# The battle of the Nudge

I was invited to present a paper in Stirling, the European Capital of Nudge, last week. (http://www.stir.ac.uk/management/research/behavioural-science-centre/)

Here are pictures of me resisting the nudge to put my trash in the bin (pics taken by Leonhard Lades, my very nice host there).

This is actually a nice illustration of an issue with nudges, how they can make you do the opposite of what the nudger wants, just to mock the authority (or is that just me?).

Beyond having fun littering in the city, I also presented the results of a project that I did with the very clever, fast and efficient Magdalena Kaczmarek during the dying days of the Max Planck Institute of Economics in Jena.

We were investigating what happens after the nudge, i.e. the impact of nudges on people’s attitudes towards the behavior they are encouraged to adopt. Our question was whether the nudge changes people‘s mind about the “desirable action”, or if they rather react to it mechanically, like one reacts to an obstacle in the way of one’s preferences.

In our experiment, we offered people a total of 4€ to fill a survey. At the end, they could pledge the money to a charity. There were four treatments:

– Nudge: The default was to pledge to one charity.
– No nudge: The default was to keep money to oneself
– Nudge with choice: The default was to pledge to one of three charities.
– No nudge with choice: The default was to keep money to oneself, the alternative was to pledge to one of three charities

Taking the alternative involved a (limited) effort, i.e. writing “I want to do this” rather than clicking on a button to do what the nudge suggested.

In all cases, whether people pledged the money or wanted it for themselves, they had to come collect the money in our offices. They could then put the money into piggybanks for each charities.

We found that the nudge did work in eliciting about twice more pledges to charities. However, those who were nudged to pledge were less likely to actually come to claim the money. In the end, treatments with nudges did not result in more money actually contributed to charities.

We also elicited people’s attitudes to the charities and to us, the nudgers. We found that there was no apparent effect of nudges on people’s perception of charities, or of us, the nudgers. The good thing is that they did not make people more cross against charities or against us, so people do not usually react like me when people try to push me to do something.

In fact, the only robust effect on perceptions of charities was that if you give people the possibility to pledge, then they become less keen on charities than in a control treatment where they did not have the possibility to pledge. This is probably due to reactance, i.e. people trying to find reasons not to pledge by devaluing charities.

Giving more choice whom to pledge to improved matters only in so far as people were then more satisfied with their choices, but they did not pledge or contribute more, and giving choice did not improve their perception of us, the nudgers.

Subjects were not very fond of the possibility to contribute the money to a charity and were not keen on the possibility to donate proceeds from experiments in further experiments. Nudging them to pledge also made them more likely to say they felt forced to contribute.

Our experiment confirms the view that nudges act in a mechanical way, i.e. they lower the threshold at which people adopt a given behavior. We were able to exclude the other possible effect of a nudge, i.e. that nudging people to pledge makes them keener on charities. This could have been the case if people rationalize their nudged pledge ex-post by telling themselves they liked the charities. Instead, we found that nudges had no effect on people’s perceptions of the charities.

All this means that those who are nudged to do something will not keep on doing this in the absence of a nudge. We knew this already, but it also means that nudging people to do something that will require subsequent effort is unlikely to work if that subsequent effort is not also incentivized. Indeed, for our case, the people we nudged to pledge were “at the margin”, i.e. more or less indifferent between keeping the money or contributing it. This means that they were not so keen on contributing in the first place and were therefore unlikely to actually do the effort to collect the money in order to give it to charity.

As in the proverb, “there’s many a slip ‘twixt the cup and the lip”: getting people to “fake it” (pledge) does not always work to get them to “make it” (contribute).

Of course, charity muggers probably knew this already. You have to make sure to be ready to collect the money right then and there and you should not let people get away with just making a pledge.

# Price and format competition with consumer confusion

Paolo Crosetto writes about our new paper about price and format competition with consumer confusion.

http://paolocrosetto.wordpress.com/2014/11/07/price-and-format-competition-with-consumer-confusion-a-new-paper-with-alexia-gaudeul/

Nice graphs depict our “Chrome market model”:

Our conclusion is as follows:

In a nutshell, clever consumers are not enough to avoid collusion and high prices. Consumer protection may therefore require some encouragement for firms to present prices and products in a common format. For example, firms may have to be required to provide some standard information to help consumers in comparing products, for example an index of energy efficiency for fridges and other appliances.

Unit price information is already generally available or even mandated in supermarkets. Some standardization is also present at the national level for presenting lending rates in terms of annual percentage rate of charge. There is however a lot of progress to be made for example in the automobile market, where fuel economy information is often misleading and wrongly conveyed.

Agreeing on common formats for measuring the performance and prices of different type of relatively undifferentiated products could therefore be a valuable extension to the efforts that have led to the progressive spread of the metric system for physical measurements.

The paper is available on SSRN as:

Crosetto, Paolo and Gaudeul, Alexia, Choosing Whether to Compete: Price and Format Competition with Consumer Confusion (November 3, 2014). Available at SSRN: http://ssrn.com/abstract=2519000 or http://dx.doi.org/10.2139/ssrn.2519000

or on RePEC at:

Crosetto, Paolo and Gaudeul, Alexia, (2014), Choosing whether to compete: Price and format competition with consumer confusion, No 2014-026, Jena Economic Research Papers, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics, http://EconPapers.repec.org/RePEc:jrp:jrpwrp:2014-026.

# Busy like a bee and still buzzing not so weakly

A very busy summer for me this year, after last year’s ban on conferences to focus on doing experiments.

For me the summer started at the end of May with a research stay in Rennes, where I was invited by Eric Darmon and gave a talk about my research with Paolo Crosetto on how firms can profit from keeping consumers confused about how their product compares with the competition. A shorter version of my presentation is here. I blogged about it here. Paolo and I are putting the last touches to the paper before releasing it.

Rennes was a very enjoyable stay indeed, as Eric Darmon and I had very fruitful discussion about how far consumers would trust firms that advise them on what product to choose based on private information collected for example via an analysis of their behaviour on the Internet.

Right after returning, I participated in the Jena Science Slam, which I won! (blog post here)

End of June was a trip to Italy. Final destination was Alberobello and I stopped on the way for the marriage of Paolo Crosetto with beautiful Irene in Turin. I also visited Caterina Giannetti in Pisa and saw her supra-cute baby, Ana.

Alberobello was the location for the bi-annual industrial organization conference organized by the University of Salento. I presented my paper with Paolo on whether firms can collude to maintain a confusopoly. Particularly interesting presentations for me were in the field of behavioral IO: Anastasia Shchepetova on confusopolies, Giovani Ursino on deceptive advertising, and Sofronis Clerides on consumer inattention. There was also a plenary talk by Mark Armstrong that provided a summary of some efforts in modelling markets with uninformed consumers.

After two weeks back, it was the start of the Jena Summer School, with two parallel programs, one for the GK-EIC focused on innovation and the other for the IMPRS focused on experimental economics.

I was the happy adviser of the IMPRS team that won the group work contest, which involves running an experiment from idea generation to design, data gathering in the lab, analysis and presentation of findings, over 4 weeks. Their theme was investigating the difference between uncertainty and strategic uncertainty. See p. 13 here for a nice pic of the group.

Right after the summer school finished, there was then the Schumpeter conference in Jena. I presented my work on the reasons why individuals exit partnerships.  My presentation is here.

The conference included a number of sessions of interest for me, notably a session I chaired and which focused on measures of subjective well-being (Hans-Jürgen Engelbrecht), whether governments should focus on increasing happiness (Christian Schubert) and how paternalism could be autonomy enhancing (Martin Binder).

The sessions I enjoyed most were however about history, notably talks by Mark Knell, Heinz Kurz and Harald Hageman with insights about the differences between Schumpeter and Keynes.

A very enlightening presentation was about the future of capitalism by Carlota Perez which predicted a new “Belle Epoque”, and a very dynamic talk was by Mariana Mazzucato on how firms, notably banks, socialize risks and privatise rewards. A bit too black and white for some, but I liked it all the same.

Finally, the summer ended with the ESA European conference in Prague, where I met many present and former members of the soon to be disbanded Max Planck Institute for Economics.

I presented two works of mine. The first was on confusopolies in the lab, which looks at the IO consequences of findings in a paper with Paolo that tests the strength and robustness of the attraction effect in consumer choice.

The second was about social preferences when faced with random wealth assignments mechanisms – also knowns as “catastrophes” in some circles :). I blogged about that work here but the paper I wrote at that time was very misguided and I completely changed my method of analysis, getting rid of the parametric assumptions about utility functions and focusing on non-parametric measures of risk aversion and their relation with lottery characteristics. Preparing this presentation was the occasion for me to make sense of two experiments I ran on that theme, and to plan for a third that will bind those two.

The most interesting presentation was that by Han Bleichrodt on PRINCE, the PRior INCEntive system. I intend to use his suggestions in my future experiment, with an easy adaptation to incentivizing two-person interactions rather than simply individual choice. I also liked a presentation by Claudia Neri on preferences for decision rights, which has some similarities with work by Nadine Chlass on purely procedural preferences.

Overall, a very busy summer indeed, during which co-authors Marian Panganiban and Ayu Okvitawanli also ran the sessions for our job market experiment on gender discrimination. We vary not only the composition of the hiring pool but also the composition of the hiring team and relate discrimination to a number of individual variables, including an Implicit Association Test between competence and masculinity.

Beyond work, I also spent week-ends in Leipzig and Dresden, went kayaking on the Saale, spent many evenings hanging in my hammock in Paradies Park and kept on improving my skills in chess. I reached what is now a pretty decent club player level and intend to take part in my first chess competition next year!

# Science Slam picture and video

A really good picture of the Science Slam victory celebration with GSBC and MPI colleagues. The photographer managed to do a really good group picture. I will remember his technique to encourage people to do a wide smile: not the usual “Cheese!”, but stretching his own mouth wide with his fingers. It seems to have worked!

The videos of the 4th Jena Science Slam are also now online:

http://www.db-thueringen.de/servlets/DerivateServlet/Derivate-29821.xml

I am slammer number 4. I am not sure I like my presentation so much but at least it got people laughing. I was told I already won with the first picture in the presentation, which features THREE cats. Cats are for the win apparently!

In other remarks, it is surprising how things that appear to last only a second on the video seemed to go so much slower when I was on stage!

# Jena Science Slam Winner!

My (winning!) Jena Science Slam presentation, with notes in small character added. The title of my slam was “Why is shopping such a baffling ordeal, and what can you do about it?”. I am very thankful to the audience, they had amazing energy in their cheering and applause!

There should soon be videos of this year’s Slam on the Graduate Academy’s website. It will be funny to see how it looked like :)

# Competition when firms can confuse consumers: A primer on some ongoing research

I felt like giving a little primer on the results of an experiment that Paolo and I did in December, about the incentives for firms to confuse consumers. I was motivated by seeing the following recent article in JEBO:

“Consumer Myopia, Competition and the Incentives to Unshroud Add-on Information” by Tobias Wenzel
http://dx.doi.org/10.1016/j.jebo.2013.12.002

As in most (all?) articles on shrouding, this paper considers only the one stage game and finds as usual that firms will want to make their prices transparent… while ignoring the impact of collusion.

Yes, I did the same thing in my paper in Economica with Bob Sugden on spurious complexity and common standards (http://dx.doi.org/10.1111/j.1468-0335.2011.00895.x). But now, from a recent experiment with Paolo Crosetto where we test a similar model in the lab, we found that firms were quite able to collude not to unshroud after experiencing the horrors of an unshrouded equilibrium!

I am excited about writing up the results, as in fact, being able to choose to make prices transparent or not can help collusion compared to a standard setting with no possible shrouding, and this in two ways: by serving as a signal that one wishes to make peace with others, and also by making the punishment phase harder on those who deviate and unshroud. Once said, this looks obvious now, but I guess this has been missed by others than us, so I don’t feel so bad about missing it.

I will be working in the next month or so on writing up the results, but I am now busy finishing writing a paper on the relation between exit costs and incentives to exit in a repeated version of the public good game with imperfect public monitoring and stochastic outcomes. Very interesting, but it has been hell to find the correct perspective in writing about the experimental findings.

# Social preferences under uncertainty. An experiment

In his short story “The Lottery in Babylon”, Borges imagines a city where a lottery, managed by a secret society, mandates the fate of its citizens. Every sixty nights, drawings are made and determine each citizen’s fate until the next drawing, and this with “incalculable consequences”. Like the narrator, one might end up a proconsul, or one might end up a slave… until the next drawing, unless of course the draw mandates death!

This is one extreme example of enforced social mobility of course, but the author, intriguingly, ends the story by saying that the lottery has become so much part of life in Babylon that one is not any more sure it even ever existed. Could our lives also be determined by a secret society of Fates?

In our more prosaic lives as well, chance, or misfortune, can befall any of us without warning. While one may think one’s in control of one’s destiny, a lot of our decisions have unpredictable consequences. Yet, one must decide one way or the other. In most of the literature on decisions in a risky setting, chance only affects oneself. However, more recently, some authors have started to investigate the social dimension of risk, that is, whether perceptions of a risk may be affected not only by how that risk affects oneself, but also by how it affects others (Bolton and Ockenfels, 2010Brennan, González, Güth and Levati, 2008Charness and Jackson, 2009Güth, Levati and Ploner, 2008Bradler, 2009Harrison, Lau, Rutström and Tarazona-Gómez, 2013Linde and Sonnemans, 2012Rohde and Rohde, 2011)

This matters because people are sensitive to how their wealth compares with that of others, so that a catastrophe that affects all in the same way, such as a tsunami in a coastal city in Japan, will have a different impact than a risk that affects only oneself, such as when one’s house burns down.

In a new working paper, Social preferences under uncertainty, I decided to investigate how individuals consider different types of social lotteries by using the simplest experimental design I could think of. I got a number of experimental subjects (humans of the student variety) to choose between different allocations of wealth between themselves and an anonymous other, some of those allocations being subject to chance.

The main variables I was interested in were as follows:

• If the allocation is subject to chance, does a bad outcome for me (low payoff) also mean a bad outcome for the others?
• If there is an alternative to risk, such that I can get a payoff for sure and the other as well, does that safe alternative guarantee me as much as the other, less, or more?

I was expecting, based on earlier literature, that correlation in payoffs (the first aspect) would not influence choice that much. That actually did not fit with my intuition, as I thought people would dislike negatively correlated social payoffs most. I also expected that people would be more ready to take risk if that meant avoiding a safe but subordinate alternative. Because many people do not like inequality even if it favours themselves, I also expected people would be more ready to take risk to avoid dominant safe alternative, maybe out of a sense of fairness.

In the event, I did find that people did not like their payoffs to be correlated with that of others, though the effect was small, and that they indeed did not like inequality in terms of the safe alternative. This means they were more likely to choose a risky but fair lottery giving expected payoff of 45 ECU for both when the alternative was a safe but unequal payoff than when it was a safe and equal payoff.

The issue is that while dislike for correlated lotteries can be explained through altruism (people do not like others to bear risk even if themselves do bear risk), dislike for unequal safe payoffs can be explained through inequality aversion, which goes against altruism in some cases. Indeed, altruism mandates preferring higher payoffs for the other no matter what, while inequality aversion means that one prefers the other to have less if the other has more than oneself!

This generates some issues when generalizing the social preferences as modeled in Fehr and Schmidt (1999) or Bolton and Ockenfels (2000) and in a lot of the literature on choice in social settings, as one cannot be at the same time altruistic and inequality averse. Why were people not happy for the other to get a higher payoff than themselves in the safe lottery? Among others, Brock, Lange and Ozbay (2013)Cappelen, Konow, Sørensen and Tungodden (2010) and Krawczyk and Le Lec, (2010) in particular suggested fairness considerations had to play a role. I used a suggestion in Fudenberg and Levine (2012) whereby utility would be a mix of utility for ex-ante, expected payoffs and ex-post social outcomes from the lottery. I later found out this idea was used in recent theoretical papers by Krawczyck (2011) and Saito (2012).

The formula for utility of lottery $L=(a,\frac{1}{2};b,\frac{1}{2})$ takes the form $U_{L}=\lambda(\frac{1}{2}u(a)+\frac{1}{2}u(b))+(1-\lambda)u(\frac{1}{2}a+\frac{1}{2}b)$

that is, utility is $\lambda$ times the expected utility of the lottery, with the utility of different outcomes possibly influenced by the utility of the other in that situation, so $u(me,you)=u(me)-\alpha|u(you)-u(me)|$ for example, plus $1- \lambda$ times the utility of the expected value of the lottery, maybe influenced by the expected value of the lottery for the other.

An individual would thus judge a lottery along two dimensions: Is it fair? Are the outcomes correlated or not with those of the other? I did find that people’s choices were consistent with them putting a high weight on ex-ante fairness ($1-\lambda$ high), but also taking account of the type of risk borne in the lottery. However, I was still not able to reconcile subjects’ preferences among lotteries with my modelling, suggesting that maybe individuals do indeed have different social preferences under risk than under certainty.

In terms of experimental methods, one of my issue with standard ways to elicit preferences is that, when offered the choice between two lotteries, subjects can generally only say: “I prefer this one”, or “I prefer this other”, but not by how much. Some experiments allow people to express indifference, and some, such as Connolly and Butler (2006) ask people to express the strength of their preferences or emotions associated with a lottery, though not in an incentive compatible way. Peter Moffatt in his excellent book Experimetrics (forthcoming at Palgrave Macmillan ) explains how far expressed strength of preferences can indeed be used to refine estimates, but as he mentions along Grether and Plott (1979), “task related incentives are the bedrock of theories under test”, so that tests of theories “cannot be taken seriously in the absence of non negligible task-related incentives”. I had the idea to make people pay to increase the probability to obtain their preferred lottery. In principle, they would pay only up to the point where their preferred lottery minus the price would be indifferent vs. the less preferred lottery. I think I am the first to implement such a system, which ended up working nicely, and allowed me to have more precise and robust estimates of subjects’ preferences (see the econometric section). However, this made the experiment more difficult to understand for subjects.

Another issue I had with other experiments on the topic was how the choices offered to the subjects looked too much like each other so that subjects could quite easily apply decisions made in one setting to another setting. For example, if they keep being offered a lottery that gives either 20 or 80 with probability ½ and ½, while the payoff of the other varies between choice instances, then they might just economize on the thinking cost and always make the same decisions without considering the payoff of the other. I therefore randomized payoffs in my lotteries, at the cost however of not being able to compare decisions directly across different situations, and therefore having to adopt a parametric approach to identifying subjects’ preferences (i.e. postulating a model of choice, estimating its parameters and looking at its consequences in terms of choice among different types of lotteries).

For more details, the paper is available at SSRN and at RePEC.