Sunstein's Colorado Experiment

A Harvard lawyer, Sunstein is also deeply steeped in behavioural economics and has applied those theories to law and politics. In a delightful talk at Rotman, both instructive and entertaining, Sustein described some of his latest research studies that put a theoretical foundation to the understanding of the growing political polarization in the US.

Sunstein started by laying out the results of a 'Colorado experiment'. Here's how it went. Boulder is a left-leaning community in Colorado while Colorado Springs is right-leaning. Groups were pulled together from these two separate communities to talk about climate change, affirmative action and same sex marriage. Their views on these topics were measured before the discussion. In private, many people tended to be uncertain and tentative about their opinions. Then Boulder people had a short discussion about this topics with other Boulder people while the Colorado Springs people talked to others from Colorado Springs. After these discussions with like-minded people, they become more confident, more unified and more extreme. As Sunstein said, this was not all that surprising, but it was useful to verify the process of people being influenced by others in a group experimentally rather than relying on intuition.

Sunstein went on to describe the effects of mixed and homogeneous composition of judicial panels. A laborious analysis of the decisions of three-person judiciary panels, comparing homogeneous (as to who was the President when they were appointed) and mixed (people appointed by different presidents of different parties) panels showed a rather surprising result. The best predictor of their decisions was not their own political leaning but the leaning of the others on the panel.

He gave many examples of people's resistance to new data, when they have firm opinions already. Add to that the fact that most Americans get their news from Facebook, which filters news to suit their tastes - this generates more clicks and more opportunity to sell advertising. He showed us a quote from an earlier FB statement of how their NewsFeed works:

Our success is getting people the stories that matter to them most. If you look through thousands of stories every day and choose the 100 that were most important to you, which would they be? The answer would be your News Feed. It is subjective, personal and unique - and defines the spirit we hope to achieve.

It's easy to see how this approach would solidify extreme positions and lead to polarization. Facebook is now making moves to modify how News Feed works, under considerable public pressure. Sunstein made a strong point that we shouldn't be algorithmed into being extreme, which the original Facebook algorithm certainly did. He got a good laugh when he said we needed to made algorithm a verb, but we needed a shorter word. Unfortunately algored wouldn't really work.

Sunstein was discussing topics from his latest book #Republic: Divided Democracy in the Age of Social Media. I'm looking forward to reading the book and hearing more about his research, because I'm sure I haven't done justice to what he talked about. 

After the talk I made a suggestion to Sunstein. The New York Times often runs a section entitled What the Conservative Media  that it might be interesting to see the relative click rate on The New York Times' section called What the Conservative Media are Saying (or some such title). Compared to the laborious research on the judiciary panels, this would provide simple quantitative results. I know what I'd be betting. But Sunstein was scrupulous in not claiming positions for which he didn't yet have experimental verification. His book should be a good read.

Nudging Social Policy

There's a lot of buzz about behavioural economics these days, and Rotman School of Management has held several talks about the topic and has published Nudging: A Practical Guide. Using Behavioural Economics to Inform Social Policy was the title of the most recent Rotman talk by Adam Oliver of the London School of Economics.  Oliver has moved from his initial enthusiasm for these methodologies to harbouring significant reservations.  But more about that later.  First a summary of the principles of behavioural economics.

Oliver started with a very clear exposition.  Put simply, he says, mainstream classical, economics, assumes that humans behave rationally to maximize their economic gain. Behavioural economists believe the contrary, that humans behave irrationally based on a reflexive instantaneous reaction and not in their best long term interest.

Behavioural economists use their knowledge of human behaviour to design a choice architecture that will enough people to make choices in their own best interest.   Thaler and Sunstein, authors of Nudge (reviewed here), call this Liberal Paternalism.

Some key behaviours that lead people to act against their own best interests:

Loss Aversion   If people lose a certain amount, that causes about twice as much pain as they feel pleasure from a gain of that same amount. 

Present Bias   People prefer prefer present pleasure to even greater pleasure in the future.  

Probability Weighting   People have difficulty with probabilities.  They tend to overweight events that have very low probability (think of lotteries) and underweight events that have high probability.

Optimism   People are more optimistic than justified about the future. 

Oliver then went on to describe some of the main techniques that practitioners employ to influence people based on the tenets of behavioural economics:

Change the default   Requiring people to opt in to organ donation results in a take-up percentage of about 10-20%; flipping the default so that people have to do something actively to opt out results in organ donation of 80-95%.  Companies that require employees to opt in to a retirement savings see a much lower participation rate than those who change the default so that people have to take explicit action to opt out. 

Manipulation of Reference Point   The most effective way to motivate people to save energy has been to inform them of the lowest energy usage of their neighbours.  That changes their reference point for how much energy they should be using. 

Application of Incentives   While the use of financial incentives is part of classical economics, behavioural economists use non-financial incentives to trigger desired behaviour.  A good example of this was the practice of children in Iceland signing contracts around better eating, following which child obesity rates fell. 

So, on to the serious efforts to apply these principles in national policy formation. Prime Minister Cameron was the first to embrace these ideas.  He required all his MPs to read Nudge and set up the Behavioural Insights Team, popularly dubbed The Nudge unit, which 'applies insights from academic research in behavioural economics and psychology to public policy and services'.

Subsequently, Sunstein joined the Obama administration in the Office of Information and Regulatory Affairs, with a mandate to base policy on evidence, not intuitions.  In his talk at Rotman, Sunstein  claims billions of dollars of savings through following the behavioural economics principles and the office's nudging people toward good choices by making those choices automatic, simple, intuitive and meaningful, with a huge emphasis on the value of simplicity.

An article this summer in The Globe and Mail reported that Canada is also weighing the possibility of employing this approach.

Oliver described his reservations about the application of behavioural economics principles in public policy.  While it's clear using these tools can advance good policies, Oliver is concerned that some of these experiments have not been vetted to ensure that they actually produce sustained results.  Most of all, Oliver worries that the interventions based on behavioural economics require subtle, covert decisions when government should always be transparent and open. The examples quoted in publications invariably focus on indisputably beneficial interventions, but of course these interventions could also be put to less noble objectives.  For instance, corporations have known about manipulating default options. Canadians are aware of the power of the negative option. A major Canadian telecoms company, Rogers, is still remembered for its introduction of a negative option billing plan - back in 1995!  Although it was withdrawn after a public outcry, the company retains association with this ugly tactic.

As academics and politicians continue to explore the possibilities behind behavioural economics, it's healthy to question its efficacy and appropriateness.

Nudging Public Policy

Nudge: Improving Decisions about Health, Wealth, and Happiness, a book by Richard Thaler and Cass Sunstein, argues that behavioural economics can help improve public policy. It's very persuasive about the value of 'nudging' people toward better decisions in their own interests, rather than trying to educate them or legislate them into those better decisions.   

In countries where you have to check off a box to be an organ donor, the overwhelming majority do not agree to donate their organs.  If you have to check off a box not to be an organ donor, the overwhelming majority agree to donate their organs.  You're taking a position on the question just by how you pose it.  So why not choose the way that will incline people to make the best choices for themselves and society?  In other words, make public policy that leverages on the natural behaviour of people rather than fighting against it.

Sunstein is working with the Obama administration to infuse their regulatory policy with these ideas.  A recent interview with Thaler in The McKinsey Quarterly publication described his contributions in the UK's so-called Nudge Unit.  This rather long quote comes in the preview of that article: 

Richard Thaler is the rare academic whose ideas are being translated directly into action. Since last year, the University of Chicago professor has been advising the “Nudge Unit,” established by the government of the United Kingdom to create policies that will enhance the public welfare by helping citizens make better choices. . . . Policy makers can nudge people to save more, invest better, consume more intelligently, use less energy, and live healthier lives, Thaler and Sunstein argue, through greater sensitivity to human tendencies such as “anchoring” on an initial value, using “mental accounting” to compartmentalize different categories of expenditures, and being biased toward the status quo.

It's worth reading the whole article.  Thaler says that policy makers in the UK have been very open to suggestions from the unit.

In their book, Thaler and Sunstein called this approach libertarian paternalism, and some people detest such paternalism (see  this article in The Telegraph.)  What do you think?

The Upside of Irrationality

Dan Ariely

There's a lot being written about behavioural economics these days.  Dan Ariely is one of the leaders of the crowd.  I mentioned his latest book, The Upside of Irrationality, was a recent TED Book Club selection.  (He's also been a TED speaker).

In this book, he describes many experiments, usually introduced by describing what sparked his curiosity about the effect, which makes it a rather chatty and breezy read.

Some experiments prove what we intuitively believe - how we adapt to either extreme happiness or extreme pain, with both losing intensity over time.  Well, we knew that - something can smell very strong when we first enter a room, but, with time, we no longer are conscious of it. .  When I was leading a business, I would often ask new employees what they thought was stupid about the way we did things.  You have to ask such a question within their first few weeks; after that, our stupidities had started to appear sensible to them.   Even though some of Ariely's research seems obvious, many things that we intuitively 'know' turn out to be false, so it's still useful to scientifically test their validity.

Another experiment showed that moderate bonuses motivate people to excel more than very small bonuses do.  But, perhaps counterintuitively, the experiment also demonstrated that very large bonuses result in poorer performances than moderate bonuses.  This experiment was carried out in rural India so that they could afford to offer bonuses that were significant relative to their total annual salaries.  Ariely often speaks to audiences in the financial industry, who greet these experiments with a stolid disbelief.

From the first book, and from a couple of times I've heard him speak, I knew a bit about Ariely's horrific accident as a teenager which left him with third degree burns over 70% of his body, but this book delves more deeply into this period of his life, and the very lasting influence the incident has had on his life.  Experiences from that time have inspired his research into reactions to pain, for instance.

I really enjoyed Ariely's first book Predictable Irrational (see this post for my reaction to that book), but in the last couple of years since reading it, I have read enough about behavioural economics that this book, if not redundant, was not very startling.