Behavioral Economics

Behavioral Economics – Its Complicated

At a recent workshop, we discussed a behavioral economics experiment that showed how stressing the positive or negative aspects of a situation altered the way participants responded to the risk inherent in the situation.  We demonstrated the famous test regarding treatment options that were framed to highlight either the number of patients who would die or the number of patients who would live in a hypothetical program.  The point of the exercise is to show how framing the potential outcomes differently can drive us to make safe or risky decisions.

The test focuses on a disease outbreak that, if not treated would kill 6,000 people.  In the second part of the demonstration, participants are presented with two possible responses that are framed to focus on how many people would die with each of the responses.

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(slide from Understanding Behavioral Economics workshop)

In most studies participants overwhelming chose response D with its lack of guarantee of any saved lives, even though response C would guarantee the survival of 2,000 people.  Even when response D is altered so that the odds are a 75% chance that everyone will die, and only a 25% chance that the solution will save everyone, most participants still chose the riskier option.

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(slide from Understanding Behavioral Economics workshop)

This highlights the interaction between framing and loss aversion bias. When confronted with the possibility of a loss we tend to chose the riskier option if there is even a small chance it will eliminate any loss.

One of the workshop participants, a wise doctor, challenged some of the assumptions involved in the outcome.   His reasoning was that the moral pressure to keep everyone alive would naturally have steered participants to the riskiest option.

We used this example precisely to highlight a truth that is often missed about behavioral economics.  BE is complicated.  Rarely are the factors involved as clear cut as short articles and pop culture fans would suggest.  There are always multiple factors involved; understanding the nuances, dealing with the context and having a clear-headed view of all the aspects of choice analysis, decision making and behaviors are important.  Too often we rush to judgment based on a few data points and fail to test our assumptions before jumping in with a “solution.”

At our upcoming workshop, we discuss in detail the bias that Credit Unions need to understand if they want to make a real impact on the financial well-being of their members and improve the engagement of their employees.  You will learn how to analyze behaviors, identify interventions and design and test environments that help improve outcomes for your members and your organization.

Register here to attend the Understanding Behavioral Economics workshop in Washington DC on June 5 & 6 presented in partnership with Callahan & Associates, the Credit Union Company.

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