Nudge of the Month

Espresso…What else?

Just start with few questions for coffee-addicted people: how many coffees do you take per day and how much sugar do you usually consume per coffee?

We all know that the world divides into two types of people: those who like their coffee natural, and those who like it sweet (sometimes very sweet).

Coffee

If you happen to be in the second group, we have bad news for you. According to the WHO, sugar is one of the major causes of several diseases, especially obesity. Given that the limit of sugar that an adult male can ingest is about 50g per day (7-10 teaspoons of sugar), charging your coffee with extra sugar may not be the best choice for your health, especially if you drink more than simply one or two coffees per day.

Changing habits is easier in words than in action, but there is also good news for all sweet coffee lovers: several kinds of nudges have been developed to address the issue, and have the potential to find further applications in the food sector, for our health’s sake. Here are two simple but effective examples.

 

Do you like to take your coffee at the cafeteria?

Coffee2

Have you ever realised that every time you go to the cafeteria taking a coffee, a tea or a cappuccino, automatically you accompany it with one or two sugar bags?

A study conducted in Italy has investigated whether coffee consumers are aware of how much sugar they consume each time they take a break.

The behaviour of two groups of people has been monitored for 6 days – each one before and after reducing the weight of sugar in each packet from 7g to 4g. The research has shown that the reduction in sugar consumed per client is statistically significant.

This means that reducing the weight of sugar does not affect the number of packets clients take, as people tend to pick up a fixed number of packets out of habit.

Or are you just looking for a quick break?

Coffee3

Most of the times, busy students and workers prefer to just grab a coffee at the nearest vending machine. In this case, how often do they actually pay attention to choosing the amount of sugar?

Assuming that students do not change the default amount of sugar that is set by the machine (e.g. leaving the selection to 3 out of 5 units of sugar), a first simple way to reduce sugar consumption may be reducing the default level of sugar from 3 to 2. In this way, increasing sugar would be an active choice, that is likely not to happen. In fact, behavioural scientists have largely shown that people generally have a bias for maintaining the status quo.

A nudge has been hypothesized by Albert Gascon, a participant in a Nudge Competition on edx.org.
It consists of two intelligent strategies tested in a single nudge intervention.

Firstly, the choice of sugar may be put before the choice of the drink; secondly, instead of reporting “more sugar” and “less sugar”, the extremes of the scale may report the options “healthier” and “less healthy”. In this way, consumers are induced to pay more attention to their choice – instead of relying upon the default option – and are nudged towards a better choice through highlighting the consequences of their choices, that are too often not taken into consideration.

 

Sources:

State of mind http://www.stateofmind.it/2017/11/nudge-quantita-zucchero-caffe/

Albert Gascon http://albertgascon.com/behavioral-economics-in-action-be101x-nudge-challenge/

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Article Review

“Adapting to the Destitute Situations: Poverty Cues Lead to Short-Term Choice”

Review of a paper by Liu, Feng, Suo, Lee, Li (2012)

In previous posts (“Scarcity”, “Through the psychology of poverty”), we showed how scarcity affects the way people consider problems and take decisions. Although scarcity may concern many kinds of goods, including even available time, in this article we will consider only the lack of financial means. The underlying idea is that when people are wealthy enough not to have to worry about small expenditures, they do not need to spend mental resources on the task, whereas indigents have to invest time and thought on it.

This has a consequence: scarcity leads people to focus primarily on problems wherein shortage is more severely perceived, even though those same issues are not necessarily the most relevant ones for long term well-being. This compromises the individual’s ability to choose wisely.

Mani, Mullainathan, Shafir and Zhao (2013), following the same intuition, showed how Intelligence Quotient (IQ) test scores are correlated to the perception of poverty. In particular, by inducing thoughts about everyday small financial problems in poor subjects, they were able to severely diminish their cognitive ability, while leaving the wealthy ones unaffected. Interestingly, when no manipulation was performed, there were no significant differences between the rich and the poor’s test scores, suggesting that the reduction in cognitive skills was due to the stress linked to the fact of being (relatively) poor, and not to indigence itself. The idea behind this observation is that cognitive capability is limited and poverty – or simply a reminder of the fact of being poor – “taxes” it, leaving less to handle everyday choices.

Liu, Feng, Suo, Lee and Li (2012) took the discussion a step further: in this case, the considered subjects (all college students) were not poor, but simply cued into different economic statuses. In particular, they studied whether poverty cues affected inter-temporal choices under the general assumption that people exposed to poverty prefer a short-term but smaller reward.

In all experiments, participants could opt between a smaller but immediate payment and larger but later in time one. They were asked to take their choice before and after completing the priming task, so that the first one can be used as a benchmark. The games were repeated several times. In Experiment 1, subjects were primed in an explicit way by having to judge the degree of poverty or affluence (according to the group they were randomly assigned to) of several pictures; in Experiment 2 they had to count the number of people in each picture, so that the purpose of the experiment was less explicit; in the third one they participated in a lucky draw game in which they would gain a prize or nothing, thus being exposed to a moment of relative affluence or poverty.

22782124_10212901226357233_1588832224_nPictures representing “poverty” and “affluence” from Experiments 1 and 2.

In every experiment the groups assigned to the different cues were balanced, as the percentage of present biased individuals was the same. However, after completing the task, subjects who had been exposed to poverty cues became significantly more prone to opt for an immediate but smaller payment, while those cued into affluence showed a non-significant increase in the choice of the later but larger prize. Results were the same in each experiment, thus suggesting that the environment influences individuals’ perceptions, which is in turn reflected in time preference. Indeed, according to the authors, the poor are subconsciously associated with an unstable context and a lack of means to deal with it, whilst the rich are perceived as economically independent. As a consequence, people, when exposed to situations of poverty, felt more in need of liquidity to deal with uncertainties and hence opted for a smaller but closer-in-time reward. Moreover, the fact that the choices of the other group did not change suggests that individuals are more sensitive to negative cues.

22833343_10212901224477186_1592177517_o22812843_10212901225637215_307340708_oResults from Experiment 2 and 3 respectively: mean percentage of immediate reward as a function of the manipulations of the ‘‘poverty’’ state (left) and the ‘‘affluence’’ state (right), with pre-test (brown) vs. post-test (green) percentage of demand for immediate payments. Error bars indicate standard errors of the mean.

Therefore, the authors conclude that  “just the feeling of poverty influences intertemporal choices – the actual reality of poverty (restricted resources, etc.) is not necessary to get the effect”.

 

References:

Liu L., Feng T., Suo T., Lee K., Li H. (2012), “Adapting to the Destitute Situations: Poverty Cues Lead to Short-Term Choice”, PLoS ONE, Vol. 7, No. 4: e33950.

Mani A., Mullainathan S., Shafir E., Zhao J. (2013). “Poverty Impedes Cognitive Function”, Science, Vol. 341, No. 6149: 976-980.

Mullainathan S., Shafir E. (2013), Scarcity: Why Having Little Means So Much, Times Books, New York.

 

Nudge of the Month

Challenging the Broken-Window theory

How can we prevent individuals from urinating in open areas?

In the Nudge TV show “The Power of Habit”, Sille Krukow, a behavioural expert based in Denmark, designed a nudge to help the Copenhagen Central Station. The problem they were faced with was that many men would urinate in hidden corners outside the building, despite the close location of public (and clean) toilets.

Cleaning.png

Staff has to clean the area several times a day

According to Ms. Krukow, this phenomenon can be explained by the broken-window theory of policing (Wilson and Kelling, 1982). When individuals observe others misbehaving, they tend to act in the same way, instead of doing the right thing.

The solution adopted in the show was to add a urinal to the area in question and stickers on the sidewalks signaling the direction and distance to the closest WC.

WC stickers.png

Implementation of the WC stickers

Urinal.png

Urinal installed in the most critical zone

Around 500 people had been observed urinating in two corners of the station during the week before the experiment. After the intervention, half of the people did the right thing, i.e. they instantly used the urinal, while the other half started  to urinate on the street, but changed their behaviour once they saw the urinal. This means that the cleaning staff and station customers were saved of 5,000 liters of urine a week!

To learn more about this nudge (and other experiments), you can find the episodes online here.

Our Work

When our brain decides for us… And without our permission

(Originally published in Slovak at mindworx.net)

Most of us probably believe that we are in control of our own decisions. We have our opinions, beliefs and principles, we know what we like and dislike and we always decide in accordance with our preferences.

However, this is not entirely true. Our brain reacts to all kinds of cues from the external environment and so our behaviour and decision making depend heavily on these. Even if we do not realise it.

MINDSPACE FRAMEWORK

Since there are a lot of these external cues, it is useful to categorise them to be able to analyse them better. One of the possible models is the “MINDSPACE” framework, created a few years ago in the UK by the Cabinet Office and the Institute for Government. Obviously, such models do not include all the possible factors that influence our behaviour, but do describe the most important ones. Thus, it serves as a good basis for a better understanding of human decision making.

The name MINDSPACE is an acronym made of the first letters of the main motivators of human behaviour. These are Messenger, Incentives, Norms, Defaults, Salience, Priming, Affect, Commitments and Ego. Let’s now have a look at each of them.

mindspace-1

Messenger

It is true that how we perceive information depends on their source. Different researchers have shown that we are more likely to listen to what the experts say, but also to accept advice from people similar to us in some ways. On the other hand, if we get advice from someone we dislike, it is probable we will not take it into account no matter how good it is.

Incentives

They include everything that motivates us – either physical motivators (such as money or other non-financial rewards) or psychological motivators (like our intrinsic motivation to do something good for the others). It is useful to know how we react to various motivators and which of them work best in various situations. In general, it is true that losses loom larger than gains, so a potential loss can be a better motivator than a potential gain. Also, our perception is relative – the same amount of money can be seen as too small or too large depending on the reference point.

Norms

More precisely, social norms. People tend to be influenced by what other people are doing. Usually nobody wants to be the “outsider” and have fingers pointing to them, just because they are different.

Defaults

People tend not to change the pre-set options, even for important decisions. The countries in which you are automatically considered to be an organ donor, unless you opt out, have a much larger proportion of donors than the countries in which you have to opt in to become one.

Salience

Logically, our behaviour is influenced by the things we pay attention to. And since there is a huge number of stimuli out there, our brain has to be selective – it pays attention mostly to what is new, simple and different. Sometimes, though, the brain actively seeks for cues that facilitate the decision making. For instance, it may search for an “anchor”, which is the information (mostly numerical) that is used as a basis for making a (numerical) judgement. However, such information does not need to be relevant in a given context and even a randomly picked number can influence how we decide.

Priming

Our behaviour is influenced also by our senses and at the unconscious level. The exposure to a certain type of words, sounds or smells can have a large impact on our behaviour. For example, the participants of an experiment that were required to read words related to old age left the room in a slower pace than the other participants. Or the smell of an all-purpose cleaner in a school canteen prompted the students to leave their tables cleaner.

Affect

It is nothing new that the emotions play an important role in our decision making. What is a bit more surprising is the fact that they influence us even when we do not realise it. An experiment has shown that when a mortgage offer included a picture of a smiling woman, the demand for the mortgage increased in the same amount as if the interest rate of the mortgage decreased by 25%.

Commitment

Commitments and promises, mainly the public ones, determine how we behave. If you struggle to do something, it is useful to commit yourself in some way. Tell your friends that you will stop smoking by a certain date. This will force you to do everything to accomplish our goal, just to avoid the shame of admitting the failure in front of people that are important to you.

Ego

Our actions should be in accordance with what image we have, or we would like to have (in our own eyes, or in the others’ eyes). For instance, men are more willing to contribute to charities if they are approached by attractive women, because in this way they manage to keep a good image in the eyes of the opposite sex.

SO, WHAT?

The MINDSPACE model has been created mainly for public institutions with the aim of improving public policies. Many governmental programmes are unsuccessful exactly because they are not designed for real people, but for “people” that are described by the theoretical (mainly economic) models.

This does not mean, though, that the framework is useless outside the public sector. Each one of us can learn a lot from it. If we better understand how our brains work and what influences our behaviour, we will be able to make better decisions, develop more successful products or provide better services and have better relationships with people around us.

Source: https://www.instituteforgovernment.org.uk/sites/default/files/publications/MINDSPACE.pdf

Article Review

BE environmentally moral to save the planet

Review of a paper by Kjell Arne Brekke and Olof Johansson-Stenman (2008)

Taking into account economic behavior in the environmental economic political process could change the impact of economic measures

Cap and Trade, Pigouvian Taxes; Kyoto Protocol yesterday, Paris Agreement today. Why does environmental policy never work? As economists struggle for developing new economic models to address environmental threats, our planet fights to survive. What is the main obstacle to environmental economic policy? In this sense, one word is essential: implementation.

Economists talk about environmental damages (Greenhouses emissions, SO2, etc.) as social costs:  harms that affect the society as a whole, but that are not relevant in private economic choices (hence the title “negative externalities”). The reason is that clean production is costly and not efficient, both for firms and for the government. Measures to protect the environment, such as taxes and restrictions on production, raise the cost of production for firms, and their implementation is difficult for political reasons.

Therefore, when it comes to decision making, firms and countries tend to consider only their own costs and benefits, ignoring negative externalities: why should one country care about trans-border emissions, when it is a global matter and when the others do not?  

Someone would then argue that international agreements are necessary to enforce environmental regulations, in order to address this moral hazard problem. However, when it comes to transnational regulation, global commitments are even harder to be enforced. In this context, is there any possibility left of “saving the planet”?


Risultati immagini per international agreements on climate changeSource: Ecoadapt

It has been demonstrated that, even if not considered in the private costs-benefits analysis, environmental damages matter at a psychological level.

Economic agents do not consider all the environmental measures that restrict economic private profits equally. The key difference lies in the way those measures influence the “environmental moral(Frey, 1999): the intrinsic motivation for pro‐environmental activity. In this view, if we look at all the diverse economic measures each government can take, we find that not only do they differ in terms of economic and administrative efficiency, but also in terms of the impact that they have on people’s environmental moral. As a result, some measures are more likely to be implemented than others (Pollitt and Shaorshadze, 2011).

Frey (1999), for example, argues that both “tradable permits” (that allow firms for the production of a maximum emission as determined by the government) and “Pigouvian taxes” (on the generator of negative externalities) have two opposing effects on consumers. Not only the higher price that derives from their implementation discourages the aggregate demand, but the individual intrinsic environmental moral also goes down (crowding‐out effect).

Moreover, it has been demonstrated that low and high rate environmental taxes on emissions are more effective than the moderate ones in encouraging individuals to accept the environmental policy. In fact, with low taxes, consumers may be persuaded that the reason why they are being taxed is only moral, and they would be more positive to pay. On the other hand, high Pigouvian taxes make harmful behavior prohibitive: therefore, the economic effect dominates the crowding-out effect. Furthermore, according to Goodin (1994), tradable permits will reduce consumers’ motivation even more than taxes, because they may convey the impression that it is acceptable to sin as long as one pays the price for it.

However, since most of the climate policies address firms rather than final consumers, behavioral economics has a very limited influence on the choice of the level of production. On the other hand, public perception of the effect of these instruments is still relevant for policy because, when the public perceives that taxes and tradable permits are morally superior, governments may find it politically easier to implement them.

Similar results are valid internationally, in the context of global agreements. Given that humans are less self-serving than the “economic man”, cooperation has been demonstrated to be possible. However, it must be conditional and require the existence of sanctioning mechanisms (Kjell Arne Brekke and Olof Johansson-Stenman, 2008).

In BE there is a wide experimental literature focused on individual decisions, trying to understand under what conditions people cooperate, even when it is not in their own material interest. Conditional cooperation is usually the answer, suggesting that many people (in our case, countries) choose to cooperate only if others do too (Gächter, 2007). In addition, the evidence suggests that people are more willing to contribute to social causes when they think others are doing the same (Levitt and List, 2006).

In conclusion, what makes negotiations effective? We could summarize the best practices in three Ps:

1.Principles.

Principles are essential to persuade people that they are paying for a moral reason. In this way, the individual intrinsic environmental moral also goes up and dominates the private cost bias.

2. Punishments.

They are fundamental for the long-term effectiveness. Kyoto protocol, for example, without including any penalty, lacked effectiveness, and commitments had never been really implemented.

3. Participation.

Since we are dealing with global externalities, everyone should commit. Only a global solution could be the best response to a global problem.

Article Review

Through the psychology of poverty

What explains the differences in economic decisions amongst poor and rich individuals?

In 2014 Johannes Haushofer and Ernst Fehr, professors at Princeton and Zurich University, respectively, have written the article “On the Psychology of Poverty” for the Science magazine (original version here). They show evidence that poverty causes psychological consequences such as negative affectivity and stress with unexpected changes in economic behavior by changing individuals’ revealed preferences and leading to short-sighted and risk-averse decision making. But what are the channels through which poverty could arise and perpetuate itself?

Bear in mind two things when interpreting their findings. First, although poverty is defined as the lack of sufficient income, it is also characterized by the exposure to dysfunctional institutions, violence, crime, poor access to health care, etc. Second, being born in such an environment can trigger processes that reinforce poverty. For instance, lower willingness to take risks, adopt new technologies, invest in education and health, together with present-biased income preferences, make it harder to escape from poverty.

The effect of poverty on economic behavior. Some laboratory experiments have randomly assigned individuals to income shocks after they have earned some money in an effort assignment. Then, researchers compared the discounting of future payoffs between “treated” individuals with negative income shocks and the “control” group, who didn’t experience any changes. Such exogenous manipulation of income eliminates any potential reverse causality between discount rates and income. They found that individuals with negative shocks on income showed more present-bias behavior than others. No analogous effect was obtained for positive shock on income.

The effect of poverty on psychological characteristics. Recent findings show a positive correlation between income and happiness/life satisfaction both within and across countries (see fig.1).

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Fig.1. Relationship between income and life satisfaction within countries

According to the World Health Report, the poorest population quintiles in rich countries have records of depression and anxiety disorder up to twice as large as that of the richest quintiles. Besides, there are numerous findings that poverty is positively correlated with the stress hormone cortisol, as well as depression, anxiety and unhappiness. One should already expect such relationship, but is it a causal one?

 

Causal effect of poverty on affectivity and stress. A study by Haushofer and Shapiro (2013) evaluated the effects of an unconditional cash transfer program in Kenya on psychological well-being, by measuring characteristics such as happiness, life satisfaction, depression and stress. Individuals were randomly selected to receive transfers of $0, $400 or $1,500, and they found positive effects for all variables whenever receiving any positive transfer. However, levels of the stress hormone cortisol decreased only for the ones receiving a large transfer.

 

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Fig.2. Z-score happiness response and levels of stress hormone cortisol

A series of natural experiments (e.g. lottery payouts, introduction of guaranteed incomes, access to pensions) suggest causal links between increases of income and well-being (e.g. reduction in hospitalization, lower consumption of anxiolytics, increased self-reported mental health). Randomized control trials also show that offering households access to health insurance, better housing conditions and access to water have a significant effect on psychological well-being.

The takeaway from this review is that the poor may intrinsically have identical time and risk preferences to those of wealthier people, but their discount rates and risk-taking behavior can change if living in a chronic condition of poverty. Should a welfare state intervene to avoid the creation of a poverty trap? According to the authors, there are three possible courses of action to break this vicious circle, which requires directly targeting:

  • poverty through poverty alleviation programs (e.g. cash transfers), proven to increase general welfare;
  • its psychological consequences (e.g. interpersonal psychotherapy);
  • its deriving economic behaviors (e.g. commitment savings account, reminders to save), which usually lead to considerable increases in savings.

These interventions allow us to better understand the relationship between poverty, its consequences and their potentially negative effects on decision-making, giving us a fresh perspective on how development economics can help to tackle poverty.