More nudges

Nudge blog just published one of the decision making nudges that I observed and sent to them.

You can find the post on:

http://nudges.wordpress.com/2010/02/12/assorted-links-24/

Nudge blog

Authors of the "Nudge", Thaler and Sunstein, set up a blog on which they present new and fascinating incentives, many of which are sent by email by its readers. I actually sent them one myself, but it turns out that it was previously published. Anyway, here I post my nudge to make people stop littering with their chewing gum, which was employed at the Norwich bus station.

For more neat ideas of incentives that make us better decision makers you can visit:

http://nudges.wordpress.com/

10 Big Studies of 2009

Cool stuff, thanks for the link Matt.

http://trueslant.com/daviddisalvo/2009/12/28/ten-psychology-studies-from-2009-worth-knowing-about/

Financial Crisis

I found it on the internet today. It is an amazing flash video explaining all main the reasons behind the economical crisis that started in 2008. Great explanations for the complex financial interactions that led to the collapse of worldwide economy.

enjoy:

http://cashmoneylife.com/2008/09/29/economic-financial-crisis-2008-causes/

Nudges

Just a brief post:

In recent news, attention was brought to the changes in the way people manage their money as a result of the shaky economy. Surveys suggest that the average proportion of the household income put aside as savings remained relatively constant in last four years. At the same time there seems to be a strengthening trend to pay off credit card debts and loans.

In purely economical terms, this situation can be difficult to explain. The choice to spend more on paying off a mortgage, for instance, should appear as less attractive than simply saving money, from a rational standpoint. The idea to pay off the debt is an “investment” with no fluidity, in contrast with saving account from which the money can be withdrawn if there is a need to do so. At the same time, speeding up on paying your loan increases the already existing transaction costs, whereas saving accounts don’t require regular payments (unless we are talking about a saving scheme/fund). Strictly speaking, saving up money, at first glance, appears to be the most appealing and safest route given how uncertain the economical future is.

However, a possible explanation for the current situation could be extracted from the book “Nudge” written by two extraordinary psychologists/economists; Richard Thaler and Cass Sunstein. Two authors elaborate on the subject of temptation and possible strategies that people can adopt as a condition to avoid unnecessary spending. Some techniques can be internal (like mental accounting) and involve our personal determination in managing our finances. Very often, however, people tend to use external devices such as saving schemas or pension programs. Many of these methods are in fact self imposed limitations and rules that make us stick to our long term plans. In fact, people do this all the time, as if they anticipated their poor and unstable judgment! Sometimes, we are aware of our weaknesses and would like to take precautions so that we don’t get in trouble later on. A great example of this phenomenon is the new initiative run in Nevada, USA. Knowing how many people have a gambling problem, a new registry of banned from casinos individuals has been formed. The key element is that people are allowed to put themselves on this list, if they feel that they have a gambling addiction. Amazingly, loads of people take an advantage of this system!

Going back to the British economy, self regulation could explain why people prefer to pay off their debts, rather than saving up for the unexpected. Accordingly, it appears that because of the unclear economic situation, people need to refrain from unnecessary spending. As we know, money can be withdrawn freely from a bank account so people may be tempted to use it on, let’s say, Christmas presents. However, lowering the amount we own is a sensitive strategy to locate our money, if one thinks about the future. Many loans, like mortgages, don’t have a fixed interest rate so they can be affected by the economical situations. Therefore, people don’t want to be in debt, and don’t want to waste money if they feel a strong urge to do so. Conclusively, increasing our mortgage repayment could be regarded a self controlling external device.

In my opinion, this seems to be plausible explanation for the current state of affairs.

Risky Risk

Recently, while reading „Risk” by John Adams, I came across with a very interesting issue in risk psychology. It seems that in the vast majority of literature devoted to risk-taking behavior, not much attention is given to the concept of prudence. I have to say that it seems natural to focus on instances when people make errors and miscalculate the danger, so that these situations can be avoided.

However, we might be missing a great amount of valuable data by simply omitting the “normal” behavior. In general, this type of problem touches on a general tendency to study the abnormal, unusual and strange. A good example of this type of propensity could be the field of research in mental health. For instance, constant focus on single case studies on abnormal conduct loses its validity when someone asks: What actually is meant by normal behavior? An analogous problem has been also haunting the study of human memory. Every new case of an unusual amnesia (they are never the same) seems to shatter every memory model produced. This way, we are in year 2009 and we still cite studies that are 40 years old, although the debate is far from being resolved. We are much better in saying what memory is not, rather than what it actually is.

Anyway, John Adams goes a little bit further and presents few interesting instances when people who take less risk can be in trouble, the issue of excessive prudence. For instance, everyone is familiar with how strict the rules are about crossing the railways In Britain. The safety measures seem to be out of proportion, but no one dares to say anything as human lives are being saved. But are they really? While more and more money is spent to assure safety, the more expensive the tickets are. In result, less people use trains but and decide to take a much more dangerous drive in a car instead. This plausible explanation is only a speculation, but wouldn’t it be beneficial to test this hypothesis?

A similar issue is caused by the swine flu scare. The pressure to provide us with a new vaccination increases the probability that less testing and more side effects will be caused by it. Currently, it is not even clear whether it is safer to get a vaccination or not. At the same time, enormous amounts of money are being spent to tackle the disease which is not predicted to cause more deaths than regular seasonal flu… (BBC).

These are examples of taking risks a little bit too far. They reflect on the general neglect of things that appear to be “normal” or “regular”. Just like people prefer to learn about a new amnesia case or a new strange type of schizophrenia; risk research is mostly concerned with the errors we make when we act in risky fashion. In reality, we should think of a risk as an attempt to balance on a rope; Taking too much risk increases the chance of falling over, but so does going to slow. Too much hesitance, precaution and carefulness can lead us to the same magnitude of an error as being involved in risky behaviour does. Saying this, we could learn more about risk by studying how people act when they are both careful and too careful!

PS

By the way, how many of you do know who H.M was? Or, what is dissociative identity disorder? Most of us should have heard about these. But how many people can easily define what behavior is? Or, what is the definition of memory?

Adams, J. (2001). Risk. Abington: Routledge

Birthday Party Problem

Here is another popular statistical/mathematical brain teaser.

Imagine that you come to a house party with 23 people. What, in your opinion, is the probability that two of the people have their birthday on the exact same day (same day and month, not year)?

The answer is: just over 50%.

Not surprisingly, not many people give this answer when they are presented with the riddle. Most common response is 5-10%!

What is the reason for the probability of this event being so high?

This is the proper calculation:

23 people make 253 possible pairs of people;

23*22/2=253

The probability of finding a match at the party is

.69; 253/365days in a year=.69

Now, this is a simple version of solving the task. As you can see, it gives us 70% rather than 50%. To be fair, we originally asked about TWO PEOPLE ONLY having the same birthday on the exact same day. The probability of 70% includes cases when more than two people have birthday on the same day.

As a condition to get 50% we have to use the following formula:

P(A)= 1 - 364*363*362...(365-n+1) / 365^n

If we plot our 23 people into this formula we will get 50% (you have to believe me :-) ). Voila!

Rosenthal, J. S. (2005). Struck by the Lightning. London: Granta Books