How rational is irrational?

Behavioral economics bills itself as an alternative to the standard economics approach which assumes people make decisions rationally. Behavioral econ doesn’t say we are totally irrational, it just shows that the devil is in the details.

Let me illustrate with one of my favorite topics – the obesity epidemic. The rational economic model describes the decision thusly (I love that word :-D): When Joe is deciding whether to eat the jelly donut or to go for a jog, he evaluates the various tradeoffs (gain the pleasure of eating the donut along with the cost of extra weight or gain the advantage of losing weight along with the cost of jogging) and decides accordingly. Free will and the free market allow him to make the decision that best meets his priorities. All is good.

The behavioral economic model describes it somewhat differently. Joe figures he can get the best of both worlds by eating the donut now (gain the pleasure of the donut) and starting his diet tomorrow (gain the advantage of losing weight). But then tomorrow he is faced with the same decision, and can put off the diet for “just one more day.”

The problem is twofold. What seems like an obvious hypocrisy is made possible by the fact that there are two different parts of the brain that make these decisions without coordinating with each other. One part of the brain makes decisions about what to do right now (a more instinctive, emotional center that is dominated by sensory experience). This brain wants the donut.

A different part of the brain decides what to do in the future (a more analytical center that can delay gratification for higher level objectives like health). This brain agrees to jog.

The way the two brains resolve their disagreement is to eat the donut now and agree to jog tomorrow. It’s like two different people.

The second part of the problem is that the decision making process is recursive. The next day when we are supposed to go for the jog that our logical brain promised, our emotional brain takes over (because it is again a "now" decision) and says “hey, I never promised nothin’.” And our logical brain is limited to complaining about the irresponsible emotional brain and again promising what to jog “next time.”

Behavioral economics recognizes that this can go on forever, even with the best of intentions. The solution is to add some emotional component to the process that favors the long term benefits. So for example with 401(k)s, we can counteract the emotional brain’s desire to enjoy our money NOW by making it a real pain to opt-out of contributing to the 401(k). Stickk.com makes us give money to charity (which is emotionally painful, especially when you give it to an organization you DISAGREE with) every time we eat a donut. These are artificial situations, but they can be effective by recruiting the emotional brain to help us do what our logical brain knows is best.

Youth Sports is an Arms Race

This is a great article for anyone who has kids that play youth sports or who is interested in behavioral science. I love analogies that tie together seemingly disparate situations (although the analogy on NPR earlier this week comparing rappers to geopolitics was a bit of a stretch).

But in addition to the basic premise, what do you think about the statement:

“It's crucial to recognize the difference between intensive athletic practices and something like studying. Competitive athletic success is a zero sum game. There will be the same number of major league players making the same salaries if everyone in the world became twice as good at playing baseball.

Studying, on the other hand, makes people smarter, more educated and more productive. And that makes your life better, regardless of what everyone else is doing. Economic productivity is not a zero sum game. If we all became twice as smart, we would all be richer, healthier, safer and so on.”

Is it true? I think there also are positive externalities of athletic training. Not just better fitness, but the ability to practice intensely also transfers (read Talent is Overrated for more on this). Or the ability to be a team player (although does this get better or worse if you are intensely competitive in sports?).

More questions than answers. My favorite kind of reading!!

Can we trust customer service?

I recently did some business with a British publisher who offered me a choice of £50 ($80) or a book up to £150 in value as compensation. I don’t often buy books that cost more than $80, so I figured I should take the cash. But just in case, I contacted my bank (Wachovia) to see what the service fee would be to deposit a check in pounds. They told me that as long as the currency of the bank matched its nationality (both are British), then there is no extra fee. I knew they would hit me on the conversion rate, but cash still gave me the best deal. So I took the cash.

This morning, I went to the bank to deposit the check (first time I used a human teller in years!!). The teller told me that because it was a foreign check, it had to go to collections. This has a $75 fee and a week or two delay. And given the conversion rate hit of 7 cents/pound, I would only get $3. Needless to say, I was a bit angry. For $3, I would taken the book. Or I would not have done the work in the first place.

Given enough complaining, any major company will waive a fee like this, so I got to keep the $78. But I have now lost faith that contacting customer service to check on fees in advance works. If people want to sign up for a credit card, get a loan, or whatever, how can you make good decisions if you can’t trust the information they give you? Do I need to get official letters on company letterhead signed by the “VP of whatever” every time I want to engage in some kind of transaction? Just the frictional costs of this requirement could add up to a real pain.

Has anyone else experienced something like this, or is it rare?

Can we trust reviews and ratings??

I am reading a book on applying brain science to management. I am only on chapter 3, but so far the book really stinks. I will write a review to warn you about it somewhere else. The topic of my post today is on social networking and reputation management systems (ratings and reviews).

The book got some fantastic reviews from brain scientists who seem to have good credentials. Maybe they liked the book, but so far it’s such a trivialization and oversimplification of brain science I just can’t imagine they did. Could they have done it for the social networking benefits – getting their reviews out there and read? Is this so valuable that it would be worth exaggerating the value of the content you are reviewing – especially since most readers probably don’t know enough about brain science to realize how bad the book really is? Here’s a paradox – if writing reviews is valuable in and of itself, we may not be able to trust them because people will be writing them just to get the reviews listed. And when reading reviews isn’t valuable anymore, writing them will not be either. So the more we value reviews now, the less we will be able to use them in the future.

Here is another reputation management question. The book references some of the world’s leading brain science researchers. But these are not the people whose reviews are shown. If they were, I think I would be second guessing my own opinion instead of the reviewer’s honesty. How do we judge the quality of a reviewer? Are rate the rater systems (e.g. 90% of customers rate this reviewer’s reviews as 4 or 5 stars) helpful? Or do you want to see a bio (maybe not for reviewing music, but for technology?)?

I am starting a research project to look into these questions, so any thoughts would be greatly appreciated.

Why we may never solve the obesity crisis

Ezra Klein shares a story that is all too true for many of us. When we are eating out, we have no clue what the fat or calorie content is of the dishes on the menu. Not only that, the dishes that sound like good choices may turn out to be the worst ones. He writes (about the Cheesecake Factory menu):

On first glance, I would have figure the salmon for the lightest entree, followed by the chicken piccata, the carbonara, and the crispy beef. Not so. The salmon weighs in at 1,673 calories -- which is to say, a bit more than 75 percent of the food an adult male should eat in a day. The piccata is a comparably slim 1,385 calories. The crispy beef is 1,528 calories. And the carbonara? 2,191. The answer might be that someone looking for a healthful meal shouldn't go to the Cheesecake Factory. But insofar as you're already there, or your family wants to go there, making a good decision isn't a particularly straightforward proposition.

The problem here is threefold. Cheesecake creates their dishes with the intention of maximizing taste. And fat, sugar, and calories taste GOOD!! This is America and we have the right to eat whatever we want, even if it blows up our waistline (and our healthcare bills). So I would not want any regulations that prevent Cheesecake from serving up these dishes. But the other two problems are more worthy of attention.

First, if anyone wants to make a more healthful choice, they should have the information to do so. Again, this is America and we have that right. So either the descriptions need to give eaters a better idea of what’s in the dish or we need to require nutritional information on the menu (like several cities are already starting to do). You are free to ignore it if you want to, but it should be there for people who want it, or especially for people who need it for health reasons (diabetics, medically obese, etc).

Second, the costs of treating obesity-related disease is often covered by other people, either through Medicare/Medicaid or through shared insurance risk pools. If we have a new “public option” in the Obama plan, that would increase shared costs even further. I am OK if you want to overeat and get obese, but don’t make ME pay for the resulting medical care. Some company health plans are starting to offer discounts for people who are fit. But we need a way to make this more systematic to make it societally acceptable.

In essence, it comes down to what it always comes down to. We should have the freedom to make bad choices if we want to (smoking, eating, etc). But this freedom is taken away from us if we don’t have the information we need to evaluate the costs and benefits of our choices. We deserve both kinds of freedom.

And as soon as there are externalities (shared health costs, second hand smoke) on other people, we are infringing on THEIR rights. So we need mechanisms to either eliminate the externality or a payment system that compensates for it.

In-your-face TV news

I am very interested in the concept of decision making bias and polarization. The challenge is that we focus on ideas that we agree with much more than those we disagree with. The result is that we learn more and become more confident in our previous opinions whether they are right or wrong. This is of course an overgeneralization, but it happens much more than we would like to admit. I just read a study that looked at the effects of in-your-face TV news. You know the ones – one person from each side of a debate argue back and forth, uncivilly, and with lots of close-up camera shots to magnify the heat of the argument.

This is a long excerpt, but I think worth reading (the article is by Diana Mutz in the 11/2007 issue of American Political Science Review):

Incivility alone does not dampen enthusiasm for political advocates nor the arguments they make. However, when uncivil discourse and close-up camera perspectives combine to produce the unique “in-your-face” perspective, then the high levels of arousal and attention come at the cost of lowering regard for the other side. The “in-your-face” intimacy of uncivil political discourse on television discourages the kind of mutual respect that might sustain perceptions of a legitimate opposition. Here the pattern of findings is quite consistent; close-up perspectives on uncivil discourse routinely damage perceptions of the candidates and issue arguments that subjects are already prone to dislike; that is, attitudes toward the least-liked candidate, and the perceived legitimacy of rationales for opposing issue positions.

When we lose respect for the experts/politicians on the other side of the argument, we are less likely to really listen to what they say. It becomes that much harder to change our minds in the face of counter evidence. It’s no wonder that our politicians can never agree on anything. Are they even listening to each other any more?

Interacting with brands on social networks

An article in yesterday’s Advertising Age discussed a survey of people who had used social networking sites at least once a month and developed basic demographic and psychographic profiles. The article was not very insightful (Myspace users are younger, LinkedIn users are richer), but one subject got me thinking.

Half of us have “friended” or become a fan of a brand. Just under 20% react positively when they see brands on our social networks and about the same react negatively. 20% of us want more communication from brands and 35% want less.

Why did this part get me thinking? Because as usual, the real answer is that “it depends.” General questions like this are pretty useless. If Hershey’s wants to contact me with a free sample, then I will want more communication and react positively. If they put up some inane ad, then I want less and react negatively. Since this is an Advertising Age article, what they should talk about is how the brands can craft their communications to fit into the positive categories and avoid the negative ones. Like this newly viral video that is really an Evian ad.

Compared to your neighbors

This is really important so please think hard. What would you do if you got an insert in your electricity bill praising you for using 10% less electricity than your neighbors? What if it criticized you for using 10% more? In Sacramento, it decreased total electricity use by 2%. This sounds small (so it means it doesn’t really impact peoples’ lifestyle), but in terms of cost for the utility (not having to build more power plants) and reducing global climate change, the impact can be huge.

Soon, people in California, Washington, Minnesota, Illinois, and New York will be getting these notices. It’s Behavioral Economics in action. Then the next step is to apply this to your water bill. And then . . . . well, I don’t know what comes after that. But this is the basic idea of Sunstein and Thaler’s concept of paternalistic libertarianism. Don’t force people to do things, just give them information that helps them make the right decision and then create a process that makes the right decision easy (like making a max donation to your 401(k) the default option and then allowing people who want to to reduce it, instead of the opposite which we have now).

How much would you improve about your life if it were easier? And if your neighbors were informed? And if you got community recognition from them for doing the right thing? I wonder what else we can change about our society . . . . .

Design solves problems

In many cases, design is all about making a product look good. It also has to be functional. But sometimes, design can solve systemic problems that go beyond the product itself. If designers understand the context in which their design will be used, it is amazing what design can solve.

Here is an example.

In Nepal, airport personnel have a bad habit of accepting bribes. Nepal decided it would easier to use a design solution than a regulatory or police solution. They simply redesigned the airport uniforms so they don’t have pockets. If they don't have a place to put the money, they can't accept it. A simple solution that shows the elegance of design.

its easy to fool ourselves, even when our life depends on it.

Great example of confirmation bias yesterday on NPR. A small town in Texas has been receiving tons of money in royalties from a natural gas company that is drilling the Barnett shale. They are getting up to tens of thousands of dollars per person per MONTH!!

In June, they experienced the first earthquake EVER in the recorded history of this region. Then another. Then another. Six so far in just one month. If it weren’t for the royalty checks, I am sure that the townspeople would have jumped to the conclusion that the drilling is causing them. But because the drilling is their golden egg, they have jumped to the conclusion that it can’t be the drilling. Or that the earthquakes are too small to matter.

Either way, the townspeople are making decisions based on no real information. The interesting thing is how easy an unrelated fact (the payments) is impacted their cognitive processes. I don’t think that they are consciously deluding themselves. I think this is a natural manifestation of what cognitive science has known about for years. Cognition is not a logical process. We often start out with the answer we want and then collect and interpret information to fit that answer. And this is unconscious, so it’s insidiously hard to overcome.

Hurray for Simplicity !!

Hurray for simplicity.

One of my favorite authors, Nassim Taleb, just posted an excerpt from a book that really caught my attention. It’s a small excerpt that tells a story about a statistician who tried to prove that statistical short cuts were costing businesses a bundle. He wanted to prove that companies should use state of the art extensive econometric models. Horror of horrors, he found out that the simple methods actually worked better.

Hurray for simplicity !!