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Individual choices and behaviour By Daan Ratering (3: Persuasion: CLASS-R,…
Individual choices and behaviour By Daan Ratering
1: Deviation from rationality
Heuristics:
Methods for arriving at satisfactory solutions with modest amounts of computation; mental shortcuts; rules-of-thumb.
Biases:
systematic (non-random) deviations from “rationality”
Prevalent judgment:
probability estimation
Availability Heuristic
Recalling instead of probability
Representative heuristic
Representation instead of probability
Factors that should influence but do not:
Insensitivity to prior probability
Base-rate frequency
Misconceptions of chance
Insensitivity to predictability
The illusion of validity
Misconceptions of regression
Biases due to the retrievability of instances
Biases due to the effectiveness of a search set
Biases of imaginability
Illusory correlation
Affect heuristic
Liking instead of probability of benefit
Anchoring and adjustment
: use an anchor and try to adjust to that number; anchors can be unrelated
Choice context matters
Decoy options
Attraction effect:
add a new option that is close to one of the choices.
Compromises
Compromise effect:
add a new option that is better/higher quality to the list.
Insufficient adjustment
Biases in the evaluation of conjunctive and disjunctive events
Anchoring in the assessment of subjective probability distributions
Humans are irrational in predictable ways
2: Decisions under risk
How do we respond to a problem?
System 1
Automatic
Fast
Not cognitively demanding
Intuitive answer
System 2
Controlled
Slow
Cognitively demanding
Intervene system 1 (sometimes)
Situational dependend: hurry, stress or problems
Individual dependend
Scarcity taxes our system 2; rich vs poor in car experiment
Bias blind spot
: the cognitive bias of recognizing the impact of biases on the judgment of others, while failing to see the impact of biases on one’s own judgment.
Overconfidence
Overprecision
Being certain that you know the truth
Overestimation
Thinking you are better than you really are (individual)
Overplacement
Falsely thinking that you are better than others (comparing)
Worse-than-average effect
Opposite of overconfidence
Model
suggests 5 ways a judgment is made
1 An intuitive judgment or intention is initated and
Endorsed by System 2
Adjusted for other relevant features
Corrected for a recognized bias
identified as violating and blocked
2 No intuitive response comes to mind and judgment is computed by System 2
How should we respond to a problem?
Rational: maximize expected value
Expected value = outcome probability * outcome value
We don't do this; we choose 'save' options
Slightly better: we maximize expected utility
Expected utility = probability * utility
Diminishing marginal utility property: utility goes down relatively to the higher values
Framing
Gain frame
Risk aversion
Loss frame
risk seeking
In total:
Prospect Theory
Reference dependence
No asset integration
Outcomes are coded as separate gains or losses
Choose a reference point
Loss aversion
A loss has more impact than a gain of similar magnitude
Kink in reference point
Framing effect: difference between losses and gains
Endowment effect: disutility of losing vs utility of gaining; owning something has more utility than obtaining that same object
Sunk cost fallacy
Diminishing sensitivty
Diminishing utility for gains and losses
Risk aversion for gains
Risk proneness for losses
Earning 10 twice is better than earning 20 once
Losing 10 twice is worse than losing 20 once
Probability weighting function
People distort probabilities
Decision weight is smaller than probability for moderate probability
Decision weight is larger than probability for small probability
Fourfold pattern of risk attitudes
gains with moderate probabilities: risk aversion
gains with small probabilities: risk seeking (gambling
losses with small probabilities risk aversion (insurance)
losses with moderate probabilities: risk seeking
All analysis on rational choice should incorporate two principles
Dominance
Demands that if prospect A is at least as good as prospect B in every respect and better than B in at least one respect, then A should be preferred to B
Invariance
Requires that the preference order between prospects should not depend on the manner in which they are described. In particular, two versions of a choice problem are recognized to be equivalent when shown together should elicit the same preference even when shown separately
3: Persuasion: CLASS-R
Reciprocity
People repay in kind
They strive for equity/fairness/social justice
Universal
That's not all technique
Before one takes a decision, give him something
Door in the face technique
large request, turn down, small request
Application: give what you want to receive
Social proof
People follow the lead of similar others
When?
Lot other people
People like us
Collectivistic cultures
Uncertainty about what's right
However, even when there is no uncertainty, still affected by what people say
Application: use peer power whenever it’s available
Scarcity
People want more of what they can have less of
Why?
Competition effects
People value freedom of choice (reactance theory)
Application: highlight unique benefits and exclusive information
Liking
We say yes to those we like
physical attraction
flatter/being nice
similarity
familiarity
association
Incidental similarity and liking
Astrology study; compliance when they have the same birthday as the confederate
Processing fluency
the subjective experience of the ease or difficulty with which a cognitive task is accomplished.
Application: uncover real similarities and offer genuine praise
Commitment & Consistency
People align with their clear commitments
People have need for consistentcy
Personally
Socially
Decision-making
Foot-in-the-door technique
Small request, receive a yes, large request
Other effects
Mere measurement effect
Stating intentions increase accessibility of thoughts; behavior is consistent with the thoughts
Lowballing effect
Offer good deal with x, gets accepted, "something happend... no more x", customer already committed so still agrees
Foot-in-the-mouth
Ask question to show interest, they answer; increases positive respond to request
Giver-matched gifts
We like gift that "match the giver"
Application: make their commitments active, public, and voluntary
Authority
People defer to experts
Why?
Life is complex, we need to rely on others
Obedience is often beneficial
Obeying to authority is a cultural norm
What creates authority?
Content (normative)
Presentation
Application: Expose your expertise, don’t assume it’s self-evident
Using the principles
Each principle independently affects persuasion
Not independent
Tradeoffs (liking & authority e.g.)
Positive spillovers (e.g. reciprocity to liking)
Be aware of persuasion knowledge
4: Choice Architecture
How can we make or induce better decisions?
Remind yourself to use system 2? not easy...
Nudges
A nudge is any small feature in the environment that attracts our attention and influences the behaviour we have. Nudging is done by a choice architect; anyone who influences the choices we make.
Expect error
A well-designed system expects its users to err and is as forgiving as possible
Give feedback
Well-designed systems tell people when they are doing well and when they are making mistakes
iNcentives
One way to start to think about incentives is to ask four questions about a particular choice architecture: who uses, chooses, pays, profits?
Defaults
Structure complex choices
People adopt different strategies for making choices depending on the size and complexity of the available options
Understand mappings
Understand the relation between choice and welfare
A good nudge
Preserves freedom of choice
Discriminates between people who want to decide vs. not
Decision makers do not make choices in a vacuum. they make them in an environment where many features, noticed and unnoticed, can influence their decisions, the person who creates that environment is a choice architect.
Examples
Dealing with (or taking advantage of)
inertia
Defaults
What happens if you do not take action?
Three influences of defaults
Decision-makers might beleive that defaults are suggestions by the policy-maker which imply a recommended action
Deciding often involves effort, whereas accepting the default is effortless
Defaults often represent the existing state or status quo, and change usually involves a trade-off
Decisions over time
People discount future outcomes
Traditional discounted utility theory
Common difference effect:
adding a constant delay to both choice options shifts preference from the smaller, sooner outcome
to the larger, later outcome
Present bias:
the tendency of people to give stronger weight to payoffs that are closer to the present time when considering trade-offs between two future moments
Solving
self-control issues
with commitment devices
Bounded willpower
Self-control problems
Planning often does not work
Precommitment as a solution
Procrasticnation and goal setting
Effort depends on how close the goal is
Explained by diminishing sensitivity
Use choice architecture
Present bias: people wont save more now
Precommit to save more in the future
Loss aversion: reducing disposable income is bad
Increase savings at the times they pay rises
Inertia: hard to get people away from status quo
Automatic enrollment = favorable default
Experiments
Correlation
interdependence of variable quantities.
does not imply causation
good decisions require causation
Causation
the relationship between cause and effect
Three conditions
Relationship between X and Y
Time order
Elimination of other possible causal factors
How?
Two or more conditions
conditions differ in one characteristic ("independent variable")
Everything else is constant across conditions
Participants are randomly assigned to one condition
Question is, do the participants behave differently across conditions?
Seven rules for running experiments
Focus on individuals and think short term
Keep it simple
Start with a proof-of-concept test
When the results come in, slice the data
Try out-of-the-box thinking
Measure everything that matters
Look for natural experiments
Avoid obstacles