Unanticipated Interpersonal and Societal Consequences of Choice

Thanks to Clare for pointing me to this paper forthcoming in Psychological Science by Savani, Stevens and Markus. Abstract below.

Abstract
Choice makes North Americans feel more in control, free, and independent, and thus has many positive consequences for individuals’ motivation and well-being. We report five studies that uncover novel consequences of choice for public policy and
interpersonal judgments. Studies 1-3 found that activating the concept of choice decreases support for policies promoting intergroup equality (e.g., affirmative action) and societal benefits (e.g., reducing environmental pollution), but increases support for policies promoting individual rights (e.g., legalizing drugs). Studies 4 and 5 found that activating the concept of choice increases victim-blaming and decreases empathy for disadvantaged others. Study 5 found that choice does not decrease Indians’ empathy for disadvantaged individuals, indicating that these effects of choice are culture specific. This research suggest that the well-known positive consequences of choice for individuals can be accompanied by an array of previously unexamined and potentially negative consequences for others and for society.

Shane O'Mara: Psychology and the Crash

TCD Neuroscience Professor, Shane O'Mara, sketches a number of potential cognitive biases that might have underlay the Irish economic crash in this article (from http://www.irishscience.wordpress.com). Testing the extent to which particular psychological mechanisms can cause macroeconomic fluctuations is a tricky excercise but the article provides much food for thought in terms of potential mechanisms.

DG Sanco and Behavioural Economics

The European Health and Consumer Directorate, in particular its consumer division, has been taking an active interest in behavioural economics, as reflected in two large conferences it has held on this area in the last couple of years (link here and here). A recent paper by Emmanuele Ciriole, economist with the division, is available here. A recent report commissioned by Sanco on retail investment services is available here

Behavioural economics of weight loss

This article in Scientific American discusses some behavioural economics approaches to weight loss.

Secrets of the MoneyLab

Readers interested in applying behavioural economics ideas in business should read "Secrets of the MoneyLab: How Understanding People will increase your profits". It is a very readable account of the use of behavioural economics in business applications by Kay-Yut Chen, head economist at Hewlett Packard Labs and journalist Marina Krakovsky. The book's eight chapters look at uncertainty and tailoring to people's risk preferences; reciprocity; rationality; reputation; trust; incentive compatability and prediction. The book advocates an experimental economics approach to business process design, giving a number of practical examples.

The general issue of the application of behavioural economics in business is something we have discussed at a number of events here. Almost all the examples used in the MoneyLab book are "win-win" type examples, where behavioural economics ideas are used to improve products in ways that the customer would probably prefer even if they were aware of how they were being affected e.g. simplifying interfaces, building trust in the company, establishing fairness norms etc., And I think it is fair to say that a lot of the business and policy applications of BE are like this. I think though it is worth thinking about cases where what we know about consumers can be used to get them to do things they wouldn't choose were they better informed. The best example I can think of is the use of default options where it is not perfectly clear how to opt-out. One message that might come from the literature is that such "tricks" are self-defeating in the sense that losing trust and reciprocity with consumers might be more costly in the long-run. And yet, it is obvious that many companies set interfaces up not to help us make the "right" decision but in the hope that we will purchase things that we probably wouldn't if we thought about it properly and that such companies are probably calculating that the gains from doing this outweigh reputational costs (I remember wondering once why "no travel insurance required" had suddenly entered into the list of countries on a popular airline website but I still booked the flight!). I think the literature on behavioural economics is becoming really helpful in pointing out how these work. One aspect that people like Cass Sunstein have been emphasising is that if we know how these effects operate, then it will become possible to establish, at the very least, social norms and sanctions for companies that try to make money from confusing people rather than providing them with a valuable product. Whether the literature goes further and points to a direct motivation for stopping companies from doing things like this through regulation is a question being debated fairly vigorously at present.

The Drunkard's Walk

With my usual degree of timeliness I read The Drunkward's Walk by Leonard Mlodinow. It begins with the wonderful anecdote of the Spanish man who won the lotto with a number ending in 48 and explained that he dreamt of the number 7 for 7 nights and since 7 times 7 is 48 then it was clear to him what to do!

Drawing from the history of probability theory and statistics, the book address how people form judgments and make choices under uncertainty. It has 10 chapters. Chapter 1 "Peering through the eyes of randomness" is a beautiful discussion of the role of chance in our lives and the limits to our use of intuition to understand this role. Includes, among a lot of other things, the interesting factoid that the first Harry Potter novel was rejected by nine publishers! Chapter 2 "The Law of Truths and Half-Truths" outlines some basic probability rules and how they can sometimes confound intuition. Includes a discussion of the representativeness heurisic. Former students will recognise Linda! Interesting discussion of the greek deficiency in probability. Chapter 3 "Finding your way through a space of probabilities" goes through subtle rules of probability. I still feel stupid when I see the Monty Hall problem solution, having seen it first in the late 90s though I enjoyed Mlodinow's account of it a great deal particularly as it shows that even people like Paul Erdos literally had to have simulations shown to him before he would accept the answer. Mlondinow knits the biography of forgotten Italian statistician Cardano into an account of how to solve Monty-Hall type problems through representing them as state-spaces. Chapter 4 "Tracking the Path to Success" outlines Pascal's contribution to probability theory. Chapter 5 "The Dueling Law of Large and Small Numbers" deals with random numbers and probabilistic expectation. Among many great pieces, includes the anecdote I hadn't heard that Pascal is rumoured to have invented the roulette wheel while playing with an idea for a perpetual motion machine. Chapter 6 False Positives and Positive Fallacies examines Bayes rule. Chapter 7 "Measurement and the Law of Errors", among other things, outlines normality and statistical distributions. Chapter 8 "Order in Chaos" examines statistical regularity. Chapter 9 "Illusions of Patterns and Patterns of Illusions" examines how people impose flawed patterns on data e.g. illusory cancer clusters, baseball hothands, luftwaffe bombing clusters. Chapter 10 "Drunkwards Walk" further examines the role of flawed expectations and misconceptions of chance.

My favourite aspect of the book is the rich and complex anecdotes and examples he uses to illustrate the main concepts. I like the fact that in a discussion of medieval preference for incantations over analysis, you suddenly get a glimpse of a modern bond trader explaining to a CNN reporter that they worry about using the "wrong" toilet before a major trade. The book sets the judgement and biases programme in a history of statistics narrative and this creates a number of great points of contact between modern judgement research and the lives of people like Cardano, Galileo and Pascal.

I don't know if the publishers will see this blogpost but this book would be a brilliant RSA-animate production.

The Psychology of Selling

An article by Patrick Freyne that quotes from interviews with Pete Lunn, Richard Roche and myself is currently the most emailed article on the Irish Times website. Nice article. Patrick definitely did ask me the supermarket question but thankfully he skillfully edited my boring replies into a more readable article.

Shelby on Diamond

Thanks to Enda for sending this link to Senator Richard Selby of Alabama's opposition to the nomination of Peter Diamond.

"He supports the use of behavioral economics to help bureaucrats more effectively control the choices Americans make... In short, Dr. Diamond is an old-fashioned, big government Keynesian. Many of us believe that this is not the economic philosophy the Fed should be embracing at this point in our economic history. Our economy is already suffering from excessive government debt and misguided regulation. Our financial regulators should be trying to take steps to strengthen our markets, rather than replace them with new layers of government."

Portfolios of the Poor

I should open a category for late book recommendations, but better late than never. The book "Portfolios of the Poor" by Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven is an important ommission from the blog so far. As described below, the book is a detailed description of the financial lives of people living in poverty, based on diary studies conducted in three countries.

Portfolios of the Poor: How the World's Poor Live on $2 a Day (Princeton University Press, 2009) tackles the fundamental question of how the poor make ends meet. Over 250 families in Bangladesh, India, and South Africa participated in this unprecedented study of the financial practices of the world's poor.

These households were interviewed every two weeks over the course of a year, reporting on their most minute financial transactions. This book shows that many poor people have surprisingly sophisticated financial lives, saving and borrowing with an eye to the future and creating complex "financial portfolios" of formal and informal tools.

Indispensable for those in development studies, economics, and microfinance, Portfolios of the Poor will appeal to anyone interested in knowing more about poverty and what can be done about it.

The book has seven chapters, along with some very interesting appendices detailing particular case-studies. Chapter 1 outlines the basic premise of the book and is very thought-provoking. As pointed out by the authors, figures outlining the amount of people living on average incomes of a dollar or two per day mask the fact that, for many of these people, there are days when they make money and days when they dont, so ensuring that they are able to smooth consumption through periods of no income is a critical task, not to mention saving for basic durables or cultural neccesities like funerals. I am tempted to paste great wads of text from the chapter up here but better to go and read it. Chapter 2 "The Daily Grind" examines income insecurity and the use of basic credit mechanisms to smooth consumption. Chapter 3 "Dealing with Risk" examines basic insurance and assurance mechanisms used by poor people. Chapter 4 "Building Blocks" examines savings among the poor. Chapter 5 "The Price of Money" examines the cost of various money mechanisms used by poor people. Chapter 6 "Rethinking Microfinance" examines microfinance mechanisms. Chapter 7 "Better Portfolios" outlines some ideas for improving the lives of poor people through better access to reliable financial instruments.

I haven't followed the literature on evaluating microfinance closely enough to assess the latter chapters but I found the bulk of this book very mind-opening and an excellent window into the lives of people on economic knife-edges going about the business of everyday life. Highly recommended book. The first chapter is available for free on their website and really worth reading.

Ideas for Summer and November

This is mostly for people around the Institute but suggestions welcome more generally. We will run the internship programme in July and August. Also, the fourth annual session on Economics and Psychology will take place in November. Please get in touch if you have ideas for speakers, journal clubs, policy sessions etc,. Last summer, we ran something on pretty much every day that the interns were here, whether a formal seminar or just things like journal clubs, introduction to studies and so on. It would be good to get something lively going again this year.

Is ignorance bliss?

A recent add for a price comparison website has two women sitting on deck chairs in a resort. One is getting a massage from a tall muscular guy called Magnus and the other is just chilling out. Some text on the screen informs you that the woman getting the massage saved so much money from going to the website being advertised that she was able to afford to pay the guy for the whole afternoon. Some text also informs you that the other woman has overpaid for her room. However, both look pretty happy. Its fair to say that the woman getting the massage probably looks a bit happier but, in general, they both look like they are having a good holiday. The add even prompts the question on the screen "Is ignorance bliss?".

My first reaction on seeing this was firstly how cool it was to have adds so clearly informed by current debates in areas like behavioural economics. My second reaction was that its not really clear what the answer is. One reading of the add is that its a bit overboard to go looking through lots of websites when planning a holiday. Ultimately, satisficing rather than optimising might be fine - just go somewhere that meets some criteria you have and is within your budget - whether you get some expensive drinks thrown in for free or save enough money on the room to get an afternoon's massage is ultimately not really the point of going on holiday. I am definitely not the demographic for the add and my response is probably not representative of their targeted customers. But it is, in general, an interesting question as to whether we miss what we didn't know was available. The add finishes by saying that ignorance isn't bliss - "Magnus is bliss" - in other words that the lost opportunity is a negative thing for the overall holiday.

There is a fascinating debate similar to this at the moment as to how we should interpret the fact that women have not gotten happier despite large increases in opportunity (see e.g. the NBER paper The Paradox of Declining Female Happiness). One response is that ignorance might be bliss in one sense but ultimately there is a procedural happiness that comes from knowing you have made the best of your opportunities. Maybe this is the type of happiness the add is trying to tap in to.

Behavioral Economics and the Next Government

Barring a very unusual set of events, the next Irish government will be a Fine Gael/Labour coalition with Enda Kenny as Taoiseach. The party has put forward its plans for reforming government and addressing unemployment and, as Kevin pointed out, they seem willing to embrace some of the innovative ideas coming out of modern microeconomics, in particular devoting a reasonable amount of space to early childhood education including the PFL project which involves some of our colleagues here.

It would be worth the time and energy of the policy advisors to the new government to look at the literature emerging from behavioural economics for ideas on how to reform key aspects of the tax, welfare and pensions systems of the country. Both the Obama and Cameron administrations have put a lot of energy into taking on board insights from behavioural economics, and a new government will have the advantage of being able to observe successes and failures of countries farther down this road. One advantage of the tight economic situation facing the new government will be that it will force it to address issues head-on rather than ducking issues by handing out money. There is arguably a stronger momentum for real reform of the operation of the state now than in any previous time, with both a dramatic downturn and a substantially more educated population than before.

Some things that would really be worth having a full national debate on in Ireland include:

- The growing literature on the importance of default options in determining behaviour even in important life domains is perhaps the most relevant to policy. The literature on automatic enrolment plans, in part, motivated the current governments decision to move to a system of automatic enrolment for the private sector in 2014. This is one of the boldest moves in this direction anywhere in the world and it is worth examining closely the extent to which this achieves its desired objectives and lessons that might be learned for other aspects of policy. In particular, the design of universal health insurance systems may benefit from the results of these analyses.

- FG plans to move all employment-related services into a single point of contact. At first glance, this would have a lot of advantages from the point of view of reducing complexity and potentially improving the outcomes of unemployed people. Sendhil Mullainathan and colleagues summarise some of the potential insights from behavioural economics in designing the interfaces that uemployed people interact with.

- There is a growing literature on how behavioural economics could be applied to more flexibly design tax policies. I gave a few presentations on this during the last couple of years including here. The Irish tax system is far too complicated and every move the new government can make toward simplifying it will be a victory for common sense.

- I have provided reading lists on this topic before (e.g. here) and my teaching website has a lot of links. The book by Richard Thaler and Cass Sunnstein Nudge provides an accesible overview.

- In general, the financial health and stability of Irish households will be a key concern over the rest of this cycle. The development of the role of the financial regulator as being an advocate for sensible household financial decision making would be bulked up a lot by taking on board this literature as a complement to the traditional financial capability literature.

Simolean Sense Weekly Roundups

For people interested in behavioural economics and related areas, the weekly roundup on Simolean Sense is a really good resource with well-chosen links. I always find something interesting in it. This week's edition is linked here

NBER Paper: Behavioral Economics and Public Sector Pension Plans

Behavioral Economics Perspectives on Public Sector Pension Plans

John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian NBER Working Paper No. 16728 Issued in January 2011 We describe the pension plan features of the states and the largest cities and counties in the U.S. Unlike in the private sector, defined benefit (DB) pensions are still the norm in the public sector. However, a few jurisdictions have shifted towards defined contribution (DC) plans as their primary savings plan, and fiscal pressures are likely to generate more movement in this direction. Holding fixed a public employee‘s work and salary history, we show that DB retirement income replacement ratios vary greatly across jurisdictions. This creates large variation in workers‘ need to save for retirement in other accounts. There is also substantial heterogeneity across jurisdictions in the savings generated in primary DC plans because of differences in the level of mandatory employer and employee contributions. One notable difference between public and private sector DC plans is that public sector primary DC plans are characterized by required employee or employer contributions (or both), whereas private sector plans largely feature voluntary employee contributions that are supplemented by an employer match. We conclude by applying lessons from savings behavior in private sector savings plans to the design of public sector plans.

Behavioural Economics and Organisations

Colin Camerer (Caltech) and Ulrike Malmendier (Berkeley) have written an interesting chapter on the Behavioral Economics of Organizations in 'Behavioral Economics and Its Applications', Princeton University Press, March 2007 (edited by P. Diamond and H. Vartiainen). The authors view this chapter as more of a research agenda than a review of what is known about how behavioural economics works in organisations. A rough summary of some of the issues in the chapter is as follows. Workers' perception of fairness in organisations is potentially very important (for effort disutility, reservation wages). Psychological influences on judgments of causality are also important; these include: hindsight bias, assymetric distribution (taking credit but avoiding blame), and overconfidence about skill. Overconfidence is also discussed in relation to managerial performance.

Camerer and Malmendier's chapter is more about the interal workings of organisations (particularly the management of human resources), rather than their strategic behaviour. A useful reference for the latter is the Economics of Strategy by Besanko, Dranove, Shanley and Shaefer. The Besanko et al. textbook covers four main areas: firm boundaries, market analysis, strategic position and internal organisation. Of course, the research agenda outlined by Camerer and Malmendier is relevant to future developments in the field of strategy economics, in particular internal organisation.

Behavioural economics has been applied to organisations in practice by Gallup Consulting. They provide a free-to-download document on their website, describing the process of "applying behavioral economics to drive growth and profitability":

Gallup research revealed that a study group of 10 companies that applied these principles outperformed peers by 85% in sales growth and more than 25% in gross margin during a recent one-year period. The key to achieving this kind of financial performance is for leaders to accept and work with human nature rather than against it... Mastery of... applied behavioral economics holds the promise of realizing breakthrough improvements in employee productivity, customer retention, and real growth and profitability.

John Fleming, Chief Scientist for Gallup's Customer Engagement elaborates further on the application of behavioural economics to organisations in this Harvard Business Review article: "Manage Your Human Sigma" (with Curt Coffman and James Harter). Human Sigma is a version of Six Sigma inspired by behavioural economics. Fleming has also written a book called Human Sigma with Jim Asplund.

Lunn and Lyons ESRI: Behavioural Economics and Vulnerable Consumers

Behavioural Economics and "Vulnerable Consumers": A Summary of Evidence
Author(s):
Lunn, Pete / Lyons, Seán
Publisher
Communications Consumer Panel UK
Place of Publication
London
Publication Date
09/12/10
Downloads
Download full text
Abstract
Key findings
• The relevant behavioural biases exist across all groups of consumers, but there is variation in their relative strength across groups.
• Evidence from experiments and surveys, which is indicative rather than conclusive, suggests that some groups of consumers are more prone than others to decision-making that deviates systematically from traditional economic assumptions of rational behaviour.
• The strongest evidence concerns people in lower socio-economic groups, who are more inclined towards some biases and tend to score lower on tests of general decision-making competence.
• There is some evidence that older people may also be more prone to certain biases.
• There is too little evidence regarding disabled consumers to draw any conclusions.
• In the market, these differences between groups may be amplified. Consumers who have the same tendency towards a given bias may produce different decisions because the bias interacts with their situation. For instance, older people and people in lower socio-economic groups may receive less marketing information and be more isolated from helpful social networks, making them more likely to fall back on biased rules of thumb.
• The overall impact on consumer welfare may well be detrimental
• More evidence is needed, but especially research examining the influence of behavioural biases that is specific to the communications sector.

Fine Gael Website Change

Correction Friday 7th: The site does allow you to comment and to withhold the comment from the public display.

The Obama campaign's use of the internet has been talked about a lot by people interested in behavioural economics. The Fine Gael website today has been more or less taken down and replaced by a website designed to elicit feedback from the population. As a strategy, this will obviously be more focused on active internet users but, as even the 2006 figures show, this is now a sizeable proportion of the Irish population. Users are asked to give open-ended feedback on three different questions - "What do you think of Ireland's current problems?", "How can we improve the country?", and "How can we earn your support?".

One little "nudge" embedded in the website is a comment feed, which rotates different comments as they come in, presumably to demonstrate that this is something many others are engaged with. It does not say on the website how these comments are selected. My sense is that they are more positive than you would expect, particularly as people tend to use open-ended boxes more to voice complaint than express admiration, but the positivity might relate to early adoption by people that are pro-FineGael rather than any filtering. It would be worthwhile stating this on the site as I think positive filtering would be "cheating" in terms of having an open forum.

One main function of websites such as this is to build a data-base for subsequent electioneering, something the Obama campaign did to amazing effect. In terms of the behavioural economics aspects of the website design, if you go on to the website, your email address is a mandatory field if you want to offer comments, and you are given the option of entering your mobile phone number. It is then assumed that you wish to receive communications in the run-up to the election unless you untick boxes that are underneath. As uses of defaults go, this is not so evil as it is pretty clear that you are being opted in and the mechanism of opting out is simple. It is worth checking how easy it is to subsequently opt-out given that you have opted-in but I would be very surprised if this was not simple to do.

A few inital thoughts I have about this new development in Irish politics are:

- The value of the feedback is somewhat questionable. Few scientists or market researchers would base a policy prescription on the output of three open-ended questions asked to a self-selected sample of the population, particularly with a 250 character limit. Having said that, I have made heavy use of open-ended questions in surveys that I have conducted myself and they often perform a very useful function as a basic sanity check or to elicit ideas that did not come up during design.

- I talked a bit above about the rotating comments section. Let's assume for a moment it is random. This means that anyone entering a comment could potentially have their name and location displayed along with their comment. My intuition is that this could deter a significant proportion of people. If you look at irisheconomy.ie or the Irish Times website or whatever, a sizeable proportion of people making public comments on websites tend to prefer to do so anonymously for a whole host of reasons.

- It will be interesting to see how many people offer their mobile phone information. They must have considered at some stage something like offering incentives like entry into raffles or prize draws to encourage people to sign up. It would certainly raise the prospect of negative publicity but if the goal is to build a big data-base and, holy of holies, go viral to some extent then it is not clear how this will be kick-started without some initial pump-priming. I have a vague nagging doubt about legality in my head but raffles are a very common method of raising finance for political parties so people should not exaggerate the difficulties of using incentives in this fashion.

- Compared to a blog feed or something like www.politics.ie, the actual scope for "conversation" is very limited as there is no interaction between commenters or with the site leaders. It will be interesting to see if anything like that develops. Without it, then it really has very limited scope as a tool for deliberative democracy and will ultimately be a way of harvesting email addresses and mobile numbers. In fairness, many TDs and Senators across parties have started using things like Facebook and twitter to communicate with people online and there have already been a few famous twitter incidents involving prominent Irish politicians. As a once fairly enthusiastic tweeter, my main doubt about its use is that it doesn't add to the deliberative nature of conversations between voters and politicians. Rather than trying to elevate both voter and policy-maker to a more considered level of conversation, it often serves to bring the policy-maker into the general scrum. Great fun and all that, but it often widens rather than deepens discussion. Tools of deliberative democracy such as citizen juries are much more cumbersome to set up and manage, but would serve to develop a more informed and reflective debate. Worth thinking about for parties like Fine Gael if they are serious about bringing in serious feedback from voters.

- Once they get the initial data-base, a key task will be to segment the different groups along the lines of key policy-issues, again something Obama's team did relentlessly. A second task will be to view each person as embedded in a social network and to attempt to use the people on their data-base to get their peers on board. The potential for 'boomerang effects' here will be interesting to look out for. Clearly, those who have signed into the website wont be too annoyed about receiving emails from FG but getting ten emails a week from mates of yours that have been converted could become pretty annoying pretty quickly.

In general, it is good to see Irish political parties trying to normalise the use of different communications methods that are now routinely used by a large chunk of the Irish population. Overall, I think the current FG effort as it stands works more as a data-base building mechanism than any real attempt to elicit feedback but, having said, one collects a data-base in order to then communicate further so it would be premature to dismiss it yet.

Say a little prayer

Being able to trust people is important. Yet dishonesty is pervasive. In Dan Ariely's Predictably Irrational book he describes this as a tragedy of the commons problem since dishonest people or companies lower the level of trust generally. So what to do?
One simple solution is priming. In a series of experiments, Ariely and co-authors Mazar & Amir had subjects think about the 10 Commandments (the actual commandments & not the movie of the same name) before completing a task and being rewarded for their success where they had the opportunity to cheat. Sure enough they cheated significantly less than the controls. It turns out that there are more than 10 commandments in the 10 commandments since they differ between Catholic, Protestant and Jewish faiths: only Catholics are required not to covet their neighbours' wives for example.
There is a curious angle to all this since the presence of a monument displaying the 10 commandments on the grounds of the Texas State Capitol (pictured) and also in a Kentucky courthouse generated long-running and heated court battles that reached the US Supreme Court. Whatever about the legal merits of the case (which centers on the separation of church and state and on the freedom of speech) it seems possible from the experimental evidence that the presence of the monument (and similar monuments) might generate more honest behaviour in these important contexts. Wouldn't that be a good thing?

Behavioural Economics and Labour Market Policy

Notes on Behavioral Economics and Labor Market Policy
Labor, Jobs and the Economy, Unemployment, U.S. Economy

Linda Babcock, James M. Walton Professor of Economics, Carnegie Mellon University
William J. Congdon, Research Director, Economic Studies
Lawrence F. Katz, Elisabeth Allison Professor of Economics, Harvard University
Sendhil Mullainathan, Professor of Economics, Harvard University; Nonresident Senior Fellow, Brookings Institution
The Brookings Institution

I am currently reading this paper with a view to thinking about the applicability to the Irish and UK labour market. Their suggestions for policy reform are below. Any policy people who read this blog and are interested in unemployment should read this paper. Would be great to start thinking concretely about applications in the Irish case.

Recommendations for policy reform

Unemployment compensation. Should include wage-loss insurance in some form. In addition to the insurance benefits it provides, wage-loss insurance offers a way of assisting individuals with the psychological adjustment to changing labor market conditions and addresses likely biases in wage expectations that impede work incentives.

Employment services and job search assistance. Should be expanded to provide more accessible and meaningful information about labor market conditions and occupational projections. These programs should help address procrastination in job search and provide guidance to unemployed and low-wage individuals in a way that both reflects and takes advantage of the way people process information.

Job training. Should simplify program take-up, navigation, and completion, and provide user-friendly information on the quality of training providers. These programs should structure choices to reflect the limited abilities of individuals to manage complexity and exert self-control.

Biases, Scams and Regulation: Shiller Lecture

I posted before on the fact that Robert Shiller's undergraduate finance lectures at Yale are available to view on the web. I posted already on the behavioural finance lecture (lecture 7), which is obviously worth watching for most of the people who read this blog. Lecture 8 extends the study of heuristics and biases to examine their implications for fraud and regulation, and in general the implications for people's behaviour in financial markets. He covers various deviations from rationality such as wishful thinking, attention anomalies, anchoring, representativeness, gambling and quasi-magical thinking. These lead to market temptations including: overselling, hiding information and loyalty to friends with respect to channelling of investment opportunities of varying quality. The job of regulatory authorities is partly to prevent asset prices from being unduly influenced by the exploitation of these psychological biases and the temptation to capitalise on them, using mechanisms such as forced disclosure, ease of access to information, regular filing rules, accreditation, insider-trading rules, surveillance, accounting standards and deposit protection.