Chapter 23 - Public policy and choice architecture. After studying this chapter you will be able to understand: How to define choice architecture, and how nudges influence individual decision making? In what ways human decision‐making does not conform to the model of full information and rational choices? How demand for commitment devices can be rational?...
Chapter23 PublicPolicyandChoiceArchitecture â2014byMcGrawHillEducation Whatwillyoulearninthischapter? ã Howtodefinechoicearchitecture,andhow nudgesinfluenceindividualdecisionmaking ã Inwhatwayshumandecisionmakingdoesnot conform to the model of full information and rational choices • How demand for commitment devices can be rational • How default rules affect people’s choices and the implications for policy • How framing affects the way people process informationanditsimplicationsforpolicy â2014byMcGrawHillEducation Choicearchitectureandnudges ã Evidencesuggeststhatpeoplesdecisionscanbe influencedbyhowoptionsarepresentedtothem ã Choicearchitecture istheorganizationofthecontextand process in which people make decisions • It focuses on factors that alter decisions and thus outcomes. Factors include: – Timing of choices. – How different options are described • Implementing choice architecture into practice uses a nudge to alter people’s behavior in a deliberate and predictable way without changing economic incentives much – Kenyan farmers were nudged into using fertilizer by allowing farmers to pay for fertilizer after harvests © 2014 by McGraw‐Hill Education Mistakes people make • A mistake is a choice that a decision maker later regrets, even though they were trying to act in their own self‐interest • Often, mistakes happen in common and predictable ways • Mistakes often occur due to biases in human decision making Temptation: Time inconsistency is a situation in which we change our minds about what we want simply because of the timing of the decision – Preferences about the present are inconsistent with future ones, because future choices are more distant © 2014 by McGraw‐Hill Education Mistakes people make Limited processing power: The opportunity cost of time spent researching choices may be too great to make the correct choice – More complicated choices are harder to process – More likely to make an error on infrequent decisions Reluctance to change: People tend to choose the default option or current situation even when it is in their best interest to switch, known as the status‐quo bias – People tend to place more value on something they own, known as the endowment effect – People tend to put more effort into avoiding losses than achieving gains, known as loss aversion © 2014 by McGraw‐Hill Education Mistakes people make Framing matters: Individuals can be nudged into a decision by how the choices are framed. – Choices can be framed to feel like a loss or a gain – People respond better to positive framing than to negative framing © 2014 by McGraw‐Hill Education Active Learning: Mistakes people make For each of the following, identify the most fitting category of biases in decision making: You age a bottle of wine for 20 years, increasing its value to $250. You would never buy a bottle of wine for $250, but you drink it anyways rather than sell it Every night, you set your alarm for 7 a.m., and every morning you hit the snooze button at least four times People are more likely to undergo a surgical procedure whentoldthesurvivalrateratherthanthedeathrate â2014byMcGrawHillEducation Toolsofchoicearchitecture ã Thereareseveraltechniquesthatchoice architectsusetostructurethedecisionsthat peopleface Commitmentdevices:Allowpeopleto voluntarily restrict their choices in order to make it easier to stick to plans – Removes the regret of having taken an option by removing the option – Increases the price of choosing a vice and lowers the price of choosing a virtue © 2014 by McGraw‐Hill Education Tools of choice architecture Information campaigns and disclosure rules – Because people have limited processing capacity, people rely on rules of thumb – A rule of thumb is an example of a heuristic, a mental short‐cut that helps make decisions – Theanchorsthatunderlietheseshortcutscanbe manipulatedtochangepeoplesdecisions ã Forexample,charitiesthatsuggestdonationsof$50, $100,or$500tendtoreceivemoremoneythanthose suggesting$1,$5,or$10 â2014byMcGrawHillEducation Toolsofchoicearchitecture – Similarly, by changing disclosure information, people can be nudged towards a specific choice • The EPA now requires gas mileage information to include the MPG and the average annual fuel costs Default rules defining what will automatically occur if a chooser fails to make an active decision Bychangingthedefaultrules,individualscanbe nudgedtowardsspecificchoices ã Ifthedefaultistooptintoorgandonation,peopleare morelikelytodonateorgans â2014byMcGrawHillEducation 10 Toolsofchoicearchitecture Framing can be used to influence people’s choices in many different ways. Two of particular importance are: – Knowing that people tend to go along with the majority, social norms that raise awareness of what others do can nudge individuals into a specific choice • Everyone else pays their taxes, so I will – Loss aversion, which uses individuals’ aversion to loss to nudge them into a specific choice • Stores can use credit‐card fees rather than cash discounts to push consumers into a specific choice © 2014 by McGraw‐Hill Education 11 Active Learning: Tools of choice architecture For each of the following situations, determine whether the default option affects the decision A doctor recommends continuing treatment; the ultimate decision is left up to the patient A website automatically checks the option “share activity with my friends on Facebook” at sign up Pets from a shelter are automatically spayed/neutered unless the owner prefers them not to be A phone user has to enter a choice at start‐up between installing a special feature or not. The user is informed that most people install the special feature © 2014 by McGraw‐Hill Education 12 Summary • Choice architecture is the study of the environment in which people make decisions • A mistake is a choice that the chooser later regrets • A nudge affects people’s behavior without coercing them or fundamentally changing the economic incentives they face • Time inconsistency helps explain procrastination and temptation • People have limited ability to process information © 2014 by McGraw‐Hill Education 13 Summary • People have trouble with change: – Tend to prefer the status quo – Avoid losses – Give more value to things they own than things they don’t • Decisions are influenced by the way in which options are presented – Social norms and loss aversion are used by architects • Commitment devices are strategies and tools that allow people to commit to making good choices in the future by voluntarily restricting their own options © 2014 by McGraw‐Hill Education 14 ... nudgedtowardsspecificchoices ã Ifthedefaultistooptintoorgandonation,peopleare morelikelytodonateorgans â2014byMcGrawHillEducation 10 Toolsofchoicearchitecture Framing can be used to influence people’s choices in many different ways. Two of ... Increases the price of choosing a vice? ?and? ?lowers the price of choosing a virtue © 2014 by McGraw‐Hill Education Tools of? ?choice? ?architecture Information campaigns? ?and? ?disclosure rules – Because people have limited processing capacity, ... Toolsofchoicearchitecture – Similarly, by changing disclosure information, people can be nudged towards a specific? ?choice • The EPA now requires gas mileage information to include the MPG? ?and? ?the average annual fuel costs