In this session, we'll review some of the key behavioral biases that are important enhancements of the standard economic view of human behavior. These both more accurately describe what humans do and provide a road map for how we might think about the design of interventions. In standard economics, it's assumed that people make optimal decisions based on their information, resources, and preferences. This in some sense assumes a way of problems like obesity, not a very satisfactory conclusion for public health leaders or clinicians who want to help people lower their future health risk. Behavioral Economics helps us understand why people do things that may seem to not be entirely rational, and have trouble changing behavior even when their future selves would be better off. Let's think for a moment about how the Science of Motivation has evolved. In the past, people often assumed that if we just provided people with information, if people know what to do, they would do it. That unfortunately doesn't work very well. And there are lots of examples of failed efforts to try to provide people with information in the hope that it would change their behavior. But for example, 70% of smokers in the US say they want to quit. Only about 3% per year actually do, even though the risks of smoking are widely known. Because of frustration perhaps with standard information provision approaches, a lot of health plans and employers have moved in the realm of Standard Economics, providing economic incentives to people to do healthy behaviors. The limitation for a lot of those programs is that they assume people are perfectly rational, and the size of the reward is all that matters. What Behavioral Economics has mapped out are ways in which people are predictably irrational. Where decisions are affected by present bias, loss framing, emotions, social context and inertia. This means that the incentive delivery, design, the choice environment are all critical. We've gone over a lot of decision errors in recent lectures, where we've highlighted that while people may be irrational, they're rational in predictable ways. By taking advantage of these typically decision errors, we can steer people to healthier behaviors. By way of quick review, reference dependence refers to the concept that how people evaluate a set of choices all depends on where they're starting. Think about that example of somebody who has $4 million , but had a $1 million yesterday versus $7 million yesterday. Framing, very important. Choices can be presented to people in different ways and whether they are presented as gains, as losses, makes a huge difference. The Endowment Effect; a very important concept, which is a little bit of an interesting one because it surprises people that having something in hand is so much more important in terms of motivating people. But it relates to the notion that people really don't like to lose what they already have. Status Quo Bias; very important, underlies a lot of the work on defaults and choice architecture which you're going to hear a lot more about, but relates to the notion that people often stick with what they've already been doing even when other much better alternatives present themselves. Mental Accounting; People have lots of different accounts for example in which they keep their money. In essence it all should be a part of one mega account. But people often make these decisions which don't make sense. Saving money for a house or a car, and then having a credit card with very high interest in a different account. Loss Aversion: We talked about a bit. The notion that the disutility of a loss is much greater than the utility of an equivalent gain. Non-linear Probability Weighting relates to the notion that people overweight very small have probabilities near zero, underweight probabilities near one. Present-Biased Preferences. People heavily discount the future to a much greater degree than typically makes sense. And Anticipated Regret relates to the notion that people can anticipate the regret they'll feel if the outcome isn't as desired and it relates to a choice they made. This all leads to different Intervention Approaches. When we think about Standard Economics, we would think about only intervening when there is a clear market failure. We used the example earlier of Externalities, a behavior like smoking in a small closed space like a room or an airplane that imposes costs on others. Other examples of market failure would be Information asymmetries, or markets that are imperfect, where there's a monopoly and it makes sense for the government to intervene and introduce competition. Behavioral Economics, however opens up a whole another realm of possibilities, where we'd consider intervening when there are what George Loewenstein might call Internalities. Behaviors that impose costs on one's own self in the long run, and where if we accept people make a lot of decision errors, we might consider helping people help their future selves. A lot of interventions in Behavioral Economics are couched around the notion of Libertarian or Asymmetric Paternalism. There's no denying that a lot of these interventions are paternalistic in the sense that we're trying to help provide people with guidance towards achieving their goals and helping to steer them towards goals we might view or the choice architect might view, as desirable. However, they're asymmetric in a couple of important ways. One is that we're helping those who make decision errors while not affecting those who make deliberate well-informed decisions without decision errors. We're also helping people without interfering with their freedom of choice. In essence what we're trying to do, is exploit biases that often lead to self harmful behavior to how people engage in healthy behavior at higher rates. One of the classic examples of this is food lay out in a cafeteria. There are a lot of studies that show that the food that's most easily accessible tends to be chosen most often. So in a cafeteria that's typically the food in the middle of the cafeteria, near the cashiers. There's no denying that somebody needs to make a decision about which food gets laid out where. It could be the healthy food in the prime position. It could be the most profitable food in the prime position. It could be the most unhealthy food. It could be done at random. But here's a nice example of how people can be steered towards healthier choices without limiting options for those who want to eat unhealthy food. Nobody's removing them from the menu or the cafeteria. We're not changing the differential prices, we're just making it easier for those who might be susceptible to these types of interventions to make choices that they themselves might view as consistent with their own long term goals. In this session, we've reviewed several of the key behavioral biases that make it difficult for people to behave fully rationally, and discussed Asymmetric or Libertarian Paternalism as a framework for thinking about potential Behavioral Economic Interventions. The key thing to note is that these interventions ideally do not affect freedom of choice for those who behave optimally or have strong preferences, but rather make it easier for people who don't to make decisions that may be more in keeping with their own long term best interest. This is markedly different than a more heavy handed paternalistic approach. Throughout this course, we'll use this notion of light paternalism as a guide for thinking about how to influence behavior choices in ways that preserve freedom of choice. Thank you.
