Base rate neglect for the wealth of populations

Base rate neglect has been shown to be a very robust bias in human information processing. It has also been show to be ecologically rational in some environments. However, when arguing about base rate neglect usually isolated individuals are considered. I complement these results by showing that in many scenarios of social learning a base rate neglect increases a population's wealth. I thereby strengthen the argument that the presence of base rate neglect could be evolutionary stable. I pick up a model of social learning that has been used to demonstrate the potential benefits of overconfidence. Individuals are confronted with a safe and a risky option. They receive a private signal about the risky option's outcome, they decide in an exogenously given sequence, and they observe decisions of preceding individuals. I first deviate from the original model by incorporating base rates that differ from fifty-fifty and show that under weighting this base rate can be for the wealth of a population. Then I analyse how the optimal base rate neglect reacts to changes in payoffs. I show that for large set of settings under weighting the base rate is still positive, but for a smaller subset it decreases wealth insteadcognitive biases, base rate neglect, social learning, ecological rationality

Soft Paternalism and Nudging - Critique of the Behavioral Foundations

This brief note rises doubts on the argument that nudging will help people to behave more rational in terms of their own preferences. This justification of soft paternalism overlooks some methodological problems of expected utility theory which are one of the roots of behavioral economics

Success from Satisficing and Imitation: Entrepreneurs’ Location Choice and Implications of Heuristics for Local Economic Development

Decisions about location choice provide an opportunity to compare the predictions of optimization models, which require exhaustive search through very large choice sets, against the actual decision processes used by entrepreneurs choosing where to allocate investment capital. This paper presents new data on entrepreneurs’ self-described decision processes when choosing where to locate, based on scripted interviews with 49 well-placed business owners and senior managers in charge of location choice. Consideration sets are surprisingly small, especially among those who are successful. According to entrepreneurs’ own accounts, locations are frequently discovered by chance rather than systematic search. Few describe decision processes that bear any resemblance to equating marginal benefit with marginal cost as prescribed by standard optimization theory. Nearly all interviewees describe location choice decisions based on threshold conditions, providing direct evidence of satisficing rather than optimization. Imitation is beneficial for small investment projects. Decision process data collected here suggests a need to rethink standard policy tools used to stimulate local economic development.Process Model, Bounded Rationality, Interview Data, Ethnic, Discrimination, Low income, Neighborhood, Lexicographic, Non-compensatory, Business Owners

Illusive competition in school reform: Comment on Merrifield's "Imagined evidence and false imperatives"

Merrifield (2009) provides a useful polemic about the sad state of data analysis too frequently encountered in the school choice literature. The available data come mostly from limited policy experiments with only modest amounts of choice and competition. These data are then misapplied in debates about more dramatic shifts to new systems to supply educational services that aim for large expansions of choice and competition. It is difficult to cleanly separate theoretical priors from empirical evidence. I contend that it is possible to make a stronger empirical case for dramatic school reform. But doing so would require dealing with six potential pitfalls based on economic theory that might arise when attempting to move to school systems more reliant on private providers of educational services. Given the difficulty of policy experiments, this is a high evidential bar, and may leave us stuck in an unfortunate status quo, as Merrifield suggests. More detailed definitions of competition together with bold, new empirical evidence are clear priorities for advancing debates over school reform, and should be core elements of prescriptive policy analysis

Illusive competition in school reform: Comment on Merrifield's "Imagined evidence and false imperatives"

Merrifield (2009) provides a useful polemic about the sad state of data analysis too frequently encountered in the school choice literature. The available data come mostly from limited policy experiments with only modest amounts of choice and competition. These data are then misapplied in debates about more dramatic shifts to new systems to supply educational services that aim for large expansions of choice and competition. It is difficult to cleanly separate theoretical priors from empirical evidence. I contend that it is possible to make a stronger empirical case for dramatic school reform. But doing so would require dealing with six potential pitfalls based on economic theory that might arise when attempting to move to school systems more reliant on private providers of educational services. Given the difficulty of policy experiments, this is a high evidential bar, and may leave us stuck in an unfortunate status quo, as Merrifield suggests. More detailed definitions of competition together with bold, new empirical evidence are clear priorities for advancing debates over school reform, and should be core elements of prescriptive policy analysis

Demand for Self Control: A model of Consumer Response to Programs and Products that Moderate Consumption

Is it better to apply effort to increase personal consumption, or control what one wants? The model presented here provides a characterization of demand for self control, namely, its responsiveness to price and risk. Unlike most other models of self control, the model does not identify self control with time inconsistency or rely on the multiple-selves framework. Self control refers to resources allocated to preference transformation technology enabling consumers to moderate desire for ordinary consumption by reducing threshold levels required to achieve goals or target-levels of consumption. Consumers face a choice between allocating resources toward increasing expected levels of consumption or increasing chances of contentment through self control. Because of strong income effects, demand for self control turns out to be non-monotonic in price and sometimes discontinuous, revealing potential for unanticipated and sometimes surprisingly large responses to small changes in price. The model is used to analyze consumers’ willingness to follow new regulations, take up credit counseling, enroll in financial literacy programs, and purchase products aimed at improving financial decision making through cultivation of self control.Preference Choice, Preference Change, Moderation, Restraint, Desire, Financial, Decision Making, Consumer Credit, Consumer Finance, Institutional Design, Ecological Rationality, Bounded Rationality, Behavioral Economics

The limits to libertarian paternalism: two new critiques, and seven best practice imperatives

publication-status: AcceptedCopyright © 2012 PionGill N, Gill M, 2012. The definitive, peer-reviewed and edited version of this article is published in Environment and Planning C, 2012, Vol. 30, Issue 5, pp. 924 - 940Behavioural economists argue that humans are predictably irrational in various ways, as a result of which there appears to be a role for public policy to improve their decision-making. We offer a sympathetic critique of this so-called ‘libertarian paternalist’ approach. As well as reviewing existing critiques, we present two new arguments. First, we question the use of libertarian paternalism in situations where the social good is invoked to justify policies that are not beneficial to the individuals directly affected. Second, we highlight the potentially adverse consequences of poorly targeted libertarian paternalist techniques. The penultimate section then brings together the existing critiques and the new arguments to offer seven best practice imperatives for the reflective application of these powerful, but easily misused, tools of government. We conclude with some brief reflections on what freedom might mean in the context of libertarian paternalist governance