W1: Introduction
Literature
Thaler & Sunstein: part 1
The concept of a nudge
Nudge = any aspect of the choice environment that alters people’s behavior in
predictable ways without forbidding any options or significantly changing their
economic incentives.
Nudges are gentle pushes that help people make better choices for
themselves and society while preserving freedom of choice.
Example: Chicago lake shore drive stripes → painted lines narrow visually,
making drivers slow down automatically
Libertarian Paternalism
Libertarian Paternalism = a philosophy of policy-making combining two
principles:
(1) Libertarian = people should be free to choose.
(2) Paternalist = institutions can legitimately influence choices to make
people better off (as judged by themselves
Core logic → humans often act against their own interests because of
limited willpower, biases, or information overload.
Nudges guide them toward beneficial decisions while preserving
autonomy
Assumptions and misconceptions on human decision making that are often
found in policy makers
Tempting = when we consume more of it when we are in a hot state (highly
aroused)
W1: Introduction 1
, Loewenstein → hot-cold empathy gap = even if people realize that they
behave differently when aroused, they underestimate the strength of the effect
When in a cold state, we do not appreciate the extent to which our desires
and our behavior will be altered when we are under the influence of arousal
As a result, our behavior reflects a certain naivete about the effects that
context can have on choice
E.g., Luke, on a diet, agrees to go out for a business dinner, thinking
that it will be easy enough to have just one cocktail and no dessert. But
then the host orders a bottle of wine and the waiter brings by the
dessert cart, and all bets are off.
Two system conception of self-control:
Planner = reflective system; tries to promote long-term welfare but must
cope with the feelings and strong will of the doer
Enables us to resist temptation by assessing how we should react
Doer = automatic system; is exposed to the temptations that come with
arousal
Brain is tempted
Strategies for planners to control conflicts with doers (posed by private and
public institutions):
Informal bets = e.g., missing a deadline means paying 100eu to a friend
A company (stickk.com) has been invented to facilitate such friend
commitments
Forbid certain substances
Tax on sugar/cigarettes
Government imposed self-control strategy → daylight saving time
Bank imposed self-control strategy → saving accounts
W1: Introduction 2
, Mental accounting = the system (implicit or explicit) that households use to
evaluate, regulate and process their home budget
Economic theory → money is fungible = it doesn’t come with labels
I.e., 100eu in the travel savings can buy just as much food as the same
amount in the food savings
However, households adopt mental accounting schemes that violate
fungibility for the same reasons that organizations do → control spending
Misers = people who have trouble spending money (save everything)
Basic knowledge of dual systems
Kahneman → dual system of the brain:
System 1 / automatic system = fast and intuitive thinking, uncontrolled and
unconscious, effortless, associative, skilled
Brain activities in the automatic system are associated with the oldest
parts of the brain (lizard brain)
Gut reaction
We often make mistakes because we rely to heavily on automatic
thinking
System 2 / reflective system = slow and reflective thinking, controlled,
effortful, deductive, self-aware and rule-following
I used, e.g., when speaking a foreign language
Conscious though
Basic knowledge of heuristic mechanisms and biases: anchoring,
representativeness, availability, overconfidence, optimism, framing effects
Anchoring
Anchoring and adjustment heuristic = you start with some anchor, a number
you do know, and adjust in the direction you think is appropriate
W1: Introduction 3
, Bias occurs because the adjustments are typically insufficient and even
obvious irrelevant anchors creep into the decision-making process
Example: write down last 3 digits of phone number and then guess
whether a historical event happend before or after that
Anchors can influence how you think your life is going
Example: someone is asked to guess the population of Milwaukee; people
from Chicago are likely to make a high guess (based on their high anchor),
while those from Green Bay guess low (based on their low anchor)
Example: tip ‘15%, 20%, 25%, choose own amount’
Reactance = when people feel ordered around, they might get mad and do the
opposite od what is being ordered or suggested
Example: give no tip at all if the default amounts are ‘25%, 30%, 35%’
Evidence shows that, within reason, the more you ask for, the more you get
→ however, reactance shows that if you get greedy, you might end up with
nothing
Availability
Availability heuristic = people assess the likelihood of risks by asking how
readily examples come to mind
Example: because homicides are much more heavily reported in the news
media, they are more available than suicides, and so people tend to believe
(wrongly) that guns cause more deaths from homicide than from suicide
Accessibility and salience are important to how available information is; if
you personally experienced a serious earthquake, you’re more likely to
think a flood or earthquake is common than when reading about it in the
news
Recent events also have a greater impact on our behavior and fears than
earlier events do
The availability heuristic helps to explain risk-related behavior such as
buying insurance for natural disasters
W1: Introduction 4
Literature
Thaler & Sunstein: part 1
The concept of a nudge
Nudge = any aspect of the choice environment that alters people’s behavior in
predictable ways without forbidding any options or significantly changing their
economic incentives.
Nudges are gentle pushes that help people make better choices for
themselves and society while preserving freedom of choice.
Example: Chicago lake shore drive stripes → painted lines narrow visually,
making drivers slow down automatically
Libertarian Paternalism
Libertarian Paternalism = a philosophy of policy-making combining two
principles:
(1) Libertarian = people should be free to choose.
(2) Paternalist = institutions can legitimately influence choices to make
people better off (as judged by themselves
Core logic → humans often act against their own interests because of
limited willpower, biases, or information overload.
Nudges guide them toward beneficial decisions while preserving
autonomy
Assumptions and misconceptions on human decision making that are often
found in policy makers
Tempting = when we consume more of it when we are in a hot state (highly
aroused)
W1: Introduction 1
, Loewenstein → hot-cold empathy gap = even if people realize that they
behave differently when aroused, they underestimate the strength of the effect
When in a cold state, we do not appreciate the extent to which our desires
and our behavior will be altered when we are under the influence of arousal
As a result, our behavior reflects a certain naivete about the effects that
context can have on choice
E.g., Luke, on a diet, agrees to go out for a business dinner, thinking
that it will be easy enough to have just one cocktail and no dessert. But
then the host orders a bottle of wine and the waiter brings by the
dessert cart, and all bets are off.
Two system conception of self-control:
Planner = reflective system; tries to promote long-term welfare but must
cope with the feelings and strong will of the doer
Enables us to resist temptation by assessing how we should react
Doer = automatic system; is exposed to the temptations that come with
arousal
Brain is tempted
Strategies for planners to control conflicts with doers (posed by private and
public institutions):
Informal bets = e.g., missing a deadline means paying 100eu to a friend
A company (stickk.com) has been invented to facilitate such friend
commitments
Forbid certain substances
Tax on sugar/cigarettes
Government imposed self-control strategy → daylight saving time
Bank imposed self-control strategy → saving accounts
W1: Introduction 2
, Mental accounting = the system (implicit or explicit) that households use to
evaluate, regulate and process their home budget
Economic theory → money is fungible = it doesn’t come with labels
I.e., 100eu in the travel savings can buy just as much food as the same
amount in the food savings
However, households adopt mental accounting schemes that violate
fungibility for the same reasons that organizations do → control spending
Misers = people who have trouble spending money (save everything)
Basic knowledge of dual systems
Kahneman → dual system of the brain:
System 1 / automatic system = fast and intuitive thinking, uncontrolled and
unconscious, effortless, associative, skilled
Brain activities in the automatic system are associated with the oldest
parts of the brain (lizard brain)
Gut reaction
We often make mistakes because we rely to heavily on automatic
thinking
System 2 / reflective system = slow and reflective thinking, controlled,
effortful, deductive, self-aware and rule-following
I used, e.g., when speaking a foreign language
Conscious though
Basic knowledge of heuristic mechanisms and biases: anchoring,
representativeness, availability, overconfidence, optimism, framing effects
Anchoring
Anchoring and adjustment heuristic = you start with some anchor, a number
you do know, and adjust in the direction you think is appropriate
W1: Introduction 3
, Bias occurs because the adjustments are typically insufficient and even
obvious irrelevant anchors creep into the decision-making process
Example: write down last 3 digits of phone number and then guess
whether a historical event happend before or after that
Anchors can influence how you think your life is going
Example: someone is asked to guess the population of Milwaukee; people
from Chicago are likely to make a high guess (based on their high anchor),
while those from Green Bay guess low (based on their low anchor)
Example: tip ‘15%, 20%, 25%, choose own amount’
Reactance = when people feel ordered around, they might get mad and do the
opposite od what is being ordered or suggested
Example: give no tip at all if the default amounts are ‘25%, 30%, 35%’
Evidence shows that, within reason, the more you ask for, the more you get
→ however, reactance shows that if you get greedy, you might end up with
nothing
Availability
Availability heuristic = people assess the likelihood of risks by asking how
readily examples come to mind
Example: because homicides are much more heavily reported in the news
media, they are more available than suicides, and so people tend to believe
(wrongly) that guns cause more deaths from homicide than from suicide
Accessibility and salience are important to how available information is; if
you personally experienced a serious earthquake, you’re more likely to
think a flood or earthquake is common than when reading about it in the
news
Recent events also have a greater impact on our behavior and fears than
earlier events do
The availability heuristic helps to explain risk-related behavior such as
buying insurance for natural disasters
W1: Introduction 4
