• 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.
• How default rules affect people’s choices and the implications for policy.
• How framing affects the way people process information and its implications for policy.
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11© 2014 by McGraw‐Hill Education
Chapter 23
Public Policy and Choice Architecture
2© 2014 by McGraw‐Hill Education
• 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.
• How default rules affect people’s choices and the
implications for policy.
• How framing affects the way people process
information and its implications for policy.
What will you learn in this chapter?
3© 2014 by McGraw‐Hill Education
• Evidence suggests that people’s decisions can be
influenced by how options are presented to them.
• Choice architecture is the organization of the context and
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.
Choice architecture and nudges
24© 2014 by McGraw‐Hill Education
• 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.
1. 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.
Mistakes people make
5© 2014 by McGraw‐Hill Education
2. 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.
3. 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.
Mistakes people make
6© 2014 by McGraw‐Hill Education
5. 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.
Mistakes people make
37© 2014 by McGraw‐Hill Education
For each of the following, identify the most fitting
category of biases in decision making:
1. 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.
2. Every night, you set your alarm for 7 a.m., and every
morning you hit the snooze button at least four times.
3. People are more likely to undergo a surgical procedure
when told the survival rate rather than the death rate.
Active Learning: Mistakes people make
8© 2014 by McGraw‐Hill Education
• There are several techniques that choice
architects use to structure the decisions that
people face.
1. Commitment devices: Allow people to
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.
Tools of choice architecture
9© 2014 by McGraw‐Hill Education
2. 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.
– The anchors that underlie these short‐cuts can be
manipulated to change people’s decisions.
• For example, charities that suggest donations of $50,
$100, or $500 tend to receive more money than those
suggesting $1, $5, or $10.
Tools of choice architecture
410© 2014 by McGraw‐Hill Education
– 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.
3. Default rules defining what will automatically
occur if a chooser fails to make an active
decision.
– By changing the default rules, individuals can be
nudged towards specific choices.
• If the default is to opt‐in to organ donation, people are
more likely to donate organs.
Tools of choice architecture
11© 2014 by McGraw‐Hill Education
4. 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.
Tools of choice architecture
12© 2014 by McGraw‐Hill Education
For each of the following situations, determine whether the default
option affects the decision.
1. A doctor recommends continuing treatment; the ultimate decision
is left up to the patient.
2. A website automatically checks the option “share activity with my
friends on Facebook” at sign up.
3. Pets from a shelter are automatically spayed/neutered unless the
owner prefers them not to be.
4. 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.
Active Learning: Tools of choice architecture
513© 2014 by McGraw‐Hill Education
• 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.
Summary
14© 2014 by McGraw‐Hill Education
• 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.
Summary