OUR BEHAVIORS

GARY BELSKY AUTHOR, WHY SMART PEOPLE MAKE BIG MONEY MISTAKES: LESSONS FROM THE LIFE-CHANGING SCIENCE OF BEHAVIOR ECONOMICS; FORMER EDITOR IN CHIEF, ESPN THE MAGAZINE

Gary Belsky LTR Conference November 5, 2015

DIGITAL ENGAGEMENT:A Behavioral Economics Perspective

A BRIEF HISTORY OF BEHAVIORAL ECONOMICS

DANIEL KAHNEMAN AMOS TVERSKY

SYSTEM 1 SYSTEM 2

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FAST PARALLEL

AUTOMATIC

EFFORTLESS ASSOCIATIVE

SLOW-LEARNING

SLOW SERIAL

CONTROLLED EFFORT-FILLED

RULE-GOVERNED

FLEXIBLE

HOW WE DECIDE

A BRIEF HISTORY OF BEHAVIORAL ECONOMICS

BIASED TOWARD BIASES

An uncle left you money, which you must now invest. You’ve narrowed your choices to four options:

1. Shares of XYZ Tech (18%) 2. Shares of ABC Widgets (32%) 3. Treasury bills (18%) 4. Municipal bonds (32%)

Which option would you choose?

STATUS QUO BIAS

An uncle has left you money invested in XYZ Tech, a volatile Internet company. You’ve narrowed your investment choices to these options:

1. Shares of XYZ Tech (+/-50%) 2. Shares of ABC Widgets 3. Treasury bills 4. Municipal bonds

Which option would you choose?

STATUS QUO BIAS

An uncle has left you money invested in ABC Widgets, a volatile Internet company. You’ve narrowed your investment choices to these options:

1. Shares of XYZ Tech 2. Shares of ABC Widgets (+/-50%) 3. Treasury bills 4. Municipal bonds

Which option would you choose?

STATUS QUO BIAS

An uncle has left you money invested in Treasury Bills, a volatile Internet company. You’ve narrowed your investment choices to these options:

1. Shares of XYZ Tech 2. Shares of ABC Widgets 3. Treasury bills (+/-50%) 4. Municipal bonds

Which option would you choose?

STATUS QUO BIAS

An uncle has left you money invested in Municipal bonds, a volatile Internet company. You’ve narrowed your investment choices to these options:

1. Shares of XYZ Tech 2. Shares of ABC Widgets (50%) 3. Treasury bills 4. Municipal bonds (+/-50%)

Which option would you choose?

STATUS QUO BIAS

Confirmation Bias Mental Accounting

Availability Bias

Representativeness

Hindsight Bias

Money Illusion

Base Rate Ignorance

Survivorship Bias

Anchoring Sunk Cost Fallacy

Choice Conflict

Planning Fallacy

Herding Overconfidence Effect

Status Quo Bias

Loss Aversion

Hot Hand Fallacy

Gambler’s Fallacy

Focalism

Endowment Effect

Dunning-Kruger Effect

Region-Beta Paradox

Immune Neglect

Regret Aversion

Channel Factors

Framing

Preferential Bias

Tradeoff Contrast

Feature Fatigue

Extremeness Aversion

WHEN SYSTEMS COLLIDE

A BRIEF HISTORY OF BEHAVIORAL ECONOMICS

PROSPECT THEORY: AN ANALYSIS OF DECISION UNDER RISK

NOBEL PURSUITS

Imagine you’ve been given $1,000 and are asked to choose between two options. OPTION A: You win an additional $500.

OPTION B: You flip a coin. Heads, you get another $1,000. Tails, you get nothing. Which option would you choose?

LOSS AVERSION

Imagine you’ve been given $2,000 and are asked to choose between two options. OPTION A: You lose $500.

OPTION B: You flip a coin. Heads, you lose $1,000. Tails, you lose nothing.

Which option would you choose?

LOSS AVERSION

Confirmation Bias Mental Accounting

Availability Bias

Representativeness

Hindsight Bias

Money Illusion

Base Rate Ignorance

Survivorship Bias

Anchoring Sunk Cost Fallacy

Choice Conflict

Planning Fallacy

Herding Overconfidence Effect

Status Quo Bias

Loss Aversion

Hot Hand Fallacy

Gambler’s Fallacy

Focalism

Endowment Effect

Dunning-Kruger Effect

Region-Beta Paradox

Immune Neglect

Regret Aversion

Channel Factors

Framing Effects

Preferential Bias

Tradeoff Contrast

Feature Fatigue

Extremeness Aversion

WHEN SYSTEMS COLLIDE

• CHANNEL FACTORS

SYSTEM 1 PROBLEMS

Man and Tetanus at Yale

CHANNEL FACTORS

SYSTEM 1 PROBLEMS

• CHANNEL FACTORS

• CHOICE CONFLICT

Jam Session

CHOICE CONFLICT

CHOICE CONFLICT

Jam Session

vs.

MAXIMIZERS AND SATICFICERS

SYSTEM 1 PROBLEMS

• CHANNEL FACTORS

• CHOICE CONFLICT

• FEATURE FATIGUE

Enough Already

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FEATURE FATIGUE

SYSTEM 1 PROBLEMS

• CHANNEL FACTORS

• CHOICE CONFLICT

• FEATURE FATIGUE

• TRADEOFF CONTRAST

Microwave Special

0.5-cubic foot Emerson Microwave, 35% off its $109.99 retail price (57%) ***

0.8-cubic foot Panasonic I Microwave, 35% off its $179.99 retail price (43%)

WHICH MICROWAVE DO YOU PREFER?

TRADEOFF CONTRAST…

Microwave Special

0.5-cubic foot Emerson Microwave, 35% off its $109.99 retail price (27%) ***

0.8-cubic foot Panasonic Microwave, 35% off its $179.99 retail price (60%) ***

1.1-cubic foot Panasonic II Microwave,10% off its $199.99 retail price (13%)

TRADEOFF CONTRAST…

WHICH MICROWAVE DO YOU PREFER?

SYSTEM 1 PROBLEMS

• CHANNEL FACTORS

• CHOICE CONFLICT

• FEATURE FATIGUE

• TRADEOFF CONTRAST

• FRAMING EFFECTS

Imagine you are an army commander, threatened by a superior enemy. Your staff informs you that your troops will be caught in an ambush in which 600 will die—unless you lead them to safety by one of two routes.

Route A: 200 soldiers will be saved.

Route B: There’s a 1/3 chance all 600 will make it and a 2/3 chance none will.

Which route is best?

LOSS AVERSION

Now imagine that you are in the same exact situation, but this time your staff describes the following two options:

Route A: 400 soldiers will die.

Route B: There’s a 1/3 chance no soldiers will be killed and a 2/3 chance that all 600 will perish.

Which route is best?

LOSS AVERSION

Discount vs. Surcharge

FRAMING

Save Now, Spend Later

FRAMING

A Stitch in Time

VS.

FRAMING

SYSTEM 1 PROBLEMS

• CHANNEL FACTORS

• CHOICE CONFLICT

• FEATURE FATIGUE

• TRADEOFF CONTRAST

• FRAMING EFFECTS

• REGRET AVERSION

Pat goes to the movies. At the box office, she is told that as Customer 100,000 she has won $100.

Chris is at a different theater, where she is told that as Customer 500,001 she has won $150.

Who would you rather be, Pat or Chris?

REGRET AVERSION

Pat goes to the movies. At the ticket window, she is told that as Customer 100,000 she’s won $100.

Chris is at a different theater, where she is told that as Customer 500,001 she wins $150. The 500,000 the customer wins $1,000.

Who would you rather be, Pat or Chris?

REGRET AVERSION

SYSTEM 1 PROBLEMS

• CHANNEL FACTORS

• CHOICE CONFLICT

• FEATURE FATIGUE

• TRADEOFF CONTRAST

• FRAMING EFFECTS

• REGRET AVERSION

• HERDING

HERDING

Bedlam

SYSTEM 1 PROBLEMS

• CHANNEL FACTORS • CHOICE CONFLICT • FEATURE FATIGUE • TRADEOFF CONTRAST • FRAMING EFFECTS • REGRET AVERSION

• HERDING

Gary Belsky

DIGITAL ENGAGEMENT:A Behavioral Economics Perspective