Chapter 1: Biases and Blunders
Anchoring and adjustment:
- Making guesses based on something you know (for example, the population of Milwaukee based on what you know about Chicago).
- Can influence your answer – for example: a) How happy are you? b) How often are you dating? When the questions are asked in reverse order, people's responses change.
- People give more if the options are $100, $250, $1000, and $5,000 than if they are $50, $75, $100, and $150.
If floods have not occurred in the immediate past, people who live on floodplains are far less likely to purchase insurance. People who know someone who has experienced a flood are more likely to buy flood insurance for themselves, regardless of the flood risk they actually face. In the aftermath of an earthquake, purchases of new earthquake insurance policies rise sharply and then steadily decline as memories fade.
Optimism and overconfidence:
- When MBA students are asked what deciles they expect to fall into in the distribution of grades in the class, only 5% expected to perform below the median and more than half the class expects to finish in the top two deciles.
- Nearly everyone thinks they have an above-average sense of humor, or are an above-average driver.
- People are unrealistically optimistic about marriage, even though they know there is a 50-percent chance of divorce.
People hate losses:
- Loss aversion helps produce inertia, meaning a strong desire to stick with your current holdings.
- Default options act as powerful nudges – think about automatic magazine renewals.
What do you think when your doctor says "Of one hundred patients who have this operation, ninety are alive after five years" versus when they say "Of one hundred patients who have this operation, ten are dead after five years".
People are nudge-able. Case example:
Chicago's Lake Shore drive hugs the Lake Michigan coast. Many drivers fail to take heed of the reduced speed limit (25 mph) and wipe out. To encourage drivers to slow down, they encounter a series of white stripes painted onto the road. The stripes are not tactile information (they are not speed bumps) but rather just send a visual signal to drivers. When the stripes first appear, they are evenly spaced, but as drivers reach the most dangerous portion of the curve, the stripes get closer together, giving the sensation that the driving speed is increasing. One's natural instinct is to slow down.
Chapter 2: Resisting Temptation
In many situations, people put themselves in "automatic pilot" mode. Case example: people were given a free bucket of stale popcorn. Half of the recipients received a medium-sized bucket and half received a large bucket. On average, recipients of the big bucket ate about 53% more popcorn – even though they didn't really like it.
This is the system that households use to evaluate, regulate, and process their home budget. Even though people may have a certain amount of money, they label it for various things. For example, you might see a gambler take the money he has won and put it into one pocket and put the money he brought with him to gamble that evening into a different pocket.
This accounted for the large increase in stock prices in the 1990s as many people took on more and more risk with the justification that they were playing only with their gains from the past few years. Similarly, people are far more likely to splurge impulsively on a big luxury purchase when they receive an unexpected windfall than with savings that they have accumulated over time, even if those savings are fully available to be spent.
Chapter 3: Following the Herd
Social influences come in two basic categories. The first involves information. If many people do something or think something, their actions, and their thoughts convey information about what might be best for you to do or think. The second involves peer pressure. If you care about what other people think about you, then you might go along with the crowd to avoid their wrath or curry their favor.
Some examples of social nudges:
- Teenage girls who see that other teenagers are having children are more likely to become pregnant themselves.
- Obesity is contagious. If your best friends get fat, your chance of gaining weight goes up. On average, those who eat with one other person eat about 35% more than they do when they are alone; members of a group of 4 eat about 75% more; those in groups of 7 or more eat 96% more.
When asked a question in a group rather than individually, people are more likely to pick an answer in common with others.
Social nudges were given to decrease energy use. Households were informed exactly about how much energy they had used in previous weeks; they were also given accurate information about the average consumption of energy by households in their neighborhood. In the following, the above-average users significantly decreased their energy use; the below-average energy users significantly increased their energy use. The latter finding is called the boomerang effect. Even more interesting is that when households were given a small, non-verbal signal that their energy consumption was socially approved or socially disapproved. More specifically, those households that consumed more than the norm received an "unhappy" emoticon, whereas those that consumed less than the norm received a happy emoticon. Surprisingly, the big energy users showed an even larger decrease when they received the unhappy emoticon. More importantly, the below-average energy users receiving the happy emoticon didn't increase their energy use, thus, the boomerang effect disappeared. When they were merely told that their energy use was below average, they felt that they had some room to increase consumption, but when the informational message was combined with an emotional nudge, they didn't adjust their use upward.
- Asking people "do you intend to vote" just before an election increases voter turnout.
- College students lectured on getting a tetanus shot showed up in greater numbers when given a map to the campus health center, asked to look at their schedules, and plan when they would get their shot.
- Exposure to the scent of an all-purpose cleaner makes people keep their environment cleaner while they eat.
Chapter 6: Save More Tomorrow
To encourage increasing savings in 401(k) s, employees could sign up to have their savings rates increase 3% every time they got a pay raise. (Think about the loss aversion bias mentioned earlier.)