We have been doing some research on the effects of wearing fake…

Here is a short video on this

A Fictional historic view of the future: a look at policy from 2034 back to the last 25 years

This is what I think I would like t0 write in 25 years…

It is hard to remember how politicians used to go about legislating policies. Let’s take a quick trip down memory lane and examine public policy, as it was twenty-five years ago, before the experimental policy era—that is, an approach that values and nurtures social experimentation as a way to design policies – we live in now.

As you may recall, in 2008-2009 a global financial crisis was brought on by lack of transparency, conflicts of interest, terrible bank-lending policies, complex financial instruments, and lack of government regulations. Above all, a religious-like belief that humans and the market are perfectly rational was a major contributor to this historical catastrophe and the five-year economic recession that followed.

In retrospect it sounds ridiculous, but before the 2008 crisis, rational economics– now largely restricted to university courses taught by a few academics–was the only guiding light that politicians used while designing taxation strategies, policies, and institutions.  When the economic tragedy of 2008 hit, it illustrated beyond any doubt that relying on the assumption of perfect rationality is dangerous; and this realization, in turn, ushered in a new era for behavioral economics.

After the initial shock from the crisis, this painful and expensive lesson caused businesses and policy makers to recognize three main lessons: 1) human beings have many irrational tendencies, fallibilities, and quirks; 2) we often have bad intuitions and a limited understanding of our irrational tendencies and; 3) if we want to create effective policies we shouldn’t rely on our intuitions for finding recommendations nor on the assumption that people behave rationally; instead, we should ground our recommendations in how people actually behave.

With these three lessons in mind, the business and policy landscape changed dramatically over the next twenty-five years. As expected, businesses led the charge and questioned their basic assumptions about the relationship between salary and productivity, the value of meetings, and the problems with conflicts of interest. After a few years spent watching in awe as business productivity improved,  government policymakers followed suit by implementing experiments with the Education-Forward Initiative (formerly No Child Left Behind). These experiments showed that basing teachers’ salaries on student performances had minor short-term benefits and caused substantial long-term damage on teacher and student motivation; that creating interest in education was more important than grades; and that shifting the curriculum focus from calculus to statistics and probability had a wonderful impact on students.

Between 2019 and 2025, experimental policy, which became a more established field, examined the simplification of the income tax (with huge social and tax benefits) and studied incentives that encouraged people to get routine medical exams (with tremendous long-term benefits). Currently up for debate are the benefits and disadvantages of socialized health care. In 2009, this might have become an ideological debate about right and wrong. But given our realization of how little we truly understand ourselves and the systems we design, combined with an appreciation for the benefits of detailed experimental investigations and empiricism, we are trying to solve this important issue by setting up multiple different experimental programs.  In some of these the levels of co-pay are low, in some medium and in some high.  In some of these programs the focus is in specialists, while in others the focus on the family doctor, and some focus on treating patients while other focus on preventative care and education. Rhode Island, being a small state, currently runs many of these experiments and in the next few years we will have a much better idea of the costs and benefits, both short-term and long-term, associated with all of these approaches.  Based on these we will pick the best policy to adapt. At the end, thanks to experimental policy, the decision will be based on solid empirical testing and data, not on a misconception of rationality.

In light of these improvements, maybe the financial meltdown of 2008-2009 was really a blessing in disguise; It got us to think more carefully across the assumptions we were making across the board and helped us get rid of the assumption of perfect rationality and replace it with empirical data.

Many awkward situations inevitably arise from the college roommate situation, most of which do not have a clear-cut solution. For instance, should you try to get your roommate to take out the garbage for a change? Should you tell your roommate to stop playing M.I.A.’s “Paper Planes” from his or her laptop 9 times a day? Should you tell your roommate it’s not cool to have to get kicked out of the room for 15 minutes every time your roommate brings someone back to have sex with? This last quandary brings up the notorious practice of “sexiling,” in which college students “exile” roommates from their room for a period of time so that they could have sex. This has become a relatively common practice on campuses because one alternative would simply be to have sex while your roommate is in the room, which brings up its own obvious issues. The other alternative, of course, is not to have sex at all. But, c’mon, is that really an option to many horny college students?

But Tufts University has now officially banned “sexiling,” stating that “any sexual activity in the room should not interfere with a roommate’s privacy, study habits, or sleep.” Besides the obvious question of whether or not this is even enforceable (“Excuse me…campus police? My roommate is currently having sex while I’m here trying to sleep!”), it raises a number of interesting psychological issues that suggest not only its inevitable failure as a policy, but also its indirect effect on the roommate dynamic.

First of all, even if students simply giggle at this new policy and passively accept it by not directly fighting against it right now, this does not mean that the practice will stop at all. Dan’s “laptop” study showed that people do not realize what desires they will succumb to when they are in a “hot” state (eg, horny) while they are in a “colder” state. So when it comes to sex at Tufts (or any college for that matter), students may be currently thinking something along the lines of “OK, I guess this rule makes sense. I wouldn’t want to have sex while my roommate is sitting there studying Orgo anyway.” However, when the moment of passion comes, that same person might not be able to resist the urge to have sex- whether that means kicking the roommate out of the room or having sex while the roommate is studying or trying to sleep. We simply do not know the decisions that we will make in certain states when we are not currently in that state.

My second point is that this new anti-“sexiling” rule could- perhaps ironically- damage the roommate-roommate relationship. Roommates generally have explicit or implicit social contracts with each other, filled with all sorts of social norms. For instance, roommates may understand that if one is “forced” to leave the room so that the other could have sex, the other will inevitably hit him or her back with a favor later on. Basically, these social contracts between roommates help in the cultivation of a relationship between the two and the imposition of rules from the college administration may undermine this relationship. Now, instead of, say, Roommate #1 being grateful that Roommate #2 was nice enough to wait until Roommate #1 went to the gym before having sex, Roommate #1 may think that Roommate #2 just didn’t want to get slapped with a punishment from Tufts.

And finally, it is a shame when institutions set stupid rules, but it is particularly sad when a university does not study a topic, and test it out before trying something like this.

How are people’s judgments affected when they learn of shocking news? How do they see the world differently? Gordon Closter, a student of mine, explores this topic in the latest Predictably Irrational Short Story. It can be found here.

Change Begets Change
This is how you put a positive spin on the recession.

In a new study, Moore School of Business marketing professor Stacy Wood suggests that it’s in times of upheaval that we’re particularly inclined to leave our comfort zone and try new things.

On first thought, this sounds counter-intuitive. You would think that upon losing our job or girlfriend, we’d be more intent on crawling under the sheets with a favorite book or movie and lying low for a while – not deciding that now’s the time to quit smoking or take up sky-diving.

And yet, these are the very kinds of challenges that we’re likely to take on following a big life change, according to Wood. In her study, she ran five related experiments comparing participants’ consumer choices with the degree of stability in their lives at the time.

In the initial experiment, for instance, she had undergrads take their pick between a pack of tried-and-true Lay’s potato chips and a bag of unfamiliar and odd-flavored British crisps (Camembert and plum, anyone?). Afterwards, she handed out a questionnaire that checked for the number of changes occurring in the participants’ lives. And the result? The students who chose the unusual chips were also more likely to be experiencing lots of change at the moment.

Wood later switched up the order of the questionnaire and consumer choice task in a follow-up experiment, and in another she also expanded the choice test to include a wide range of items – and still, the results were the same. When she asked participants to think about either two big life changes or eight, those who thought of more chose the strange chips more often.

It seems that when we are confronted with one disruption to our daily routine, we become more open to other change. Or, to put it differently, when things break, we enter the right mind-frame for breaking our old habits as well. According to Wood’s rationale, this is because once something pivotal in our routine gets switched around, we’re no longer so attached to all the other habits that formed our daily script.

When it comes to our recessionary times, then, it appears that now is a good time for us to embrace all kinds of change. A tighter budget or shorter hours at work might be that catalyst you need to reevaluate your daily shot of Starbucks espresso or your aversion toward exercise. To paraphrase President Obama, (and for somewhat different reasons) now’s the time to believe in change.

Reflecting back on our recent economic history bring to my mind a two sad surprises.

Even as a behavioral economist who generally believes in the prevalence of irrationality in our every day life, I place some stock in the main mechanism that should have maintained the efficiency of the financial markets: competition. In principle, the drive for competition among individuals, banks, and financial institutions should get the actors in the market to do the right thing for their clients as they fight to outdo their competition. After the Wall Street fiasco, I expected and hoped that in the spirit of competition some financial institutions would change their way given the new information about the risks they were talking and self-impose restrictions on themselves. I did not expect that they would do so because they were benevolent, but because they wanted to get the business of those who have lost trust in the financial institutions.

Surprise one: Sadly, the forces of competition do not seem to have any effect on the functioning of our financial institutions and Wall Street seems to be back to is pre-fiasco structure.

We are now discussing the possibility of health care reform, which arguably is even more messed up than our financial institutions (about 18 percent of GDP, bad incentives, bad intuitions, and the leading cause for bankruptcy before the current housing problem). When I look at the health care debate, it seems to be fueled by ideological beliefs about the importance of competition and freedom of choice on one hand, and the evilness of regulations and limits on the other. As someone who loves data beyond theories, it is surprising to me how little we know about the effectiveness of different versions of health care, and how sure people are in their own beliefs — which makes it an ideological and not a very useful debate (this is just a small surprise).

But what is the most surprising to me is that the tremendously expensive lessons we have experienced about the efficiency of markets and self interest do not seem to carry to the health care debate. As a society, we still seem to be enamored with the ideology of free markets, and have not seemed to update our beliefs in their efficiency despite the evidence. On the bright side, it looks like behavioral economists will have a lot of work for the foreseeable future.

Today we have a dark story about the very controversial topic of end of life decision making that demonstrates what we in decision making studies call the “endowment effect.” Again, this wonderful story is written by another one of my undergraduate behavioral economics students at Duke. Hope you enjoy it! You can find it here.

Ever since the financial meltdown, and throughout this recession, people keep asking me if I’m optimistic about our future. I think people are actually asking two questions: Where does one naturally fall on the optimism spectrum? And is there a place for optimism in our present circumstances?

One of the most basic findings in behavioral economics is what’s called the “optimism bias,” also known as the “positivity” illusion.

The basic idea is that when people judge their chances of experiencing a good outcome–getting a great job or having a successful marriage, healthy kids, or financial security–they estimate their odds to be higher than average. But when they contemplate the probability that something bad will befall them (a heart attack, a divorce, a parking ticket), they estimate their odds to be lower than those of other people.

This optimism bias transcends gender, age, education, and nationality–although it seems to be correlated with the absence of depression. Depressed people tend to show a smaller optimism bias. They also have a more accurate take on reality–perceptions more in line with what actuaries figure to be their real chances of divorcing, suffering a heart attack, and so on.

UNDERESTIMATING RISK

It is interesting to ponder the utility of over-optimism. It’s not a simple matter, because it can both hurt and help us. Individuals often suffer because of an overly bright outlook. They wind up dead, or poor, or bankrupt because they underestimated the downside of taking a certain path. But society as a whole often benefits from behavior spurred by upbeat outlooks.

It’s the inverse of “the paradox of thrift,” which holds that saving money (instead of consuming) may be good for an individual but is bad for an economy trying to grow.

Overoptimism works the other way. Imagine a society in which no one would take on the risk of creating startups, developing new medications, or opening new businesses. We know most new enterprises fail in the first few years. Yet they crop up all the time, sometimes jump-starting entirely new sectors. A society in which no one is overly optimistic and no one takes too much risk? Such a culture wouldn’t advance much.

So are there objective reasons for optimism in the current recession? There are. Amid the countless half-empty glasses strewn about at the moment, there are many that could be viewed as half-full. Most important, there are lessons we can absorb–insights that point to ways we can improve things. And what’s more optimistic than believing in the possibility of improvement?

This recession has delivered a huge lesson in how far human folly and irrationality can lead us astray–into conflicts of interest, extrapolating long-term projections from short-term trends, putting too much trust in economic advisers, and so on. I don’t anticipate that the downturn will change human nature. We aren’t better, more thoughtful people now. And we’re unlikely to become phoenixes rising from our fiscal ashes. But I am hopeful that if we take these painful lessons to heart (and mind), we might create lasting changes.

There are signs we are doing so, sometimes because there’s no other choice. From my perch as a professor, I see undergraduates turning to volunteering, startups, and the pursuit of all kinds of dreams. And for the first time in many years, Americans are starting to save money. (This might not quicken the recovery, but it’s good for the economy long term.) Manufacturers are building smaller, more sustainable homes and cars. And some banks (banks!) are thinking about how to help consumers become more financially responsible.

Finally, it looks as if there are advances in banking regulations that will endure–those mandating clearer disclosures of mortgage rules, for instance, and those making banks more accountable. Changes like these are unlikely to prevent all future financial shenanigans. But I’m optimistic about their ability to prevent some of them.

This reflection first appeared in Businessweek

Dear Irrational,

I recently met a great guy – let’s call him George – and now I can’t stop thinking about him. Though we’ve only been on a couple dinner dates, he’s officially won me over.

Now here’s my problem: Smitten as I am, I’m ready to hop into bed with George this very minute, but I’m not sure that’s the best idea. After all, there must be some reason that all those books and magazines (not to mention my mother) champion the make-him-wait rule. But does it really work? I’ve never followed it in the past, but then, I can’t say I have the best dating track record either.

What do you think? Should I play hard to get, or no? Help!

Sincerely,

Unsure

——

Dear Unsure,

Your mother is right: making the guy sweat a little (no, not like that) is in your best interest if you want to maximize the chances f a long term relationship. The reason lies in cognitive dissonance, which refers to what we do when our beliefs and actions misalign: Can’t change the cold, hard facts? Then change your beliefs!

The classic experiment here comes from psychologists Leon Festinger and James Carlsmith, who had participants perform a boring task and then paid them either $20 or $1 to convince someone else that the task had been great fun. Everyone then rated the task, with the result that the $1 participants rated the task more positively than did the $20 crew. While the $20 group could explain away the dissonance between their action (“I told someone the task was riveting”) and their belief (“It actually bored me to tears”) via money (“I was paid to promote the task”), the $1 individuals could not because they could not justify misleading others for such a small amount of money– so they changed their initial belief (“I must really like the task, to have promoted it”) and they ended up rating the task more positively.

To give you an example that is closer to our social life, look at fraternities: loyalty to frats increases with the amount of hazing, since pledges tell themselves, “I did a lot of embarrassing stuff for my frat – it must really matter to me.”

So, going back to your dilemma, Unsure, cognitive dissonance suggests that if you really want a guy, you have to create a dissonance for him, so that he will say, “Wow, if I put in all this effort for the woman – I must love her.”

This means that instead of putting out early, you have George pursue you. Instead of splitting the check, you let him pick up the entire tab. Instead of calling him up and suggesting dates, you leave the calling and planning up to him. In other words, make him work, and he will rationalize it by deciding he loves you.

Good luck.

Irrationally yours,

Dan

p.s please don’t tell George about my advice, and who gave it to you

Here is a video dedicated to the start of a new academic year.

Today we all have good intentions but what will come of these intentions in the future?

Happy semester