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

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

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

4. 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

5. 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

6. 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

7. 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)

8. 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)

9. 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

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

11. 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…”

12. 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)

13. 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…

14. 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…

15. 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?

16. 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.)

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

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

19. Poor Doug Pitt…

20. (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)

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

22. Asymmetric Dominance R+ R
Rome Utility P+
Paris Utility

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

24. Asymmetric Dominance R+
Rome Utility P P+
Paris Utility

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

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

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

28. 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)

29. 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

30. 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

31. 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

32. 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

33. scholar.harvard.edu/sbhanot
Thanks!
Syon Bhanot
Swarthmore College
Contact:
scholar.harvard.edu/sbhanot