Behavioral economics and decision making

Assignment #2 Ann Rancourt

Dan Ariely’s talk was very interesting and engaging. The experiments he conducts provide clear examples of the hypotheses he is testing. I agree with the concept of “predictably irrational” thought and action and have lived long enough to see how the same mistakes are repeated and, sometimes, no matter what facts or logic are brought to the discussion in hopes of revising the outcome, how patterns remain the same.

There is no doubt with my own experiences that the more factors involved in a decision, the more complex, the easier it is to make a less effective, if not a more irrational decision. I agree with Ariely that human beings seem to be quite myopic and easily confused. Regarding rational decisions (assignment 1), it seems that, though one might expect, for example, higher educators to be concerned with the common good, decisions often reflect a much more myopic focus of “is this good for me” or “what is or is not in it for me”?

I am not sure how much rational thinking I have actually experienced in my career (higher education), and the times that the thinking has seemed rational have not always resulted in creative strategies regarding decisions. In fact, what I have experienced pretty consistently in the academy is some pretty good levels of critical thinking but very few examples of good levels of creative thinking.

If only we human beings could be as rational as Ariely calls us to be when he says “if we are prone to mistakes”, we can target them and impact them. Rather we seem content to not analyze the potential for mistakes and their impact, but rather to continue to make the same mistakes over and over again. This is highlighted by Chris’ (a member of my group) comment about rational decision making based on a flawed model.

The points Ariely made about our perceptions being impacted by real or perceived norms, relying on cues, including misleading ones, to make decisions, manipulating options to impact decision making and the role structure impacts behavior were very thought provoking, as was what I found to be the most thought provoking part of the lecture: structures typically facilitate a lot of people cheating a little rather than a few people cheating a lot. We probably have all cheated a little and in doing so we have weighed, as Ariely says, what we will gain, what the chances are of getting caught, and how much we will be punished if caught. When he asked “what drives people to cheat a little”, I thought it might be our ability to distance ourselves from that or those from whom we are taking. We are probably less likely to take from someone we know than from someone we do not know. Though recent frauds and schemes have proven that is not always the case. I have always felt that the first time you cheat or litter or whatever, is the hardest, after that, if successful, it gets easier. When we don’t see who or what is getting hurt or is impacted by our “cheating” then, after doing it once, it probably has less and less impact on us (on our ability to see ourselves as good while weighing the impact of doing something wrong [cheating] a little.

The issue of structure presented in Ariely’s lecture seems to coincide with the information we read about framing. There is no doubt the choices we make are based on our perceptions of how things are framed and the language used to communicate ideas and lead us to a particular action. At the heart of these two concepts to me is the idea of manipulation and the question as to what end is attempting to be achieved by who is doing the manipulating?

Ariely says our new economy is not going to be about the money, but what is one step removed from it. So, people are likely to be less focused on stealing money but finding other ways to advantage themselves (stock options). I wonder how this links to the prospect theory that what we perceive we may lose is more powerful than what we perceive will be gained.

Ariely identifies as lessons of behavioral economics that people have irrational tendencies, we have developed certain assumptions about what is right and what is wrong, our intuitions are often wrong, we need to understand human limitations, and we need to continually weigh, at a very individual level, what risks we are willing to take and why. Standard economics purports that people will pursue their best interests; however, the behavioral economists posit that when things get complex, people often don’t know what is in their best interest and may not always make the best decision.

Finally what I find compelling in this week’s readings and lecture is that when we own something we find it more valuable (endowment effect). Perhaps if we felt responsible for owning our actions we would think differently about making some of the decisions we make.

It is always dramatic and enjoyable to see the kinds of hand-picked examples and experimental results that we saw this week, but if there is any “surprise” in this week’s content I’d say it is that so many people today are still surprised by such examples and findings.  For me, the content is all fascinating stuff (and I really do love hearing the examples) but it is equally fascinating that behavioral economics has been mainstream for only such a short time.  Maybe I suffer from the curse of knowledge, but many of the relevant topics have been studied in psychology for as many as 100 years at this point.  Of course, while the amount of support collected over 100 years’ time is quite significant for the position that “the best predictor of future behavior is past behavior,” we can still do only a very poor job of actually predicting human behavior.  But all the same, each of us is very well aware that entire disciplines (marketing, advertising, public relations, sales and the like) exist for the purpose of influencing our behavior–and are quite successful at it.  To realize that the design of a DMV form would affect whether or not we declare ourselves to be organ donors should not be much of a stretch.

I’m a little bit confused about the levels of analysis and the kinds of things being studied in behavioral economics.  I always thought that traditional economics was concerned with a pretty narrow range of economic concepts (pricing, value, wealth, production, consumption, interest, profits, investment, returns, etc.), only the most overt human behaviors as they related to that set of concepts (how many hours you’d work at a certain rate of pay, could costs of production be maximized by employing x amount of people and y amount of machinery, etc.), and mainly the effects in the aggregate—especially with a focus on how markets and overall economic systems work (and not so much about the individual except for where understanding the non-existent “average individual” is critical to understanding the system).  So I’m having trouble figuring out why behavioral economists are interested in how people self-characterize the number of times per day they floss, how many flavors of jam they will sample, and whether contemplating the Ten Commandments would keep them from cheating at school.  It is probably that I am defining “economic” matters too narrowly or mistakenly thinking that they should just be directly studying what they want to know about (as opposed to studying something else—like cheating in school–that may lead them down a path or allow them to generalize findings to something that would be more germane to economics).  After all, in psychology behavior is defined broadly (it includes thoughts, feelings, decisions and overt actions) so economists should probably also be allowed to have a range of interests!

I’m also a bit confused about the rational and irrational thing.  As I already stated, I agree that these so-called irrational tendencies exist.  I also agree that is valuable to recognize that they exist because this information that can be put to use in any number of ways for good or evil purposes.  And I agree that I’d personally call at least some of them “irrational.” But in economics the definitions of rational and irrational are different.  And if these cognitive biases, mental blindspots and perceptual deficits are actual constraints that result from the hardwiring of the brain and the normal functioning of the mind, then economic decision making in which these factors come into play can still involve the reasoned type of thinking that traditional economists expect from econ-flavored people, yes?   It would just be that their reasoned cost-benefit analyses would be flawed based on “other” factors (namely, lack of capability) in much the same way that a reasoned analysis could still be flawed due to incomplete information.  I’d think the behavioral economics takeaway that most people’s intuitions are wrong about whether they will be influenced by different design factors could even be some sort of evidence that people do consciously go through a rational decision making process (in other words, I’d think that the reason that they think they are rational is that they know they intentionally reason through at least some of their decisions).

Anyway, the topics are fun but pretty intense.  I see this stuff all over the place in my own life.  For instance, I’ll see a tv commercial for a chain restaurant and identify several dishes I’d like to try.  When I actually go to the restaurant, I will really just order the same thing that I like.  This is something behavioral economists look at; we are wired to plan for the short term plus we express an interest for variety over the long term but each time we are in the situation it is a single event and we choose differently in that single instance then we would if dealing with a big-picture hypothetical or intention for the longer-term.  In fact, I am not a picky eater and have eaten and enjoyed many things that other Americans wouldn’t consider eating, but I am quite guilty of ordering exactly the same thing repeatedly across multiple visits to any given restaurant.  I also have a very close friend who is about as different from me as they come; she is actually the most irrational person I know in every area of her life and her behavior is full of items that I can have fun looking at through the behavioral economics lens (especially her behaviors around gambling and general handling of money).

I seem to be suffering from some sort of confirmation bias because I now see things that are relevant to behavioral economics everywhere I look!  I spend a lot of time on the internet each day and follow tons of blogs dealing with a variety of topics and fields, so I get turned on to a lot of random stuff that other people have found interesting.  I didn’t realize that the Pope is interested in economics.  I think it is creepy that the government would pay kids not to get pregnant; I also think it is scary that the government can think it is better to take away the possibility that we will make what they consider to be a bad choice than to give us better information and accept the choice we do make.  And it is very easy to see that Google directly applies at least some of the same things in their product development process that the psychologists and behavioral economists have uncovered and continue to study: people don’t actually know very well what they want, need, or do—but watch them and you can see for yourself.

I hope that the topic of situation and context will come up at some point because the effects on behavior are profound.  Situations are complex, changeable, hard to predict and highly variable so that is part of the reason why it is so hard to predict behavior.  I also think that motivation is important and I’m pretty sure that some studies have shown that sustained intention impacts behavior.  Those kinds of patterns are more interesting to me than the mathematics of the full-blown economic models.  When this class is over I doubt that I’ll remember what Prospect Theory is, but I’ll probably remember the disposition effect and endowment effect (even though I won’t remember what they are called).

In conclusion, we are predictable. Dan’s presentation put me in the position of a bystander watching my own decision making processes.  Many of the decisions we make and the decision processes we take are automated and follow the same pattern, but we, or I such say I, have never stop to analyze such patterns as Dan has.

I found it interesting that he questioned if we really knew our preferences by stating that our preferences aren’t truly defined, but relied on advice or a form of guidance.

Dan also made a point on decision illusion by citing the example of the organ plot. Depending on how the question was worded, our perception of how often we floss changed. This reminds me of how prices are presented. Here in Brazil, you have self service restaurants everywhere and most of the prices are presented according to the kilo amount you eat, for example R$15.99/kilo (of food). Other places in which the price tag is considered a bit high in terms of kilo, present their prices in terms of grams, therefore $15.99/kilo would then be presented as R$1.59/100grams (of course 100 grams written in small letters). At first glance the former seems more expensive, but in reality the prices are the same. Consequently, we are able see the power of perception in marketing.

 I found unusual though, that there was no mentioning on the influence of culture, background, upbringing, and realized that these decision making processes may not directly be linked to these factors and perhaps are independent processes pertaining mostly to individuals in the face of society and not society against society.  Again another advantage for marketers!

Regarding some of the readings on wiki , the text on framing brought up the example of a PR ‘firm advises clients to use “bridging language” that uses a strategy of answering questions with specific terms or ideas in order to shift the discourse from an uncomfortable topic to a more comfortable one.[12] Practitioners of this strategy might attempt to draw attention away from one frame in order to focus on another.’ We can relate this to the recent emphasis on the ‘cap and trade’ bill or as now referred to as “Pollution Reduction and Investment” program; the billed was renamed. Senator John Kerry, the lead sponsor of the Clean Energy Jobs and American Power Act, never used the term “cap and trade” in the new bill the democarats have set to fight global warming. It is a clear shift in discourse to highlight individual investing on climate change.  We are yet to see the consequences of evaluaed the bill from this angle alone.

 In the end, I wonder if everything were revealed to us, as to how the act of framing, our knowledge of the endowment effect, decision illuson, etc not only influenced our decisions, but were the basis of which we made them, would we change, would and could we “correct” our system?

This week’s materials either validated much of my thinking re: human behavior, or opened doors – enabling leaps of thought – that I didn’t think existed.

To an extent some of my work focuses on corruption (particularly in gov’t) and another strand has always been about media/technology/innovation. In a sense I was an ideal audience member, if not subject, for Dan Ariely’s discussion on cheating. [Even if I didn't quite grasp the Wikipedia discussion of Prospect Theory - I'd love further coaching.]

I found it surprising that the honor code at Princeton made no difference compared to MIT’s lack of one (that said, the community there is one of the most ethical of populations I’ve ever met).

If I had been in the audience, I’d have asked Ariely a few things: Could we run an experiment that compared the “truthiness” (Colbert Report term, for those unfamiliar) between white-collar and blue-collar folks? (Also: What are the implications here for Digital Piracy? Are any behavioral economists studying the emerging gift economy? Virtual goods? eBay and other auction models? When I was an e-commerce mediator for eBay, the expression “As Is” was fraught. To some, it was license to omit that a good was non-working… )

On a related note: In fall I tend to watch many of the TV pilots – in the sitcom Community the lead character finds himself back at school because he’s been disbarred for lying about his credentials. When queried on how he could take such a wrong turn as a smart person, he volunteered: “that’s the problem with being smart, you don’t have to DO anything.” Getting by on cleverness, possessing a keen intellect, does that amplify or undermine our moral compass? Of course, smarts and ethics may be unrelated.

While this lecture was compelling in its totality, I came across a more recent Ariely clip on BigThink on how buying fake designer goods (those sunglasses on NYC’s Canal Street, fake Vuitton bags, etc) leads to an outlook where lying is in a sense normed. I was not entirely swayed. Here’s the link to the brief discussion (10 minutes or so): http://bigthink.com/bigthinkeditor/do-prada-knockoffs-make-you-evil What does everyone think?

A second question is based on the recognition that Ariely worked for the Fed in Boston. He must’ve had an insider perspective to the financial crisis. One that was not evident in this summer, 2008 lecture.

Reflecting back on the essays for Assignment #1 -

First of all, I commented on each of my group’s responses within their essays.

Overall, I was surprised on what seemed like a stigma to admit being an econ. If I could, I wouldn’t mind a bit more econ in my decision-making. My character – aspirationally, and to a lessor extent, in reality – is very open to new ideas, doing things at the drop of a hat. I’ve built my life as a freelancer as one who prizes flexibility and randomness. My apartment allows me to walk most places in Manhattan and I can do so usually within 20 minutes. As a “culture worker” I love not planning the day and letting events take me. That said, I am rigorous about my work – I give my clients 110% and am quite pragmatic in whether or not my silly brainstorms can take flight.

But like my fellow classmates, I am self-aware that I am vulnerable in a number of areas: Until a year ago, I also was easily seduced by “economy-sized” offerings, “pay one price” deals for amusement parks. I then adopted greater restraint. Even though Michael Pollan has little focus on economics in his books (The Omnivore’s Dilemma) I can now re-read him as a BE practitioner. As an antidote to overconsumption in the age of Supersize Me Pollan makes a case for portion control – specifically cutting back 20% on the size of your meals. He argues that it won’t be noticeable from the point of view of appetite… and he was right. One takeaway from the lecture is that I’m now noticing opportunities where a behaviorial economics wouldn’t have produced a better outcome. My gym – new to me since it opened this summer – is still trying to find members – and I’m amazed at how unsophisticated their approach is.

How the global recession forced us to be more Econ? Or am I giving too much credit to people – that they can so easily re-pattern their behavioral thrust?

I’m not sure if I completely agree with Ariely’s premise on how we don’t actually have well-defined preferences. In making long lists or having numerous choices, I think he’s really confirming Prof. Barry Schwartz’s thesis in The Paradox of Choice, that after too many choices (more than 5 colors, 3 or 4 choices) we shut down. Which brings me to ask: For those familiar with his book -can we graph it against our understanding of behavioral economics? Schwartz speaks of “maximizers” and “sufficers.” I think it would be cool to compare/contrast these personality types against econs and humans. [Sidebar: Who believes that polling in depth is deliberately undermining our preferences? When I saw a recent Obama poll on healthcare and Afghanistan I was struck by how dissimilar the issues were and wondered how this might affect responses.]

To be candid – and shallow – I’ve found myself distracted in the past by Ariely’s appearance. Learning that he was a burn victim – and how it was a poignant entree into his specialty – hasn’t erased what he looks like, but now it’s irrelevant and not a stopping point. Not only was I pondering the implications of his work on doctor-patient relationships (I *just* wrote a piece on this) but I began considering how secondary factors (such as his scarred face) can inhibit both learning and action. Sometimes in fact, they’re at odds. Five years ago I went to see a play, The Vagina Monologues. In this play about female empowerment, the actress Loretta Swit from M*A*S*H*) showed off some seriously bad plastic surgery; it was a cognitive disconnect.

I LOVE Ariely’s statement that Scale Designers have an unrealized influence in how choices are made. I understood this innately, yet had never pondered the implications across topics and disciplines.

Riffing of “Rome Without Coffee”: Did anyone see Saturday Night Live two weeks ago? There was a skit where a man is presented with two women as possible brides. One is gorgeous and $50, the other is cast member Fred Armison in drag (not so stunning) and “she” is $49. The groom-to-be has a difficult time deciding because of the price discrepancy. Thanks to Ariely, I was able to see – and enjoy even more – the skit in a behavioral economic context: http://www.hulu.com/watch/98327/saturday-night-live-russian-brides

Other thoughts: Is the resistance to healthcare reform based on the endowment effect? A sizeable % of the US population has health insurance. It may be eroding, it may be insecure, but are they overvaluing it versus the risk of a public option? I’d love to discuss this. (Related: in the discussion of Framing, I couldn’t help but think of a recent observation by Nate Silver of the blog fivethirtyeight.com (a polling savant) who tried to plot the dollar inflection cost that an elected official could be “bought” by the healthcare industry. That came down to just $50,000.)

Have there been any “debates” between classical and behavioral economists? I’d love to see these. Also: How would a BE have handled the bank crash?

Cheers,

Jerry

In his talk Dan Ariely covers several issues such as

How to deliver bad news (Burn department story). Although his story about his injuries and subsequent recovery is very dramatic and sad, it does demonstrate an an inquisitive mind of a scientist that questions the assumed basics of human behavior. The author describes well the nature of a non econ person. He shows through examples that in high stake situations people tend to make mistakes, and sometimes those mistakes are allowed to accumulate to result in a snowball effect. In my opinion the overarching purpose of the video for Dan Ariely is to portray a person as a human, an alternative to a classical econ. He does so by showing several instances where human perception fails, and where logic misleads. For example in his example of visual system failures Dan Ariely used a video clip, but it was cut out. I managed to find this clip online so while you watch it try to count how many passes the white team makes and then watch it without counting. http://viscog.beckman.illinois.edu/flashmovie/15.php

The author also demonstrates how people can predictably behave in an irrational way (thus I guess the title of his book). If you recall during his examples of complex decisions (one time and successive) and suggestions (organ donation decision, hip replacement, jam study) it was quite clear that there is a set of factors that can affect one’s decision making process. He also successfully manipulated those factors to create specified outcomes. In his example of Strength of Preferences and how they can be influenced them, contrast and implicit scale  he managed to direct to a specific outcome.

At this point this reminded me very vividly of the Marketing course I took during my BBA degree. The science of consumer behavior deals with exactly this kind of patterns. Except their goals usually are not academic in nature.

I think the issue how marketing people use that knowledge and whether it’s a good or bad way of going about it is very complex and involves many ethical dilemmas.  But the fact is that people are not 100% efficient and there is room for improvement/manipulation (depends how you see it)

Dan Ariely’s studies into ethics and cheating + contemplation of morality are very impressive. It puts a lot of question on the table about how we are allocating our resources and constructing our policies as a society. After all a lot of people cheating by a little bit results in huge expenses to our economy. It seems like it is in nature of humans to concentrate on newsworthy events (such as Enron) and ignore events of much bigger magnitude but of lesser intensity.

Lastly authors demonstration of endowment effect is yet another pattern of behavior that is engraved into the human brain. I have experienced it myself countless times (whether showing my friends my new gadget and thinking that they are fools for not having one or  getting bored hearing about an acquaintance purchasing a new supposedly awesome grill).

Ultimately I agree with the author that current models do not have sufficient power to explain human behavior and that cognitive methods of human brain can be studied and predicted. Although the result will not be a rational universe it will be a predictable one and thus more efficient  than current “surprise just behind the corner” scenario”

I have recently been thinking about similarities between measurements and practices, that is, how our practices can be thought of in measurement terms.  This weeks reading reminds me of the terms bias and test bias.  The basic idea is that is the structure of practice is not neutral; it biases people toward certain outcomes.  People often think of bias as synonymous with the term fairness in regards to the effect it has on different groups, and bias certainly includes this aspect as well.   But, a more technical definition might be that practices and processes have proclivities that influence the direction of outcomes.  Just as the investigation of test bias is an important research topic, so too should bias as it is found in processes and practices.  I think this is just what Thaler and Ariely are doing in their investigations and examples, pointing out how the structure of practices and processes are not neutral, but have profound influence over outcomes; that is, they include bias.

I find the idea of frames interesting and relates to ideas I have been thinking about in other contexts.  I often speak in terms of of frameworks, by which I mean the idea of a cognitive architecture to give structure to, or maybe to scaffold complex ideas.  This is the source of the idea of an educational scaffold that acts as a superstructure and cognitive support.  Frameworks are similar in some ways to paradigms, except that frames are like paradigms of everyday thinking processes.

The mind is limited by how many things can be considered and dealt with at any given time and much of what we have discussed so far is relevant to the idea that the mind is limited.  Think of your senses.  You have so many sensory inputs that your conscious can not process all of it.  Similarly there are so many possible perspectives that you could take when interpreting what’s going on around you.  Frames sort of pre-selects perspective saving the mind for other tasks (like survival; not being eaten is potentially important in an evolutionary context).  Goffman’s usage of frame analysis is similar and I think is closer to philosophies like Wittgenstein’s, who said that a words meaning is found in it’s use.  People gather schemata or frames from the contexts of a lived life and then use those frames to reflect back on events in order to label and interpret them.

I think that Kahneman’s ideas fits in with the above in this way.  Frames are everywhere, and they’re significant in that they substantially effect how we think and act.  We should be aware of them and on the lookout for their effects.  In example, consider Goffman’s other work Stigma.  In this work Goffman demonstrated how people who seemed different came to be labeled as deviant.  Through much work and effort from the disability rights community , people with disabilities are now recognized as different, but not deviance.  We are all different, just in different ways.  This change was not completed easily, but with much effort.  Similarly, I think that becoming aware of how our practices and schemata and opening up to changes in frames is not an easy task, or something that can change without deliberation and effort.

This week’s assignment is to comment on your group members’ answers for Assignment #1 and write a reflection on the materials for this week’s class.  

Comment:  Enjoyed reading the responses from the other group members.  In some cases, I was struck at how some answers were quite similar to mine, though much more eloquent (e.g., Chris, #3).  On Yemesi’s #2, I particularly enjoyed her McDonald’s story—as mentioned, the Happy Meal certainly doesn’t appear a rational choice to an adult; this said, the simplicity of satisfying several screaming little tikes with one easy order may not be so irrational after all.  Finally, kudos to Ann (#1) who commented, “I cannot remember making decisions about who to love using any rational means whatsoever.” Priceless, but also raises the question of whether there are circumstances in which we humans throw analysis to the wind and rely predominantly on instinct.

 Reflection:  I found the concept of the endowment effect –that people often demand much more to give up an object than they would be willing to pay to acquire it—fascinating.  Looking for  additional readings I came across The Endowment Effect, Loss Aversion, and Status Quo Bias by Kahneman, Knetsch, and Thaler (http://darkwing.uoregon.edu/~harbaugh/Readings/UGBE/KKT%20Endow%20JEP.pdf) which patiently explains the endowment effect and related concepts.  Reading the narrative, I found one statement that drove the concept home: “…the main effect of endowment is not to enhance the appeal of the good one owns, only the pain of giving it up.  Eureka!…endowment and its effects become perfectly clear:  why home sellers refuse to reduce their asking price in a market meltdown; why politicians become enamored with draft legislation even when it’s shown to be faulty; why I found it so hard to give up my HS girlfriend to a rival even though she and I  had agreed to part ways.  I recommend the paper…it provides a great explanation to a very cool concept. 

 What struck you about the Dan Ariely talk?  What was surprising?  What wasn’t surprising?  Have you noticed any of these effects in your own life? For example, have you ever been overwhelmed by the amount of choices presented to you?

 What struck me the most about the Ariely talk were the numerous examples of behavior that, after his explanation, seemed so intuitively obvious, yet until now went unnoticed (by me). What was surprising was how common the behaviors were in day-to-day life.

 Two aspects of his talk hit home immediately.  First, the idea that too many possibilities can cause consternation with buyers is something I’d been railing about to my consulting clients for years, but had no scientific evidence to support my position.  (Though, honestly, I never looked.)  Several clients had what I believed to be overly broad product lines, though my clients’ position was that their customers needed this myriad of choices.   I argued (to no avail) that they were providing too many choices, and that rationalizing offerings to a basic and premium product, for example, might facilitate customer decision-making.  Having never gotten a client to relent, I don’t know if my approach would have shown results, but I’m at least comforted that there’ was a reason for my intuition.

 Second, as a developer of online teaching and learning systems, our customers (instructors) have always asked for ways to counter cheating during online assessments, which they perceive as more prevalent than during classroom assessments.  (A fact shown to be false, but I digress.)  After listening to Ariely talk about cheating, it dawned on me that adding a simple checkbox together with the statement “I will not cheat” (grossly paraphrased, but you get the idea) prior to opening the online assessment may be an effective deterrent.  The cost to add such a feature is minimal, so it’s certainly worth the effort and I plan to propose it for our next product release.

I am not an unmitigated egotist, but I am going to post my reflection first, then go back and comment on others’ posts.  We have been incredibly busy this week with our largest event of the year (Parents Weekend) and this is the first time I have had a block of time to write.  I do intend to read and respond to everyone else as I can eke out the time, but wanted to get this online at least…

The Ariely Video – I really enjoyed Ariely’s wry sense of humour and the gentle matter of fact way that he moved the discussion along when illustrating how utterly unrational and gullible we all are when making decisions about gain and loss. Having known a young person recently who suffered a terrible burn injury and spent over a year in rehabilitation I wonder if perhaps this particular kind of experience — tremendous pain and trauma — modifies one’s world view so extravagantly as to give one an exotic and detached perspective nurtured by the necessity of dissociating from one’s physical presence in defense of one’s sanity while undergoing such extraordinarily painful procedures. Ariely seems to be able to regard our collective irrationality with the kind affection that our creator might have for our cluelessness while holding out hope that we can, if we just try harder, grasp at least a minimally coherent framework for our individual and collective efforts to improve our lot. His illustrations both embarassed and inspired me. What poor thinkers we humans actually are, but what hope scientific examination of how we operate our thinking mechanisms (or are operated by them…) give us to reach a more effective level of functioning! I didn’t have time to view the other related videos, but am eager to go back and sample them. These concepts are challenging, but really exciting in terms of gaining tools to use in working not just in economic, but in social systems.

Prospect Theory – I found this reading rather dry (as soon as you start writing formulas, my mind begins to wander) and challenging. I quickly wandered off to read the wiki entry about intertemporal consumption, which I found much more to my liking. As a person closer to retirement than most I have begun reluctantly to contemplate whether I 1) can afford to retire at the Social Security full benefit age or 2) will need to continue to work to maintain my not very extravagant lifestyle. Not being a planner or a careful resource consumer, I begin to see that I may end up with a very limited income … I wondered whether these models were always evaluated in terms of individuals or if there is a model that looks at couples as economic units in terms of the behavioural life cycle. It seems to me that the couples I know who have been together for a long period of time with both individuals working and hopefully saving at least a little are collectively better off even if you halve their assets than individuals. Is there a factor that encourages asset accumulation and lessens risk taking when people are pooling their resources?

Endowment Effect – This is where my ears really started to burn because I know I am very inclined to overvalue my “things” when considering whether to have a clean and tidy house or save my collections of books, musical instruments, and handcarved deities as “investments” for my old age (or inheritance for my only child). What was not really addressed in this article that I am curious about is how much does actually knowing the potential value of an item if held over time with the likelihood of scarcity creating demand affect the rationality of the value with which one endows the item? For instance, I generally never buy books new. I purchase them used in good condition at a variety of venues (yard sales, thrift stores, church bazaars, etc.) I have a certain amount of knowledge about book values, though am not an expert by any means. Many of my books are scarce and a few are becoming rare. Almost all of them are potentially worth at least as much as I bought them for. Even though I might be able to liquidate them by selling online or having a yard sale, the prospect of them increasing in value due to increased scarcity prevents me from going to the trouble of selling them. In the Arielly experiement, the tickets in question really were only as valuable as the amount a big fan would pay prior to the game to obtain them. The value invested in them by the fans who had run the gauntlet to get them was clearly not rational based on demand for the tickets, but this was a time-limited opportunity. What if the item had been a signed football? There would have been a real time current demand price that could be assigned, but also a potential for a tremendous gain if, for instance, a player on the team won a Heisman, or the school won an SEC tournament. Holding the asset could be an incredibly smart decision. I am guessing we are venturing into the kind of economics involved in making stock purchases and commodities investing — an area where I am completely adrift and untutored.

Loss Aversion – In evaluating risk aversion, I am convinced that inborn personality traits heavily influence decision making in terms of risks and would question how to evaulate risk-taking across a broad spectrum of humanity. Given that particular genetic dispositions could dominate in a small isolated community, one might find that a peaceful cooperative community of shy people would harbor a strong majority of risk-averse individuals while a frontier community of recent immigrants would contain a strong majority of eager risk-takers. The risk evaluation would have more to do with the inborn and environmentally conditioned willingness to take risks than the nature of the risk itself, yes?

Framing – This concept is moving into an area where I have some real interest in developing tools for promoting pro-social behavior. Framing techniques would be extremely valuable in educating college students in making lower risk choices about alcohol and other substance use. Risk reduction as an activity of college administrators is a constant and ever-shifting pursuit of the magic combination of presentations of relative risks and absolute benefits of abstaining (or at least moderating) this behavior. Most recently we have abandoned the “social norming” approach as not very effective (they just don’t believe our stats!!) and we have moved to a pro-social behavior enhancement message about group caring and attentiveness, peer partner responsibility, and self-sacrifice for the common good (the designated driver ploy). This seems to work better with our “millenials” who are more group oriented and willing to look out for their peers and work as teams.

While I was on my way to looking up something else, I came across a document that outlines a process for community collaboration in the service of a social rather than economic goal (maws.org/tctatsite_top/FVFF%20Curic/2.pdf ). It provides a ten-step group process for transforming communities that begins, of course, by defining the issue, and progresses by stages to re-frame the group understanding of and value for social transactions. This is the kind of information that I am digging for in behavioral economics to illuminate the ways in which to improve quality of life for all of us. This is the hopeful outcome that I think Ariely is hinting at when he tells us that the discovery of our irrationality is not all bad — there is room, if one works at understanding, for improvement!  – Cheryl Soehl

I really enjoyed the Dan Ariely talk this week. I found it fascinating that by making questions slightly more complex people can make irrational decisions. Interesting but not surprising that when decisions are difficult that people accept defaults – the example given on the morals of a default ‘no’ to organ donation has been discussed at length in UK. We see, and must consider (and to be honest sometimes exploit) these types of behavior all the time in user interface design.

The observations on cheating where very interesting. The fact that if people can make justifications about their choices around minor cheating is related to some of the ideas around endowment theory – depending on whether you own or don’t own an item, you can justify a higher sale or lower purchase price to your benefit based on the potential return to self (achieve a higher sale price or a lower purchase price), just in the same way people can justify their personal fudge factor to themselves. The difference here is that with cheating, you can decrease the fudge factor by influencing people and drawing their attention to morality directly before they make the decision (i.e. sign to verify truth at the TOP of the insurance mileage form)  – the trick being to directly challenge the justifications they make to themselves before they tell that white lie to the mirror.

In my post last week I said:

I wonder whether intuition is considered “human” behavior rather than econ due to the complex and individual weightings we subconsciously put on different vectors depending on our own past experiences. Combined with our personal profile of aspiration, ethics and attitude to risk, which will be different for every individual, means that two humans with the same control experiences can plausibly reach a different choice.

On reflection of this week’s reading, I wonder whether some of what I said there could be attributed to framing (collection of anecdotes and stereotypes) and whether or not an individual is risk seeking or loss averse.

A small point on Dan’s assertion towards the end of the talk that we should take comfort in the fact that we are irrational beings, and therefore we can look to fix the world. I despair to think about how marketeers can and do consciously use techniques such as asymmetric dominance this to their own effect when selling products and services!

I’ll come back later and add some more…