Behavioral Economics (Part 3)

 

continue from the part 2,

Fighting childhood obesity is a priority in many countries and policy makers have suggested a whole range of solutions. Everything from banning soda in schools to running media campaigns promoting healthy eating. Behavioral economists approached the problem a little differently.

They wanted to see if they could get children to eat healthier by rearranging school cafeterias.

They put healthier food like fruits and vegetables on eye-level shelves and less healthy foods, like desserts, in less convenient places. Classical economic theory suggests that this idea wouldn’t work since rational people would pick the brownie.

But it turns out, students choose the healthier foods. Nudge theory works and it’s changing how we implement public policy. There are some issues that can be addressed best with the right type of nudge.

Let’s talk about something else behavioral economists look at: risk. Let’s say someone offered you two sealed envelopes. One has a hundred dollars, and one has no dollars.

You can choose an envelope, or you can take $50 cash right now.

So do you take the fifty bucks? Or what about $49?

Now, this is unlikely to happen to you in real life, but the exercise is about your attitude towards risk. Since there’s a 50/50 chance of getting $100 or nothing, the expected return, or the average of the possible outcomes is $50. If you’re willing to accept $50 cash to abandon the envelopes, then you’re risk neutral. But if you accept less than $50, just to avoid walking away with nothing, then you’re risk-averse. Behavioral economists have done lots of studies about risk and in particular loss aversion, the idea that people strongly want to avoid losing. Studies show that, in general, losses are more painful than gains are pleasurable. So people might choose a safe course of action even if it’s not the most logical choice. Let’s say we flip a coin and if it’s heads I give you $100 but if it’s tails, you have to give me $50. Now, mathematically you should go for it. But many people won’t because they want to avoid losing. Understanding of loss aversion can help businesses and policymakers influence decisions. For example, some grocery stores in the Washington DC tried to decrease the use of disposable plastic bags by offering five cent bonuses if customers brought reusable bags. The policy didn’t do that much. Later they tried a five-cent tax on plastic bags, and, this time, people used fewer disposable bags. This is loss aversion at work. The pain of having to pay 5 cents per bag was greater than the benefit of receiving 5 cents per bag.

Another study analyzed how loss aversion can help incentivize employees. Researchers divided workers into three groups. The first was a control group that wasn’t given a bonus.

The second group was promised a bonus at the end of the year based on meeting specific goals.

Participants in third group were given the bonus at the beginning of the year and were told that they would have to pay it back if they didn’t meet specific goals.

The workers in the first and second groups performed about the same.

But those in the third group performed significantly better. We just hate losing so, behavioral economics has a lot to tell us. Accounting for emotion gives us a realistic view of how people actually behave.

We might not always be the rational actors classical economists believe us to be.

For years, economics has had a blind spot. But behavioral economics helps us get a better look at how we make decisions.