Better decision-making for the planet – Yasemin Saplakoglu
We might think we have control of the mix of decisions we make during the day. But it turns out that our brain gives us subconscious nudges, preferring some choices over others.
Elke Weber, the Gerhard R. Andlinger Professor in Energy and the Environment, studies how the science of human behavior can inform policies that encourage people to make good choices for the environment.
“For far too long, we’ve assumed that people’s decisions are rational,” said Weber, who is also a professor of psychology and public affairs in the Woodrow Wilson School of Public and International Affairs.
“My research asks, in what ways can we understand what goes on in the brain and use that knowledge to help us all make better decisions?”
Weber researches how to design solutions to society’s greatest problems, such as climate change. “It turns out we can do some psychological jiujitsu to convert seemingly negative choices into something positive,” Weber said.
In the psychology field this is called “choice architecture.”
For example, merely renaming a choice to avoid negative associations can make an impact on people’s decisions. Weber and colleagues found that airline passengers were far more willing to pay a surcharge to combat climate change if the fee was called a “carbon offset” instead of a “carbon tax.”
Another aspect of choice architecture comes into play when talking about present versus future activities. Climate change seems far off to many people. But people tend to make choices based on the present or the immediate future, which psychologists call presence bias. “We focus on the here and now, which makes evolutionary sense,” Weber said. “If you might not survive until tomorrow, what’s the point of planning for next year?”
One way to combat presence bias is by tapping into people’s desires to be remembered in a positive light, Weber and colleagues at Columbia University and the University of Massachusetts-Amherst found. If first prompted with questions about how they would like to be remembered, individuals are more likely to think about their future rather than their present selves, and therefore make pro-environmental choices. The research, funded in part by the National Science Foundation, was published in Psychological Science in 2015.
Then there’s our inability to concentrate on more than one option at a time when we are presented with a choice. Weber and her colleague Eric Johnson, a business and marketing professor at Columbia, coined the “query theory” to explain how people internally generate more arguments favoring the first option they consider, temporarily inhibiting arguments in favor of all other options.
When a “default” option is given, it becomes the option we think of first, which puts it at an advantage. Weber gives the example of a hypothetical electric utility company that offers customers the opportunity to switch to “green” energy. Typically, fossil fuel energy is the default option, and few customers end up switching to the cleaner though somewhat more expensive green power. In contrast, when in lab and field studies the company made it the default option to choose “green” energy, a large majority of customers did just that. “In terms of what influences people’s decisions, the million-dollar question is which option gets considered first,” Weber said.
Weber’s research demonstrates that changing the way choices are presented can play a role in conserving the environment through influencing people, the instigators of our warming planet.
Richard Thaler Explains How “Choice Architecture” Makes the World a Better Place – Phil Rockrohr
Because of limitations in neoclassical economic theory, the world needs to nudge people toward the right choices to make their lives better, said Richard Thaler, Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics.
“Although libertarianism and paternalism appear to be two of the most reviled terms in America, both of these terms are actually lovable,” Thaler said. Thaler spoke at the 56th Annual Management Conference, which drew nearly 1,000 alumni and friends of Chicago GSB to his luncheon address at the Chicago Marriott Hotel and a series of panel discussions at Gleacher Center on May 16.
Thaler and fellow author Cass Sunstein, Karl N. Llewellyn Distinguished Service Professor of Jurisprudence at the Law School, coined the phrase “libertarian paternalism” to describe their approach, which they outline in their book Nudge.
“By libertarianism we mean protecting peoples’ right to choose,” Thaler said. “By paternalism, all we mean is caring about peoples’ outcomes. We want to devise policies that will make people better off, not worse off, as judged by them. It’s not that Cass and I think we know what’s best for you or anyone else. It’s that we think we can help people make choices that they themselves think are better.”
That goal can be achieved with “choice architecture,” or the careful design of the environments in which people make choices, he said. “If anything you do influences the way people choose, then you are a choice architect,” Thaler said. “If you remember one thing from this lecture, remember the following: Choice architects must choose something. You have to meddle. For example, you can’t design a neutral building. There is no such thing. A building must have doors, elevators, restrooms. All of these details influence choices people make.
“Three key features of choice architecture are the default, giving feedback, and expecting error, he said. “Default is what happens if you do nothing, such as leaving your computer unused until the screen saver appears,” Thaler said. “The main lesson from psychology on this is that default options are sticky.
Whatever you choose as the default has a very good chance of being selected. If you are the choice architect, you need to spend a lot of time thinking about what those default options should be. “People respond to feedback; for instance, someone designed light bulbs that glow darker shades of red as homes use higher levels of energy.
Such devices helped reduce energy use in peak periods by 40 percent in Southern California. By expecting error, Thaler points to the design of the Paris subway card, which allows users to insert it into an electronic turnstile in any of four ways to gain entrance to the subway. “Compare that to exiting the parking garages of Chicago,” he said. “You have to put your credit card in and there are four possible ways up, down, left, right and exactly one works. This is the difference between good and bad design.” Google is developing choice architecture to remind Gmail users when they forget an attachment or may be about to send a rude email, Thaler said.
“If you mention the word attachment in the text of your email and you don’t include an attachment, it would prompt you,” he said. “Even better would be an emotion detection system that will send you a warning if you are about to send an angry email.”
More important economic applications of choice architecture include the Save More Tomorrow program, which helps employees set aside future pay hikes for retirement.
“Save More Tomorrow is based on the same principle of expecting error,” he said. “We ask people if they want to commit now to saving more later, because all of us have more self-control in the future. The first company that adopted it tripled savings rates, and the program is now spreading worldwide.
“Thaler and Sunstein’s newest idea, can be applied to many domains, including credit cards, mortgages, Medicare, and cell phone contracts, Thaler said. Called Record, Evaluate, and Compare Alternative Prices, or RECAP, it would require credit card issuers to provide each customer with an annual spread sheet showing the formulas for each way they bill and a second spread sheet of the ways in which the customer incurred charges during the previous year, he said.”What would people do with these spreadsheets?” Thaler said.
“We predict that websites would emerge immediately that would analyze these spreadsheets. In one click you could upload these to, say, comparisoncredit.com, which would explain to you what your credit card company is doing to you and suggest three other providers if you plan to continue to use your credit card in the same ways.”
Research from the field of behavioral economics has shown that individuals tend to be subject to predictable biases that may lead to decision errors. The following sections describe these biases and describe the ways that they can be minimized by changing decision context through choice architecture.
Reducing choice overload
Classical economics predicts that providing more options will generally improve consumer utility, or at least leave it unchanged. However, each additional choice demands additional time and consideration to evaluate, potentially outweighing the benefits of greater choice. Behavioral economists have shown that in some instances presenting consumers with many choices can lead to reduced motivation to make a choice and decreased satisfaction with choices once they are made. This phenomenon is often referred to as choice overload, Overchoice or the tyranny of choice. However, the importance of this effect appears to vary significantly across situations. Choice architects can reduce choice overload by either limiting alternatives or providing decision support tools.
Choice architects may choose to limit choice options; however, limits to choice may lead to reductions of consumer welfare. This is because the greater the number of choices, the greater the likelihood that the choice set will include the optimal choice for any given consumer. As a result, the ideal number of alternatives will depend upon the cognitive effort required to evaluate each option and the heterogeneity of needs and preferences across consumers. There are examples of consumers faring worse with many options rather than fewer in social-security investments and Medicare drug plans
As consumption decisions increasingly move online, consumers are relying upon search engines and product recommendation systems to find and evaluate products and services. These types of search and decision aids both reduce the time and effort associated with information search, but also have the power to subtly shape decisions dependent upon what products are presented, the context of the presentation, and the way that they are ranked and ordered. For example, research on consumer goods like wine has shown that the expansion of online retailing has made it simpler for consumers to gather information on products and compare alternatives, making them more responsive to price and quality information.
A large body of research has shown that, all things being equal, consumers are more likely to choose options that are presented as a default. A default is defined as a choice frame in which one selection is pre-selected so that individuals must take active steps to select another option. Defaults can take many forms ranging from the automatic enrollment of college students in university health insurance plans to forms which default to a specific option unless changed.
Several mechanisms have been proposed to explain the influence of defaults. For example, individuals may interpret defaults as policymaker recommendations, cognitive biases related to loss aversion like the status quo bias or endowment effect might be at work, or consumers may fail to opt out of the default due to associated effort. It is important to note that these mechanisms are not mutually exclusive and their relative influence will likely differ across decision contexts.
Types of default include simple defaults where one choice is automatically selected for all consumers, forced choice in which a product or service is denied until the consumer makes a proactive selection, and sensory defaults in which the choice is pre-selected based upon other information that was gathered about specific consumers. Choices that are made repeatedly may also be affected by defaults, for instance persistent defaults may be continually reset regardless of past decisions, whereas reoccurring defaults “remember” past decisions for use as the default, and predictive defaults use algorithms to set defaults based upon other related behavior.
One of the most commonly cited studies on the power of defaults is the example of organ donation. One study found that donor registration rates were twice as high when potential donors had to opt out versus opt into donor registration. However, the influence of defaults has been demonstrated across a range of domains including investment and insurance
Choice over time
Choices with outcomes that manifest in the future will be influenced by several biases. For example, individuals tend to be myopic, preferring positive outcomes in the present often at the expense of future outcomes. This may lead to behaviors like overeating or overspending in the short-term at the expense of longer term health and financial security outcomes. In addition, individual projections about the future tend to be inaccurate. When the future is uncertain they may overestimate the likelihood of salient or desirable outcomes, and are generally overly optimistic about the future, for example assuming that they will have more time and money in the future than they will in actuality.
However research indicates that there are several ways to structure choice architecture to compensate for or reduce these biases. For example, researchers demonstrated improved decision-making by drawing attention to the future outcomes of decisions or by emphasizing second best options. In addition, limited time offers can be successful in reducing procrastination.
Partitioning options and attributes
The ways in which options and attributes are grouped influence the choices that are made. Examples of such partitioning of options include the division of a household budget into categories (e.g. rent, food, utilities, transportation etc.), or categories of investments within a portfolio (e.g. real estate, stocks, bonds, etc.), while examples of partitioning attributes include the manner in which attributes are grouped together for example a label may group several related attributes together (e.g. convenient) or list them individually (e.g. short running time, little cleanup, low maintenance). The number and type of these categories is important because individuals have a tendency to allocate scarce resources equally across them. People tend to divide investments over the options listed in 401K plans they favor equal allocation of resources and costs across individuals (all else being equal), and are biased to assign equal probabilities to all events that could occur. As a result, aggregate consumption can be changed by the number and types of categorizations. For instance, car buyers can be nudged toward more responsible purchases by itemizing practical attributes (gas mileage, safety, warranty etc.) and aggregating less practical attributes (i.e. speed, radio, and design are grouped together as “stylishness”).
Avoiding attribute overload
Consumers would optimally consider all of a product’s attributes when deciding between options. However, due to cognitive constraints, consumers may face similar challenges in weighing many attributes to those of evaluating many choices. As a result, choice architects may choose to limit the number of attributes, weighing the cognitive effort required to consider multiple attributes against the value of improved information. This may present challenges if consumers care about different attributes, but online forms that allow consumers to sort by different attributes should minimize the cognitive effort to evaluate many options without losing choice.
The presentation of information about attributes can also reduce the cognitive effort associated with processing and reduce errors. This can generally be accomplished by increasing evaluability and comparability of attributes. One example is to convert commonly used metrics into those that consumers can be assumed to care about. For example, choice architects might translate non-linear metrics (including monthly credit payments or miles per gallon) into relevant linear metrics (in this case the payback period associated with a credit payment or the gallons per 100 miles). Choice architects can also influence decisions by adding evaluative labels (e.g. good versus bad or high versus low) to numerical metrics, explicitly calculating consequences(for instance translating energy consumption into greenhouse gas emissions), or by changing the scale of a metric (for instance listing monthly cost versus yearly cost).