Look, this is science. Belief isn't an option. —Daniel Kahneman
FIRST DAY REPORT—EDGE MASTER CLASS 08 [7.26.08]
By Nathan Myhrvold
DR. NATHAN MYHRVOLD is CEO and managing director of Intellectual Ventures, a private entrepreneurial firm. Before Intellectual Ventures, Dr. Myhrvold spent 14 years at Microsoft Corporation. In addition to working directly for Bill Gates, he founded Microsoft Research and served as Chief Technology Officer.
Nathan Myhrvold's Edge Bio Page
The recent Edge event on behavioral economics was a great success. Here is a report on the first day.
Over the course of the last few years we've been treated to quite a few expositions of behavioral economics—probably a dozen popular books seek to explain some aspect of the field. This isn't the place for a full summary but the gist is pretty simple. Classical economics has studied a society of creatures that Richard Thaler, an economist at University of Chicago dubs the "Econ". Econs are rather superhuman in some ways—they do everything by optimizing utility functions, paragons of bounded rationality. Behavioral economics is about understanding how real live Humans differ from Econs.
In previous reading, and an Edge event last year I learned the most prominent differences between Econs and Humans. Humans, as it turns out, are not always bounded rational—they can be downright irrational. Thaler likes to say that Humans are like Homer Simpson, Econs are like Mr Spock. This is a great start, but to have any substance in economics one has to understand that in the context of economic situations. Humans make a number of systematic deviations from the Econ ideal, and behavioral economics has categorized a few of these. So, for example, we humans fear loss more than we love gain. Humans care about how a question is put to them—propositions which an Econ would instantly recognize as mathematically equivalent seem different to Humans and they behave differently.
Daniel Kahneman, a Nobel laureate for his work in behavioral economics told us about priming—how a subtle influence radically shifts how people act. So, in one experiment people are asked to fill out a survey. In the corner of the room is a computer, with a screen saver running. That's it—nothing overt, just a background image in the room. If the screen saver shows pictures of money, the survey answers are radically different. Danny went through example after example like this where occurred. The first impulse one has in hearing this is no, this can't be the case. People can't be that easily and subconsciously influenced. You don't want to believe it. But Danny in his professorial way says "Look, this is science. Belief isn't an option". Repeated randomized trials confirm the results. Get over it.
The second impression is perhaps even more surprising—the influences are quite predictable. Show people images of money, and they tend to be more selfish and less willing to help others. Make people plot points on graph paper that are far apart, and they act more distant in lots of way. Make them plot points that are close together, and damned if they don't act closer. Again, it seems absurd, but cheap metaphors capture our minds. Humans, it seems, are like drunken poets, who can't glimpse a screen saver in the corner, or plot some points on graph paper without swooning under the metaphorical load and going off on tangents these stray images inspire.
This is all very strange, but is it important? The analogy that seems most apt to me is optical illusions. An earlier generation of psychologists got very excited about how the low level visual processing in our brains is hardwired to produce paradoxical results. The priming stories seem to me to be the symbolic and metaphorical equivalent. The priming metaphors in optical illusions are the context of the image—the extra lines or arrows that fool us into making errors in judgment of sizes or shapes. While one can learn to recognize optical illusions, you can't help but see the effect for what it is. Knowing the trick does not lessen its intuitive impact. You really cannot help but think one line is longer, even if you know that the trick will be revealed in a moment.
I wonder how closely this analogy carries over. Danny said today that you can't avoid priming; if he is right perhaps the analogy is close. Perhaps not.
I also can't help but wonder how important these effects are to thinking and decision making in general. After the early excitement about optical illusions, they have retreated from prominence—they explain a few cute things in vision, but they are only important in very artificial cases. Yes, there are a few cases where product design, architecture and other visual design problems are impacted by optical illusions, but very very few. In most cases the visual context is not misleading. So, while it offers an interesting clue to how visual processing works, it is a rare special case that has little practical importance.
Perhaps the same thing is true here—the point of these psychological experiments, like the illusions, is to isolate an effect in a very artificial circumstance. This is a great way to get a clue about how the brain works (indeed it would seem akin to Steven Pinker's latest work The Stuff of Thought which argues for the importance of metaphors in the brain). But is it really important to day-to-day real world thinking? In particular, can economics be informed by these experiments? Does behavioral economics produce a systematically different result that classical economics if these ideas are factored in?
I can imagine it both ways. If it is important, then we are all at sea, tossed and turned in a tumultuous tide of metaphors imposed by our context. That is a very strange world—totally counter to our intuition. But maybe that is reality.
Or, I could equally imagine that it only matters in cases where you create a very artificial experiment—in effect, turning up the volume on the noise in the thought process. In more realistic contexts the signal trumps the noise.
The truth is likely some linear combination of these two extreme—but what combination? There are some great experiments yet to be done to nail that down.
Dick Thaler gave a fascinating talk that tries to apply these ideas in a very practical way. There is an old debate in economics about the right way to regulate society. Libertarians would say don't try—the harm in reducing choice is worse than the benefit, in part because of unintended consequences, but mostly because the market will reach the right equilibrium. Marxist economists, at the other extreme, took it for granted that one needs a dictatorship of the proletariat—choice is not an option, at least for the populace. Thaler has a new creation—a concept he calls "libertarian paternalism" which tries to split the baby.
The core idea (treated fully in his book Nudge) is pretty simple—present plenty of options, but then encourage certain outcomes by using behavioral economics concepts to stack the deck. A classic example is the difference between opt-in and opt-out in a program such as organ donation. If you tell people that they can opt-in to donating their organs if they are killed, a few will feel strongly enough to do it—most people won't. If you switch that to opt-out the reverse happens—very few people opt out. Changing the "choice architecture" that people have, changes choices. This is not going to work on people who feel strongly, but the majority don't really care and can be pushed in one direction or another by choice architecture.
A better example is a program called "save more tomorrow" (SMT), for 401K plans in companies. People generally don't save very much. So, the "save more tomorrow" program lets you decide up front to save a greater portion of promotions and raises. You are not cutting into today's income (to which you feel you are entitled to spend) but rather you are pre-allocating a future windfall. Seems pretty simple but there are dramatic increases in savings rates when it is instituted.
Dick came to the session loaded for bear, expecting the objections of classical economics. Apparently this is all very controversial among economists and policy wonks. It struck me as very clever, but once explained, very obvious. Of course you can put some spin on the ball and nudge people the right way using to achieve a policy effect. It's called marketing when you do this in business, and it certainly can matter. In the world of policy wonk economists this may be controversial, but it wasn't to me.
An interesting connection with the discussion of priming experiments is that many policy contexts are highly artificial—very much like experiments. Filling out a driver's license form is a kind of questionnaire, and the organ donation scenario seems very remote to most people despite the fact that they're making a binding choice rather than . So the mechanics of opt-in versus opt-out or required choice could matter a lot in these contexts.
Dick has a bunch of other interesting ideas. One of them is to require that government disclosures on things like cell phone plans, or credit card statements be machine readable disclosure with a standard schema. This would allow web sites to offer automated comparisons, and other tools to help people understand the complexities.
This is a fascinating idea that could have a lot of merit. Dick is, from my perspective, a bit over optimistic in some ways—it is unclear that it will be overwhelming. An example is unit prices in grocery stores—those little labels on store shelves that tell you that Progesso canned tomatoes are 57 cents per pound, while the store brand is 43. Consumer advocates thought these would revolutionize consumer behavior—and perhaps they did in some limited ways. But premium brands didn't disappear.
I also differ on another point—must this be required by government, and would it be incorruptible were it so mandated. In the world of technology most standards are de facto, rather than de juris, and are driven by private owners (companies or private sector standards bodies), because the creation and maintenance of a standard is a dynamic balancing act—not a static one. I think that many of the disclosure standards he seeks would be better done this way. Conversely, a government mandate disclosure standard might become so ossified by changing slowly that it did not achieve the right result. Nevertheless, this is a small point compared to the main idea which is that machine readable disclosures with standardized schema allow third party analysis and enables a degree of competition that would harder to achieve by other means.
Sendhil Mullainathan gave a fascinating talk about applying behavior economics to understand poverty. If this succeeds (it is a work in progress) it would be extremely important.
He showed a bunch of data on itinerant fruit vendors (all women) in India. 69% of them are constantly in debt to money lenders who charge 5% per day interest. The fruit ladies make 10% per day profit, so half their income goes to the money lender. They also typically buy a couple cups of tea per day. Sendhil shows that 1 cup of tea per day less would let them be debt free in 30 days, doubling their income. 31% of these women have figured that out, so it is not impossible. Why don't the rest get there?
Sendhil then showed a bunch of other data arguing that poor people—even those in the US (who are vastly richer in absolute scale than his Indian fruit vendors)—do similar things with how they spend food stamps, or use of payday loans. He was very deliberate at drawing this out, until I finally couldn't stand it and blurted out "you're saying that they all have high discount rate". His argument is that under scarcity there is a systematic effect that you put the discount rate way too high for your own good. With too high a discount rate, you spend for the moment, not for the future. So, you have a cup a tea rather than double your income.
He is testing this with an amazing experiment. What would these women do if they could escape the "debt trap"? Bono, Jeffery Sachs and others have argued this point for poor nations—this is the individual version of the proposition.
Sendhil is studying 1000 of these fruit vendors (all women). Their total debt is typically $25 each, so he is just stepping in and paying off the debt for 500 of them! The question is then to see how many of them revert to being in debt over time, versus the 500 who are studied, but do not have their debt paid off. The experiment is underway and he has no idea what the result will be.
The interesting thing here is that, for these people, one can do a meaningful experiment (N = 500 gives good statistics) without much money in absolute. It would be hard to do this experiment with debt relief for poor nations, or even the US poor, but in India you can do serious field experiments for little money.
Sendhil also has an amusing argument, which is that very busy people are exactly like these poor fruit vendors. If you have very little time, it is scarce and you are as time-poor as the fruit ladies are cash-poor. So, you act like there is a high discount—and you commit to future events—like agreeing to travel and give a talk. Then as the time approaches, you tend to regret it and ask "why did I agree to this?". So you act like there is a high discount rate. This got everybody laughing. The difference here is that time can't be banked or borrowed, so it is unclear to me how close an analogy it is, but it was interesting nonetheless.
Indeed, I almost cancelled my attendance at this event right before hand, thinking "why did I agree to this? I don't have the time!". After much wrestling I decided I could attend the first day, but no more. Well, this is one of those times when having the "wrong" discount rate is in your favor. I'm very glad I attended.
Nathan
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