1. Loewenstein: IAREP The Economist as Therapist: Behavioural economics and "light" paternalism

2. Loewenstein: IAREP

3. In fact, people often don’t know what’s best for themselves (and when they do, often have trouble getting themselves to do it) Health behaviors –1960-2000, obesity (BMI>30) in U.S. adults increased from 13% to 31%  1985: no states in U.S. with obesity rate > 15%  2005: no states with obesity rate < 15% –“Lifestyle diseases caused by, e.g., tobacco & alcohol use account for ≈ 1/3 of all deaths in US. –Potential benefit of many medicines – e.g., to control blood pressure, cholesterol and avoid strokes -- stymied by poor adherence  e.g., ≈ 1/2 of patients who have a heart attack stop taking cholesterol medication in first year Spending/saving/investing  Average U.S. savings rate: -1%  Median Net worth, excluding home equity (year 2000): ◦All U.S. households: $13,473 ◦Households 65+: $23,369

4. Loewenstein: IAREP Traditional economics not well equipped to deal with these problems; assumes that people.. –know what’s best for themselves –are able to act on that understanding  little or no need for intervention (beyond problem of externalities)  focus on prices and/or information as main tools for policy

5. Loewenstein: IAREP Behavioral economics: allows for mistakes. People often... –don’t know what’s best for themselves –do know, but can’t do it  motivates intervention (much as one intervenes in diet of children)  inspires new approach to policy: ‘light paternalism’

6. Loewenstein: IAREP Paternalism: –policies intended to benefit individuals, premised on the idea that people cannot be relied upon to pursue self-interest – commonly justified for children and others deemed unable to behave rationally –distinct from regulations intended to deal with externalities – i.e., to protect others Behavioral economics: –expands the possible application of paternalism by identifying systematic mistakes made by a broad cross-section of the population

7. Loewenstein: IAREP However, widespread discomfort with ‘heavy-handed’ paternalism Fear that policy-makers won’t make better decisions Fear of regulatory capture (e.g., cigarette companies knew warnings wouldn’t help but would shield them from liability) People may have good reasons for behaving as they do (that policy-makers don’t understand) Inherent value of autonomy/liberty

8. Loewenstein: IAREP Proposed solution: ‘light paternalism” Blanket term intended to encompass: “Libertarian paternalism” (Thaler & Sunstein, 2003) Point out that paternalism is often unavoidable; why not make decisions that are best for people? “Asymmetric paternalism” (Camerer, Issacharoff, Loewenstein, O’Donoghue & Rabin, 2003) Argue that it’s often possible to implement policies that improve welfare of those behaving suboptimally without limiting freedom of those behaving optimally

9. Loewenstein: IAREP Common theme: using errors and biases that ordinarily hurt people to, instead, help them

10. Loewenstein: IAREP An example: defaults Substantial evidence that defaults matter – e.g., organ donations, savings behavior, investment allocations

11. Loewenstein: IAREP “Status quo bias” and defaults in organ donation (Johnson-Goldstein Sci 03)

12. Loewenstein: IAREP Defaults fit the definition of both libertarian and asymmetric paternalism No avoiding a policy on defaults Defaults (e.g., on amount of salary allocated to 401k) are almost unavoidable (and lack of default itself involves a policy decision) Asymmetric in two respects: –Desirable defaults can improve the welfare of those who mindlessly adhere to the default without restricting the options of those who do not. –Carefully selected defaults should be unobjectionable to those who don’t believe there is a status quo bias but should be embraced by those who believe that there is such an effect.

13. Loewenstein: IAREP Changes introduced into benefits package of large corporation.. NEW Cohort defaults (all could be changed easily by employee): –Automatic enrollment –3% of salary allocated to 401k –100% of allocation to money market WINDOW cohort: –Immediately eligible for 401k –No automatic enrollment or allocation default

14. Loewenstein: IAREP Enrollment

15. Loewenstein: IAREP

16. Light paternalism has diverse ramifications 1.Need for new welfare criterion 2.Encourage a focus on process 3.Need for expanded field research 4.Implementation issues: channeling existing economic interests

17. Loewenstein: IAREP 1. Need for alternative welfare criterion Standard preference-based welfare criterion assumes that people naturally choose what’s best for themselves; welfare measured by the degree to which individual preferences are satisfied But premise of light paternalism is that people can’t be relied upon to choose what’s best for themselves  need for alternative welfare criterion to evaluate success of paternalistic interventions

18. Loewenstein: IAREP Possible welfare criteria Experience utility (back to Bentham!) Problem: adaptation Limiting utility to ‘valid’ choices (Bernheim & Rangel, forthcoming) ‘Informed’ decision utility Problems: –Informing often difficult –Information often not the issue Preponderance of preferences

19. Loewenstein: IAREP Big problem with experience utility: adaptation Wortman and Silver (1987): quadriplegics reported no greater frequency of negative affect than control respondents! Tyc (1992): “ no difference in quality of life or psychiatric symptomatology ” in young patients who had lost limbs to cancer compared with those who had not.  Experience utility would place no negative value on quadriplegia or limb-loss! Also, our research shows that people with disabilities who report being perfectly happy also say that they would give up substantial money or life-expectancy to re-attain good health.

20. Loewenstein: IAREP Possible welfare criteria Experience utility (back to Bentham!) Problem: adaptation Limiting utility to ‘valid’ choices (Bernheim & Rangel, forthcoming) ‘Informed’ decision utility Problem: Informing often difficult if not impossible Preponderance of preferences

21. Loewenstein: IAREP 2. Importance of process Decision biases often contribute to suboptimal behavior – e.g., –Hyperbolic time discounting  inadequate saving, overeating, procrastination, poor medication adherence –Status quo bias  inadequate retirement saving –Loss aversion  poor investment decisions –Overweighting of small probabilities  burning money by playing the lottery Best light paternalistic programs use same biases to promote well-being

22. Loewenstein: IAREP Example: Save More (AR) Tomorrow plan (Benartzi & Thaler) Inadequate saving due in part to: –hyperbolic time discounting (which leads to overweighting of present gratifications) –underweighting of opportunity costs relative to out of pocket costs (because putting money aside is seen as an out of pocket cost) –Status quo bias (because default on most 401k plans is zero) SMarT Plan: –Employees agree to increase 401k put-aside next year –Financed out of wage increase (which is reduced) Uses all three biases to promote saving –Hyperbolic time discounting  willingness to save tomorrow –Underweighting of opportunity costs  willingness to save out of salary raises –Status-quo effect  continued adherence once implemented  Highly effective!

23. Loewenstein: IAREP First implementation of SMarT plan

24. Loewenstein: IAREP 3. Need for expanded field research Paternalistic policies often have unintended consequences Different biases come into play People may have had good reasons for behaving as they do Social/economic interactions produce unexpected consequences  Need for field experiments

25. Loewenstein: IAREP

26. Asset allocation

27. Loewenstein: IAREP 4. Channeling existing economic interests Many economic interests stand to gain from individual mistakes: credit-card companies: overspending Fast-food companies: over-eating Diet industry: obesity Banks: overdrafts, etc. Realtors/mortgage companies: overextension Hospitals & pharmaceutical companies: poor preventive care States: lottery play Casinos, Pornographers, etc. etc.

28. Loewenstein: IAREP Economist as therapist needs to identify commercial/government interests aligned with those of individuals Health insurers, Veterans administration: preventive health Drug companies: medical adherence Investment companies: adequate saving

29. Loewenstein: IAREP Some projects.. Warfarin adherence Weight loss Promoting saving

30. Loewenstein: IAREP Warfarin Adherence (project with Kevin Volpp & Stephen Kimmel) Illustrates.. Importance of process Value of field experiments Alignment of commercial and individual interests

31. Loewenstein: IAREP Warfarin (Coumadin): Anti-stroke medication Benefits are unambiguous (welfare evaluation is trivial) Chance of stroke / past stroke ≈ 21% Warfarin (if taken correctly)  ~3% However, only 66% adhere, even in best conditions (warfarin clinic) –For every 10% increase in missed doses, ~14% increase in odds of under-coagulation –Patients with more erratic doses have higher risk of both under- and over-coagulation Our goal: increase adherence through incentives

32. Loewenstein: IAREP Importance of process.. Insight #1: need to deliver frequent feedback and rewards – ideally at the daily level Insight #2: lotteries give more bang for the buck (in part because people overweight small probabilities) Insight #3: ideal lottery gives frequent positive feedback plus the hope of big payout (because people are both forward- and backward-looking) Insight #4: play on regret...

33. Loewenstein: IAREP Our solution.. Patient gets 2 digit number (e.g., 27) Every evening we draw a two digit number –If first two digits match (e.g., 25) or second two digits match (e.g., 57), they get $10 –If both digits match (27), they get $100 But..... ONLY IF THEY TOOK THEIR WARFARIN –Message transmitted to subject whether they won or would have won (if didn’t take medication)

34. Loewenstein: IAREP How do we know if they took their warfarin?

35. Loewenstein: IAREP Planned study 4 conditions: 2 (reminder/no reminder) x 2 (lottery incentive/no lottery incentive) factorial design Outcome meaures –Primary: proportion of time out of therapeutic INR range –Secondary: rates of thromboembolic events, bleeding, adherence, costs Who can fund? Aetna (health insurance company)

36. Loewenstein: IAREP But, first need to prove it works.. Pilot Project #1 –10 subjects for one month –reminder + incentive condition only (controls = same patients before intervention, and other patients) –got the incentives wrong ($5 EV/day) Pilot project #2 ($3 EV/day)

37. Loewenstein: IAREP Rates of non-adherence

38. Loewenstein: IAREP Weight Loss Study All Participants: Attempt to lose 1 pound per week for 16 weeks Asked to return to lab each month for weigh-in 3 conditions: Control Experimental (2 conditions) –Both conditions:  Daily weight-monitoring: Ps asked to phone in weight every day  Feedback: Sent daily text message –E1: Lottery incentives –E2: Deposit contracts

39. Loewenstein: IAREP Incentive conditions Lottery Same lottery scheme as for warfarin And, similarly, participants only receive lottery payment if.. a) called in weight that day and b) are at or below daily weight loss goal Message transmitted to Ps via pager whether they won or would have won Deposit Contract Ps can put “money down” toward weight loss at beginning of month All deposits matched 1:1 If P is at or below weight loss goal at end of month, he gets the deposit contract back If not, he forfeits the $

40. Loewenstein: IAREP First month 1-way ANOVA: F(2,38) = 19.96, p < 0.0005

41. Loewenstein: IAREP First month χ 2 (2) = 25.61, p < 0.0005

42. Loewenstein: IAREP Results to date (4 months into study)

43. Loewenstein: IAREP χ 2 (2) = 29.07, p < 0.0005 Results to date (4 months into study)

44. Loewenstein: IAREP Saving (in progress; need partner!) The problem (welfare criterion) Out of 122 million working Americans, 42 Million Save through Defined contribution plans Median family owns zero stocks, even in retirement plans Average U.S. savings rate: -1% Median Net worth, excluding home equity (year 2000) –All U.S. households: $13,473 –Households 65+: $23,369

45. Loewenstein: IAREP Usual Assumption: People don’t care about retirement  Try to make retirement more vivid (either positively or negatively)

46. Loewenstein: IAREP Participants set a yearly saving goal (e.g., $1,000) Make weekly deposits (e.g., $20) Every week they are on or above target, participate in a lottery (at the time of making their deposit) Plays on: hyperbolic time discounting, goal gradients, peanuts effect Alternative approach: lottery-based rewards

47. Loewenstein: IAREP Conclusion Public policy is currently the most important application of behavioral economics Possible to design ‘light paternalistic’ policies that help people without reducing their autonomy Many of the most successful interventions use the same biases that typically hurt people to, instead, help them