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behavioral economics

The Things We Do: How Crowd Science Can Help Eliminate Biases

Roxanne Bauer's picture

There is a new and exciting field emerging that combines the insight of analytics and psychology; it’s known as crowd science.  Already, it’s a fairly pervasive industry, involving not just data scientists but also behavioral economists, marketers, and entrepreneurs.
 
Crowd science analyzes data (through mining, algorithms, statistical modeling, and others) and then applies psychological or behavioral theories to make sense of the analyses. It is sometimes referred to as the “guinea pig” economy because it utilizes consumer tests— often without the consumer realizing it— to obtain its data and, therefore, insight.
 
One of the most popular forms of crowd science is A/B testing whereby website visitors are shown different interfaces or versions of the same site. The way in which each visitor navigates through the site is then tracked to determine which version is more appealing or effective. One reason A/B testing is so helpful is that it divides users into a control group and a treatment group, allowing the engineers of the experiment to determine not just what the issues are but how to solve them. It also allows decision-makers to test for biases in project design and implementation.

Human Nature is Not Always Rational- How Behavioral Science can Aid Development

Paolo Mefalopulos's picture

I am not sure if I was more surprised, glad, or excited to see the recent 2015 World Development Report published by the World Bank Group. Knowing well this institution, I admit I did not expect to see the day when it would acknowledge that human behavior is not necessarily guided by rational considerations and that behavior change is not a linear process and needs to reflect the complexity of factors affecting such process. The possibility that rational thought is not at the basis of every human action is something quite revolutionary, at least within the mainstream boundaries of economic discourse.

The WDR entitled “Mind, Society and Behavior” seems to suggest that economists might actually have something to learn from behavioural scientists! However, such concepts have been floating around for a quite some time. A handful of social scientists, development scholars, and practitioners have been exploring, advocating, and applying to a different degree principles, which are now illustrated in the WDR and applying approaches that promote human agency and facilitate social change.

Quote of the Week: Cass R. Sunstein

Sina Odugbemi's picture

“Public figures are ordinarily rewarded for what they say, not for what they don’t. Grace is an underrated virtue; gracelessness is an insufficiently acknowledged vice.”

- Cass R. Sunstein, an American legal scholar and author. He taught at the University of Chicago Law School for 27 years and is currently the Robert Walmsley University Professor and Felix Frankfurter Professor of Law at Harvard Law School. Sunstein also served as the Administrator of the White House Office of Information and Regulatory Affairs in the Obama administration. He is the author of numerous books on legal philosophy and co-authored, with Richard Thaler, Nudge: Improving Decisions about Health, Wealth, and Happiness (2008).
 

The Things We Do: What Obamacare Teaches Us About Consumer Behavior

Roxanne Bauer's picture

How bad would the customer service at your bank have to be for you to switch to another?  How long would you have to sit in a waiting area, reading bad magazines, before you would look for a new doctor?  How about switching health insurance plans?

At the foundation of economics is the premise that people make rational choices, based on the information they have. This may be true, but as a decision becomes more complex, so does our desire to avoid it. According to the literature on economic behavior, this phenomenon is known as consumer inertia.

As Stigler and Becker (1977) state: “the making of decisions is costly, and not simply because it is an activity which some people find unpleasant. In order to make a decision one requires information, and the information must be analyzed. The costs of searching for information and of applying the information to a new situation may be such that habit is often a more efficient way to deal with moderate or temporary changes in the environment than would be a full, apparently utility–maximizing decision” (pg. 82).

The Things We Do: We Don't Trade Rationally

Roxanne Bauer's picture

Imagine you are shopping for dinner.  You go to the local grocer and notice that rice costs $4 per package and noodles cost $2 per package.  You think to yourself, “hmmmm for one package of rice, I can buy 2 packages of noodles… but I can make more meals with a bag of rice than 2 packages of noodles. I’ll buy the rice.” 

This mental equation tells us much more about what a consumer values than knowing that rice is $4 per bag— a variable the shopper cannot control. It tells us they value rice above noodles.  It tells us about the shopper’s opportunity costs.

Opportunity costs represent the next best option relative to the current choice. Every economic decision necessarily involves an alternative that is passed up in order to pursue it.  The idea is central to how economics views costs and relies on the assumption that in a world of scarcity, the use of resources in one way precludes their use in other ways. 

Nevertheless, while the concept is central to economic theory, there are inconsistencies in how people apply it to their every-day decision-making.  

What would happen if you already had a bag of rice? What would be the opportunity cost of selling it? Would you sell it at the market rate or ask for more?

The Things We Do: Bandwidth Poverty- When our Minds Betray Us

Roxanne Bauer's picture

Struggling to ‘get by’ is stressful.  We worry whether we can make it to our next paycheck, whether a trip to the market will be successful, whether we can pay the rent on-time… the list goes on.

All of this stress leads to an attention shortage, known as bandwidth poverty.  Bandwidth poverty creates a negative, reinforcing cycle.  When we experience financial poverty, we focus on the immediate need to make money or to pay a bill, and we don’t have sufficient cognitive resources or bandwidth to spend on other tasks or later deadlines. This leads to less-than-optimal decisions that leave us worse-off because we’ve lost the capacity or mental space to consider future needs.

In a series of experiments, researchers from Harvard, Princeton and Britain's University of Warwick found that urgent financial worries had an immediate impact on poor people's ability to perform well in tests of cognition and logic.

The researchers conducted two sets of experiments— in two very different settings— one in a mall in suburban New Jersey and one involving sugar cane farmers in rural India.
 

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