. It removed obstacles such as state laws that restricted the practice and shielded employers who use certain types of investments from liability for losses suffered by participants who are auto-enrolled.

"The law has boosted auto-enrollment and participation rates dramatically. About 57% of large companies now automatically enroll new employees in 401(k) plans, up from 24% in 2006, according to Aon Hewitt. While employees are free to opt out, companies report average participation rates above 85%, compared with 67% for those without auto-enrollment, Aon Hewitt says.

"Yet 401(k) participants' average savings rates have fallen in recent years. Among plans Aon Hewitt administers, the average contribution rate declined to 7.3% in 2010, from 7.9% in 2006. The Vanguard Group Inc. says average contribution rates at its plans fell to 6.8% in 2010, from 7.3% in 2006. Over the same period, the average for Fidelity Investments' defined contribution plans decreased to 8.2%, from 8.9%.

"Vanguard estimates>about half the decline "was attributable to increased adoption of auto-enrollment."
...
"Many companies said they selected a 3% default contribution rate in part out of concern that a higher rate could prompt employees to drop out of these plans.Medtronic Inc. spokeswoman Cindy Resman said the medical-device maker opted for a 3% contribution rate because that was the prevailing rate in 2007, when the company implemented auto-enrollment."

Behavioral Economics in Management Science

Kathleen McGinn forwards the following announcement, a version of which also appears here:

Given the tremendous growth and importance of behavioral economics research and building on the success of our Behavioral Economics and Finance Special Issue (which is scheduled to appear in the January 2012 issue), we have created a new department in Management Science: 
Behavioral Economics
We provide below our editorial team, the editorial statement for the department and information about Management Science. You are receiving this email most likely because you have reviewed or submitted to Management Science.  Please pass on this information to all that may be interested. 

Department Editors:
Uri Gneezy, University of California, San Diego
Teck-Hua Ho, University of California, Berkeley
John List, University of Chicago

Associate Editors:
Nick Bloom,Stanford University
Colin Camerer, California Institute of Technology
Jeffrey Carpenter, Middlebury College
Gary Charness, University of California, Santa Barbara
Yan Chen,  University of Michigan
Anna Dreber,  Stockholm School of Economics
Simon Gaechter,   University of Nottingham
Stephan Meier,  Columbia University
Klaus Schmidt,  Univeristy of Munich
Andrew Schotter,  New York University
Uri Simonsohn,  University of Pennsylvania
Matthias Sutter,  University of Innsbruck
Chad Syverson,  University of Chicago
John van Reenen,  London School of Economics
Roberto Weber,   University of Zurich  

Editorial Statement:
The Behavioral Economics Department seeks to publish original research broadly related to behavioral economics. We welcome laboratory experiments, field studies, empirical and theoretical papers. The goal of the Department is to promote research on incentives and behavior in domains such as markets, groups and individual decision making.  In the cross-disciplinary tradition of Management Science, we encourage research that draws ideas from multiple disciplines including economics, psychology, sociology, and statistics to provide novel insights on behavioral economics.  In all cases, manuscripts should provide high quality original approaches to behavioral economics, should be motivated such that the importance of the results are clear to nonspecialists and have important managerial implications for business and public policy.