Alles

Social science dealing studying production, distribution and consumption of services and goods (Krugman & Robin, 2012). Theory driven – top down.

individual behavior and their underlying processes. Lacks overarching theory – bottom up.

•psychological mechanisms, processes, cognitive theories underlying various economic behaviors.

• perceptions and emotions surrounding economic behavior

• descriptive studies, nonincentivized experiments, deception is okay (less and less so).

• Usually, no theoretical model – only statistical models

• Provides potential insights how and perhaps why observed behavior deviates from what econ models predict

• Integrating these simple and robust behavioral phenomenon into models

• Mostly choice models, no deception is allowed • Incentivized experiments → choices/behavior have monetary consequences

• Theory driven – predictions are deployed from theoretical models and tested

Convential economics:

free rider/externalities problem and financial incentivizes to deal with them. E.g. carbon tax

Unexplained:

1) why there is too little protest, outrage (vs. terrorism?)

o BE/EP adaptation

o Wishful thinking

o Self-servingly questioning scientific evidence

o Intangibility

2) why greenhouse gas negotiations are so difficult

o Self-serving beliefs about fairness: Fair burdens

o Loss aversion

3) Remedies through cheap and easily implementable behavioral interventions

Exploitation of choosing reference group:

Salary negiotiation of teachers based on different reference groups (low salary district from school board side, high salary from teacher/union side)

Prehistory (before psych existed as a field. Economists and moral philosophers were dealing with topics what psychologists deal today – A.Smith

• Early neoclassicals – some openness to psychology

• Postwar neoclassicals – open hostility against psychology

• Behavioral/psychological insights:

❑ 1980s Prospect Theory and Anomalies of choices

❑ 1990s Bunch of theory development (incorporating behavioral components into models)

❑ Post2000 explosion:

• Bunch of lab and field studies

• Light/asymmetric paternalism – incorporating behavioral insights into public policy

• Neuroeconomics – whole new field

1. Loss aversion (losing hurts more than gaining the same amount)

2. Overconfidence (thinking that your/company’s chances are better than they are)

3. Adaptation (getting used to things instead of changing them) 4. Failure to predict experienced utility (We cannot precisely predict how much we will enjoy/dislike a consumption in the future)

Passions/emotions on stakeholder Indulge!

Would an honorable man do it? “impartial spectator”

Introduction to Principles of Morals and Legislation (1789)

“Nature has placed mankind under the governance of two sovereign masters, pain and pleasure.... They govern us in all we do, in all we say, in all we think”

Utility = Sum of all pleasures from an action minus pain

New approach to economics on foundation of Bentham’s (hedonic) utility.

E.g., Jevons (1871): “Pleasure and pain are undoubtedly the ultimate objects of the Calculus of Economics. To satisfy our wants to the utmost with the least effort ... in other words, to maximize pleasure, is the problem of Economics.

Behavioral decision research (Kahneman & Tversky)

– 1974 Heuristics and Biases (Science)

– 1979 Prospect Theory (Econometrica)

1980 Richard Thaler “Toward a positive theory of consumer choice” (JEBO)

– applies Prospect Theory to consumer behavior:

• Endowment effect

• Underweighting of opportunity costs

• Self-control – 1980s & 90s: Thaler publishes influential “Anomalies” column in J. Econ Perspectives

• Framework for formalizing social and economic behavior

• Aggregate social behavior which is made up of individuals making their own choices.

•Preferences given, we reveal them by choice

❑ Complete – you can always rank alternatives or bundles of goods – (<,>,=)

❑ Transitive – A>B and B>C then A>C

• No claim of describing choice process but rather predicting outcome or choice

• You have complete information → bounded rationality

• probability of each outcome to known and perceived on face-value - EV

❑ If uncertainty is involved: you maximize your expected value but not always – expected utility theory. And you buy insurance and lottery ticket at the same time → prospect theory

❑ If choice over time situation is involved: you discount alternatives happening in future and comparable discounted value - discounted utility → hyperbolic/beta-delta discounting

• You maximize your utility/happiness (whatever utility means…) → decision and experienced utility are separable

• You maximize on your wealth → reference dependent choice models (e.g., PT)

• Preferences are stable

• Preferences are coherent (e.g., complete, transitive)

• We know our own preferences

• Preferences take specific forms – e.g., time preferences, risk preferences, altruism

$2^k Win

EV invite but only paying limited amount:

It is not the money (expected value) but the utility what matters

Diminishing marginal utility → utility of the gamble converges to zero.

Expected utility of the gamble is finite, the expected value is infinite.

= EV – certainty equivalent (+ for risk averse and – for risk loving people)

Ellsberg paradox

P(red or blue) = P (red) + P (blue) and P (green or blue) = P (green) + P (blue)

But first we say: P (red) > P (blue)

→ should imply: P (red or blue) > (green or blue).

In fact, however, P (red or blue) < (green or blue).

• We perform insufficient probability estimations

• We fail to update probability distributions or we update those with errors

• We have limited processing capacities and simplify things to the point that drives us away from making the seemingly maximizing choice

(but systematically, so can be incorporated into choice models)

Contextual effect (lines)

Monthy hall problem

• Efficient, quick rules of thumb, short-cuts when decision is complex •

But, systematically deviate from rational choice theory model prediction

• Early on H. Simon (1950s) – bounded rationality

• Sometimes called as intuitive judgements/cognitive biases • 1970s Tversky and Kahneman paper in Science 1974

o Limited mental capacity

o Time constraints

o Limited available information

Easy of recall tricks us overestimating the probability of an event ❑ Surprising (sudden)

❑ Devastating

❑ Recent

❖ Specific consequence – illusionary correlation – rare or novel occurrences are more salient – reasons for stereotypes to form and endure (just think about the fake news propaganda about immigrants raping women …)

• Mood-as-information – mood as an internal context (Scwarz, 1990) and makes us overestimate the p of mood congruent outcomes.

• We rely on the degree to which one specific event is similar to those in the parent population.

• Simply: An example represents well (on the salient features) a category so, it must belong to the category.

HOW? o We neglect base rate

o We focus on the similarity

o Law of small numbers – small samples represent population just like large samples , e.g. THTHTH – coin flips outcome

We rely too much on the initial piece of information when making decisions

• Initial price we see and other arbitrary focal points

Focusing illusion – we compare values to the initial value and overestimate great difference

Judgements are tied to affects/emotions when making judgements or decisions about risk or the costs/benefits of an outcome or action. • Affect is quick (vs mood or feeling) o You have a good feeling about something (bad thing) so, you underestimate its probability to happen.

Damasio et al. Somatic marker hypothesis You body marks images negative or positive. It can alarm bad or good outcomes. Sometimes, even w/o experience the feeling of it, you make the right choice. In fact, you learn this way

1. E(u) < than the utility of the expected outcome of Lott1, u(E(z)).

 Risk-averse behavior is buying insurance : paying a premium to avoidgetting into A. 2. E(u’) > than the utility of the expected outcome of Lott2, u(E(z’)).

 Risk-seeking behavior is buying lottery: paying a premium to undertakethe risk.

Markowitz:

Person is at F. would accept a gamble (lottery ticket) that could take him to F’. Conversely, this person would not buy an insurance against getting into F from F’. (huge losses with very low p)

1. Disputes FS doubly inflected utility curves

2. Z is not income levels but rather changes income

3. [The origo is average income-level]

Decisions based on values rather than outcomes

Values are compared to a reference point (this can be many things: expectations, aspiration, past outcomes, believed norms, etc.) —> Highlights importance of changes, and of relative comparisons

Evaluating gains and losses systematically differ

Losing 5 Euros hurts more than finding 5 Euros.

1. Editing: Aims to reduce complexity

• Select a reference point —> value = 0

• We frame acts, outcomes —> gain/loss compared to reference point

• Results in ordered values

2. Evaluation: We select the one with the highest value

In EUT: utility of an outcome is weighted by its likelihood (some kind of “translation” of uncertainty)

• In PT: the value of an outcome is multiplied by the decisionweight, π(p) —> monotonic function of p though not the probability

This behavior aligns with the idea that people tend to be more sensitive to differences in low probabilities and are more likely to overweigh small probabilities, making their decision weights for low probabilities more similar. As probabilities increase, the decision weights exhibit less sensitivity to small changes, leading to a greater disparity in decision weights.

Risk aversion exhibited by choices when all outcomes are gains. When the same choices are framed as losses, people show risk seeking preferences.

Winning 4000 80% not prefered over winning 3000

Vice Versa with Loss

e.g Asian disease:

Saving 200 prefered over saving 600 with 1/3 probability

but saving 600 with 1/3 prefered over 400 dying

(same information)

Would like to play 50-50 chance to win 150 Euros or lose 100 Euros?

One explanation is choice bracketing (Read, Loewenstein & Rabin, 1999). – Broad bracketing = assessing the consequences of all choices together. This allows taking into account all hedonic consequences of actions promotes utility maximization – Narrow bracketing = assessing the consequences in isolation

stocks outperform bonds on the long run

The reason is Myopic loss aversion (Benartzi and Thaler, 1995, QJE)

Based on Prospect Theory 1. Loss aversion 2. Evaluating portfolios too frequently even though investments are should be made for long run

We overvalue something in our property regardless of its market value

• Or, WTA (willingness to accept) > WTP (willingness to pay) after we own the good o Shifted reference points once we own the good – most common explanation So, we anticipate loss aversion once we part with something as owning that thing is the new reference point and giving it away is a loss.

An implication: treating opportunity cost differently than “out-ofthe-pocket” loss

—> Foregone gains are less painful than perceived losses •

(no endowment effect on behalf of others)

Kahneman, Knetsch and Thaler (1986, AER)

(Cars and listing price)

Imposing an extra charge (i.e., loss) is seen as unfair, while eliminating a discount (reduction of gain) is seen as fair.

amuelson and Zeckhauser (1988, J of Risk and Uncertainty)

• We have a strong tendency to remain in the status quo (current situation) – Because the disadvantage of leaving it looms larger than the advantage of staying. Example: •

Inheriting a portfolio – people tend to stay with it even alternatives which are given as they see these more profitable. • By contrast: inheriting the same amount of money.

Badeticket

Losing ticket vs losing 20 euro

Accounting: "the system of recording and summarizing business and financial transactions in books, and analyzing, verifying, and reporting the results." (Merriam-Webster Dict)

• Mental accounting: a description of how individuals do these things (mentally):

• Sources / purposes of the money, etc. Purposes of MA:

– keep track of where there money is (and is going)

– easier when on separate balances

– self-control device

– you can plan how much you will spend – diminish 'pain of paying' (not discussed by Thaler)

– you have already assigned money for a certain purchase

Pro: 1. A big bonus

saving for something big vs higher monthly salary upwards adjusting consumption

2. One can use it as a self-control device

3. Feel rich and poor simultaneously

Cons:

1. Rigidity of tapping across accounts: We do not want to repay a car loan from the money put aside for our kids college education even though we could save paying a bunch of interest

1. When sharing multiple good news (gains):

tell them separately, wrap Xmas gifts in different boxes

Because people experience separate gains which add up to more than one big compound gain

they are happy for each present

2. When sharing multiple bad news (losses): Tell them all at once Because people experience one compound loss which is less than experiencing loss for each thing/bad.

Transitivity: If A > B and B > C then A > C

Completeness: when you compare your two alternatives you can only get: A < B, A> B or A = B.

Reflexivity: An option is at least as good as itself.

Revealed preference: If you choose A over B, you must prefer A over B.

Cancellation: Same outcomes should be ignored as we have once picked up preference on them.

Dominance: If X is better at least in one dimension than Y and the same in all other dimensions, then you should prefer X to Y.

Extensionality: You should have the same attitude towards a good irrespective of how it is described. Milk 3 % fat should be = milk 97 % fat free.

Invariance: Different representations of the same choice should yield to similar preferences. Descriptive = no matter how you describe a choice (loss vs gain) and Procedural = no matter how you elicit choices: willingness to pay, ordering, etc.

Utility maximization: with choice we always maximize utility

Traditionally no uncertainty.

APPLE BANANA ORANGE context does not always hold:

Sometimes, a market share of a brand increases (vs decreases) after another brand is introduced. Marketers want to foresee how introducing a brand/product impacts existing ones and what is going to be the market share

uncertain nevertheless they do exist and just need to be discovered = Discovered Preference Hypothesis (DPH) (Plott, 1996) – we reveal them and they become stable over time.

Harder approach: Preferences are uncertain, and there is nothing there until one is faced with a choice. Then, we construct them, Constructed Preferences (Slovic, 1995)

Given that people are uncertain about their own preferences, when called upon to make a decision, they use any available information to help resolve the uncertainty

—> deviations from standard predictions about choices and the influence of the context in which options (mostly multiattribute) are presented

—> violates/contradicts regularity ( adding an alternative should not influence preference for other alternatives)

12 1. Simultaneously presented multiattribute alternatives are the context.

2. Influence of the past (i.e., options that are not present)

Trick1: Attraction /Asymmetric dominance/Decoy effect (Huber et al, 1982 and 1983)

Violates independence of irrelevant alternatives! (An alternative that would not be considered should not influence choice)

The closer the inferior alternative to the relative superior one, the more stronger is the compromise argument (Simonson, 1989, JC

justification of choices

They seek good reasons for explaining their actions o Idea from social psychology – motives are various:

Enhancing self-esteem

Avoiding regret

Decrease cognitive dissonance

To perceive themselves are rational beings with good reasons •

—>happier

Preferences are reversed between JE to SE evaluation • In JE – options are evaluated comparatively, in respect with each other. Attributes gain meaning in respect with each other. • In SE – options are evaluated separately. Hard-to-understand attributes are ignored/gain less attention

Absolute judgments are often difficult to make

Relative judgments simpler and more natural

Problematic to examine absolute attitudes with relative methods Normatively irrelevant factors influence valuation

Sometimes, normatively relevant factors do not affect valuations

Findings challenge the idea of fundamental value in economic theory

Absolute valuations are arbitrary and sensitive to normative and nonnormative influences. But, once valued this serves as an anchor —> imprinting. Then, relative valuations are coherent to the initial arbitrary valuation —> locally coherent

Willingness to pay influcences by anchor (social security number)

You can influence people valuations for goods/experiences by randomly assigning them (i) getting paid for doing something or (ii) making them pay to do something. Even when this randomization is transparent to people.

Accept Group

Would you attend Ariely recital for $2?

59% say Yes

Would you attend Ariely recital for Free?

8% say Yes

Pay Group

Would you pay $2 to attend Ariely recital?

3% say Yes

Would you attend Ariely recital for Free?

35% say Yes

prices are endogenous to economy – e.g. new product’s price is published than we anchor to it and then behave coherently to this arbitrary price – prices could prevail because of collective anchoring or historical precedent

SEU = Expected utility plus the idea that people behave as if they held coherent subjective probabilities of uncertain gambles.

In other words, in their decision making, people behave as if

• All uncertainties can be reduced to risks: We could assign numerical probabilities to uncertainty, but the transformation is subjective

• Assign degrees of beliefs to how likely uncertain things will happen

When we are willing to place bets (amount of money) on uncertain events, we reveal the degree of our beliefs about that event —> derive subject probabilities from preferences between bets.

Subjective probability of event E is p if the decision-maker is indifferent between the prospect of receiving $X if E occurs (and nothing otherwise) and the prospect of receiving $X if a red ball is drawn from an urn which contains a proportion p of red balls. Ellsberg challenges these.

Tendency to prefer risky over uncertain events.

Preferring or betting on events where the probability distribution is known, over when it is unknown.

Ambiguity also effects probability judgments:

1. Subadditivity: probability judgments add to less than 1.

2. Most people prefer non-ambiguous gambles over ambiguous ones except at very low probabilities

3. Ambiguity decreases willingness to act

1. People dislike making decisions when one is missing relevant information and believes that this missing information can be potentially sought out/known.

2. They wrongly transfer a heuristic which is otherwise (in real life) useful heuristic: Do not bet when you lack information.

3. They wrongly apply a decision-making rule/or fail to recognize its appropriateness

4. They are suspicious that the urns are rigged – in experimental settings

people tend to bet on their (uncertain) judgement when they feel knowledgeable but on the chance event when they feel ignorant (non-knowledgeable).

When comparing two events: clear (probabilistic) and vague (uncertain)

Jointly: clear bet and vague bet are present —> AA arises Sequentially: clear bet and vague bet are presented one after another —> AA disappears

For jointly presented events, people experience a contrast which makes the clear event more informative relative to the vague event but people do not factor in this experience into their reasoning.

In sum, AA arises in contrasting states where the context (jointly presented options) serve as context for the choice.

(Stanford chips and price for bet)

Optimistic people are far less AA

But, pessimism was not found to be associated to AA.

Via what mechanism?

• Optimists hold higher probability beliefs about the advantageous outcome

• Optimists have higher self-esteem and hold stronger beliefs that about their ability of being able to make good judgements

Any choice made between consuming at two or more different points in time, i.e., across temporal prospects

• Specifically, when the benefits and the costs of a choice are separated by time – smoking, borrowing money, investment decisions, working hard for promotion, studying, exercising, dieting, etc.

1. Final consumption what matters – we integrate new options into existing plans.

2. Utilities across periods are independent

3. Temporal and atemporal preferences are independent

4. Independence of atemporal preferences from outcomes in other periods

5. Constant discounting

6. Stationary atemporal preferences

7. Positive time preference

8. Diminishing marginal utility of consumption over time

Giving up consumption now is a greater pain than – as we anticipate – giving up the same consumption later.

• Overconsuming on short run or immediately, even if this does not correspond to wellbeing on the long run, e.g, not saving, habit-formation, etc.

Solution:

• Time-variant preferences causing present biased behavior and dynamic inconsistency in the behavior

• The reason: Discount rate sharply declines in time causing nonstationary discount rates (<-> constant/timeinvariant discounting)

Preferences depend on the time of the consumption. When we discount consumption, we steeply discount those that need to be postponed from now to future BUT we do not discount the same consumption so much when it needs to be delayed from a future time point to a more remote time point.

Consequence of time-variant preferences. We prefer consuming now than in the future and are willing to give up a significant proportion of the consumption for this.

When we plan a consumption ahead of time (e.g., starting diet) we discount a future consumption much less than how much we discount it when we have to consume that thing on immediately.

Time preferences are not invariant but they vary by how remote the consumption is:

o Imminent consumption is heavily discounted : Less sooner then more later

o Remote consumption is not so heavily discounted :immediate versus delayed gratification

People do not stick to their plans because it hurts more when you have to give up something good on the spot than as you anticipated how much it will hurt in the future:

We procrastinate on tasks that impose an immediate cost and delayed reward

We are more sensitive to a given delay if it occurs earlier than later.

Discount rates decline with the size of the reward.Example:

$15 now ≈ $60 1 year; $250 now ≈ $350 1 year; $3000 now ≈ $4000 1 year;

Interest rate for gains are much higher than for losses. In other words, we discount delayed gains more than willing to pay for delaying a loss. You can get 100 Euros next and how much do you want to get next week instead of the 100 Euros now? Say, 110 Euros. BUT! You have to pay 100 Euros now and how much would you willing to pay extra if you would be able to delay paying the 100 Euros by a week? Say, 105 Euros.

Delaying a consumption is discounted more than speeding up the same consumption.

Exponential disc is steadier

HD drops then levels out

implication: procrastination

binding is helpful for performance (groups 3 & 2 > group 1) • some demand for self-control (based on group 2 setting completion dates before the final date) • self-set dates not optimal (group 3 > group

Sophisticated people:

Aware that will have self-control problems: Knowing that future preferences will not accord with current preferences, but this prediction is also incorrect —> Either succumb or overly refrain (since they are worried about developing a habit and thus overconsuming in the future).

These people can display, for instance, future biases: working too much for a promotion and loose a bunch of utility in the meantime while focusing too much on and assigning too utility to a future promotion (or any kind of event).

Naïve people: Unaware of having self-control problems: Believing that future preferences will accord current preferences —> Succumb

Partially naïve people: Aware of having self-control problems, but underestimate its magnitude —> displaying projection bias (discussed in this class)

People under-appreciate effects of changes in future states. They project their current preferences onto the future.

state dependent preferences

The overestimation is coming from:

1. Resemblances = you overestimate how much your future taste will resemble to your current taste. 2. Impact = you under/overestimate how much that state will influence your utility.

Utility from savoring – waiting for something good to happen, imagine and linger on the thought, image also gives utility  ppl are willing to delay good things • Disutility from dreading – dreading something bad to happen decreases its utility  summer romance feels worse if you think about summer ending and your partner travelling away. Or, waiting for a dentistry treatment  you would rather get over it sooner than delaying it.  To avoid dread, we are willing to speed-up the timing of mild discomfort. • Not willing to speed up larger loss/discomfort

1. Reduce harm arising from suboptimal choices – most individual level – “protecting people from themselves” – this is complicated…

2. Increase overall welfare (even though admittedly hard to measure)

1. Conventional economic policy = economic solutions such as taxes, incentives, regulations to remedy problems arising from externalities, misaligned incentives or information asymmetries.

2. Purely behaviorally focused interventions = solutions address internalities, bounded rationality – Choice architecture – nudging ppl towards more desirable behaviors

3. Hybrid solutions!

   
   

In 2003 two sets of research teams proposed applying behavioral economics to public policy o

One set (C. Camrer, S. Issacharoff, G. Loewenstein, T. O’Donoghue and M. Rabin) - ”Asymmetric Paternalism”

o Other set (R. Thaler and C. Sunstein) – “Libertarian Paternalism”

1. Traditional economic

• E.g.: Negative externalities from producing clothes, second hand smoke • E.g.: Information Asymmetries

2. Behavioral

• E.g.: Internalities

• E.g.: Bounded rationality

3. Hybrid (Econ+Behav)

• E.g.: Firms exploiting consumer biases

1. Traditional economic policies

• Taxes

• Subsidies

• Mandatory information disclosure

2. Behaviorally informed policies

• Choice architecture – nudges

3. Hybrid policies • Carefully framed taxes/subsidies*

Intervention alternatives =

1. Traditional: taxing smoking

2. Behavioral: psychologically informed policies

= nudging people against smoking

Note, Debate (open question) on how much the system/government should paternalistically intervene into one’s choice his own welfare

Intervention alternatives: 1. Traditional: taxing smoking

Exploiting loss aversion =

• Make it into a tax than a subsidy – smokers pay taxes rather than nonsmokers getting subsidy

• Separate rather than integrate tax costs: cigarette price = its tax separately presented – mental accounting

• Deposit contract – e.g.: steering people into doing regular exercise, or to comply with regular medicine intake.

Put own money in fund. Money is lost if goal unmet and doubled when met.

Profit maximizing firms exploit consumer frailties: present-bias, inattentiveness.

• Pay-day loans

• Large penalties for overdrawing from bank account

• Penalties if someone spends LESS than the credit card limit (crazy, right?) • Etc…

—> they take advantage of people’s limited/bounded rationality

1. test with some behavioral analysis whether people would notice and respond to any information. E.g.: would they notice if pay-day loans interest rates and how they compound are explicitly stated?

2. Analyze with conventional econ analysis what borrowers will do if pay-day loans are banned and how would firms react to these regulations.

• Easy to implement

• Cheap to implement

• Overt and not covert

• No restriction on choice – preserve the freedom of choice

• No forcing into any options - preserve the freedom of choice

• No changing of the incentive structure

1) (Fighting against) obesity – no much success

2) Retirement saving – clearly successful

3) Increase organ donation – clearly successful

4) Getting people pay their tax dues – successful

Eating unhealthy food young/early ages and then, this consumption backfires later: Habit-formation – people get used to high sugar and fat intake and/or inactive lifestyle  present consumption undermines optimal long-term consumption. (Recall narrow versus broad bracketing!) • Procrastinating getting exercise: again due to present -bias

There is a need for policy interventions. BUT! It is hard because: All-or-nothing impossible (you have to eat) Process (diet & exercise) difficult to observe and hence incentivize Natural homeostatic processes oppose most interventions Social factors – norms that reinforce individual behaviors  eating together as a leisure activity

As it assumes that:

People know what is the best for themselves

Are able to act on that understanding

—> Little or no need for intervention & Focus on information as main tool for policy

PLAN INTERVENTION BASED ON INSIGHTS FROM Behavioral Economics (and perhaps some interventions could also be hybrid)

People optimize consumption for lifetime – they smooth consumption

They save up for retirement to maintain their consumption level over time

BUT! Given the median household retirement savings and also more recent evidence, this assumption is false.

Due to internalities: present-bias, intangibility, small contributions seem meaningless (so, why do them), people compare their current consumption to reference group and overconsume in the present (third row from Table) • Esp. low income people: payday loans, pawn shops, expensive credit cards, etc. • People (esp., low-income people) are reluctant to give up immediate consumption for the future (retirement). • Decreased social network to level income gaps, urban life eliminates for home produces to supplement bought groceries, less social safety – more individual factors in taking care of ourselve

1. Traditional approach = people’ choice depicts people preference for organ donation – they find little value in donating their organs This implies, whatever default people are enrolled into, should not matter. They would opt-in/opt-out according to their preferences.

2. Behaviorally informed economics = as per constructed preferences, choice will be influenced by how it is presented. Because:

(1) this is the status-quo (norm),

(2) effortless to accept (inertia), (3) this is the suggestion

Social norms seem to be powerful: people like to adhere to these norms – as they gained some utility behaving according the perceived norm •

2 large-scale field studies in the UK

• Appr 100,000 taxpayers who have already declared their to-bedeclared incomes but have not paid their tax dues.

• Randomized into different groups – varying content of letters sent out by the Tax Agency

Descriptive and injunctive norms change behavior but descriptive norms have a larger impact 2. Providing financial information also increased payments.