Behavioral Economics and Behavior Change
David Laibson
Robert I. Goldman Professor of Economics
Harvard University
February 2013
Research funding from National Institutes of Health, National Science Foundation,
Russell Sage Foundation, Sloan Foundation, Humana, Social Security Administration.
Mainstream economics
Standard (or “classical”) economic assumptions:
§ People know what’s in their best interest.
§ And they act on that knowledge.
Behavioral Economics
also known as
Psychology and Economics
Better assumptions:
§ People often hold mistaken beliefs.
“I feel fine. Why should I take this statin?”
§ And even when we do understand what’s best,
we often don’t follow through.
“I’m busy now. I’ll pick up my prescription next week.”
Psychology + Economics
§ Nobel Prize (2002) to Daniel Kahneman
How can you change behavior?
§ Financial incentives?
§ Education?
§ Information?
4
We’ve learned a lot about
behavior change by studying
savings behavior…
§ I’ll use savings behavior to illustrate many of the
concepts in my talk
§ I’ll then apply the concepts to the health domain
§ In the US, workers save in 401(k) accounts that are
organized by their employers
§ These are voluntary savings accounts
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$100 bills on the sidewalk
Choi, Laibson, Madrian (2010)
§ In 401(k)’s, employer match is a risk-free high return
§ You put in 6% of your salary and typical employer
matches you with 3% from the employer’s funds
§ 401(k) is particularly appealing if you are over 59½
– Can withdraw your contribution without penalty
§ We find that on average, half of employees over 59½
are not fully exploiting their employer match
– Average loss is 1.6% of salary per year
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We then conducted an educational
intervention.
§ We randomly chose a group of employees age 59½+
who were not getting full employer match
§ We explained that they could:
– contribute to the 401(k) plan and then withdraw their
contributions at any time without paying a penalty
– keep the employer’s matching funds even if they
withdrew their own contribution
§ We also asked them to calculate how much they were
losing in matching dollars (median answer:
$1200/year)
§ How much did contributions increase on average
among the newly educated group: 0.1% of pay.
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Do 401(k) employer matches work?
§ Only raise participation by 5 to 10 percentage points.
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Classical economics view:
Incentives and education are very powerful
Behavioral economics view:
Incentives and education often don’t work
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Fee insensitivity
Choi, Laibson, Madrian (2009)
§ Experimental study with 400 subjects
§ Subjects are Harvard staff members
§ Subjects read prospectuses of four S&P 500 index funds
§ Subjects allocate $10,000 across the four index funds
§ Subjects get to keep their gains net of fees
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Data from Harvard Staff
$581
$516
Control Treatment
$518
$451
$385
$320
$255
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3% of Harvard staff
in Control Treatment
put all $$$
in low-cost fund
Fees salient
$494
Fees from
random
allocation
$431
Data from Harvard Staff
$581
$516
Control Treatment
$518
$451
Fees salient
$494
$385
$320
$255
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3% of Harvard staff
in Control Treatment
put all $$$
in low-cost fund
9% of Harvard staff
in Fee Treatment
put all $$$
in low-cost fund
Fees from
random
allocation
$431
So what does reliably work?
Interventions that channel good
intentions into action.
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Choosing fruit vs. chocolate
Read and van Leeuwen (1998)
Choosing Today
Eating Next Week
Time
If you were
deciding today,
would you choose
fruit or chocolate
for next week?
14
Patient choices for the future:
Choosing Today
Eating Next Week
Time
Today, subjects
typically choose
fruit for next week.
15
74%
choose
fruit
Impatient choices for today:
Choosing and Eating
Simultaneously
Time
If you were
deciding today,
would you choose
fruit or chocolate
for today?
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Time Inconsistent Preferences:
Choosing and Eating
Simultaneously
Time
70%
choose
chocolate
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Choosing movies
Read, Loewenstein & Kalyanaraman (1999)
Choose among 24 movie videos
§ Some are “low brow”: Four Weddings and a Funeral
§ Some are “high brow”: Schindler’s List
§ Picking for tonight: 66% of subjects choose low brow.
§ Picking for next Saturday: 37% choose low brow.
§ Picking for second Saturday: 29% choose low brow.
Tonight I want to have fun…
next week I want things that are good for me.
A psychological theory of good intentions:
Present bias (Phelps and Pollak 1968, Laibson 1997)
Immediate events get psychological weight of 1
Future events get psychological weight of only ½
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Procrastination
Akerlof (1991), O’Donoghue and Rabin (1999)
§ Suppose you can exercise (effort cost 6) to gain
delayed benefits (health value 8).
§ When will you exercise?
§ Exercise Today:
§ Exercise Tomorrow:
-6 + ½ [8] = -2
0 + ½ [-6 + 8] = 1
§ Happy to make plans today to exercise tomorrow.
§ But likely to fail to follow through.
Joining a Gym
Della Vigna and Malmendier (2004)
§ Average cost of gym membership: $75 per month
§ Average number of visits: 4
§ Average cost per vist: $19
§ Cost of “pay per visit”: $10
Procrastination in retirement savings
Choi, Laibson, Madrian, Metrick (2002)
§ Survey
– Mailed to a random sample of employees
– Matched to administrative data on actual savings behavior
Procrastination in retirement savings
Choi, Laibson, Madrian, Metrick (2002)
Typical breakdown among 100 employees
Out of
every 100
surveyed
employees
68 self-report
saving too little
24 plan to
raise
savings rate
in next 2
months
3 actually follow through
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Opt-in enrollment
Opt-out enrollment (auto-enrollment)
PROCRASTINATION
UNDESIRED
BEHAVIOR:
Non-participation
DESIRED
BEHAVIOR:
participation
START HERE
Madrian and Shea (2002)
Choi, Laibson, Madrian, and Metrick (2004)
Active choice
Carrol, Choi, Laibson, Madrian, Metrick (2009)
§ Welcome to the company
§ You are required to submit this participation form
§ If you don’t want to participate, indicate that decision
§ If you want to participate, indicate that decision
§ Making no choice is not an option
Active Choice
PROCRASTINATION
UNDESIRED
BEHAVIOR:
Must choose for oneself
Non-participation
DESIRED
BEHAVIOR:
participation
START HERE
Carrol, Choi, Laibson, Madrian, Metrick (2009)
Quick enrollment
PROCRASTINATION
UNDESIRED
BEHAVIOR:
Non-participation
DESIRED
BEHAVIOR:
participation
START HERE
Beshears, Choi, Laibson, Madrian (2009)
Quick enrollment
PROCRASTINATION
UNDESIRED
BEHAVIOR:
Non-participation
DESIRED
BEHAVIOR:
participation
START HERE
Beshears, Choi, Laibson, Madrian (2009)
Improving participation
Default non-enrollment
40%
(financial incentives alone)
Quick Enrollment
50%
(“check a box”)
Active choice
70%
(perceived req’t to choose)
Default enrollment
90%
(opt out)
0%
20%
40%
60%
80%
100%
Participation Rate (1 year of tenure)
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Locus of self control in frontal cortex
Frontal
cortex
mPFC
mOFC
vmPFC
Neural foundations
functional magnetic resonance imaging (fMRI)
Stay on your diet
(Executive
function in
analytic cortex
dlPFC)
I want a donut
(impulsivity in
dopamine reward
system)
McClure, Laibson, Loewenstein, Cohen (2004)
McClure, Ericson, Laibson, Loewenstein, Cohen (2007)
Hare, Camerer, Rangel (2009)
Figner, Knoch, Johnson, Krosch, Lisanby, Fehr, Weber (2010)
Albrecht, Volz, Sutter, Laibson, von Cramon (2011)
Brain Activity in the Frontal System and
Dopamine Reward System Predict Behavior
Brain Activity
McClure, Laibson, Loewenstein, Cohen (2004)
Frontal
system
0.05
0.0
Dopamine
Reward
System
-0.05
Choose
Smaller
Immediate
Reward
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Choose
Larger
Delayed
Reward
Translation to the health domain
Similarities with saving behavior:
§ Individuals and society have many aligned goals
– Improve individual health and control social costs
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Will information work?
§ Example
§ New York City calorie disclosure (Elbel et al 2009)
Calories from
fast food purchases
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Before
After
NYC (intervention city)
825
846
Newark (control city)
823
826
Did calorie disclosure lower calorie
consumption?
§ Calorie disclosure at fast food establishments
lowered calorie consumption
§ Calorie disclosure at fast food establishments
didn’t affect calorie consumption
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Will information work?
§ Example
§ New York City calorie disclosure (Elbel et al 2009)
Calories from
fast food purchases
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Before
After
NYC (intervention city)
825
846
Newark (control city)
823
826
Translation to the health domain
Similarities with saving behavior:
§ Individuals and society have many aligned goals
– Improve individual health and control social costs
§ Education is not going to drive behavior change on
its own
§ Individuals want behavior change (just not right now)
– Improve diet
– Increase physical activity
– Stop smoking
– Adhere to therapeutic recommendations
– Utilize wellness programs
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Translation to the health domain
Similarities with saving behavior:
§ Individuals and society have many aligned goals
– Improve individual health and control social costs
§ Education is not going to drive behavior change on
its own
§ Individuals want behavior change (just not right now)
– Improve diet
– Increase physical activity
– Stop smoking
– Adhere to therapeutic recommendations
– Utilize wellness programs
§ The challenge is to align intentions and actions
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Example of a free intervention:
flu shot communication
§ Control: normal (informational) mailing
§ Treatment 1: normal mailing + make a date plan
§ Treatment 2: normal mailing + make a date/time plan
Empower good intentions
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¨
Partner company
¤
¨
¨
Sent workplace flu
shot clinic reminders
in Fall ‘09
RCT with employees
with vaccine
indications
¤
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Sends health
reminders to
employees of client
corporations
> 50 or chronic
disease
Control Condition
Employees informed
of the dates/times of
workplace flu clinics
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Date Plan Condition
Employees invited
to choose a concrete
DATE for getting
a flu vaccine
Employees informed
of the dates/times of
workplace flu clinics
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Date/Time Plan Condition
Employees invited
to choose a concrete
DATE AND TIME for
getting a flu vaccine
Employees informed
of the dates/times of
workplace flu clinics
Ask employees to make a precise plan
Milkman, Beshears, Choi, Laibson, and Madrian 2011
Flu shot letter
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Flu shot letter
+ date plan
Flu shot letter
+ date plan
+ time plan
Another example of a free intervention:
colonoscopy communication
§ Control: normal (informational) mailing + sticky note
§ Treatment: normal mailing + sticky note + action prompt
Empower good intentions
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46
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Percent scheduled colonoscopy within 6 months
Milkman, Beshears, Choi, Laibson, and Madrian 2013
Control Group
(sticky note)
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Treatment Group
(sticky note + action prompt)
Use Active Choice to encourage adoption of
Home Delivery of chronic medication
Beshears, Choi, Laibson, and Madrian (2012)
•
•
•
•
•
•
•
Voluntary
No plan design change
Lower employee co-pay
Time saving for employee
Lower employer cost
Better medication adherence
Improved safety
Member Express Scripts Scientific Advisory Board
(Payments donated to charity by Express Scripts.)
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Preliminary results from pilot study on
a large firm
Among those making an active choice:
Fraction choosing home delivery:
52.2%
Fraction choosing standard pharmacy pick-up: 47.8%
Results
Annualized Rxs by Mail*
After
Before
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Home Delivery Utilization for All Drug
Classes (including ineligible classes)
Economic Consequences
Annual Savings at one company
Plan
$350,000+
Members
$820,000+
Total Annual Savings $1,170,000+
Summary
§ Behavioral economics explains why people often fail
to act in their own best interest
§ Key problem
– costs come early and benefits come late
§ Self-defeating behavior can be changed using
inexpensive, scalable interventions
§ Defaults and other nudges have worked with savings
§ The same concepts will also work with health
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Two basic questions:
§ Which behaviors would you like to influence?
§ How can you transform good intentions into sticky
actions?
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