TSOE listener Geir, from Norway, sent us: Influences and Irrationalities of the Human Mind, Ogilvy Behavioural Sciences Practice.
The book lists 29 of most subtle and powerful nudges, “combining gravitas of academic understanding with application of real world communications.”
As Charlie Munger, Warren Buffet’s bridge and business partner said: “If economics isn’t behavioral, I don’t know what the hell is…”
Some of Our Biases
Anchoring: Those whose last two digits of their Social Security number was above 80 were willing to spend $20 more on a bottle wine than those last two digits was below 20.
Chunking: Ryanair, low seat price, add-ons, already attached to the idea of a holiday, more likely to purchase
Over-Confidence: 93% are above average drivers. Lake Wobegon Effect
Priming: French music played, French wine outsold German wines 5:1; German music, German wines outsold French wine 2:1
Paradox of Choice: Often paralyzed by choice. Prius offered one choice, since the real choice was hybrid or not. If Toyota had offer several, customers might have postponed to buy the best one (Starbucks refutes this Paradox of Choice).
Status Quo Bias: Nine out of ten people favor organ donation: Germany donation rate is 12%; Austria is 99%, because in Austria you are opted-in unless you opt-out.
Loss Aversion: It’s two times as painful to lose something as a similar gain. “Lose $X if you don’t insulate your attic vs. you will save $x each year if you do.
But then The Economist, August 20, 2021, published this article, “A study on dishonesty was based on fraudulent data,” which questions the data and facts in one of the studies in Dan Ariely’s book, The Honest Truth About Dishonesty.
Jason Hreha, one of Ariely’s collaborators wrote “The Death of Behavioral Economics,” Undated, 2021, wherein he claims: “Behavioral economics is dead.” For two reasons:
1. Failing to replicate a lot of the studies
2. Interventions are surprisingly weak in practice
Even Loss Aversion, the field’s most important idea, has failed to replicate. Other have found losses and benefits equally effective in driving conversion because many see loss-focused messaging as gimmicky and spammy. Loss aversion does exist, but only for large losses.
Weak Effect
UC Berkeley researches looked at 126 Random Controlled Trials by two nudge units in the USA. According to papers, the average effect was 8.7%. The researchers found the actual effect to be 1.4%.
Hreha argues that behavioral economics offers up cookie-cutter solutions to complicated problems. Yet specific problems require specific solutions.
He also wrote, “Applied behavioral science is where creativity goes to die.”
Deirdre McCloskey [Episode #6 and Episode #293], in her book Bettering Humanomics, wrote:
Other recent neobehaviorist fashions, such as neuroeconomics and behavioral finance and happiness studies, are dubious—or, they treat creative adults like a flock of little children.
We need, they say, merely to “observe their behavior,” omitting for some reason linguistic behavior.
Ludwig von Mises further developed the idea of praxeology, the science preoccupied with psychology and understanding human decision making. He believed economics is the study of human praxeology under conditions of scarcity.
Humans engage in purposeful behavior, said Mises. Animals behave. Humans act. We have a goal in mind, and we learn. Human action vs. Human behavior:
1. Each of us acts purposefully, with a goal in mind. It can be fixed, or changed frequently.
2. Each of us learns
He also wrote: “Error, inefficiency, and failure must not be confused with irrationality. He who shoots wants, as a rule, to hit the mark. If he misses it, he is not irrational’ he is a poor marksman.”
Economist John Kay wrote Obliquity, where he said, “If people are predictably irrational, perhaps they are not irrational at all: Perhaps the fault lies not with the world but with our concept of rationality.
One of Ron’s Top Five book of 2019 [Episode #275] was Cents and Sensibility: What Economics Can Learn from the Humanities, by Gary Saul Morson and Morton Schapiro. They begin by noting the difference between humanities and economics: stories.
“Great novelists understand people better than any social scientist who has ever lived.”
“Surely no one in his right mind ever thought people are rational to begin with? Why, the whole heritage of Western literature has described people as irrational, and the social sciences point to many factors other than reason that shape behavior.
“Why would philosophers since Socrates have been urging people to act rationally, if they always did so anyway?
Behavioral Economics purports to adding the human dimension to economic models, but it does nothing of the kind. The human beings it imagines behave just as mechanically, only less efficiently. They are still abstract monads shaped by no particular culture.
“There’s no way to grasp most of what people do by deductive logic—we need stories. Novels are a distinct way of knowing. Ethics requires judgment, it cannot be reduced to theories, models, or sets of rules alone.
“Economics can’t deal with culture since culture can’t be mathematized. Same with wisdom.”
There is also no place for surprise in either classical or behavioral economics, and yet humans constantly surprise.
Dostoevsky wrote: [If someone would] “some day…truly discover a formula for all our desires and caprices,” there would be no caprices at all. “There will be no more incidents and adventures in the world.”
Another book highly critical of nudges and libertarian paternalism is The Manipulation of Choice: Ethics and Libertarian Paternalism, by Mark D. White.
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