Amanda Bayer:	Hello. Good evening. Welcome. I'm Professor Amanda Bayer of the economics department here at Swarthmore, and I would like to welcome you to the 2014 Bernie Saffran lecture. This event honors the memory of Bernie Saffran, who was a member of the Swarthmore faculty from 1967 to 2004. He was a brilliant and caring teacher. Over the course of his career, he served with the Council of Economic Advisors and as a consultant to various departments in the federal government. He also wrote a well-known, well-loved column Recommendations for Further reading in the Journal of Economics Perspectives. You may already have read from this journal in your classes. If you haven't, it's a great journal to pick up in hard copy or online, and get introduced to Barry's segments of our field.
	Bernie himself was well-known and well-loved, within his profession, on this campus, and I imagine in every other facet of his life. He was a very wise, very kind person. We are honored to have in the audience tonight Bernie's daughter and son-in-law, Jenny Saffran and Seth Pollack, and Bernie's two grandchildren, Eli. I was counting on you, Eli. Now, take a bow now. All right. Tonight's speaker is Timothy Taylor. Timothy Taylor is managing editor of the Journal of Economic Perspectives, where where worked closely with Bernie since the journal's inception in 1987. On the side, he writes an informative blog entitled Conversable Economist, and I recommend it.
	Our speaker has won teaching awards for his courses at Stanford and the University of Minnesota, and he is also the lecturer for several recorded courses offered by the Teaching Company. Just to raise your expectations to meet mine, one reviewer states, "Taylor is fun, interesting, enthusiastic, and you can often hear the smile in his voice." Tonight, he will speak to us on behavioral economics. What's it all about? Please join me in welcoming him.
Timothy Taylor:	Okay. Let me take a minute or two before I start just to talk about Bernie. To understand my relationship to him, you have to imagine that when I was 25 years old, I was hired to start the Journal of Economic Perspectives by the guy who was going to be the first editor, who was Joseph Stieglitz. Some of you run into his name or his work. The journal at that time didn't exist. The one idea of the journal was that it would be a journal which, instead of being a journal when people sent in stuff, and people said thumbs up, thumbs down, which is how most academic journals work, it would be a journal where stuff was invited and then intensely edited, and intensely edited meant me.
	Everything that went into the journal, I was going to revise and rewrite until it got to a certain level of readability, and that's been true now for the last 27 years. If you look at the journal, you've seen my work. When I was starting, I was 25 years old. I had been hired to do this. I'm hired by this guy who's going to win a Nobel Prize, later does win one. I don't know how much room I've got. I don't know what I should be doing. Can I really take something from a Nobel laureate and just cut it to smithereens? Can I really cut 5,000 words out of that essay? Can I really say, "That's not clear," or, "You can't say that unless you also say this?" How much power did I have?
	I didn't know the answer to that. I'm rarely accused of being underconfident, but I was underconfident at that time and place. I didn't know how much space I had. Bernie was involved in starting the journal, and he was also writing this regular column, and so I ended up talking with him about it. He checked me out through my college connections. I went to Haverford. He said to me, I remember it clearly. He said, "Do what you do." He said, "Take the power. Do what you do. You'll be good at it. Just do what you think is right. Run with it." That was enormously reassuring to me that someone was saying that to me, because it wasn't clear to me that I had that power.
	When I think about Bernie, I think about giving advice to people, and giving them advice that they can use. One of the bits of advice is do it, run with it, and trying to turn people lose. Another bit of advice is that Bernie, I didn't really know a lot of the people who were writing. Bernie knew them. He was, among other things, a great gossip, and he knew all sorts of things about all sorts of people. When people came along, and I said, "I'm editing a paper by X or Y," he would say, "Well, they were like this, they were like that. Their marriage just broke up. They're just doing this. They just wrote a paper about that. They just got rejected here."
	I knew something about the person, and that was enormously helpful to bring me into that loop and that web, so that I had some sense of who I was dealing with day in and day out. The other thing was that in this column that he wrote, what he liked to do was to proofread the column, he would save photocopies of the articles that he was quoting as the recommendations for word of the reading, and then he would read me the quotation, and I would sit and read the galley proofs. It took forever. We would often be on the phone two hours, two and a half hours because along the way, we would stop talking about the article, and we would start talking about what the subject was, and this, and what other people said, and have you seen this?
	What about that author? What about their life? If you do that with somebody four times a year for 17 years, you actually really get to know them tremendously well. You get to know their sense of the field of economics, their sense of what's important, their fair-mindedness, their judgment. I owe him a lot for standing up for me when I was feeling uncertain for myself, and giving me a good push. I can't believe he's been dead ten years. I miss those two hour conversations four times a year very much. He's a special person, and I think the current faculty would say ts no one here to compare with him right now. He was a unique individual. Just a special guy, and I'm really honored to be giving this talk for him.
	Let's talk about behavioral economics. You can see a definition there. Behavioral economics is the subject when you combine psychology and economics, see what happens in a market when some of the people have human limitations and complications. For those of you who know some economics, what I want to make clear is I'm not talking about what we might call the standard market failure agenda, by which I mean things like externalities and public goods. Those are all things where people are well-informed about the market, but the way they act doesn't take social costs into account, or doesn't take various interactions into account, and so the market doesn't work well.
	This is not about that market failure agenda. This is about something where people have a hard time figuring out what they like or don't like, what they're maximizing or what they're not maximizing. I'll give you a list of some of these possibilities. These are some of the things that behavioral economics would look at. I'm going to run through a lot of things on this list during my talk. Things that are non-standard preferences where people have self-control problems, beliefs about overconfidence, or things about how questions are framed affecting how people behave. There's a whole literature that's developed, first of all in the psychology literature, to what extent do people actually demonstrate these sorts of things?
	Then in the economics literature, if you have people who are like these people, who are interacting in markets, how does the market behave as a result? That's where the economics part of it then clicks in. What I want to talk about is the evidence for some of these things, and then how it affects real-life economic behavior as opposed to just everyday kind of behavior. Let me start off for example, first thing of time preferences. I'll just ask you a few questions. I'll tell you the answers in a moment. Don't worry, you're not being judged. If someone asked you, "How much would you need to receive in a month to compensate for giving up $15 now?" Just think about what your answer would be?
	How much would you need to receive ten years from now to compensate for giving up $15 now? The question that they did in this study is, does the short-term versus the long-term change your preferences over time? Does it change the interest rate you would demand? When you do this study, as Richard Failor did, the median answer for how much you need to receive in a month was about $20. If you think about that, that's a return of $33 in a month. If you think about that as an annual interest rate, it would be 400%. How much would you need to receive ten years from now? The median answer is about $100. If you work that out as an interest rate, it works out to about 19% per year. Apparently, the same people will say, "I want a 400% return on a one-month loan, and I want a 19% return on a ten-year loan."
	You might think to yourself, "What sort of loony toons people would do a thing like this?" The answer is that many, many of us share the following pattern. The pattern is that we are reluctant to give up consumption in the short run, and then we demand a high return, but we're more willing to give up consumption in the long run, thus the lower rate of return. Of course that's every single person who ever said, "I want to go on a diet starting tomorrow. I don't want to give up consumption now. I want to do it in the long run, but not the short run." One of the behavioral studies looked at a study of people who joined health clubs. In this particular health club study, it cost $80 a month to join the health club.
	However, you could go for $10 per time if you wanted without having a membership. The question is obviously, if you're going to be sensible about this, you should only pay $80 a month if you're going to go more than eight times a month, because that way it pays for itself. It turns out the people who were paying $80 a month only went four times a month. Why did they do that? Of course they were planning to exercise tomorrow, not today, but tomorrow. This pattern of time preferences being not steady over time, but inverted in that way is something we see in all kinds of behavior. In the health club example, obviously what people are doing is by buying the membership, you're trying to force yourself to pre-commit.
	If I pay it, then I'll go. Even after you don't go, people don't seem to learn the lesson. They expect paying their $80 a month and going four times a month. I can vouch for that being a real-world pattern of behavior. The most important application of this is probably things like saving and borrowing behavior. I'll tell you a standard pattern for a lot of American households. A lot of American households have very large credit card debt. Credit card debt often runs as high as 10% of their annual income. These are also often people who have a large amount of home equity, and so they've got a lot of equity in their home. It would make perfect sense of course to take out a home equity loan at very low interest rates and use it to pay off your credit card debt, but that's not who we are.
	Who we are is, we want to consume now, and we're willing to pay a high return for that, and we want to have the long-term savings, and so we keep those two separate from each other. This inconsistency is something that shows up in how we save and how we behave in all kinds of contexts. Probably the single most famous of the behavioral economics studies works like this. This was actually done as an experiment at a tax prep company. The company actually did this random experiment. They randomized across their employees, and they said, "Okay, in this company, the employer offers a retirement account, 50% match with up to 66% of income contributed, and you can switch."
	There were two different groups, and people were randomly assigned either to case one or case two. Case one is if you don't do anything, you're not in the plan. You can change if you want. You can make a phone call, but your default is you're not in the plan. After a year, half the people had called up and said they want to be in the plan, 49%. The other group, if they didn't do anything, they were automatically in the retirement plan. Their default was being in rather than out. A year later from that group, 86% of the people were enrolled. For economists, that's an enormous puzzle.
	Remember, all you have to do is make a phone call to switch between one and the other. The cost of switching is trivially low. If the cost of switching is trivially low, you would think it should work out about the same. Those who want to be in will be in, those who want to be out will be out. In fact, the default choice that people make, the default that they're assigned to makes an enormous difference to their behavior. A 40 percentage point difference in whether they're in a retirement account or not. To economists, this kind of thing is a puzzle. Obviously we can say part of the issue here is you put off joining something like that, or you're naïve about how much you save, but whatever you think about it, this notion that defaulting into the plan has a big effect is important.
	For example, one of the ways of interpreting the fact that we have a social security system is we're defaulting everybody in. We're not going to give everybody a choice about whether they belong to social security. We're going to default them in, and they'll just be part of the system. There are proposals for a national policy to increase the US savings rate where everyone with a full-time job would be defaulted into a retirement plan. You could opt out with a phone call. It wouldn't be required. One phone call and you can be out of the requirement, but if this kind of evidence holds up, vastly more people would save vastly more for retirement just because they started out being in the plan, and it took one lousy phone call to get out of it, than it would be, if they had to make one lousy phone call to set up their own retirement plan and deduct their own savings.
	That's a powerful thought about how you might affect the world with a seemingly small change. Let's talk about a different sort of issue.  I'll come back to that. There we go. This is an issue of what's called reference dependence. Reference dependence, for economists when you think about what people are maximizing over time, what you tend to think is they're maximizing income or utility or lifetime wealth, or something like that. All of it is relative to just what that person has. The idea of reference dependence is that instead of maximizing what that person has, you are looking relative to something else. You're referring to something else, and you're thinking to yourself, "Referring to something else, how well am I doing?"
	Imagine that you had this question. In addition to whatever you own, you're given $1,000, and you're asked to bid the follow AB gamble. 50/50 gamble of an additional $1,000 or receiving zero, or $500 with certainty. You can think about which of those two would you prefer, A or B. Would you take the gamble? Would you take the certain choice? Then a different group is asked in addition to what you ever own, you're now given $2,000. You're asked to choose between a 50/50 chance of losing $1,000 or losing $0, or losing $500 with certainty. Which one do you choose? You can think between C or D, which one would you prefer?
	If you give this problem a half a moment's thought, you'll recognize that the outcome of A and B is the same as the outcomes of C and D. In both cases, you can have a sure $1,500, or you can have a 50/50 gamble between $1,000 and $2,000. The only difference is one is phrased in terms of sure gain, and the other is phrased in terms of sure loss. It should make no difference to people which way you phrase it in a standard economic model because the outcomes are the same, right? But if you actually ask people in this kind of a study, in A, only 16% choose the gamble because people want to get that sure gain, and in B, 69% choose the gamble because they don't want to lose $500 with certainty.
	That's a wildly different choice for two outcomes which are the same, right? How do we make sense of that? These two guy, Tversky Kahneman won the Nobel Prize in economics in 2002 for what was called prospect theory, what this article was about. He was actually trained as a psychology. I don't know if he ever got any formal economics training, but we economist are a big tent. If it's interesting, we'll give them a Nobel Prize regardless. They developed this theory called prospect theory. The idea of prospect theory, it has many parts, and it can be more technical than this, but I'll just say it has two parts that really matter.
	One part is reference dependence, the preferences related not just to how much you have, but looking at a reference point. Am I starting from $1,000, or I starting from $2,000? My reference point matters. Then the other is loss aversion. Do I care more about losses than I do about gains? If you phrase something in terms of you're going to have to take a sure loss, people think, "Oh, boy, I'd rather gamble than take a sure loss," but if you offer people a sure gain, they think, "That sounds good," and they take the sure gain. Just the phrasing of it creates that theory.
	They developed then a whole theory of how people would maximize and think about the world given that sort of a value. You can again think of many examples of this in the real world. For example, it's true that if you look at stock market investors and you say, "Are people more likely to sell after gains or after losses?" The answer is people are vastly more likely to sell after gains, because people don't like to admit they have a loss. They're averse to accepting the idea that they have a loss. Basic theory of stock markets would be it's really hard to predict what's going to happen the next day. It shouldn't matter whether it went up or down. You really can't predict very well what's going to happen the next day.
	The truth is people really, really don't want to accept they have a loss. If you look at the last few years, what happened to housing prices all over the country. A whole lot of people were not willing to sell their house if they couldn't get as much for it as they thought they could get a few years earlier. For an economist, that's not rational behavior. Your house went down in value. Get over it. Move on with your life. For a lot of people, they have this mental value in mind, and that was what it was worth, and they weren't going to sell till it got to that value one way or another.
	There are just lots of examples of where that's a tricky problem for people to try and deal with. If you think about going through life, a point I like to make sometimes, if you're too averse to losses, what happens a lot of the time is you'll get situations ... A simple example would be imagine somebody offered me a bet, and the bet was $10,000. It's a 50/50 bet. If I lose, I have to pay them $10,000, and if I win, they pay me $21,000. For me, that's an expected value, a good bet, right? It's worth more. I should be willing to take that bet, but I wouldn't take it because I can't risk losing the $10,000. That's sensible maybe if it's a one-time bet, but for most of your lives, and most of my life, you don't make on bet.
	You make a whole series of bets about your career and your job choices over and over and over. If you are averse to losses in every single choice, you will be turning down bets with expected positive value over and over and over again. You're actually much better off accepting a bunch of those bets knowing you will lose a bunch of them than you would be to systematically avoid losses over and over. How about if we think about non-standard beliefs? We'll talk about overconfidence. Here, I'll get to that in a minute. Probably some of you have heard these studies of overconfidence.
	There was one famous study in the 1980s where they asked people to say how good a driver are you. It turns out, you'll be glad to know that 93% of all drivers believe their driving skill is above the median. There's also a standard finding that when companies are doing a takeover of another company, they tend to overpay, and they end up not making much money out of the deal. They acquirer in an acquisition often on average doesn't make money. A company that's bought does just fine. They get a big premium, but they're overconfident about what that's worth. Many, many people invest all their money or a big share of their life savings in the stock of the company they work for because they're overconfident about their own company that they work for, rather than spreading that across a bunch of stocks.
	It's a standard finding that many people trade stocks way too frequently because they're convinced that they can beat the market if they just trade fast enough, even though they're paying a commission every single time they trade. Of course in my own life, and probably in a lot of your lives, the only way I get through the week is by over-promising, right? I'll get this done by Thursday, I'll get this done by Friday, I'll get this done by Saturday. Realistically, I've got no hope of making that happen, right? But I continuously promise it because I'm overconfident about my ability to get through, and I never learn from that. I haven't learned yet.
	A related idea to overconfidence is what's sometimes called self-attribution bias. This is to me one of the most interesting studies in this stuff. This was done back in the late 1970s, and they took a group of people who had various attitudes about the death penalty, pro and con, and they gave them the same information. They all had these same set of essays to read. Some against, some for, some fact, some of this, that, and the other. They had all these people who had a wide range of beliefs, and they gave them all this information. The question for you to ponder is what would you expect to happen when you survey the people at the end of that?
	Would you expect, as I think the researchers did, that when everyone was exposed to a wide range of information, people would soften their beliefs and move toward the middle? What actually happened was people's beliefs got harder and split out further apart, because now that people had read all this stuff, by golly, they were convinced they were right. They knew they were right because they studied about it. It just confirmed their belief that they were right. It didn't cause them to do anything else. Again, I operate on a college campus like a lot of you folks, but the last time somebody said there was a meeting, and the meeting said, "Come learn about X or Y," do you actually have any realistic expectation that you will be learning, or do you think you'll be preached at?
	I always assume I'll be preached at. Maybe it's different at Swarthmore. I don't know. How about non-standard decision-making? I think I skipped a page there. Let's see here. Another change is what's called social preferences. Social preferences work like this. In general, economists think that when you do something, what you really care about is what happens for you. Here's a simple game to think about that. It's called the dictator game, and the dictator game has been run in various contexts, and it works like this. The first player is given $10. You have to decide how much to give to another player who's anonymous. You don't have to look him in the eye.
	Second player gets whatever you give him. That's the end of the game. Maybe the world's simplest game, right? If you're an economist, what do you do, then? What do you predict? You predict the first person keeps it, right? Because why would they give anything to anybody else? It's $10. Why would you give anything? What's the point? When you actually play the game, what you find is about 60% of players give positive amounts. Why would they conceivably do that? Presumably the reason is that they do actually care a little bit about this anonymous person they're never going to see again. How can that make sense?
	In economic contexts, it makes lots of sense. You ever been driving across the country, you stop at little restaurants somewhere, you get something to eat, you buy something. Do you leave a tip? Usually. You're never going back to that place, you're never going to see them again, there's no chance that they're going to identify you in any way, but somehow it seems right to leave a tip and do something. A bigger application is in the labor market where people talk about what's called gift exchange in the labor market. The notion of gift exchange works basically like this. I can do for most jobs the bare minimum amount, and I can be paid the bare minimum amount for what I do.
	In most jobs, at least most jobs that are somewhat interesting to do, there's a possibility that I will do more than the minimum. There's also a possibility they will pay me more than the minimum. If I do more than the minimum and I find an employer who's willing to pay me more than the minimum, then there's a virtual happy gift exchange going on there. It's not enforceable. They can't make me do more than the minimum, and I can't make them pay me more than the minimum, but if we're both content with how that works out, there can be a positive outcome from all of that. Of course not every employer is going to be willing to play the gift exchange game with you, but it's worth looking for those who are.
	When gift exchange goes bad, it can have bad effects. There was this famous study of a tire plant run by the Firestone company back in the 1990s. They went on strike, they lost the strike, they took a pay cut, and if you look at tires produced for the two years after the strike, they are ten times as likely to be defective as the tires produce in the two years before. Why is that? It's just pay, right? Just pay for your job. I think what happened there was the gift exchange that existed before had been eroded, and the people in the plant said, "We're not giving you a scrap more than the minimum." The defects showed up as being larger. In general, there is this sense in the world that if you treat other people well, maybe it'll come back to you somehow, one way or another, or that it's a better thing to live in a world where everyone else treats everyone else a little bit better.
	The game gives you a little illustration that we do apparently care about other people, not just about ourselves. Let me give you my messiest example, which is an example of non-standard decision-making. It's an example of framing, and how a question is framed. I apologize in advance. This is going to be a little bit messy, but y'all can hang with me, I think. Here's decision one. Choose between a sure gain of two pounds and a bit, or a 25% chance to gain ten pounds and a 75% chance to gain zero. Which one would you choose? Think about it. The second choice is, choose between a sure loss and a 75% chance losing, and 25, et cetera. You can read it out.
	When they actually did this experiment, survey says the first one basically works out to being a wash, and that makes some sense if you think about it, because a 25% chance of gaining the ten pounds, that would be 2.50, presumably, right? It would be worth a little bit more to take the gamble, but not much more to take the gamble. You can imagine people saying, "It would be about 50/50." The second choice is explained pretty easily by loss aversion. People don't want to take a sure loss. They don't want to take a sure loss so they choose D, even though they'd rather take the risk of maybe not losing anything. What's interesting about this? What I want to emphasize here is that the first choice, A and B is a 50/50 choice, right? More or less.
	C and D, D is strongly preferred. Just hold that in mind. D is strongly preferred. What I'm going to do is I'm going to compare C and D again, but what we're going to do is instead of saying that just comparing these to each other, we're going to add A to D and B to C. Remember, A and B are equivalent. You would think that adding them to C and D shouldn't make much choice in the rankings. D should still be the one that nobody wants. If you add them, and again I apologize, it's a little messier, but it's not hard math here folks. A + C is the sure gain, or the sure loss of that amount. If you add A and D and B and C, what you can see here is that in these two choices that this choice, the A + D choice is clearly better. It dominates the other choice.
	In other words, remember that people didn't like D before, but now D ends up looking like a better option as a result. I didn't say that well, and I don't know that it's worth me trying to walk through it all again. I think I'm not going to. I'll let you sort it out. What I'm trying to say, what I'm trying to illustrate here is that when you combine different things together, when you have a menu of choices and you combine them all together, sometimes the outcome of the menu is different than the outcome if you looked at them one at a time. This of course is a standard outcome if you go to a restaurant, right?
	Imagine that you go to a restaurant, and you choose your favorite appetizer, and your favorite main course, and your favorite soup, and your favorite dessert, and all the rest. It might be that those favorites don't go together. If instead you picked one favorite and then planned the rest of the meal about it, you come out differently. This notion that if you're choosing, you should only look at A and B, you should only look at C and D is probably wrong. There's a lot of life choices where you want to be thinking about a series of choices, and comparing the outcomes of the different series of choices. If you do that, you can come up with really different thoughts about what might be preferred, or what might not be preferred.
	There's also another example of this framing, is an argument that people carry around what are called mental accounts in their heads. The idea of a mental account is that, and there's some evidence to support this, that a lot of people when they think about their money, they think about three things. They think about what's my consumption money? That's more or less what's in my bank account to spend right now. They think about what am I saving up as accumulation? Which they usually mean their savings account and their housing. Then what's my retirement account, or my pension account? They don't substitute much across those. Even if it seems like, "Wow, it might be a really good time to save more for the future, or not such a good time to save more for the future."
	People don't go back and forth across. They think about my consumption as one chunk, what I'm saving as another chunk, and my retirement as a third chunk. They don't jump back and forth between, although it's all just wealth. There's no special reason why you shouldn't be jumping back and forth between it. The basic issue here a lot of the time comes down to these studies which look at things like limited attention. There's some psychological studies where they do things like, they play a different message in each ear, and then they say to you, "Can you answer questions about what you heard?" Not surprisingly, it gets harder depending on how things are framed and what you pay attention to.
	If you pay attention to some things, you'll act in certain ways. If you pay attention to other things, you'll act in other ways. I think again, it's interesting to think about what are you listening to when you get something? What message are you hearing? If you're buying a car, there's a whole bunch of different messages you can hear. There's a gas mileage message, there's an economist, there's a sound system message, there's a style message. Which message are you hearing? Which message are they playing up, and which message are you paying attention to? You don't have mental attention to listen to all the things at the same time, so you're going to be picking something. What you pick can influence your outcome.
	There's a reason why lots of places online will say, "We'll pay your shipping cost." When they say, "We'll pay your shipping cost," you think, "Oh, wow, shipping cost." You have always cared about shipping cost. Maybe you don't care about shipping cost, right? But it has a focus. It gives you something that you care about, you feel like you're getting a deal. On the other side, all these free offers, you pay only shipping and handling. It's free. You pay only shipping and handling. In that case, apparently you don't care about shipping and handling. You only care that the item was free.
	There are lots of studies doing things where they did things like, what if taxes are added at the cash register versus what if you go through the store and put the price with taxes on all the items in the store? If all the prices are on the items in the store, you actually pay attention to it. If they don't get added until you get to the register, most people don't pay attention to it. You can actually see that in grocery store data and other kinds of data. The basic point here is that when choosing from menus, when choosing from stuff with a lot of information, people do weird stuff. They make interesting choices.
	Often, they diversify too much. This is one of my favorite studies from some years back. In the first group, students in a class chose snacks to be consumed. These were candy bars. They had a menu of candy bars you could choose. You were going to choose them over the next three class meetings what your snack was. In one of the things, you had to pick this week for the next three. The other one you chose each week what you wanted. It turns out if you choose all at once, 64% of the people chose three different snacks, a different one for each week because they couldn't stand to just say, "I just want the same thing every week." If you have them choose each individual week, only 9% actually wanted three different snacks, because the sequence of the choices and the menu they were offered influenced the outcome they were willing to make.
	This general pattern that people often choose a much broader range looking ahead than they would actually choose if they were just doing it one at a time is a standard finding. A standard issue where it comes up in the real world is there's a lot of companies where when you sign up, you have a pension plan. They want to get you to put stuff on the pension plan, and so they offer you a menu of options. Some companies were offering 20 different stock market funds you could put your money in. What a lot of people were doing when confronted with 20 different stock market funds was they said, "Well, if there are 20 different funds, I'll put 5% in each one." That was an insane choice, because many of them overlapped in different things.
	It was just like, "Well, I've got 20 choices, I'll put 5% in each. That must be the right thing to do." It involved no thought about maybe you would be better off actually picking one or two or three of them depending on your life circumstances one way or another. Another interesting menu of fact is in elections. Since 1975, California had a ballot thing passed where when people were being elected to the state assembly, you have to list the candidates in random order, because what they were worried about was that too many people who were named A or B or C were winning elections because they were always listed first. It seemed unfair to all of us like T at the back of the alphabet. They said, "Okay, we'll list the candidates randomly, not alphabetically anymore."
	You could actually compare and see how much difference does it make to be listed first rather than last or middle on a ballot. As you can see, it turns out that a minor party candidate gets a 10% increase in votes if they're first on the list. Just the order in which they're presented bumps them 10 percentage points. The major candidates doesn't make so much difference, which might be what you'd more or less expect. If you're unknown, or uncertain, or it's a primary election, being first can really be a huge boost, and it had been a huge boost to some unknown folks before. Again, there's this sense of how the problem is given to you determines your answer, makes a big difference.
	Yet another one of these things from the original list is persuasion and social pressure. I guess my favorite example here, I don't know if any of you have done this. Sometimes they still do it in classrooms now just to mess with you. Subjects are shown two large white cards that have lines of them. First card has three lines of different length, second card has one line, and then you're supposed to say, "Of the three lines on the first card, which one is the same length as the one on the second?" If you ask ppm standing alone, they're 98% accurate. If you just ask them that in a lab.
	Now what you do is you mess with them. You put them into a group where you've got four or eight other people in the group, and the four, eight other people in the group all choose the same wrong answer. Remember, this is a really simple thing. This is like what line is equally long? This is not a complicated social problem. It turns out that when you do that, over a third of the subjects then agree with all the other people and agree with the wrong answer, just over the length of a line. If social pressure can have that much influence on how long is something, you can only imagine how much influence it might have in more complicated contexts.
	There's interesting examples. There's one study done in Switzerland where they had students, and their job was to stuff envelopes for a certain low amount of pay. What the students didn't know was that they were being paired with another student. In some cases, they were being paired with a student who stuffed envelopes really fast. In other cases, they were being paired with a student who stuffed envelopes really slowly. Your pay didn't change depending on what the other person was doing, right? You were just being paid what you were being paid, but it turns out that if you're in the room with the person stuffing envelopes really fast, you get a lot faster.
	If you're in the room with a person stuffing envelopes slow, you do it more slowly. The peer effect makes a big difference there. There's some evidence some supermarkets that if you look at people who are cashiers who can get people through the line really quickly, and you look at the other cashiers around them, if you got a fast cashier, the people who are near that cashier speed up, as well. In all these ways, we think of ourselves as, "I make my own decisions," but actually many of us don't in many things. Many of us are strongly influenced by groups around us in ways that we just barely begin to understand.
	I'd say that one of the ways which many people are most influenced is people listening way too much to people who say, "I can make you rich if you only follow my investment strategy." They can't, as a general rule, but boy, do we listen to them. The peer effect of, "Wow, my buddy down the block, he said he gained a lot of money from this guy." You just hear that all the time. It's a very powerful form of peer effect that has big effects on how people think about investing their wealth, and what they think about looking for the future. All of this is an overview. Let me try and now pull this together a little bit.
	What does all this mean for thinking about economics? There's a broad range of work now in behavioral economics. It's all about things like how might firms design what they sell if they want to respond to consumers who are irrational in some of these ways? How could I design my product to take advantage of people, if you want to put it that way? How could I think to people who are loss aversive? One example is if you go buy an appliance, you notice they almost always offer you this warranty where if you pay an extra $20 or something like that, they'll promise to come and fix it. I can tell you actuarially speaking those warranties are almost always a terrible deal, but think about what those warranties do for a moment.
	They give you a reference of, "My appliances are working well. What if they don't?" You think, "Oh, my gosh, what if they don't? What if they don't? $20." It doesn't sound too much if they don't. Then the other thing is that people are averse to losses. They say, "Fixing it, that could be a big expense. $20, you won't have to worry about fixing it." Even though it's the sort of gamble where frankly most big electrical appliances don't break down that fast. It's really not worth worrying about them in their first year or two, but people pay that warranty. That's a way in which people can take advantage of non-standard preferences. Could firms take advantage of this stuff in how they manage workers?
	Could they somehow manage to work out something where there was more gift exchange, where workers worked harder, where they made the job seem better to workers? There's a whole literature in management about how you might try and use management techniques to do that. Can it explain patterns in markets where people are all selling when things go up, and they're not selling when things go down, where people are too responsive to financial advisors, where there are things that are running back and forth? Can we design institutions and try and deal with some of these problems so that people maybe aren't so vulnerable? If you want an easy read on this for the popular audience, Richard Failor wrote a book a few years back, Failor's name has come up a few times here, with Cass Sunstein called Nudge.
	Nudge is the notion that you should be able to think about public policies which, in one way or another, don't require people to do something, and they don't require paying a tax, but what they do is they try and nudge back against these biases. The most famous one, that first one is defaulting into savings accounts or not. For example, the second one. We're always trying to get more people to sign an organ donor card. In some countries, they have a rule that you automatically are presumed to be willing to donate your organs unless you opt out. My guess is a lot of people who don't sign an organ donor card don't care one way or another. They just never got around to checking it, right?
	Maybe the presumption, the default should be that you're opted in, rather than you're opted out. Posting calorie counts so people don't maybe discount the future quite as much. That's now come into law. Maybe filling out an application to college should be a high school graduation requirement. You don't have to turn it in. You just have to fill it out. There's a lot of people who maybe never think about going to college, literally because just filling out the application seems like too big a burden to them. If they just filled one out, they would send it in. It's a nudge. It's not a kick or a punishment. You don't have to do anything as a result. You can read, number six made me smile in particular.
	You can have a list of people who would be banned from entering casinos, and you can put yourself on the list if you want to so that they would be forced to keep you out. If you think you've got a gambling problem, you could join a list like that. You think about, there's some work on energy efficiency where what you do with people's bills is you send out to everyone a message about what the average energy use is of all the other homes in their area, and particularly what you can do is just pick out the people who consume a lot of energy, and send out things pointing that they're above the average. That actually is quite powerful.
	"Oh, I'm way above the average," and people tend to notice that. Put out parking meter-like machines in cities so people could donate their change to charity. You don't have to put any money in, but why not? People could walk out and just dump their change in something like that. Maybe that would be a useful thing to do. The book is full of suggestions like these. I just chose these at random skimming through the pages. If you want to think about what a nudge agenda might look like for public policy, I recommend the book. I guess when I read this list, when I read the book, I had two mixed feelings.
	One feeling is I think a lot of this stuff is really cool and really interesting. It's a hot subject in social science. It's a hot subject in economics. It's worth some thought from all of you, regardless of what your area of economics is. The second thought was, "Man, a lot of this stuff looks pretty small scale to me." Other than the saving accounts thing, which is big, but the parking meters to collect charitable ... Maybe that's good, maybe it's not good, but it doesn't feel like it's changing the world to. It doesn't feel like a big thing. All these things, in a way when you've limited yourself to nudges, have you limited yourself to small stuff? I think that's a hard question to get an answer on.
	We're still struggling with are there other big things beyond, say, the savings accounts that might really be powerful nudge things that would have a big effect? There were also some worries about nudging. What about say in the early 2000s when we made a big effort to nudge lots of people toward owning a home, and then it didn't turn out so well for a whole lot of them? What about past nudges on diet? If you've looked at the recommendations that the government makes about diet, it used to be in the past they recommended a whole lot more meat, and a whole lot more carbs than they would recommend now. If we had nudged people toward the diet that was thought to be good 25 years ago, it's not clear it was the right diet.
	What are we nudging toward? What are we thinking about? What kind of people, in some sense, are we trying to create? What about if we nudged everyone towards stock ownership just before 2008? You can just imagine in the hands of politicians how a nudge agenda becomes an excuse to do whatever the heck you want, basically. What about if we nudged women toward not having abortions, or we nudged people away from homosexuality, or we nudged people toward not having guns, or we nudged people toward having guns, or we nudged woman away from holding paid jobs, or we nudged people to do national service? You could say, "Maybe some of that I really don't like the sound of, some of it I do like the sound of."
	Nudges are subtle. Nudges are behind-the-scenes. Nudges are choices about defaults. When you start thinking about nudging people, there's some extra responsibility to be sensitive to exactly what you are nudging, and there perhaps should be some worry about turning loose a government of politicians with a whole bunch of nudge-related tools. Maybe we're better off giving up some good nudges for the sake of maybe not having bad nudges that we'd rather not have enacted into law one way or another. Again, this what question, what kind of people are we trying to create? How confident are we that we're heading in a good direction? Is really a large question.
	The other big question, I guess, when you think about why these are small potatoes gets to thinking about how a lot of these things work in markets. Let me go through these thoughts. A lot of people say, if you first get into economics, economics is about people behaving rationally. I don't think I believe that. I think that most of economics is about people facing constraints. The fact about economics is that the constraint is real, and because the constraint is real, people have to change in response to the constraint. They may change in a way that's rational or not rational, but the constraint is to me the key fact of economics in a already.
	For example, when the price of something goes up, and you say, "The price goes up. The demand curve tells you the quantity demanded goes down." You can make a rational argument out of that, but the fact is when the price goes up, people have to buy less of something, right? They have a constrained income, so something has to change as a result. That constraint is really there one way or another. Nudges are about rationality, but they aren't about the basic facts of constraints. The constraints are what they are one way or another, and nudges don't get you around the constraints. I think that's one reason why it makes less of difference.
	An old example people used to give here was imagine there's a disaster in the city of Chicago, and everyone flees the city. You are trying to predict how far will the cars get, and how will the cars spread out over space and time? I can tell you a fact about this. The fact is the roads that have gas stations, the cars will get further, right? It's not about their incentives, it's not about what they're trying to do. It's the fact that there's a constraint. You can only get so far without gas. When the constraint changes, then behavior changes, as well. I think that a lot of economic behavior is about the constraints more than about whether things are strictly rational or not. As a result, some of the nudge stuff doesn't quite lift those constraints or alter them.
	Second thing is that economists have long argued that even if people are not consciously rational, in many ways, they act in ways that are close to rational. The standard example, I'm sure many of you have read this essay. Milton Friedman wrote a methodology essay back in 1951 where we talked about, he gave an example of pool players. He said, "Think about people who are experts shooting pool." Many of the people who are experts shooting pool could not solve a trigonometry problem. They could not tell you if I have this spin at this revolution, and this back spin, and it hits this object of this weight at this speed, they could not solve that problem for you, but over and over and over, those very same people can hit a pool ball and make it do what they want it to do.
	It might be similarly true that lots of people in the world we live in, when it comes to answering these kinds of questions, they don't know how to answer them any more than the pool player would know how to answer exactly how hard to hit it, with that force, with that spin, with what speed. If you live in a market economy, you accumulate a certain kind of expertise. You know roughly what things should cost and what things should be, and you know what you like and what you don't like. It might be that many people are relatively good at doing what they want to do in real-world interactions even if they're really bad about answering these kinds of questions in experiments.
	When you try and nudge those people in the real world, nothing much happens because they're already doing more or less what they want to do. That's at least a possibility. I guess in particular, I would say the thing that makes the savings example interesting there is that what makes markets work a lot of the time is that people do the same thing over and over. Think about the market for restaurant meals. You go to a restaurant, you like it, you don't like it. If you like it, maybe you go back, you recommend it. You don't like it, you don't go back, but it's a one-time event. It's done. You've consumed the meal. If you think about long-term savings, you don't get to live your lifetime 50 different times over and try different saving strategies, young, old, and in between, then figure out what's going on.
	You make that choice once. If you make that choice only once, then it's going to be harder to be consciously rational like the pool player. You're like somebody who goes to the pool table for the very first time. You get one shot at getting your lifetime financial goals. Good luck. That's what happens in our lives. A lot of those long-term retirement choices, I don't get to go back and say, "I sure wish when I was 25 I had done X or Y." That's not an option that's open to me. I can switch restaurants much more easily. Third issue is the idea of money machines. A money machine works like this. Imagine that somebody is irrational. Imagine that we have a deal, and I say to you, I come over and I say to the children who are being so patient here.
	I say to you, "Guys, how about if I pay you 50 cents for a quarter? I'll give you 50 cents for a quarter, and then once you've got your 50 cents, then I'll give you 50 cents for another quarter. I'll give you 50 cents for another quarter. I'll give you 50 cents for another quarter. I'll keep doing that." If I did that with you, I would be a money machine. You can just keep giving me the quarters, and I keep giving you 50 cents for every one. The difficulty with that is that that can't go on forever because I don't have all that much money, so I'm going to run out of money. If you could take advantage of people in a behavioral way and make them into money machines, make them give you stuff, make them pay warranties, make them do things they might not otherwise do, at some point they run out of money, and they're not willing to just keep giving you money until they're completely broke.
	There's a reason those warranties are $20 or something. They're not $500 or $10,000. They're a small amount because you're willing to pay small amounts, but larger amounts, you think, "I'm not a money machine. I'm not willing to do that." There may be limits to the extent to which you can take advantage of people who are even behaviorally inclined people. A fourth thing is that markets accommodate extremes. Imagine for example that I want as a lunatic baseball fan who still believed my Minnesota twins had a chance to win some games next year, makes so I'm willing to play huge amounts of money for tickets.
	I'm willing to pay $10,000 for every game, because I'm such a big fan. The question is in a market, do I have to pay those $10,000? The answer is of course not. I just have to pay whatever the price of the ticket is. If the ticket sells for $40, that's all I have to pay. Markets have a lot of room for people who are crazy, people who would do crazy stuff, but they don't have to do crazy stuff because the market price is not determined by crazy people. The market price is determined by the people in the middle. It's determined by the marginal buyer and the marginal seller, right? We can say, "People have all this weird stuff. A lot of people would do this, and they do that, and do the other."
	When you actually get into the market, those people aren't determining the outcome. The outcome is determined by marginal buyers and marginal sellers. What they want is not relevant tow a the market is going to do. A final thing would be lots of times people can build social mechanisms where they're irrational. A standard example I mentioned before would be social security. If I know I'm not good at saving, let's pass a law which says that there's going to be something where I have to chip in a certain amount, and at retirement I will get a certain amount. Things like that have been around a long time.
	In the 19th century, early 20th century, there were what were called Christmas clubs where you put in a certain amount of money all year, and at the end of the year at Christmas time, you got a turkey, or a goose. You couldn't have bought the goose, you couldn't have saved on your own, but if you put it aside every month or every week through the year, you'd have it at the end. You can imagine disciplining yourself in those kinds of ways. Lots of things in the world like a waiting period before you buy a gun, or a time where you can go back on your contract to buy a house, you can go back on your contract to buy a car are all things where about, there's a social mechanism to stop you from jumping too quickly.
	A lot of those things can be thought of as overcoming various behavioral problems, or disclosing information of different kinds. Taking all these together, I guess right now, the evidence seems to be that the behavioral arguments can all be real in a lot of particular contexts, but that their overall effect is perhaps surprisingly limited. Trying to figure out if that's a wrong conclusion, if the effects are actually bigger in a lot of situations is a really open question, and something that economists and lots of people in other areas are trying to do work in.
	To me, maybe the most interesting concept for all this is that the notion that how I think about myself, and I guess what I would say here is that I think about myself like a lot of people do. I think about myself as a personality, as a single person, and I have a mind, and I think about choices, and I make a choice, and I think about myself as a unitary intelligence. What all behavioral stuff suggests, as well as a lot of work in brain chemistry and theory of the brain lately is that that's completely wrong, that it is not true that I have a unitary mind. It is not true that I am a single person. What is true is if you put me in a certain setting with a certain group of peers, and a certain kind of information, and a question framed in a certain way, I will act in one way.
	If you put me in a different setting with a different group of peers and a different question framed in a different way, I will act in a different way. I am not a single person. I am affected by what is around me, and I find that thought deeply disconcerting. It challenges my sense of self. It challenges who I think I am. I also think it's true, and so I guess the challenge I would leave all of you with is as you think about your own choices, think about are you being overly influenced by the framing? Are you being overly influenced by the timing? Are you being overly influenced by the menu in which things are being presented? Are you being influenced by feelings of peers around you?
	Because all of those things are shaping your choices, and you don't know it. They're all nudging you all the time. When you think about yourself and who you are, think about yourself in that context, and think about whether the choices you're making really are the choices you would choose if things were phrased or shaped or looked at just a little bit differently. That's all I've got to say. I'm happy to take some questions.