Behavioral Economics Part 2

Temptation Bundling

Temptation bundling is a technique to incentivize ourselves to get something done by pairing it with something we enjoy. I need to clean the kitchen, and I also love podcasts, so I try to save my podcasts for when I clean the kitchen (or need to do other podcast-compatible activities). In order for temptation bundling to be most effective, you have to enjoy the temptation only when you are also doing the activity it is bundled with. For instance, if you bundle Game of Thrones with yoga, you can only watch GoT when you do yoga. Depriving yourself of GoT will give you the extra motivation to do the yoga. I admit that keeping the temptation exclusive is the hardest part and I don’t do it well.

 

Correlation Is Not Causation

This idea is taught in any science or statistics 101 course. Let’s say that there is a positive correlation with the number of firefighters and the damage done by a fire. If you’re not careful, you might conclude that firefighters cause fire damage, when in fact more damage requires more firefighters to respond. This seems like a silly example, but there are a lot of examples in the news and advertising where connections are made that irresponsibly claim one variable causes changes in another. It might also be the case that neither variable causes the other to change. Have you ever heard that there’s a link between oral health and heart attacks in an advertisement about dental products? The insinuation is that you need to buy the dental product or else you’ll have a heart attack. In this case, heart health doesn’t cause dental health, and dental health doesn’t cause heart health. Instead, there is a hidden variable that causes both. People who care a lot about their health tend to have healthy hearts AND healthy teeth. So the hidden variable is the behavior of a person who is health conscious. There’s also such thing as coincidence. So be careful! The direction of causality might be different than you think, or there might be lurking variables you haven’t thought about.

 

Confirmation Bias

The confirmation bias is the natural tendency to remember information that confirms what you already believe and forget information that conflicts with your beliefs. This bias comes up a lot in politics, gambling, religion, racism, etc.  One example might be if you believe in the healing power of prayer, you are more likely to remember times people spontaneously get better and count the miracles and less likely to remember the times when a person gets sick or dies despite prayer.

 

Bounties

Let’s say there’re a lot of snakes around, and they’re a nuisance. Some might think it a good idea to put up a bounty; $1 for every dead snake. The problem is that people are clever, and they respond to incentives. If you get $1 for every snake, then the incentive isn’t to get rid of the nuisance, but rather to spead it. If you’re smart, you’ll breed the snakes for a steady income rather than hunt the snakes to extinction. For this reason, bounties seldom work. One big example is with carbon tax credits. One particularly nasty greenhouse gas called HFC-23 was so bad that the UN was paying companies to destroy it. This resulted in companies producing more of it just so they could destroy it. When the UN fixes this exploit, the companies will likely just release the chemical into the air, causing much more emission than the carbon tax prevents.

Opportunity Cost

Opportunity cost is the idea that whatever you’re doing right now, you could be doing something else. One classic example is the cost of college. Let’s say it costs $15,000 for a year of college. Not only are you spending $15,000; you are also spending a few months of time that you could use to do something else, like work or learn horseback riding.

 

Sunk Cost Fallacy

You hate your job. You have to put up with a lot and you aren’t compensated well. The hours are terrible and you’re starting to compromise your personal relationships. You think about quitting, but then you start to think, “but I’ve invested so much time, so much money into getting that degree, and I’d be throwing it all away if I left.” This is the sunk cost fallacy. It is the concept that costs that have been paid in the past should be considered in the present. It’s sometimes called “throwing good money after bad.” The costs of the past have already been paid, so you should make decisions in the present based on what is cost-effective now.  If something is a bad investment of your time, money, energy, etc. now, it doesn’t matter what you have already put into it. One personal struggle I have with this is with food. I mistakenly buy more food than is healthy to eat. It was a bad investment, but it happened and now I have a giant plate of food. I feel the need to eat all of the food, or else I will have wasted money. This is nonsense because overeating is unhealthy, and whether I overeat or not, I have already paid for the food. A better solution would be to give the extra food to someone else or throw it away and try to make better choices next time.

 

Herd Mentality

A person’s reported beliefs and justifications are often contradicted by their actions. A sign in the forest says “please don’t take pine cones, it hurts the forest and then future generations won’t get to enjoy what we have today.” People surveyed show increased awareness of the problem and disapproval of taking pine cones, but the actual rate of pine cone losses skyrockets. Why? Herd mentality. If others are doing it, then it’s ok if I do it. The sign just broadcasts loud and clear that everyone is taking pine cones. A wiser sign might say, “We have a strong tradition here of forest lovers know to leave pine cones where they lay.”

Survivorship Bias

Have you ever heard someone say, “I have no simpathy for the poor because my great great grandfather came to this county with the clothes on his back and nothing but lint in his pockets, and he worked hard and made himself a success! These poor are just lazy and trying to live off of others!” This is a great example of the survivorship bias. This is when that which survives is remembered, but that which fails is forgotten. For every successful great great grampa, how many were unsuccessful? Is it possible that even with hard work, some people just don’t catch a break? A famous example for the survivorship bias is detailed in one of the first chapters of “How Mathematicians Think.” In WW 2, the Air Force was trying to build better planes for combat. The idea was to look at the planes that came back from combat, look at where they were hit, and reinforce those parts with more armor. A mathematician saw this strategy as inherently flawed. The crafts they were inspecting were the survivors. They were a fundamentally different population of plane. The real answer was to put more armor in the places where the planes didn’t have any bulletholes, because planes that got hit in those places didn’t make it.

That’s what I got on behavioral economics at the moment! Enjoy, and remember, your bias is showing!

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