Libertarian Paternalism

Transcript

Ce.R.D. - Center for research on Risk and Decision
DPSS - University of Padova
http://decision.psy.unipd.it/
Behavioral Economics class
Faculty of Economics - University of Padova
2010/2011 academic year
Ce.R.D.
Centro di Ricerca sul
Rischio e la Decisione
Cognitive limitations and decision
Often people make mistakes when they have to decide what it would be
the best behavior or the best goal to achieve:
As we saw in previous lectures, those mistakes originate from
automatic processes induced by cognitive limitations that
characterize the way human beings think.
The complexity of the world in which we live is so high that on
many occasions we are obliged to choose:
Without being expert enough.
Without having enough information.
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Cognitive limitations and decision
Decision biases may have consequences not only for single individuals
but also for the whole society:
If a person does not save enough money for retirement, the
collectivity will have to help him/her one way or another
(providing some money or paying for health care).
If a person rejects a sub-optimal kidney for transplantation the
government will have to keep spending for his/her dialysis (about
€2600 a month for a single patient).
If people do not collect recyclable wastes separately, the whole
society will face the consequences of this behavior.
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How to change things for the better
Recent approaches based on behavioral economics suggest that it
could be possible to modify the interest of economics in a way that is
advantageous to both individuals and the society:
So far the main interest of economics was to «exploit» and profit
from consumer choices...
to try and convince them to spend more, eat more, smoke,
buy lottery tickets, and make debts with their credit cards.
Even companies that appear to be «in favor of the
consumer» (selling anti-nicotine or dietetic products) have an
interest in seeing them start smoking or eating too much.
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These new approaches aim at finding ways to favor behaviors that
increase both:
Individuals wealth and health.
Companies profits and a good management of public funds.
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A particular solution is to «induce» people, thanks to their biases, to
behave in a more correct and virtuous way. However, such solution open
a contrast between two different positions about social policy:
Libertarianism: Based on freedom of choice. Every person is
free to choose which alternative or particular behavior they prefer
to follow (i.e., whether to save money for retirement or not).
Paternalism: Reduction of the number of alternatives when
people are unable to engage in healthy behaviors (i.e., obliging
them to save by deducting money from their salary).
These two positions have long been considered incompatible, but they
both offer have positive sides as well as serious limitations.
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Recently, several behavioral economists have proposed less radical
forms of paternalism in which freedom of choice is preserved although
cognitive biases are used to increase the chance that people makes
healthy decisions:
These researchers suggest that our knowledge of behavioral
economics can be used to design more effective decision
contexts.
SMART: this is a program that uses principles of libertarian
paternalism to increase the number of employees who enroll in a
pension plan (Thaler & Benartzi, 2004).
This approach to policy making is also defined «light paternalism» or
«asymmetric paternalism.»
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Possible interventions
Taking advantage from the biases that characterize people’s reasoning
and the way they decide it is possible to design social and economical
policies that let individuals free to choose what they prefer, while at the
same time inducing them to behave better.
Several characteristics of the way human beings reason can be used to
this end:
Defaults (people prefer not to change their status quo)
Anchoring
Context effects
Monetary incentives
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Defaults and status quo bias
It is possible to design interventions that create defaults corresponding
to the choice that is more convenient for the individual (or the
community).
In this way, it should be expected that only a minority of people decide to
modify this initial condition.
For instance, in the case of pension plans, if the enrollment is the
default, only those employees who have a good reason to leave
should do that (i.e., if they have to pay the house loan).
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Defaults and organ donation
Mean = 97.56%
Opt-in
99.9
98.0
99.9
99.9
99.5
99.6
85.9
Mean = 15.23%
(Fonte: Johnson & Goldstein (2003). Do defaults save lives? Science, 302, 1338-1339).
Sweden
Portugal
Poland
Hungary
France
Belgium
United Kingdom
Netherlands
4.3
12.0
Austria
17.2
Germany
27.5
Denmark
100%
86%
71%
57%
43%
29%
14%
0%
Opt-out
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Defaults
In an experiment, law school students were asked to answer to one of
the following scenarios. The argument of the scenarios concerned laws
about paid-vacations:
Scenario 1: The law grants 2 weeks of paid-vacation every year.
Participants had to estimate their willingness to give up part of
their annual salary to get two additional weeks of paid-vacation.
Scenario 2: The law grants 2 weeks of paid-vacation every year
plus 2 additional weeks that the worker may not take.
Participants were asked to estimate the annual salary increase
they wanted to give up the two additional weeks of vacation.
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Defaults
In the first condition (scenario 1), participants were willing to give up
$6,000 each year in order to get two additional weeks of paid-vacation.
In the second condition (scenario 2), participants asked for $13,000
every year to give up the two additional weeks of paid-vacation.
Once again, the choice of the default has an effect on both the
annual salary received by the employees...
and the costs sustained by the employer.
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Anchoring
When answering to a question without knowing the exact answer we
can often be influenced by a number provided from an external source
which we use to get a hint for the estimate.
However, there are also other ways people are influenced by
anchors.
This heuristic can be used to increase investments in stock funds by
those investors who want to save money for retirement.
Traditionally, people do not invest enough in stocks because they judge
those investments too risky (loss aversion).
However, stocks have better performance than bonds on the long run
(risk-return relation and risk premium).
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Anchoring
Investors fear of stocks is explained by their excessive overestimation of
the short term (myopic loss aversion) that leads them to downplay the
long term advantages.
Suggesting default portfolio allocations that are unbalanced in favor of
stock funds it is possible to design a pension plan that induces investors
to overcome their bias about how risky stocks are.
By setting a stock allocation default of 80% could be possible to
increase investors stock allocation by about 10-15% on average
therefore getting to a final stock investment of about 50% of the
portfolio (Sunstein & Thaler, 2008).
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Context effects
We talked about context effect in the first lecture, when discussing the
violation of the regularity principle.
These effects have been introduced in consumer behavior and
marketing, however they can be more effective in fileds where the ability
to control the decision context by the policy makers is higher.
In advertisement and marketing, these strategies have been
used by companies to sell their products and prevent consumers
from buying products made by a competitor.
A goal of Libertarian Paternalism is to make use of paradigms that let
people free to choose but still increasing the chance that they make the
best choice for their wealth and health and for their community.
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Attraction effect
Quality
Product B
(Competitor)
Product A
(Target)
Cheapness
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Attraction effect
Quality
Option B
(Competitor)
Option A
(Target)
Option D1
(Decoy)
Cheapness
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Attraction effect
Quality
Option B
(Competitor)
Option D2
(Decoy)
Option A
(Target)
Cheapness
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Context effect and transplantation
In 2008, we run an experiment applying the attraction effect to the
xenotransplantation issue.
Xenotransplantation is under study as an approach to increase
the number of organs available for transplantation.
Such biotechnology foresees the use of animal organs to
transplant in human recipients.
Animals (most likely pigs) will be grown in laboratory and
genetically modified to reduce rejection because of
immunological issues.
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Context effects and transplantation
Hypotheses:
People should be averse to xenotransplantation since, although
it increases the number of available organs, it induces strong
negative affective reactions.
Introducing an alternative which is even more negative (decoy)
patients should be more willing to accept a pig liver.
Sample:
A group of patients waitlisted for liver transplantation.
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In the two alternatives condition,
patients were presented with:
Pig liver
Affective reaction
Human liver
(Competitor)
+
Human liver
... 97.5% of respondents choose
the human organ, despite it was
less available than the pig liver.
Pig liver
(Target)
-
Therefore, by choosing the
human organ they increased the
chance to die before receiving
the new organ.
20
40
Organ availability
(every 100)
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Affective reaction
In the three alternative condition,
the majority of patients still
choose the human liver...
Human liver
(Competitor)
+
However, the number of those
choosing the pig liver raises:
Pig liver
(Target)
-
From 2.5%
Dog liver
(Decoy)
To 25.6%
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Organ availability
(every 100)
(Source: Rubaltelli E., Burra P., et al. (2008). Strengthening acceptance for xenotransplantation: The case of the
attraction effect. Xenotransplantation).
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Use of incentives
Many interventions aim at reducing people’s underestimation of future
consequences providing:
Immediate rewards (or punishments)...
and feedbacks about the obtained results.
Such interventions are designed to reduce the effects of the hyperbolic
time preference (Strolz, 1955).
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Hyperbolic time preference
From a psychological point of view this phenomenon is linked to the
effort required to resist temptations and emotions:
People are more impatient for events happening in the present
(when you have to give up something now to get something
better in the future)...
than they are when facing future events (when they have to give
up something good in the future to get something even better at
an even later time).
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Hyperbolic time preference
Many people use to say:
«I will start the diet next month!»
In such a case people are willing to start giving up high-calorie foods
(e.g., cakes) from the next month to get an even further gratifications
(being lean when going to the beach!).
«However, for today I still want to eat that cake!»
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Use of incentives and drug addiction
One of the most relevant interventions in this case has been to use
incentives to help people overcome addictions:
Every day, drug addicted individuals received a coupon to buy
goods if their urine test was negative.
Often this small incentives have a great effect, despite
individuals had already incurred huge losses because of their
addiction.
The coupon allows these people to get an immediate reward,
whereas in normal conditions they would only have an immediate
cost (abstention from using drugs which is painful) and a reward
which is far away in the future (changing their lives for the
better).
(Source: Higgins S.T., Wong C.J., et al. (2000). Contingent reinforcement increases cocaine
abstinence during outpatient treatment and one year of follow-up. Journal of Consulting and Clinical
Psychology, 68, 64-72).
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Use of incentives
Similar programs have been developed to counteract different types of
issues, like:
Addition to nicotine (Volpp et al., 2006).
Obesity (inducing people to lose weight; Jeffrey et al., 1983).
Increasing kids grades in high school (Angrist et al., 2006).
It is important to consider that in many cases individuals would like to
change behaviors that they judge unhealthy (like smoking):
However, they often find it difficult to get motivated day after day
in order to get a gratification later in time.
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Evaluation of low probabilities
Another bias of reasoning is to overestimate low probabilities:
This is why individuals buy lottery tickets (or for games like
superenalotto) and think this is a good opportunity to gain
money.
It is also one of the decision implications described in Prospect
Theory.
This behavior explains why people play the lottery but at the same time
refuse to buy an insurance against highly probable (but not sure)
accidents.
(Source: Kahneman D. & Tversky A. (1979). Prospect theory: An analysis of decision under risk.
Econometrica, 47, 263-291).
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Evaluation of low probabilities
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Lottery and adherence to a medical
treatment
Starting from people’s overestimation of low probabilities it has been
designed a program to increase patients’ adherence to medical
treatments:
They had to take a drug to prevent a second heart stroke (the
drug had little side effects).
Every evening, a number corresponding to one of the patients in
this program was withdrawn like in a lottery. A small sum of
money was given to the corresponding patient.
An electronic system allows the physician to know every day
which patients have opened a special drawer to take the pills.
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treatment
Every evening those who took the pill are informed of the winning
number and therefore they know they could have won:
In this way, the process involved patients’ emotional reactions
and in particular the emotion of regret.
Regret is the feeling that a person experience when he/she could
have obtained something better behaving differently...
Usually, people do their best to avoid experiencing a negative
emotion like regret (and the feeling of being responsible for a lost
opportunity).
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treatment
In the first two trials of this intervention (each was one-month long)
researchers obtained the following increases in the adherence to the
treatment:
From 66% without lottery to 96% with lottery.
From 66% without lottery to 97% with lottery.
Overestimation of low probabilities and regret aversion increased
significantly the attractiveness of the sum offered through the lottery
and, as a consequence, the efficacy of the treatment.
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Loss aversion
Prospect Theory states that people are averse to losses:
They prefer a sure win to an uncertain one when the expected
value is held constant:
Receiving €100 for sure > 50% chance to receive €200.
They prefer an uncertain loss to a sure one when the expected
value is held constant:
50% chance to lose €200 > losing €100 for sure.
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Loss aversion
A research showed that loss aversion can be exploited to induce people
to lose wait.
Patients were asked to deposit money or other valuable objects and to
sign a contract with their physician:
Money (and other objects) would have been returned to the
patients depending on their ability to honour the schedule relative
to the weight loss.
Of all the patients enrolled in the program:
47% lost more than 9Kg and 70% lost more
(Source: Mann R.A. (1972). The behavior-therapeutic use of contingency contracting to control an
adult behavior problem; Whight control. Journal of Applied Behavioral Analysis, 5, 99-102).
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Loss aversion
Asking people for a deposit allows to increase their motivation to lose
weight, since:
It increases the negative emotion linked to the loss of a the initial
deposit.
Such a program plays with people’s initial optimism about their ability to
stick with their goal of losing weight:
Upon starting they are convinced they will achieve their goal...
as a consequence, they are willing to put their own money at
stake.
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Framing effect
Framing is one of the most useful effects to design policies that are
coherent with the principles of Libertarian Paternalism:
Framing does not limit people’s freedom of choice.
However, by changing the reference point or the «cosmetic»
features of the decision context it is possible to modify choices
quite dramatically.
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Framing effect
A recent research showed that thanks to framing and loss aversion it is
possible to increase participation to health insurance plans supported by
employers.
They are economically convenient for the employees.
Enrollment in the program was higher when it was described as a loss:
Loss: «Stop losing your money!»
Gain: «Start saving your money!»
(Source: Schwartz J., Bertrand M., Mullainathan S. & Shafir E. (2006). Boosting program take-up: An
experiment with flexible spending accounts. Presented at the “BDRM COnference”, Santa Monica,
CA; June 15-17).
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Goal gradient hypothesis
Usually, people are more and more motivated as they get closer to the
goal they want to achieve:
For instance, if a brand offer a reward to those achieving a
specific amount of loyalty points, costumers who are closer to
that score will buy more often the product.
Hull (1932) defined this phenomenon as the Goal Gradient
Hypothesis.
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A recent intervention tested in the United States aims at avoiding the
use of «Rent-to-own» solutions:
These solutions allow to rent a product for several months and to
keep it after the rental time (usually around 6 months).
These solutions have a big drawback for the consumer as he/she
would likely end up paying the product double its original price
(but paying something every month rather than in a single
solution).
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The alternative that has been tested is labeled «Save-to-own»:
This intervention allows the consumer to open a savings account
in which saving money destined to the purchase of a particular
product.
Money in this account are saved in the following way:
Initially, they are saved in small amounts...
that are increased as the consumer gets closer and closer to
saving the sum needed to buy the product.
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A similar program is consistent with the fact that people prefer to spend
their money now than in the future:
Low initial contributions do not influence significantly people’s
spending power (so they are easier to accept).
Highe contributions toward the end of the program are easier to
cope with since the goal is closer (the negative feeling of
waiting for something one like will be reduced and that’s
good).
(Source: Loewenstein G. & Haisley E. (1998). The economist as a therapist: Methodological
ramifications of “light” paternalism. In A. Caplin & A. Schotter (Eds.), Perspectives on the Future of
Economics: Positive and Normative Foundations. Oxford, England: Oxford University Press).
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Limits of Libertarian Paternalism
One of the main limits of Libertarian Paternalism is the difficulty at
identifying a general principle that can be used to decide:
Which is the optimal choice or behavior.
Which is the behavior that most people would prefer to do.
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Reference principle to induce better
choices
Different criteria can be used and all of them has some kind of limitation
or drawback:
Some of the criteria proposed are the following:
Expected utility.
Experienced utility.
Limiting welfare to valid choices (decision utility).
Informed decision utility.
Imperfect pragmatic approach.
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choices
1. Expected utility:
This is the same criteria used in the rational theories (von Neumann &
Morgenstern, 1947).
A huge number of researches in decision making showed that on many
occasions people choices do not respect this principle.
Often people do not get the highest satisfaction from what should
be the «rationally optimal» choice; see:
Prospect Theory and the violation of rationality principles.
Framing effect, loss aversion, and differences between tasks
that are supposed to held similar preferences.
Effects due to different information formats that are formally
equivalent.
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choices
2. Experienced utility:
Kahneman (as well as several other economists and psychologists)
proposed to measure people’s welfare on the basis of their happiness:
The goal would be to help people maximize their happiness
rather than the economic outcome (e.g., salary).
Research suggested that amount of salary and happiness are
not as strongly associated as it was thought in the past.
On average, American are as happy today than they were 60
year ago, despite massive increases in the average annual
income.
(Source: Kahenman D. & Krueger A.B. (2006). Developments in the measurement of subjective wellbeing. Journal of Economic Perspectives, 20, 3-24).
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choices
The problem with hedonic adaptation:
Dialysed patients report happiness ratings similar to healthy
individuals.
People tend to adapt to the situation they live in (even negative
situations).
A similar principle would not allow to conclude that a chronic
disease is an undesirable outcome (it does not necessarily
reduce perceived happiness).
(Source: Riis J., Loewenstein G., et al. (2005). Ignorance of hedonic adaptation to hemo-dyalisis: A
study using ecological momentary assessment. Journal of Experimental Psychology: General, 134,
3-9).
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choices
A second issue is how to measure happiness; at present, there are several
measures but none is consistently reliable:
Usually, people use their general conditions as a reference
point; on other occasions they compare themselves with other
people around them.
Moreover, these measures are sensitive to:
Mood at the time a respondent answers.
Weather.
Previous questions respondents had to answer to.
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choices
3. Limiting welfare to valid choices (decision utility)
This approach is to use the criterium of actual choice made by a person,
while limiting the range of available alternatives.
The hypothesis is that individuals will try to maximize their
happiness, but...
sometimes they are unable to do so because of the influence of
intense emotions or instincts
(Source: Loewenstein G. & Haisley E. (1998). The economist as a therapist: Methodological
ramifications of “light” paternalism. In A. Caplin & A. Schotter (Eds.), Perspectives on the Future of
Economics: Positive and Normative Foundations. Oxford, England: Oxford University Press).
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choices
3. Limiting welfare to valid choices (decision utility)
Obviously, an issue with this approach is how to decide which alternatives
are important (and must be available) and which are not.
Several ways have been proposed (e.g., letting individuals
choose the sub-set of relevant options) but they all received
several critics.
A solution would be to run fMRI studies to understand which
tasks and contextual factors sap decision makers cognitive
resources.
However, we will have to wait a long time before finding a
pattern of brain activation precise enough to be useful.
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choices
4. Informed decision utility:
This approach suggest to consider people’s choices as an index of utility
maximization, but only when:
Everything has been attempted to proved full information about
each alternative.
Possible examples of this approach are the following:
Labels on food and drugs packaging.
Furthermore, such approach should be applied providing to the decision
maker:
Information about possible decision biases (e.g., framing).
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choices
4. Informed decision utility:
Again, there are several limits that should be considered when using such
an approach:
Seldom it can be applied without making an a priori inference
about the actual utility of a choice:
It is fundamental to decide whether to provide full information
about a specific decision domain or not.
Provide full information can help only in some circumstances but
not always:
For instance, it would not solve issues raised by lack of self
control by the decision maker (like not saving for retirement).
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choices
5. Imperfect pragmatic approach:
Sometimes selecting the solution that would increase people’s welfare is
quite simple:
It is the case in which one of the following principles is observed:
Dominance
Clearly negative outcomes
Self-officiating policies (policies required by the decision
makers).
(Source: Loewenstein G. & Hubel P. (in press). Hedonic adaptation and the role of decision and
experience utility in public policy. Journal of Public Economy).
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choices
5. Imperfect pragmatic approach: Dominance
On some occasions, people should be helped to reach an outcome that
dominates the one they would choose by themselves:
This is the case of pension funds in the USA where the employer
can match the employee contribution (company match):
Many employees give as «last contribution» a sum that is
inferiore to the maximum value that the company is willing to
match.
Starting from the hypothesis that employees would prefere an
higher pension, maximizing the company match should be a
better choice.
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choices
5. Imperfect pragmatic approach: Clearly negative outcomes
In some situations, people make decisions whose outcomes are below their
present status quo:
In these cases, there is no need for a criteria of welfare as it is
clear that people would be better off avoiding to incur in a loss.
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choices
5. Imperfect pragmatic approach: Self-officiating policies
This principle leaves the decision about the goal to achieve to the people
who are involved in the situation (e.g., losing weight or quit smoking):
In this case, the only thing to do is to apply policies based on:
Restrictions.
Incentives.
Information aiming at support people self-control.
... in order to help the individual to reach his/her objective.
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choices
Therefore, the best approach seems to combine all those described above in
order to maximize the chance to increase peoples welfare and the efficacy of
their choices:
Depending on the specific domains it is possible to use:
Expected utility.
Experienced utility.
Informed choice utility.
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Libertarian Paternalism

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