Behavioral biases and heuristics: a primer Syon Bhanot, Swarthmore College World Bank DIME Workshop, Istanbul, May 12, 2015

Many Behavioral Challenges… (Duflo, Kremer, and Robinson, 2011)

Many Behavioral Challenges… Reforms and regulation involve individual behavior at their core (Duflo, Kremer, and Robinson, 2011)

Understanding Biases and Heuristics Heuristics: simple rules used to make decisions “If it smells bad… don’t eat it” “If someone is running towards you at high speed, yelling angrily… run away” Heuristics can be either learned or hard-wired Biases: when these mental shortcuts systematically lead us to make errors in our decisions

Nudges and Other Interventions Behavioral interventions do not always work (or they can have very different effects for different types of people) Context is key—which makes testing very important

Behavioral Concepts for Project Design 1) Status-Quo Bias and Defaults 2) Present Bias and Time-Inconsistency 3) Relativity and Context 4) The Limits of Choice 5) Social Norms and Motivators

1) Status Quo Bias and Defaults This after an extensive education campaign and mass mailing to 12m of 15m residents of the Netherlands in 1998! (Johnson and Goldstein, 2003)

1) Status Quo Bias and Defaults This after an extensive education campaign and mass mailing to 12m of 15m residents of the Netherlands in 1998! (Johnson and Goldstein, 2003)

1) Status Quo Bias and Defaults Status Quo Bias – a preference for the current state Can lead to: Inertia in decisions (financial, professional, social, personal, etc.) Low take-up of important programs Possible Solutions? SQB – a preference for the current state

Defaults Defaults in 401(k) Savings (Madrian and Shea, 2001)

Active Decisions Active Decisions in Financial Behavior (Choi, Carroll, Laibson, Madrian, and Metrick, 2009) “The active decision regime yields participation rates that are up to 25 percentage points higher than those under the regime with a standard default of non-enrollment (and) raises average saving rates and average balances…”

Smoothing the Path of Least Resistance Vaccination and implementation intention prompts (Milkman, et. al., 2011) Home delivery found to raise fertilizer use by 70%. (Duflo, Kremer, and Robinson, 2011)

Now, A Question… Would you rather have a professional, 20-minute massage right now or a professional, 25-minute massage tomorrow? Most people want it now…

Now, Another Question… Would you rather have a professional, 20-minute massage on May 12, 2016 or a professional, 25- minute on May 13, 2016? Now most people are willing to wait an extra day…

2) Present-Bias and Time Inconsistency Humans struggle with self-control, overweighting the present in their decisions Many reforms involve long-run benefits and short-run costs or hassle So present-bias can prevent program take-up or deter otherwise beneficial actions Possible solutions?

Commitments to Bind Us Commitment Savings in the Philippines (Ashraf, et. al., 2006) Save More Tomorrow (Thaler and Benartzi, 2004) Innovative Mobile Platforms (Digit, Acorns, etc.)

Using Our “Future Selves” Encourage Long- Term Thinking (Hershfield et. al., 2011)

3) Relativity and Context Nearly every decision and choice is dictated by how one thing appears in relation to another

Poor Doug Pitt…

(Ariely and Wallsten, 1995; Huber, Payne, and Puto, 1982) Asymmetric Dominance Rome Paris Vs. Free Coffee Included! (Ariely and Wallsten, 1995; Huber, Payne, and Puto, 1982)

Asymmetric Dominance R+ R Rome Utility Decoy P+ Paris Utility

Asymmetric Dominance R+ R Rome Utility P+ Paris Utility

Asymmetric Dominance R+ Rome Utility Decoy P P+ Paris Utility

Asymmetric Dominance R+ Rome Utility P P+ Paris Utility

The Compromise Effect Attribute 1 (cost) Attribute 2 (caffeination) Maybe a more relevant compromise effect example? Attribute 2 (caffeination) (Simonson, 1989)

The Compromise Effect Attribute 1 (cost) Attribute 2 (caffeination) Maybe a more relevant compromise effect example? Attribute 2 (caffeination) (Simonson, 1989)

4) The Limits of Choice More choice is not always good – “Choice Overload”

4) The Limits of Choice Having more fund options in individual 401(k) savings plan is associated with less investment in equity (Iyengar and Kamenica, 2010) In consumer behavior, more choice can mean more curiosity… but less actual purchases (Iyengar, 2000) However, when looking at Medicare plan choice, evidence that more choice leads to more beneficial switching (Ketcham, et. al., 2015)

5) Social Norms and Motivators We care about how we compare to those around us This can be a powerful tool to influence behavior at low-cost

5) Social Norms and Motivators Allcott (2011): Finds social information mailers reduce energy use by ~2% Kraft-Todd, et. al. (2015): Review of literature finds social motivators a promising tool to promote cooperative behavior in real-world settings

5) Social Norms and Motivators Some limits and heterogeneities in response to social information: Beshears, et. al. (2014): Peer savings information decreases savings for previously low-savers Schultz, et. al. (2007): Evidence of “boomerang effects” from social information Bhanot (working paper, 2015): Competitive framing on social information can demotivate low-performers

Key Takeaways 1) Human behavior and decisions are at the core of all projects being discussed here this week, in some form 2) Humans suffer from behavioral biases that keep them from making logical/rational decisions in some contexts 3) By understanding these biases (and testing them using impact evaluation methods), we can improve project design, increase take-up, and maximize impact

scholar.harvard.edu/sbhanot Thanks! Syon Bhanot Swarthmore College Contact: spbhanot@gmail.com scholar.harvard.edu/sbhanot