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The Economist as Therapist: Behavioural economics and

"light" paternalism

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In fact, people often don’t know what’s best for themselves (and when they do, often have

trouble getting themselves to do it)

• Health behaviors– 1960-2000, obesity (BMI>30) in U.S. adults increased from 13% to 31%

1985: no states in U.S. with obesity rate > 15% 2005: no states with obesity rate < 15%

– “Lifestyle diseases caused by, e.g., tobacco & alcohol use account for ≈ 1/3 of all deaths in US.

– Potential benefit of many medicines – e.g., to control blood pressure, cholesterol and avoid strokes -- stymied by poor adherence

e.g., ≈ 1/2 of patients who have a heart attack stop taking cholesterol medication in first year

• Spending/saving/investing Average U.S. savings rate: -1% Median Net worth, excluding home equity (year 2000):

◦ All U.S. households: $13,473

◦ Households 65+: $23,369

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• Traditional economics not well equipped to deal with these problems; assumes that people..– know what’s best for themselves– are able to act on that understanding

little or no need for intervention (beyond problem of externalities)

focus on prices and/or information as main tools for policy

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• Behavioral economics: allows for mistakes. People often...– don’t know what’s best for themselves– do know, but can’t do it

motivates intervention (much as one intervenes in diet of children)

inspires new approach to policy: ‘light paternalism’

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• Paternalism: – policies intended to benefit individuals,

premised on the idea that people cannot be relied upon to pursue self-interest – commonly justified for children and others deemed unable to behave rationally

– distinct from regulations intended to deal with externalities – i.e., to protect others

• Behavioral economics:– expands the possible application of

paternalism by identifying systematic mistakes made by a broad cross-section of the population

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However, widespread discomfort with ‘heavy-handed’ paternalism

• Fear that policy-makers won’t make better decisions

• Fear of regulatory capture (e.g., cigarette companies knew warnings wouldn’t help but would shield them from liability)

• People may have good reasons for behaving as they do (that policy-makers don’t understand)

• Inherent value of autonomy/liberty

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Proposed solution: ‘light paternalism”

Blanket term intended to encompass:• “Libertarian paternalism” (Thaler &

Sunstein, 2003)Point out that paternalism is often unavoidable; why not make decisions that are best for people?

• “Asymmetric paternalism” (Camerer, Issacharoff, Loewenstein, O’Donoghue & Rabin, 2003)

Argue that it’s often possible to implement policies that improve welfare of those behaving suboptimally without limiting freedom of those behaving optimally

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Common theme: using errors and biases that ordinarily hurt people to, instead, help them

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An example: defaults

• Substantial evidence that defaults matter – e.g., organ donations, savings behavior, investment allocations

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“Status quo bias” and defaults in organ donation

(Johnson-Goldstein Sci 03)

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Defaults fit the definition of both libertarian and asymmetric paternalism

• No avoiding a policy on defaultsDefaults (e.g., on amount of salary allocated to 401k) are almost unavoidable (and lack of default itself involves a policy decision)

• Asymmetric in two respects:–Desirable defaults can improve the welfare of those who mindlessly adhere to the default without restricting the options of those who do not.–Carefully selected defaults should be unobjectionable to those who don’t believe there is a status quo bias but should be embraced by those who believe that there is such an effect.

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Changes introduced into benefits package of large corporation..

• NEW Cohort defaults (all could be changed easily by employee):– Automatic enrollment– 3% of salary allocated to 401k– 100% of allocation to money market

• WINDOW cohort:– Immediately eligible for 401k– No automatic enrollment or allocation default

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Enrollment

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Light paternalism has diverse ramifications

1. Need for new welfare criterion

2. Encourage a focus on process

3. Need for expanded field research

4. Implementation issues: channeling existing economic interests

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1. Need for alternative welfare criterion

• Standard preference-based welfare criterion assumes that people naturally choose what’s best for themselves; welfare measured by the degree to which individual preferences are satisfied

• But premise of light paternalism is that people can’t be relied upon to choose what’s best for themselves

need for alternative welfare criterion to evaluate success of paternalistic interventions

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Possible welfare criteria

• Experience utility (back to Bentham!)Problem: adaptation

• Limiting utility to ‘valid’ choices (Bernheim & Rangel, forthcoming)

• ‘Informed’ decision utilityProblems: – Informing often difficult– Information often not the issue

• Preponderance of preferences

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Big problem with experience utility: adaptation

• Wortman and Silver (1987): quadriplegics reported no greater frequency of negative affect than control respondents!

• Tyc (1992): “no difference in quality of life or psychiatric symptomatology” in young patients who had lost limbs to cancer compared with those who had not.

Experience utility would place no negative value on quadriplegia or limb-loss!

• Also, our research shows that people with disabilities who report being perfectly happy also say that they would give up substantial money or life-expectancy to re-attain good health.

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Possible welfare criteria

• Experience utility (back to Bentham!)Problem: adaptation

• Limiting utility to ‘valid’ choices (Bernheim & Rangel, forthcoming)

• ‘Informed’ decision utilityProblem: Informing often difficult if not impossible

• Preponderance of preferences

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2. Importance of process

• Decision biases often contribute to suboptimal behavior – e.g.,– Hyperbolic time discounting inadequate saving,

overeating, procrastination, poor medication adherence

– Status quo bias inadequate retirement saving– Loss aversion poor investment decisions– Overweighting of small probabilities burning money

by playing the lottery• Best light paternalistic programs use same

biases to promote well-being

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Example: Save More (AR) Tomorrow plan(Benartzi & Thaler)

• Inadequate saving due in part to:– hyperbolic time discounting (which leads to overweighting of

present gratifications) – underweighting of opportunity costs relative to out of pocket costs

(because putting money aside is seen as an out of pocket cost)– Status quo bias (because default on most 401k plans is zero)

• SMarT Plan:– Employees agree to increase 401k put-aside next year– Financed out of wage increase (which is reduced)

• Uses all three biases to promote saving– Hyperbolic time discounting willingness to save tomorrow – Underweighting of opportunity costs willingness to save out of

salary raises– Status-quo effect continued adherence once implemented

Highly effective!

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First implementation of SMarT plan

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3. Need for expanded field research

Paternalistic policies often have unintended consequences

• Different biases come into play

• People may have had good reasons for behaving as they do

• Social/economic interactions produce unexpected consequences

Need for field experiments

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Asset allocation

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4. Channeling existing economic interests

Many economic interests stand to gain from individual mistakes:

• credit-card companies: overspending• Fast-food companies: over-eating• Diet industry: obesity• Banks: overdrafts, etc.• Realtors/mortgage companies: overextension• Hospitals & pharmaceutical companies: poor

preventive care• States: lottery play• Casinos, Pornographers, etc. etc.

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Economist as therapist needs to identify commercial/government interests aligned

with those of individuals

• Health insurers, Veterans administration: preventive health

• Drug companies: medical adherence

• Investment companies: adequate saving

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Some projects..

• Warfarin adherence

• Weight loss

• Promoting saving

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Warfarin Adherence(project with Kevin Volpp & Stephen Kimmel)

Illustrates..

•Importance of process

•Value of field experiments

•Alignment of commercial and individual interests

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Warfarin (Coumadin):Anti-stroke medication

Benefits are unambiguous (welfare evaluation is trivial)

• Chance of stroke / past stroke ≈ 21%• Warfarin (if taken correctly) ~3%• However, only 66% adhere, even in best

conditions (warfarin clinic)– For every 10% increase in missed doses,

~14% increase in odds of under-coagulation– Patients with more erratic doses have higher risk of

both under- and over-coagulation• Our goal: increase adherence through

incentives

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Importance of process..

Insight #1: need to deliver frequent feedback and rewards – ideally at the daily level

Insight #2: lotteries give more bang for the buck (in part because people overweight small probabilities)

Insight #3: ideal lottery gives frequent positive feedback plus the hope of big payout (because people are both forward- and backward-looking)

Insight #4: play on regret...

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Our solution..• Patient gets 2 digit number (e.g., 27)• Every evening we draw a two digit number

– If first two digits match (e.g., 25) or second two digits match (e.g., 57), they get $10

– If both digits match (27), they get $100

• But.....• ONLY IF THEY TOOK THEIR WARFARIN

– Message transmitted to subject whether they won or would have won (if didn’t take medication)

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How do we know if they took their warfarin?

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Planned study• 4 conditions:

2 (reminder/no reminder) x 2 (lottery incentive/no lottery incentive) factorial design

• Outcome meaures–Primary: proportion of time out of therapeutic INR range–Secondary: rates of thromboembolic events, bleeding, adherence, costs

• Who can fund? Aetna (health insurance company)

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But, first need to prove it works..

• Pilot Project #1– 10 subjects for one month– reminder + incentive condition only (controls =

same patients before intervention, and other patients)

– got the incentives wrong ($5 EV/day)

• Pilot project #2 ($3 EV/day)

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Rates of non-adherence

0%

5%

10%

15%

20%

25%

30%

35%

Control Pilot 1 (e.v.=$5) Pilot 2 (ev=$3)

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Weight Loss StudyAll Participants:• Attempt to lose 1 pound per week for 16 weeks• Asked to return to lab each month for weigh-in3 conditions:• Control• Experimental (2 conditions)

– Both conditions: Daily weight-monitoring: Ps asked to phone in weight every

day Feedback: Sent daily text message

– E1: Lottery incentives– E2: Deposit contracts

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Incentive conditionsLottery• Same lottery scheme as for warfarin• And, similarly, participants only receive lottery payment

if.. a) called in weight that day and b) are at or below daily weight loss goal

• Message transmitted to Ps via pager whether they won or would have won

Deposit Contract• Ps can put “money down” toward weight loss at

beginning of month• All deposits matched 1:1• If P is at or below weight loss goal at end of month, he

gets the deposit contract back• If not, he forfeits the $

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First month

1-way ANOVA: F(2,38) = 19.96, p < 0.0005

Average monthly weight loss by condition

1.76

5.87

6.81

0

1

2

3

4

5

6

7

8

Control Lottery Deposit contract

Pou

nds

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First month

χ2 (2) = 25.61, p < 0.0005

Percentage who attained first monthly weight loss goal

6.7

71.4

100.0

0.010.020.030.040.050.060.070.080.090.0

100.0

Control (n=15) Lottery (n=14) Deposit contract (n=12)

Per

cen

tag

e

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Average monthly weight loss by condition

0

1

2

3

4

5

6

7

Control Lottery Deposit contract

Poun

dsResults to date

(4 months into study)

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χ2 (2) = 29.07, p < 0.0005

Percentage attaining monthly weight loss goals

20.0

76.0

91.3

0.010.020.030.040.050.060.070.080.090.0

100.0

Control (n=25) Lottery (n=25) Deposit contract (n=23)

Per

cen

tag

eResults to date

(4 months into study)

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Saving(in progress; need partner!)

The problem (welfare criterion)• Out of 122 million working Americans, 42 Million

Save through Defined contribution plans• Median family owns zero stocks, even in

retirement plans• Average U.S. savings rate: -1%• Median Net worth, excluding home equity (year

2000)– All U.S. households: $13,473– Households 65+: $23,369

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• Usual Assumption: People don’t care about retirement

Try to make retirement more vivid (either positively or negatively)

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• Participants set a yearly saving goal (e.g., $1,000)• Make weekly deposits (e.g., $20)• Every week they are on or above target, participate in a

lottery (at the time of making their deposit)• Plays on: hyperbolic time discounting, goal gradients,

peanuts effect

Alternative approach: lottery-based rewards

Savings goal

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0 5 10 15 20 25 30 35 40 45 50

Week

Targ

et

savin

gs (

$)

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Conclusion

• Public policy is currently the most important application of behavioral economics

• Possible to design ‘light paternalistic’ policies that help people without reducing their autonomy

• Many of the most successful interventions use the same biases that typically hurt people to, instead, help them