Lecture 17 A few effects & Choice Architecture
Sairam
- Addiction and Abstention
- Conventional model: More consumption \(\implies\) more total utility
- NM talks about 'bads'. Increasing consumption is monotonically bad.
- For some people, \(\exists\) goods that give too much pleasure, though excessive consumption \(\implies\) severe issues
- Addition is a major factor (alcohol, tobacco, recreational drugs)
- Also, junk food, gambling, computer games (any activity with significant degree of excitement)
- Psychological and Physiological mechanism related to this enjoyment is complex. Double-edged nature
- Studies show that people infer happiness from their actions in a self-signaling manner. \(\implies\) Diagnostic Utility
- e.g. Daily jog despite a rain \(\implies\) Gratifying signal of willpower, dedication or future well-being
- To indulge may reveal themselves to have an addictive personality. Acknowledgement of this weakness \(\implies\) impossible to break the addiction
- "Falling off the wagon" can be explained by DU and self-signaling \(\implies\) Low self-esteem and indulgence
Let's discuss the reason for the inertia
- Endowment effect
- Utility depends on possession also
- People acquiring a good through purchase or as a gift, tend to value it more highly than others (who have not acquired it)
- Read Endowment effect and Loss aversion
- Status Quo Bias
- General tendency to stick to one's current situation
- Less cognitive effort to repeat the previous decision. (e.g. Restaurant default order, customer favorite)
- A confound1: Estimation \(P(\text{Prev Order Good})\) is higher than selecting a previously untried option.
- E.g.
- seating preferences in class
- 7-day free trial or subscription
- scheduling shows in TV channels
- Happens due to lack of attention
- \(\implies\) important policy implications, sales strategy and government intervention.
- Introduction to Choice Architecture
- SE Policies rely on 'hard' measures2.
- Hard measures are desirable when behavior is detrimental and should be avoided
- Alternatives: soft measures, through choice architecture. Described by careful design of how choices are presented.
- What is Choice Architecture?
- Choice architect: indirectly influence others' choices
- To ensure: the Automatic system doesn't get confused
- Choice Architecture:
- Strategic arrangement of DM environments to influence choice without restricting freedom
- without altering the underlying objective of the choice
- Carefully structuring the context to gently guide them to desired outcome
Principles of good choice architecture¶
Say, we are the choice architect
- Defaults - The Path of Least Resistance
- FE
- We may use availability heurist 'in the framing' to nudge.
- 'defaults' is a popular framing that exploits 'status quo bias'
- Most people will take whichever option requires least effort
- If \(\exists\) default option (that gets selected on doing nothing), the most people will end up with that option
- 2012: UK, under 2008 Pensions Act, firms automatically enroll employees in a pension scheme.
- If employees wanted to opt out, they are free to do so. But, since it requires effort, cognitive resources, time and even psychological conflict, they leave it at that.
- \(\implies\) Cognitive laziness so not many people will opt out.
- e.g. "Regular" or "custom" installation (one of the boxes is already checked, indicating default)
- Defaults are unavoidable!
- For any CAS, \(\exists\) associated rule... "What happens if the DMaker doesn't do anything"
- If choice is complex and difficult, people appreciate a sensible default (e.g. Vim)
- For a consumer, a default may be costly. e.g. "Our most popular plan". If we had researched for just a few minutes, we would have not wasted ₹2,400.
- In other cases, may be beneficial: opportunity cost of our time
- Expect Error - Design for Human Mistakes
- A well-designed system is as forgiving (to humans erring) as possible
- ATMs ask uses to remove their card before spitting out the money. "Please remove your card"... a strategy called forcing function ("In order to get what you want, do something else first")
- Cars come with warning systems: passenger safety operations related to headlight / when about to run out of fuel / oil change needed
- For elderly people, design meds as once a day. Educate the Automated System to think: "My pill(s) every morning, when I wake up". This forms a habit
- US Visitors to London. Opposite road-side rules. They are helped by good design: Pavement signs: "Look right!"
- Feedback - Helping People Learn and Adjust
- Tell when they are doing well, and when they are erring
- Modern cameras: take care of not removing lens cap, not placing target object at the centre.
- Includes, very satisfying but fake "shutter click sound"
- Ceiling Paint: pink when wet, white when dry.
- Laptops: Plug in, battery low.
- Problem: You supply so many warnings that they get ignored.
- Mapping - Translating Choice to experience
- Mapping is the relation: \(\text{Choice} \to \text{Welfare}\)
- Good system, help them map and select options that make them better off
- Hard to track how much credit card usage costs (complex pricing schemes)
- Libertarian paternalism gives a mild form of government regulation. RECAP: Record, Evaluate, Compare Alternative Prices
- Requires firms to disclose all fees in a standardize, machine-readable format
- Help consumers easily review actual usage and compare pricing plans without restricting choice
- Structuring Complex Choices
- As alternatives become more numerous, complex, we have to think more and work more as we are more likely to influence people's choices, for better or worse
- Strategies that can be used:
- Elimination by aspect (filtering?) #doubt
- Organization by paint shops (color wheel)
- Collaborative Filtering: Use judgements of other people who share your taste to filter. E.g. books or movies, to increase the likelihood of picking the one you like.
- Wisdom: it's good to learn what people unlike us like, to see whether we might like that or not.
- Structuring means helping people to learn so they make better choice on their own
- Incentives
- Sensible us, will put the right incentives on the right people
- Ask four questions
- Who uses?
- Who chooses?
- Who pays?
- Who profits?
- Free market incentivizes, good products' production and sell them to the right people due to competition
- Incentive conflicts:
- e.g. if I pay for the entire group lunch, vs someone else paying... I will go for more expensive food.
- Exist in many markets including healthcare
- Patient uses (Just wants to get treated, only incentive that should matter)
- Physician chooses (different incentive)
- Insurance company pays (different incentive)
- Equipment manufacturers, drug companies, malpractice lawyers get the profits (different incentive)
- Salience (prominence)
- Most important modification that must be made to standard analysis of incentives.
- Grab the attention to incentives in their choices
- e.g. To control people's behavior, instead of just quietly raising the electricity price, let the AC notify them about the cost per hour of lowering the temperature a few degrees during a heat wave.