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OUR BEHAVIORS
GARY BELSKY AUTHOR, WHY SMART PEOPLE MAKE BIG MONEY MISTAKES: LESSONS FROM THE LIFE-CHANGING SCIENCE OF BEHAVIOR ECONOMICS; FORMER EDITOR IN CHIEF, ESPN THE MAGAZINE
Gary Belsky LTR Conference November 5, 2015
DIGITAL ENGAGEMENT:A Behavioral Economics Perspective
A BRIEF HISTORY OF BEHAVIORAL ECONOMICS
DANIEL KAHNEMAN AMOS TVERSKY
SYSTEM 1 SYSTEM 2
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FAST PARALLEL
AUTOMATIC
EFFORTLESS ASSOCIATIVE
SLOW-LEARNING
SLOW SERIAL
CONTROLLED EFFORT-FILLED
RULE-GOVERNED
FLEXIBLE
HOW WE DECIDE
A BRIEF HISTORY OF BEHAVIORAL ECONOMICS
BIASED TOWARD BIASES
An uncle left you money, which you must now invest. You’ve narrowed your choices to four options:
1. Shares of XYZ Tech (18%) 2. Shares of ABC Widgets (32%) 3. Treasury bills (18%) 4. Municipal bonds (32%)
Which option would you choose?
STATUS QUO BIAS
An uncle has left you money invested in XYZ Tech, a volatile Internet company. You’ve narrowed your investment choices to these options:
1. Shares of XYZ Tech (+/-50%) 2. Shares of ABC Widgets 3. Treasury bills 4. Municipal bonds
Which option would you choose?
STATUS QUO BIAS
An uncle has left you money invested in ABC Widgets, a volatile Internet company. You’ve narrowed your investment choices to these options:
1. Shares of XYZ Tech 2. Shares of ABC Widgets (+/-50%) 3. Treasury bills 4. Municipal bonds
Which option would you choose?
STATUS QUO BIAS
An uncle has left you money invested in Treasury Bills, a volatile Internet company. You’ve narrowed your investment choices to these options:
1. Shares of XYZ Tech 2. Shares of ABC Widgets 3. Treasury bills (+/-50%) 4. Municipal bonds
Which option would you choose?
STATUS QUO BIAS
An uncle has left you money invested in Municipal bonds, a volatile Internet company. You’ve narrowed your investment choices to these options:
1. Shares of XYZ Tech 2. Shares of ABC Widgets (50%) 3. Treasury bills 4. Municipal bonds (+/-50%)
Which option would you choose?
STATUS QUO BIAS
Confirmation Bias Mental Accounting
Availability Bias
Representativeness
Hindsight Bias
Money Illusion
Base Rate Ignorance
Survivorship Bias
Anchoring Sunk Cost Fallacy
Choice Conflict
Planning Fallacy
Herding Overconfidence Effect
Status Quo Bias
Loss Aversion
Hot Hand Fallacy
Gambler’s Fallacy
Focalism
Endowment Effect
Dunning-Kruger Effect
Region-Beta Paradox
Immune Neglect
Regret Aversion
Channel Factors
Framing
Preferential Bias
Tradeoff Contrast
Feature Fatigue
Extremeness Aversion
WHEN SYSTEMS COLLIDE
A BRIEF HISTORY OF BEHAVIORAL ECONOMICS
PROSPECT THEORY: AN ANALYSIS OF DECISION UNDER RISK
NOBEL PURSUITS
Imagine you’ve been given $1,000 and are asked to choose between two options. OPTION A: You win an additional $500.
OPTION B: You flip a coin. Heads, you get another $1,000. Tails, you get nothing. Which option would you choose?
LOSS AVERSION
Imagine you’ve been given $2,000 and are asked to choose between two options. OPTION A: You lose $500.
OPTION B: You flip a coin. Heads, you lose $1,000. Tails, you lose nothing.
Which option would you choose?
LOSS AVERSION
Confirmation Bias Mental Accounting
Availability Bias
Representativeness
Hindsight Bias
Money Illusion
Base Rate Ignorance
Survivorship Bias
Anchoring Sunk Cost Fallacy
Choice Conflict
Planning Fallacy
Herding Overconfidence Effect
Status Quo Bias
Loss Aversion
Hot Hand Fallacy
Gambler’s Fallacy
Focalism
Endowment Effect
Dunning-Kruger Effect
Region-Beta Paradox
Immune Neglect
Regret Aversion
Channel Factors
Framing Effects
Preferential Bias
Tradeoff Contrast
Feature Fatigue
Extremeness Aversion
WHEN SYSTEMS COLLIDE
• CHANNEL FACTORS
SYSTEM 1 PROBLEMS
Man and Tetanus at Yale
CHANNEL FACTORS
SYSTEM 1 PROBLEMS
• CHANNEL FACTORS
• CHOICE CONFLICT
Jam Session
CHOICE CONFLICT
CHOICE CONFLICT
Jam Session
vs.
MAXIMIZERS AND SATICFICERS
SYSTEM 1 PROBLEMS
• CHANNEL FACTORS
• CHOICE CONFLICT
• FEATURE FATIGUE
Enough Already
.
FEATURE FATIGUE
SYSTEM 1 PROBLEMS
• CHANNEL FACTORS
• CHOICE CONFLICT
• FEATURE FATIGUE
• TRADEOFF CONTRAST
Microwave Special
0.5-cubic foot Emerson Microwave, 35% off its $109.99 retail price (57%) ***
0.8-cubic foot Panasonic I Microwave, 35% off its $179.99 retail price (43%)
WHICH MICROWAVE DO YOU PREFER?
TRADEOFF CONTRAST…
Microwave Special
0.5-cubic foot Emerson Microwave, 35% off its $109.99 retail price (27%) ***
0.8-cubic foot Panasonic Microwave, 35% off its $179.99 retail price (60%) ***
1.1-cubic foot Panasonic II Microwave,10% off its $199.99 retail price (13%)
TRADEOFF CONTRAST…
WHICH MICROWAVE DO YOU PREFER?
SYSTEM 1 PROBLEMS
• CHANNEL FACTORS
• CHOICE CONFLICT
• FEATURE FATIGUE
• TRADEOFF CONTRAST
• FRAMING EFFECTS
Imagine you are an army commander, threatened by a superior enemy. Your staff informs you that your troops will be caught in an ambush in which 600 will die—unless you lead them to safety by one of two routes.
Route A: 200 soldiers will be saved.
Route B: There’s a 1/3 chance all 600 will make it and a 2/3 chance none will.
Which route is best?
LOSS AVERSION
Now imagine that you are in the same exact situation, but this time your staff describes the following two options:
Route A: 400 soldiers will die.
Route B: There’s a 1/3 chance no soldiers will be killed and a 2/3 chance that all 600 will perish.
Which route is best?
LOSS AVERSION
Discount vs. Surcharge
FRAMING
Save Now, Spend Later
FRAMING
A Stitch in Time
VS.
FRAMING
SYSTEM 1 PROBLEMS
• CHANNEL FACTORS
• CHOICE CONFLICT
• FEATURE FATIGUE
• TRADEOFF CONTRAST
• FRAMING EFFECTS
• REGRET AVERSION
Pat goes to the movies. At the box office, she is told that as Customer 100,000 she has won $100.
Chris is at a different theater, where she is told that as Customer 500,001 she has won $150.
Who would you rather be, Pat or Chris?
REGRET AVERSION
Pat goes to the movies. At the ticket window, she is told that as Customer 100,000 she’s won $100.
Chris is at a different theater, where she is told that as Customer 500,001 she wins $150. The 500,000 the customer wins $1,000.
Who would you rather be, Pat or Chris?
REGRET AVERSION
SYSTEM 1 PROBLEMS
• CHANNEL FACTORS
• CHOICE CONFLICT
• FEATURE FATIGUE
• TRADEOFF CONTRAST
• FRAMING EFFECTS
• REGRET AVERSION
• HERDING
HERDING
Bedlam
SYSTEM 1 PROBLEMS
• CHANNEL FACTORS • CHOICE CONFLICT • FEATURE FATIGUE • TRADEOFF CONTRAST • FRAMING EFFECTS • REGRET AVERSION
• HERDING
Gary Belsky
DIGITAL ENGAGEMENT:A Behavioral Economics Perspective