How can people be simultaneously so smart and so dumb?
There are two kinds of thinking, one that is intuitive and automatic, and another that is reflec tive and rational. We will call the first the Automatic System and the second the Reflective System
The activities of the Automatic System are associated with the oldest parts of the brain, the parts we share with lizards
It is possible to predict the outcome of congressional elections with frightening ac- curacy simply by asking people to look quickly at pictures of the candidates and say which one looks more competent. These judgments, by students who did not know the candidates, forecast the winner of the election two-thirds of the time
Although rules of thumb can be very helpful, their use can also lead to systematic biases
Anchoring
You start with some anchor, the number you know, and adjust in the direction you think is appropriate. The bias occurs because the adjustments are typically insufficient.
When charities ask you for a donation, they typically offer you a range of options such as $100, $250, $1,000, $5,000, or “other.” If the charity’s fund-raisers have an idea of what they are doing, these values are not picked at random, because the options influence the amount of money people decide to donate.
In many domains, the evidence shows that, within reason, the more you ask for, the more you tend to get
Availability
People can easily think of relevant examples, they are far more likely to be frightened and concerned than if they cannot. A risk that is familiar, like that associated with terrorism in the aftermath of 9/11, will be seen as more serious than a risk that is less familiar, like that associated with sunbathing or hotter summers
Vivid and easily imagined causes of death often receive inflated estimates of probability, and less-vivid causes receive low estimates, even if they occur with a far greater frequency
Representativeness
When asked to judge how likely it is that A belongs to category B, people answer by asking themselves how similar A is to their image or stereotype of B
We often see patterns because we construct our informal tests only after looking at the evidence.
Basketball players who have made their last few shots are no more likely to make their next shot (actually a bit less likely)
Optimism and Overconfidence
Ninety percent of all drivers think they are above average behind the wheel
94 percent of professors at a large university were found to believe that they are better
Lotteries are successful partly because of unrealistic optimism.
*Gains and losses
Roughly speaking, losing something makes you twice as miserable as gaining the same thing makes you happy.
Loss aversion helps produce inertia, meaning a strong desire to stick with your current holdings. If you are reluctant to give up what you have because you do not want to incur losses, then you will turn down trades you might have otherwise made.
Status Quo Bias
People have a more general tendency to stick with their current situation.
One of the causes of status quo bias is a lack of attention. Many people adopt what we will call the “yeah, whatever” heuristic.
Framing
In numerous experiments, people react very differently to the information that “ninety of one hundred are alive” than to the information that “ten of one hundred are dead”—even though the content of the two statements is exactly the same.
Framing works because people tend to be somewhat mindless, passive decision makers.
Dynamically inconsistent: Initially people prefer A to B, but they later choose B over A.
Self-control issues arise because we underestimate the effect of arousal. This is something the behavioral economist George Loewenstein (1996) calls the “hot-cold empathy gap.”
Self-control problems can be illuminated by thinking about an individual as containing two semiautonomous selves, a far-sighted “Planner” and a myopic “Doer.”
Mindless Choosing
In many situations, people put themselves into an “automatic pilot” mode, in which they are not actively paying attention to the task at hand
Eating turns out to be one of the most mindless activities we do. Many of us simply eat whatever is put in front of us.
Self Control Strategies
Planners have a number of available strategies, such as Clocky, to control recalcitrant Doers, but they can sometimes use some help from outsiders.
In some situations, people may even want the government to help them deal with their self-control problems. In extreme cases, governments might ban some items
Three-quarters of Americans get refunds when they file their tax return, with the average refund being more than two thousand dollars. If these refunds were described as interest-free loans to the government, they would probably not be so popular.
Mental Accounting
Mental Accounting is an internal control system
Money is “fungible,” meaning that it doesn’t come with labels. At the household level, violations of fungibility are everywhere
Experimental evidence reveals that people are more willing to gamble with money that they consider house money
When investments pay off, people are willing to take big chances with their “winnings.” People are far more likely to splurge impulsively on a big luxury purchase when they receive an unexpected windfall than with savings that they have accumulated over time
Humans are not exactly lemmings, but they are easily influenced by the statements and deeds of others
If you see a movie scene in which people are smiling, you are more likely to smile yourself
Social influences come in two basic categories:
- Information: If many people do something or think something, their actions and their thoughts convey information about what might be best for you to do or think.
- Peer Pressure: If you care about what other people think about you (perhaps in the mistaken belief that they are paying some attention to what you are doing—see below), then you might go along with the crowd to avoid their wrath or curry their favor.
The academic effort of college students is influenced by their peers, so much so that the random assignments of first-year students to dormi- tories or roommates can have big consequences for their grades and hence on their future prospects.
If everyone in the room accepts a certain proposition, or sees things in a certain way, you might conclude that they are probably right.
Consistent and unwavering people, in the private or public sector, can move groups and practices in their preferred direction.
collective conservatism is the tendency of groups to stick to established patterns even as new needs arise. An important problem here is pluralistic ignorance, ignorance, on the part of all or most, about what other people think.
Conformity could produce a very persistent nudge, ultimately generating behavior (such as the events in Jonestown) that might seem unthinkable.
Spotlight Effect
People are paying less attention to you than you believe. If you have a stain on your shirt, don’t worry, they probably won’t notice. But in part because people do think that everyone has their eyes fixed on them, they conform to what they think people expect.
In many domains people are tempted to think, after the fact, that an outcome was entirely predictable, and that the success of a musician, an actor, an author, or a politician was inevitable in light of his of her skills and characteristics. However, small interventions and even coincidences, at a key stage, can produce large variations in the outcome
About 44 percent of college students engaged in binge drinking. Most students believe that alcohol abuse is far more pervasive than it actumally is.
Boomerag Effect
If you want to nudge people into socially desirable behavior, do not, by any means, let them know that their current actions are better than the social norm.
Priming
Subtle influences can increase the ease with which certain information comes to mind.
The mere measurement effect is when people are asked what they intend to do, they become more likely to act in accordance with their answers
If you ask people, the day before the election, whether they intend to vote, you can increase the probability of their voting by as much as 25 percent!
“channel factors" is a term used for small influences that could either facilitate or inhibit certain behaviors.
We can do more to facilitate good behavior by removing some small obstacle than by trying to shove people in a certain direction
Libertarian Paternalism offer nudges that are most likely to help and least likely to inflict harm
What do you need to know to design the best possible choice environment?
- Benefits Now, Cost Later: If there are unseen side effects, good candidate for a nudge
- Degree of difficulty: If it's hard, it's a good candidate for a nudge
- Frequency: If it's rare, it's a good candidate for a nudge
- Feedback: If you get little feedback, it's good candidate for a nudge
- Knowing what you like: If you don't know if you'll like it, it's good candidate for a nudge
Competition ensures that price serves as a good signal of quality
For irrational consumers to be protected there has to be competition. Sometimes that competition does not exist.
Don't buy extended warranties
Stimulus Response Compatibility is the idea is that you want the signal you receive (the stimulus) to be consistent with the desired action. When there are inconsistencies, performance suffers and people blunder.
Many organizations in both the public and the private sector have discovered the immense power of default options.
Humans will often consider required choice to be a nuisance or worse, and would much prefer to have a good default.
A Post Completion Error is when you have finished your main task, you tend to forget things relating to previous steps.
For birth control pills, the pills for days twenty-two through twenty-eight are placebos whose only role is to facilitate compliance for Human users.
Warning systems have to avoid the problem of offering so many warnings that they are ignored.
Most patients decide which course of action to take in the very meeting at which their doctor breaks the bad news about the diagnosis. The treatment option they choose depends strongly on the type of doctor they see
When we face a small number of well-understood alternatives, we tend to examine all the attributes of all the alternatives and then make trade-offs when necessary. But when the choice set gets large, we must use alternative strategies, and these can get us into trouble.
Elimination by aspects is when someone first decides what aspect is most important, establishes a cutoff level, then eliminates all the alternatives that do not come up to this standard. However, alternatives that do not meet the minimum cutoff scores may be eliminated even if they are fabulous on all other dimensions.
Incentives
One way to start to think about incentives is to ask four questions about a particular choice architecture:
- Who uses?
- Who chooses?
- Who pays?
- Who profits?
Do the choosers actually notice the incentives they face? In free markets, the answer is usually yes, but in important cases the answer is no
The six principles of good choice architecture:
- iNcentives
- Understand mappings
- Defaults
- Give feedback
- Expect error
- Structure complex choices
In 2005 the personal savings rate for Americans was negative for the first time since 1932 and 1933
Two central suggestions:
- Automatic enrollment in savings plans;
- Save More Tomorrow Program
Defined-benefit plans have one large virtue: they are forgiving to even the most mindless of Humans. With Social Security, the only decision a worker has to make is when to start receiving benefits.
Defined-contribution plans, such as 401(k) plans in the United States, have many desirable features for modern workers. The plans are completely portable, so a worker is free to move from one job to another. Employees have to get around to joining, to figuring out how much to save, to managing their portfolio over a period of years, and then to deciding what to do with the proceeds when they finally retire. People can find the whole process frightening
68 percent of 401(k) participants said that their savings rate is “too low,” 31 percent said that their savings rate is “about right,” and only 1 percent said their savings rate is “too high. Roughly 30 percent of employees eligible to join a 401(k) plan fail to enroll. Automatic enrollment has proven to be an extremely effective way to increase enrollment in U.S. defined-contribution plans. With automatic enrollment, participants join sooner, and more participants join eventually
58 percent spent less than one hour determining both their contribution rate and investment decisions
The difference in the returns between Treasury bills and equities is called the “equity premium.”
Attitudes toward risk depend on the frequency with which investors monitor their portfolios
In general, diversification is a great idea, but there is a big difference between sensible diversification and the naïve kind.
Five million Americans have more than 60 percent of their retirement savings in company stock. However, this way workers risk losing both their jobs and the bulk of their retirement savings all at once
There is no correlation between the allocation to company stock and subsequent stock performance.
A dollar in company stock is worth less than half the value of a dollar in a mutual fund
If you have more than 10 percent of your retirement money invested in the company you work for, diversify as quickly as possible
Nudges
Defaults: Give good defaults for Automatic Enrollment plans
Mapping and Feedback: Show investors what house they will get with each plan, for example. Make it tangible
Mortgages
Even mba students at a top school had difficulty picking out the best loans, and this was in a task that was much simpler than the one they would encounter in the real world.
African-American borrowers pay an additional $425 for their loans. Latino borrowers pay an additional $400.
Loans made by mortgage brokers are more expensive than those made by direct lenders by about $600
Microfinance loans in developing countries that led to Nobel Peace Prize for Muhammad Yunus in 2006 often come with interest rates of 200 percent or more
When interest rates vary and there are myriad fees to pay, just looking at the apr is far from enough
People who get the best deals are those who pay no fee up front.
How to fix it: Lenders would also have to provide a machine-readable detailed recap report, one that incorporates all the fees and interest rate provisions, in- cluding teaser rates, what the variable-rate changes are linked to, caps on the changes per year, and so forth.
Student Loans
About two-thirds of four-year college students are in debt when they graduate.
Some colleges’ financial aid offices have tag-teamed with lenders who had provided gifts, stock options, and “donations” to the college in order to become “preferred lenders". A college’s financial aid staff tells students that they may choose only lenders on a “preferred” list, even if these lenders don’t necessarily provide loans in the best interest of the student. At one university, a lender was allowed to provide staff for a call center under a college’s name; when students called in to ask about loans, those “unbiased” employees pushed their own com- pany’s loans.
Credit Cards
There were more than 1.4 billion credit cards in 2004 for 164 million cardholders—an average of 8.5 cards per cardholder. American households may have an average credit card debt of $12,000.
Credit card companies should be required to send an annual statement, both hard copy and electronic, that lists and totals all the fees that have been incurred over the course of the year.
Credit card limits, which are in place to limit spending, may serve as high anchors that actually encourage spending.
Maximizing choice may not lead to the best possible outcome
Required choosing: If the designers are confident that people will do a good job picking portfolios for themselves, then they might consider this policy
Nearly two-thirds of enrollees failed to choose the plan that minimized their out-of-pocket costs.
The demand for organs greatly exceeds the supply. As of January 2006 more than 90,000 Americans were on waiting lists for organs, mostly for kidneys. Many (possibly as many as 60 percent) will die while on the list, and the waiting list is growing at a rate of 12 percent per year.
Of those who expressed their support, only 43% had the box checked on their driver’s license. Of those who stated they personally wanted to donate their organs, only 64% had marked their driver’s license and only 36% had signed an organ donor card.
Presumed consent preserves freedom of choice, but it is different from explicit consent because it shifts the default rule.
When participants had to opt in to being an organ donor, only 42 percent did so. But when they had to opt out, 82 percent agreed to be donors.
Exposure to medical malpractice liability has been estimated to account for 5 to 9 percent of hospital expenditures—which means that litigation costs are a contributor to the expense of the healthcare system. Many doctors must pay $100,000, or significantly more, in insurance bills every year.