The COVID-19 pandemic is continuing at an increased pace to disrupt economic and societal order while imposing enormous burdens of morbidity and mortality. Although the newly developed vaccines by Pfizer & BioNTech, Moderna, and AstraZeneca are celebrated by many in anticipation of the eventual loosening of COVID’s grip on their lives, another subtle, yet profound, challenge remains to be resolved to go back to the new normal – mass vaccination.

Governments need not only to provide ready access to nationwide vaccination against COVID-19, but also to develop strategies that increase public confidence in and acceptance of the developed vaccines. Alas, in many countries, vaccine hesitancy, that is, the “delay in acceptance or refusal of vaccines despite availability of vaccination services” (WHO, 2020, p.1), manifest itself as a substantial obstacle to achieve community immunity that protects the whole population. Specifically, current levels of willingness to accept a COVID-19 vaccine are insufficient to meet the requirements to attain mass coverage in most of the countries surveyed worldwide. Globally, roughly one-third of people are either undecided or against vaccination, many of them indicating concerns about potential side-effects (Milkman, 2020 & Ipsos, 2020).

The situation is even direr in countries whereby there is a low level of trust in government and the public healthcare system – as trust plays an enormous role in the willingness to get vaccinated (Lazarus et al. 2020). As such, almost 50% of the Hungarian population do not have an either negative or positive stance towards vaccination, with people aged 18-24 being most likely to oppose the vaccine while people over 65 the most likely to accept, and only 14.9% of the population indicate their intent to get vaccinated (KSH, 2020). These, together with the significant decline between August 2020 and October 2020 in the number of people indicating that they will receive vaccination, suggest a challenge of behaviour change that can be overcome through the effective application of behavioural science, encouraging more people to do the right thing for both themselves and the society in general.

Vaccine Hesitancy Determinants: The 3C Model

As in many cases, showing why people do not behave as they should, can also shed light into, by implication, how to reorient mass behaviour. With regard to COVID-19 inoculation, overcoming vaccine hesitancy is an outcome behaviour that arises from the interaction of a multitude of factors that can potentially influence an individual’s decision to search for and get vaccination. Although many think that communicating the reasons for vaccination should suffice for an average individual to get vaccinated, vaccine hesitancy has numerous, context-specific root causes that are not knowledge related – the causes that are grouped as complacency, confidence, and convenience by the SAGE Working Group on Vaccine Hesitancy.

Complacency: Why do young adults not feel the need to get vaccinated?

Vaccination behaviour is traditionally viewed as an individual decision-making task whereby the risks of being unvaccinated are evaluated against the risks of the disease the vaccine prevents. Complacency occurs when there is a lack of perceived risk of the vaccine-preventable disease to the extent that vaccination is not regarded as a necessary preventive action by the decision-maker.

There exists a risk asymmetry between age groups for COVID-19 contraction. Whereas the mortality rate is between 0.2% and 0.4% for people aged below 50, the death rate is significantly higher – 3.6% in the 60-69 age bracket, 8% among those aged 70-79, and 14.8% for people aged 80 or more (Ourworldindata, 2020). Unpredictability of adverse reactions to the vaccines, together with the increased susceptibility to misinformation, lead people to exaggerate concerns about potential side effects, which are contingent and exotic and result in people perceiving the risks of getting vaccinated to be greater than they actually are, negatively affecting the willingness to get inoculated. Accordingly, vaccine-related events are perceived as man-made risks that can be avoided through bypassing inoculation, whereas COVID-19 contraction is perceived as a natural-risk that can only be avoided by taking that extra risk posed by the vaccines. Viewed through this lens, the low levels of intention to get vaccinated in young adults becomes a natural result due to the fact that the risks associated with vaccination outweigh those of not vaccination.

So how can behavioural science help to counteract this phenomenon? Every individual has something at stake in regard to the pandemic. For some it is their health, whereas for others it is their social lives that they want to protect and take back. However, what has been done hitherto has been unsatisfactory in the sense that the authorities have taken a one-size-fits-all approach to communicate the potential risks and benefits of not getting vaccinated. What matters the most for young adults is to continue their normal lives, and for this group, the benefits of vaccination, rather than the risks of not vaccinating should be communicated, establishing the causal link among vaccination, community immunity, and the new normal; thereby overcoming the lack of perceived risk via shifting the focus to benefits.

Confidence: The trust in the system

In almost every decision we make, trust is a key factor, and COVID-19 vaccination is no exception to this rule. Confidence comprises the “trust in the effectiveness and safety of vaccines, the system that delivers them, and the motivation of policy-makers who make vaccine decisions” (Macdonald & SAGE Group on Vaccine Hesitancy, 2015, p. 2). The most recent global survey found that high level of trust in the government was the most reliable determinant for vaccination intention, overshadowing population mortality, age, education, and even family sickness with COVID-19 (Lazarus et al., 2020). It is also interesting to observe that perceived safety of vaccines by the region is lowest in Eastern Europe (GallupWorldPoll, 2018). These might suggest that there exists an uncomfortable echoing of the past regimes and experiences, whereby individuals bring in their negative past experiences with government-related authorities whilst evaluating the information that emanate from them. But it is notable that anti-vaxxer groups gain support as well, a global trend which is also observable in the surrounding countries. In addition, the widespread concerns about lack of due diligence in developing the vaccines further exacerbate the problem by decreasing the intention to get vaccinated.

Behavioural science suggests that the value of information depends on the source of it. Evidence shows that people look to their peers for hints about how to behave. To reach specific target groups, community leaders in social circles can act as messengers. In addition, providing tangible, social cues, such as ‘I received vaccination’ stickers can and will not only instil a new social norm of getting vaccinated but also address the fears and concerns about safety, increasing the intention to get inoculated. However, governments and health authorities should also be proactive to turn over the problem by addressing the widespread concerns publicly. It is equally important not to become aggressive with communicating, as it might scare away those who are hesitant. In short – information flow and communication should be consistent, reassuring, adequate in its content, but not overused, and should always come from a person with authority and of reputation.

Convenience: When intention does not follow action

When people make decisions, despite the inner intention they possess, seemingly small factors hinder their ability and desire to follow-through. Apropos of COVID-19, convenience captures the potential negative effects of physical availability, hassle factors (e.g. paperwork), required mental effort, affordability, and time on the vaccination decision. In this case, affordability and availability do not appear to be important considerations, except for developing countries. Yet, given that to get the sufficient number of antibodies people need to receive two inoculations several weeks apart, possible adverse experiences with the initial shot, together with people’s tendency to forget, postpone, and change their decisions can negatively affect the desired vaccination behaviour.

Luckily, behavioural science has proved to be highly effective in bridging the gap between intention and action. Previous randomized experiments reveal that even the simplest techniques such as sending a reminder to individuals about their upcoming appointment increased vaccination by 36% (Chapman et al, 2010). Providing flexible options to people and accounting for their tendency to forget also proved to be highly effective. After all, it all boils down to understanding people and creating the most convenient ways to follow their intention, sometimes giving them a nudge in the back by sending them clear guidelines and reminders. Communicating these guidelines in a simple, yet memorable way can also help – in the case of the BioNTech-Pfizer vaccine, communicating the recommended 3-week interval can be highly effective.

Looking Ahead

The existing prevalence of wide variation – both in sociodemographic and health characteristics in willingness to accept vaccination delays not only the elimination of the pandemic but also the expected societal and economic recovery. According to the experts, between 60-80% of the population needs to get vaccinated to overcome the pandemic (Fox et al., 2020). Yet, with one-third of people being hesitant or rejecting vaccination, there remains a significant gap to reach the goal and to attain herd immunity. The increased susceptibility to misinformation, lack of perceived risk in certain age groups, mistrust in the government and healthcare system, and exaggerated concerns about the side effects of vaccines further exacerbate the problem. The insights of behavioural science, through pinpointing the most effective messenger channels that guide behaviour, instilling trust within the healthcare system, and nudging people to follow-through with their intentions, would be of seminal importance in developing a new conceptualization of vaccination for hesitant subgroups and to bring the pandemic to an end.

Since the beginning of the pandemic, 4883 people, on average, have lost their lives each day due to COVID-19. The potential to save lives has never been higher before. Yet, this potential can only be achieved if there is a mass behaviour change, for which, the insights of behavioural science would be critical to obtain community immunity in the shortest period of time. It is vaccination, not vaccines by themselves, that saves lives.

In our previous articles, we have shown that a choice architect, i.e. the person who organizes the context in which people make decisions, can alter individuals’ behaviour in a predictable way through utilizing so-called nudges. Although nudges are extensively used to induce people to save more, eat healthier, and rely on renewable energy sources, problems arise when one considers that nudges have a paternalistic aspect in that the choice architect decides what is good for the people, rather than allowing them to choose what is best for themselves. Accordingly, in this blog post, we will address the most common problems associated with behavioural policies from an ethical perspective and will strive to answer the question: How can choice architects know what is in the people’s best interest?

Do nudges interfere with freedom and autonomy?

Nudges are essentially built on the libertarian paternalism ideology, that is, the design of policies that push individuals towards better choices without limiting their freedom to choose. In his classic critique of paternalism, John Stuart Mill objects to paternalism through stating that it interferes with individual liberty. However, this critique is dependent on how liberty is defined. If we define liberty as an aspect of freedom, the ability to choose from available alternatives without having any restrictions, then coercion is the feature that would distinguish paternalistic policies from policies that aim at making people better off. In the canteen example, whereby healthy fruits were placed at the eye-level and cakes were placed in the back side of the shelves, the children still had the opportunity to choose chocolate cakes, they just needed to exert more effort to do so. In this vein, nudges do not appear to be morally problematic as they do not change nor limit the set of alternatives among which decision-makers can choose.

However, as per Hayek, liberty is a broader term than coercion or choice set; it also comprises autonomy – the command a person has over his or her own assessments and choices. There is a significant difference between what a choice architect does when he or she introduces fruits and salads to the school canteen, and when, owing to his understanding of innate psychological tendencies of people, devises a plan to promote individuals to consume a certain type of product. Although the latter intervention can induce people to consume more healthy food, it can also make people choose one option over another. From this perspective, nudges appear to be morally problematic as they diminish the extent to which individuals have control over their own actions. In this case, instead of reflecting their own evaluations, people’s behaviour reflect the tactics of the choice architect.

However, in many cases, regardless of whether there is a nudge, people’s choices will still be shaped by certain factors, i.e. a product will be placed at the eye-level in the canteen. Accordingly, as per Hausman and Welch, when choice shaping is unavoidable, it must also be permissible. In the nudge case, nudges help people to provide the means by which one’s own goals, such as having higher savings and not forgetting deadlines, are attained. This brings the question whether we should respect the non-autonomy of people who want to live more healthily but who cannot follow through or utilize nudges to help them actualize their goals. The latter appears to be more socially desirable.

Should choice architects let people err?

Adam Smith thought that adversity was the best school to develop the respectable virtue of self-command and experience-based learning. As nudges help people to avoid making errors in decision-making contexts for which they have incomplete or incompetent level of information to make the optimal decision for themselves, the cost of nudges may be that individuals forgo the chance to learn from their mistakes and therefore become reliant on them in the long-term. It might be the case that to warrant long-term success, one should let people make their own decisions while providing minimal aid, as nudging is similar to teaching a new-born how to run without teaching him or her how to crawl, creating the moral problem of infantilization in decision making.

Indeed, nudges are not always the best solution. In certain decision-making contexts where trial-and-error learning can happen, the choice architect has a primary reason to avoid nudging individuals. However, learning is most likely to happen when people get immediate, clear feedback subsequent to the engagement in a certain behaviour. In doing so, they would be able to create a causal link between their activities and the results they obtain, enabling them to adjust their behaviour in the desired direction. Alas, many of life’s most important decisions are not only infrequent but also have time discrepancy between costs and benefits. For instance, someone can continue to smoke for years without having any warning signs until symptoms of cancer arise, after which, modifying action will have a minimal impact. For these types of decisions, the delay in the required feedback might be too late to act, implying that individuals can indeed benefit from nudges.

How can choice architects know what is in the people’s best interest?

As choice architects effectively promote a certain type of behaviour, the question is whether the promoted course of action is in line with the decision-makers interest. Nudging is extremely effective when people’s ends are relatively clear, such as helping people to lead longer lives and increasing savings for retirement. However, when people’s ends are relatively unclear, a good criterion of judgment is proposed by Jean-Jacques Rousseau in his Social Contract doctrine. He postulated that although people differ in their interests, there exists a common interest, i.e. general will, on which all humankind can agree in principle, even though not all would wish to pursue it. According to his doctrine, the realization of general will is a deliberative means of seeking outcomes that satisfy the preferences of individuals and render the interventions as legitimate. Similarly, nudging aims to uphold the realization of the general will. As nudges account for the divergent private interests by keeping the choice set intact, one can assess whether behavioural interventions are in the best interest by questioning their alignment with the realization of the general will.This is the primary reason why the transparency test suggested by Thaler and Sunstein, the creators of nudge theory, is of utmost importance, since people, when communicated about interventions, are indirectly asked whether the proposed intervention conforms to the general will, which is their own will reflecting themselves in a rational fashion on their long-term interests.

Neoclassical economics posits that economic agents are rational, that is, they are purely self-interested individuals, who, after analyzing all available sets of information and evaluating probabilities and risks in a mathematically articulate manner, base their decisions according to their well-defined utility functions. However, economic agents are principally and primarily people. They are humans whose decisions are highly affected by psychological, cognitive, and social factors, who have non-selfish, social motives as shown by their altruistic acts, and who usually forget, procrastinate, and make errors. Therefore, whereas neoclassical economics provides a view on ‘what needs to be done’ by perfectly rational people, as it treats people as if they were someone else, it falls short of explaining ‘what is actually being done’ by people.

In our previous articles, we have already demonstrated that people continue to stick with their current options, even if choosing an alternative could make them considerably better off. We have also described how heuristics – the decision making tricks people use – lead decision makers into making errors. It appears that people make suboptimal – and often irrational – decisions due to their lack of psychological and cognitive capabilities, creating a gap between normative behaviour prescribed by mainstream economics and actual human behaviour. Nudge, in its essence, is about identifying the ‘human’ factors that cause the deviation from the optimal outcome, and modifying the decision making environment by accounting for these factors so as to guide (or nudge) people towards options that are thought to be in their own best interest.

Applied Behavioural Economics: A Cafeteria Experiment

In certain decision-making environments people are least likely to make good choices for themselves. Problems arise when people need to make decisions that test their akrasia, i.e. self-control. These issues are most likely to arise when costs and benefits from engaging in a certain kind of behaviour are time spatial. As such, for sinful goods, such as smoking and unhealthy eating, the benefits are obtained now and the costs are incurred later. The behavioural problem with these goods lies in the fact that people might continue to consume them without having any warning signs for years, after which, modifying behaviour will either become too difficult or have a minimal impact. It is of no coincidence that the worldwide obesity rate has nearly tripled since 1975, being responsible for 4.7 million premature deaths each year. These numbers not only validate that people over consume sinful goods, but also suggest that they might benefit from a nudge to eat more healthily.

In a field experiment, researchers analyzed food choices of students. Unsurprisingly, they have observed that there is an excessive intake of saturated fat and sugar among students, along with low fruit and vegetable consumption, suggesting that there is a room for improvement. Utilizing the insights from food choice architecture – people have a tendency to choose products that are placed at their eye level and in the middle of the menu – researchers made modifications to the decision-making environment such that these tendencies will lead to an increase in healthy eating, rather than preventing it. As such, whereas chocolate cakes and fast grab-and-go foods were placed in the eye level initially, the researchers switched their placement with fruits, vegetables, and other nutrient rich meals, thereby changing the promoted choice of decision making environment. The results of this simple rearrangement were highly significant and successful with fruit and sugar consumption increasing and decreasing, respectively, by 46 and 15 percent.

This relatively simple example is of high importance in the sense that it captures the notion of nudging: organizing the context in which people make decisions so as to alter people’s behaviour in a predictable way without significantly changing economic incentives. The beauty of nudging lies in its flexibility. Instead of forcing people, nudges solely smooth out the process of people reaching the desired end state of themselves by aligning the choices with underlying psychological foibles that govern human behaviour.

Business Implications

The canteen example also hinted at some business implications that are, alas, very often overlooked by practitioners. In many cases, people’s choices are shaped by behavioural factors (e.g. framing, status quo bias, and availability bias) that are extensively used by nudges. This implies that for any decision making environment there exists a promoted choice or option, which can align or contradict with a given company’s products and services. It might be the case that the interplay of these psychological factors endorse choosing the competitors’ products, thereby necessitating a behavioural market analysis to counteract – and if necessary overrule – the current situation. As as a given arrangement of choices can make some options more or less likely to be chosen, with meticulous analysis, the decision making environment can be modified to promote a business’s products and services.

We know that not only our brain circuits dictate what we do, but also our cognition and ability to control impulses increase with age. Indeed, there are remarkable changes in behaviour for a given situation over the span of development. For instance, it has been demonstrated that unlike pre-schoolers who mainly use deception to their own benefit, school-aged children increasingly start to use deception to protect other’s feelings. Furthermore, when distributing resources, 8-12-year-olds, compared to toddlers who prefer rewards to be solely given to themselves, are willing to incur costs to avoid unequal outcomes, suggesting that people have a concern for other people’s outcomes – a significant deviation from the predictions of game theory. How can we explain these stark differences? Is the change in behaviour due to prosocial concerns or strategic considerations?

Sticker Experiment: Probing into the minds of children

A recently conducted experiment by Smith, Blake, and Harris (2013) attempted to answer the aforementioned questions. Children, separated into three age groups (3-4, 5-6, and 7-8), were asked to indicate their favourite colours from a choice of 6, received 4 smiley stickers with different odour of that colour and were told that they can share their stickers with another child. Two experimental groups were formed. In the Self-Share group, the number of stickers each child shared with another was recorded; children in the Other-Norm group were asked how much another child should have shared in the same situation.

The figure demonstrates that toddlers (3-4 years old) are much more reluctant to show prosocial behaviour when they have to give up some of their own possessions to benefit another person. In contrast, around 70% of 7-8 year olds were willing to give half of their possessions, suggesting the presence of a developmental increase in costly sharing. The interesting thing is that although all age groups (65% aggregate average) mentioned that equal sharing is ‘what one should do’, the effect of established norms on behaviour was almost absent between the ages of 3-7 years, implying that the developmental change in costly sharing is not caused by the differences in the extent of explicit knowledge about fairness or equality.

What is even more interesting, perhaps humorous, is that it is the toddlers who act in line with the economic theory as they choose to keep all the resources for themselves, thereby fulfilling the definition of self-interested, rational economic man proposed by John Stuart Mill. This might mean that we grow ‘dumber’ in an economic sense or it might also indicate that there are other factors, besides monetary ones, that govern our decisions. We choose to elaborate on the latter.

Social Behaviour: Impulse Control, Perspective Taking, and Identity Building

We have mentioned that people, by definition, are social constructs, in the sense that our decisions are governed not only by our own judgment, but also the judgment of others. Furthermore, in our previous blog on theory of altruism we have delineated that people have other-regarding preferences, may it be equality for others, following social norms, or looking for social approval. The sticker experiment was of high importance as it captured these seminal, yet overlooked, aspects of decision theory via demonstrating that the effects of these factors on our decisions become more apparent over time. What if we turn out to be socially ‘smarter’, feeling virtuous about our previous actions and creating better conditions for our future economic transactions?

How we are seen and how we want to be seen from the perspective of others can and do affect our decisions. To move from the current towards the desired image, we engage in perspective taking and evaluate our possible future actions from other people’s point of view. If the possible action is not in line with our desired image – which is usually the case for purely monetarily motivated actions – we defer from doing so. This judgment hints the unique influence of perspective taking on behaviour, as its power lies not in the actual consequences it brings, but rather in the prospective consequences it can bring on the individual provided that he/she does not act in accordance with the desired image. This leads the individual to internalize the costs without even engaging in a certain behaviour. Accordingly, for situations in which a selfish behaviour can be punished (may it be monetarily, emotionally, or socially) we tend to choose courses of action that does not deteriorate our built social image, thereby building a social identity.

This is a highly strategic act, both economically and socially, since having a well-regarded social identity can have effects in future transactions. For instance, within institutional economics, the implementation of credible contracting hinges on trust and repeated transactions between counterparties, and there is an abundance of information demonstrating that building a corporate identity does build trust, decrease transaction costs, and expand the opportunity set. A similar argument can be made for individual-level interactions: “Do you remember the difference in treatment towards you and the others when you went to a restaurant where you are known?” This difference was the manifestation of positive effects of built identity.

Reverting back to our sticker experiment, children as early as 3-4yrs were aware of the importance of equality and fairness. Yet, these factors did not have a material impact on their behaviour. How can we account for this? Evidence from neuroeconomics and developmental functional magnetic resonance imaging (fMRI) studies suggest that children at that age have not fully developed the ability control their impulses; therefore, for them the impulse to ‘have it all’ overrides social concerns.

Have you ever found yourself checking your phone every few minutes for no particular reason? When was the last time you purchased a gallon of milk or a box of eggs only to find out that you have already purchased them previously? These are just simple instances whereby you can relate the extent to which habits govern our daily lives. Almost 43 percent of what we do every day is habitual, meaning that we do not even think whilst conducting roughly half of our daily activities. We continue to follow our habits even when not doing so would make us considerably better off. Yet, in stable contexts, our mind, as if it were programmed by some invisible force, prompts us to behave the way as we are used to behave. In many instances, we are not even cognizant of the fact that we are being guided by this inconspicuous, yet compelling, force.

Habits, as they are the residue of past goal pursuit, reflect our past experiences and the strategies we have devised to reach certain rewarding end-states. However, as our habits become more and more deeply-seated, our behaviour for given situations become automatic, and it persists even in the cases which we incur costs from doing so. Let’s have a look at what exactly happens when the thinkings stops.

The Popcorn Experiment

A recent experiment conducted by Neal et al. (2011) sheds light on how persistent habits are, even when the outcome from performing a given activity is detrimental for the decision-maker. In the experiment, participants were placed in a cinema and were given a free drink together with a popcorn. However, they were not told that the popcorn was either fresh or 7 days old and decidedly stale. There were distinct differences (shown below) in the amount of popcorn consumed among people grouped by the strength of their habit.

The figure demonstrates that participants who occasionally ate popcorn liked the stale popcorn less than the fresh and ate less of it. However, participants who habitually ate popcorn showed a significantly different type of behaviour: their consumption did not change between stale and fresh popcorn scenarios, and it slightly decreased for the fresh scenario. What is even more interesting is that they demonstrated this type of behaviour only within the cinema context, and they reacted the same way as non-habitual eaters when the experiment was conducted in a meeting room showing music videos.

The popcorn experiment captures the fundamental component of habitual behaviour: context-dependency. In other words, as people devise strategies to attain desired end states in particular contexts, the context, by itself, regardless of the presence of a positive or negative feedback from acting so, can directly trigger the response. Accordingly, when the experiment was replicated in a meeting room, the cognitive link between cinema and eating popcorn of habitual popcorn eaters was not activated, and therefore, they were able to change their behaviour.

Do we trick ourselves?

Habits when viewed through the lens of the popcorn experiment might appear to have limited potential in assisting us to meet our goals and acting upon our preferences. However, they reflect our past wisdom, meaning that our brain forms the links between stable contexts and certain actions on purpose. These neurological cravings, i.e. habitual links, are the coping mechanisms that allow us to meet everyday demands and divert our limited attention to things that matter the most in our daily routine. Imagine how time consuming it would be to re-think the route to your office every time you are commuting. Alternatively, imagine that you need to re-experiment every time eating nuts with a beer while watching a football match is a rewarding experience for you. Accordingly, we do not necessarily trick ourselves; instead, by utilizing associative learning we form habits and reach our desired end states in a fast and relatively effortless manner.

However, these come at a cost. The habitual shortcuts may initially serve to attain a particular goal; yet, once the mind enters into ‘automatic’ state, it loses the sight of the importance of goals, and instead focuses on performing the action assuming that the goal will ensue as a result. Alas, if the link between the desired end-state and the actions to achieve it is too strong, our mind can disregard the negative feedback we receive from performing an activity, and implicitly force us to continue what we are doing, which was exactly the case for habitual popcorn eaters.

Another interesting question related to habits is about the ways they govern our purchase behaviour, which is of particular interest to businesses. The implications can range from resistance to innovation to obtaining a behavioural lock-in. We will address the importance of considering habits in business decisions in one of our upcoming blogs.

Illustration by Amrita Marino

Markets are concerned with exchange, the purpose of which is to access resources that have value potential. What’s fascinating about value, however, is that it’s subjective. Auctions are perfect examples for this, as the huge discrepancy between the bid prices signify the presence of value subjectivity. But what exactly drives value or our willingness to pay?

Value is a multidimensional, cognitive construct in the sense that factors affecting it range from social contexts to the emotional state of the decision maker. There are different theoretical viewpoints to account for this multidimensionality of value. Whereas the classical economic theory emphasizes that value is solely derived from the instrumental and functional aspects of goods, evidence from sociology and behavioural economics suggest that hedonic attributes, i.e. attributes providing fun, pleasure, excitement, also affect value. To put it into context, for a car, the utilitarian features would be gas mileage and safety ratings, and the hedonic attributes would be sporty design, brand, or the enjoyment derived from driving a supercar. Yet, the utilitarian and hedonic aspects of value do not necessarily explain why a rather mundane cigar box, once owned by John F. Kennedy (JFK), sold for a small fortune at a closed auction, or why even the most ordinary sculpture comes to be worth millions if it is discovered to be made by Michelangelo, but worthless again if it turns out to be a counterfeit. These are the exact cases we would like to delineate in this week’s blog, thereby allowing us to probe into another dimension of value that is usually overlooked, and yet profound.

Conspicuous Consumption

In our earlier blog entry we have mentioned Thorstein Veblen’s (1899) theory of conspicuous consumption, in which, the purchase decisions of the majority of people (individuals living above the subsistence level) are made to signal wealth to outside observers. In a Veblen world, consumers communicate their social status through engaging in ‘wasteful purchases’, signalling their social standing through showing that they can afford to purchase those products with relatively low functional value. Although this might contribute to the explanation of why people pay significantly high amounts ($210) for a simple clay brick branded by Supreme, it still falls short of explaining the sudden change in value when an article is found to be related to someone well-known, as it was in the case of Michelangelo’s sculpture. This is due to the fact that Veblen would have predicted exactly the reverse, since purchasing a counterfeit sculpture poses more opportunity to signal the society of having higher capacity to waste. Accordingly, the explanation should lie elsewhere, leading us to the concept of social status.

Status Value

Napoleon, in stating “A soldier will fight long and hard for a bit of coloured ribbon” remarked how much value individuals can assign to goods improving their social status, which, in his case, was equivalent to the value of one’s life. One might wonder what do we mean by status, exactly. Although Weber regarded status as the social honour attached to a group of people, in contemporary sociology literature, it refers to one’s standing in a social hierarchy, as dictated by respect, deference, and social influence. Accordingly, evidence from economic sociology implies these status characteristics have a significant impact on value perception. In particular, it has been shown that people assign higher values to goods that are previously owned by respected figures not because they derive higher utilitarian or hedonistic value from its usage, but because they derive higher self-esteem or honour from acquiring it. As such, people act as if the status of the respected figure is divided among the articles he/she had previously used or created. Therefore, they treat the purchase as a mechanism to transfer and capitalize upon the respected figure’s status, which is the case for Veblen goods. This is the exact case in the JFK cigar box example as people treated it as a tool to capitalize on the status value that the box represents due to its association with Kennedy. Furthermore, in the Michelangelo sculpture example, the reason for the sudden shift in the value arises from the fact that once it’s realized to be a counterfeit, the link between the sculpture and the associated status is broken. Thereby, the status value that could be obtained from acquiring the good eradicated, resulting in the substantially lower willingness to pay.

Coronavirus has caused an upheaval, creating unstable and unprecedented decision-making conditions around the world. As the disease continues to spread, so does the necessity of taking appropriate and timely actions. Yet, retrospectively, we see that the most sensitive decisions were made under the influence of behavioral biases, which, alas, contributed to the disease becoming a pandemic. In this week’s blog, we analyze specific behavioral biases in the context of the COVID-19 outbreak and demonstrate the negative impacts that stemmed from the inconsideration of these biases. In particular, we address the following questions: Why do governments and people behave as they do? What were their mistakes, which behavioral biases were fomenting those mistakes, and what are the consequences?

The Ostrich Effect

‘Ostrich Alliance’ is the nickname given to the world leaders who, despite the presence of evidence suggesting otherwise, deny the coronavirus threat and bury their heads in the sand. We can view this behavior through the lens of normalcy bias – the observed tendency of people to believe that things will function the way they normally have and thus significantly underestimate threat warnings. To put it into a relatable context, in a series of investigations, Ripley (2008) identified the underlying response mechanism of people to natural disasters, and revealed that the first response is denial of the problem, followed by deliberation, and decision. This emphasizes that in response to disastrous events, our ability to react fast and implement forward-looking policies are rather limited, since at first, we tend to deny the occurrence of the event. It is no coincidence that after the spread of the first cases in Europe, the international flights continued, since governments were under the influence of the normalcy bias, and therefore denied even the possibility that the virus can become a worldwide phenomenon. What is more interesting, however, is that the governments did not take strict measures until the evidence suggesting the virus as a threat became highly formidable, implying the difficulty in transition from denial stage to deliberation. Unfortunately, the difficulty in transition further manifested itself in the latency in the responses to the coronavirus outbreak and, therefore, indirectly contributed to the spread of the virus.

Overconfidence

Overconfidence is a bias that seems to come back over and over; however, it is especially important in the context of coronavirus – as there’s a lack of information on the effects, and the transition-mechanism of the virus and a lot of other factors are unknown. There are working theories, but there are a lot of contradictions. There still is, for example, debate on whether we should wear masks in public or not.

One of the consequences of overconfidence is the optimism-bias, and we’re sure that you already experienced it before. In short, optimism-bias is when you tend to say: “Sure, this is a really bad thing, but it won’t happen to me!”. It demonstrates that people tend to think that dangerous or harmful events at work are less likely to occur to themselves compared to others doing the same exact job. Note that it does not have the prerequisite of underestimating the danger – one can acknowledge it, but for their own safety, they could still disregard it as a potential threat.

The unique thing with pandemics such as this is that if people disregard these threats, it could be potentially harmful to those who they come in touch with – or externalities, as it is being referred to as in economics. For non-econ majors: externalities are effects which are being inflicted upon others, which decision-makers do not include in their cost-benefit analysis. Obviously, in this case, we are talking about negative externalities (although there exist positive ones as well). Bethune and Korinek (2020) measured the magnitude of these externalities. They developed an epidemiological model, where economic agents had to choose their social and economic activities, while also considering a statistical mortality risk value of $50,000. Individual agents weigh the private gains from still engaging in social and economic actions with the growing cost of being infected. In their result, they showed that people severely underestimate their individual risks compared to social risks.

The Shifting of Social Norms, or: How I Learned to Stop Worrying and Love the Virus

Within the realm of social sciences, what never ceases to amaze us is how dynamic everything is. Something that was thought to be correct by everyone in one day is criticized by everyone in another day. The case with coronavirus is not exempt to this observation.

If you think about it, if you have seen someone with a mask and a glove in the beginning of the year, you would have treated them with much caution and, perhaps, antipathy. Nowadays, you would treat them in such a way if they were not wearing masks and gloves. This is a prime example of how norms, how institutions, change in a society.

The economic definition of institutions according to North (1990) is “humanly devised constraints that structure political, economic and social interactions”, or to put it simply: the rules of the game. While they are a set of rules (often formalized by legislation) which restrict how we can conduct transactions, they also make life easier – by reducing uncertainty, transaction-costs, and the cost of cooperation. In a lot of cases, social distancing and mask-wearing started as an informal institution, and was later formalized by governmental actions. While it is an inconvenience for sure, these arrangements help to make our interactions safer (at least perceive them as safer, thus tending to our gross uncertainty). While there is a debate whether it is useful or not, it is in line with the human tendency to follow each other and herd, thereby giving people some sort of rule-book that they can apply, inducing mental comfort.

This phenomenon underscores an insight that we are all aware of, but often forget the implications of: People, by definition, are social constructs, in the sense that our decisions are governed not only by our own ideas, but also the ideas of others. It is of seminal importance to remember that whenever there is a decision to be made with high consequences, independent thinking should be facilitated, since waiting for the mass to realize the importance of the problem might cause significant delays in addressing the issue at hand, which, in the case of coronavirus is exactly what happened.

As Samuel Jackson remarked, “To do nothing is within the power of all men”, individuals have a significant tendency to stick with the decisions they have already made. To put it into a real-life context, imagine your current cell phone plan. If a competitor offered a better option that provides exactly the same benefits at a lower price, imposes no costs of switching, and maintains your current cell phone number, would you switch to the alternative provider? Many people (76 percent), when asked, seemed to disregard the extra benefits that can be obtained from switching and articulated that they would not switch their plan. This occurrence is not limited to the cell phone payment plans, it is also widespread in the realms of saving and investment plans, brand choices, and insurance plans. For some reason, individuals have a strong tendency to prefer a familiar choice with less benefits over other alternatives, rendering them as having a bias towards the status quo.

Coca-Cola learned the importance of this bias the hard way. During the 1980s, the company’s market share was continuously falling, and it was forecasted that Pepsi would become the market leader in the soft-drink industry by 1990. To tackle this problem, Coke II was developed and in the blind taste tests, consumers preferred the new Coke over the older by a significant margin of 53 percent. Yet, when the product was finally released to the market, it was a disaster. The company was being flooded with angry phone calls that indicated the dissatisfaction with the product. In the course of three months, the new coke was taken off from the shelves, but the farcical decision costed the company around $34 million. Viewed through the lens of status quo bias, the result is unsurprising: the strong preference to stick with the familiar product lead customers into disregarding the enhanced taste experience that the new Coke offered. However, if the challenge of status quo bias is so influential, the fundamental question presents itself: How can we overcome it?

The Rationalist Explanation

The rationalist will posit that transaction costs can explain the status quo bias. The presence of transaction costs that is associated with switching between different alternatives can offset the benefits derived from the superior option. In addition, in the absence of explicit costs, uncertainty will have a similar effect. From the perspective of consumers, as they have not tried the better alternative, the benefits that can be gained from it are uncertain. Solely the usage of the service/product will make them gauge the quality of gains. Accordingly, the consumers react to this ambiguity by reactively devaluing the extra benefits the product offers. The costs associated with re-analyzing the offers can further explain this rationalist choice. It might be the case that customers are saving the cost of reanalysis as they stick to their previous choice, assuming that they have initially made the right decision. Therefore, these costs associated with choosing an alternative can indeed offset the to-be-obtained benefits, which, are inherently uncertain and devalued accordingly. As a result, the customer becomes actively and rationally biased towards the status quo. The implications for the practitioners within the rationalist point of view are twofold: (i) transaction costs associated with switching should be eliminated or reduced, and (ii) the effects of uncertainty ought to be alleviated using techniques such as free trials. Yet, reflecting from our life experiences, it becomes blatant that the factors rationalists suggest, except for transaction costs, are not the primary drivers behind the status quo bias, indicating that the answer lies elsewhere.

The Behaviouralist Explanation

The behaviouralist will divert the attention into perception, instead of monetary, values associated with switching. Think about the illustrated value function that depicts how differently losses and gains are perceived.

The depiction reveals that an equivalent amount of loss is perceived as significantly higher, almost twice as much, then a similar amount of gain, which is referred to as loss aversion. Within the context of switching between alternatives, reference point represents the current choice of the customer and as the losses have more effect, the customer focuses on what can be lost by choosing the alternative, instead of what can be gained. This leads to a strong innate preference towards the status quo. In addition, the presence of sunk costs that represent the previous investment can provide another perspective. Sunk costs induce people to continue to choose suboptimal, or even failing, options because of the fact that they have already invested significant amount of their resources in it and giving up will be felt as admitting failure. Indeed, in choosing between alternatives, the loyalty to the brand and previous payments to receive the service can represent a sunk cost.

More important, but perhaps more subtle, is the effect of cognitive dissonance. In the domain of choices, consumers are characterized by their motivation to have consistency in their decisions, and they tend to justify past and current actions. Accordingly, cognitive dissonance, in itself, is the common observation of consumers behaviour of mentally discarding or suppressing information that contradicts correctness of their past decisions. Reverting back to the telephone plan example, as the customer received a contradictory information that indicated (s)he is making an inferior decision, the information is disregarded to preserve cognitive consistency.

Therefore, the behaviouralist explanation highlights a different and more effective part of the observed tendency of sticking to the initial choice. The combined effect of loss aversion, sunk costs, and cognitive dissonance is similar to a transaction cost. The difference, however, is that the costs are perceived by the customers. That is, these costs are non-existent in economic terms, but are borne in the minds of customers. Hence, behaviouralist explanation suggests that practitioners should also consider the mechanisms of the consumers’ mind, and, if necessary, take steps such as framing the action of switching as a gain instead of a loss to overcome this subtle, yet substantially strong bias towards the status quo.

Incentives are a vital element of economics. As such, their usage is widespread in many areas, such as education, health, and pro-social behaviour. The seminal importance of incentives arises from the fact that they are the mechanisms by which the individuals’ interests are aligned with the public interest. This is primarily achieved through giving monetary incentives that increases (decreases) the benefit an individual obtains from a socially beneficial (detrimental) activity e.g. providing financial incentives to individuals who use renewable energy. Accordingly, as provision of monetary incentives recalibrates the relationship between costs and benefits, one would expect it to work effectively. However, a quick glance into evidence provided by behavioural economics suggests that it rarely does, and in many cases, it even backfires.

In the study of Mellström and Johannesson (2008), authors tested the effectiveness of monetary incentives on blood donations, a great example of pro-social activity. To achieve this purpose, the authors conducted randomized field experiments in blood donation centres located in Sweden. The three treatment groups were offered different incentives for blood donation: no payment, $7 cash payment, and cash payment of $7 with charity option. Traditional economics predicts the willingness to donate to be the lowest for the first and highest for the second group, since in addition to the intrinsic reward of helping someone else, the second group receives further monetary reward, rendering the highest utility. Contrary to what is expected, the willingness to donate has actually decreased by 73.3% in the second group, and the charity-incentivised group’s willingness to donate blood was highest at 54%, followed by 47% for the non-incentivised group.

Explaining the Phenomenon: Image Motivation, Overjustification Effect & Decision Frames

The key insight for understanding this seemingly idiosyncratic phenomenon is to understand the fact that, in line with the tenets of sociology, our behaviours act as a signalling mechanism of our motives. While the price effect of incentives, i.e. decreasing cost or increasing benefits, can increase the take-up of an activity, this signalling effect may act as a barrier, and it is the relationship between these factors that determine the outcome for the incentivised economic activity. Reverting back to the blood donation example, regarding the monetary reward group, the presence of extrinsic monetary reward tainted the intrinsic image motivation of signalling the society that the individual is doing good for the sake of doing good. Accordingly, the addition of monetary incentive distorted the signal effect of this prosocial activity and made it unclear whether the activity is undertaken ‘to do good’ or ‘to do well’. Therefore, as the cost of sending the wrong signal to the society surpassed, i.e. overjustified, the additional monetary benefits, a decrease in the willingness to donate ensued. This occurrence is illustrated in the graph below (Figure 1), whereby the inclusion of incentive y decreases the aggregate supply of an activity to the point at which it is lower than it would have been without providing any incentives (the top polynomial curve).

Another important, yet subtle inference is that if the signalling effect is non-present, then the monetary incentives will work as predicted by mainstream economics. The conducted experiment of Ariely, Bracha, and Meier (2009) tested this hypothesis through providing monetary incentives to donators privately. In doing so, they have directly tested whether the overjustification effect that is widespread in social contexts can be overcome. The results reveal that monetary incentives do work in private contexts for prosocial activities, yielding a linear relationship between incentives and activity uptake, similar to the one depicted in the graph. This implies that the change in the framing of the decision-making context, i.e. from social to private, was the driving factor behind behavioral change.

A very important conclusion arises at this exact point: “The framing of the decision-making situation has a crucial impact on the activity uptake”.

Implications for Public Policy and NGOs

The inferences do not imply a doom scenario whereby it is virtually impossible to incentivise uptake of prosocial activities. Instead, they imply that careful consideration, planning, and execution can provide the desired outcome. Demonstrated through the blood donation example, the effect of incentives depends on their design, the form in which they are given, and the behavioural context (social/private) in which the activity occurs. The statistically significant increase in willingness to donate of the charity-incentivised group implies that the form of incentive should be in parallel with the form of intrinsic motivation, which were both social and altruistic in the blood donation example. In addition, the framing of decision-making context should be a function of the selected incentive form. Accordingly, the framing should be social if the form is altruistic, and private if the form is monetary to increase or reduce, respectively, the effect of incentives on image motivation.

It’s 4 p.m. in the office, you hear the growling sounds coming from your stomach. As you are aware of the fact that it is too late for lunch and too early for dinner, you decide to take a walk to the vending machine, where you are confronted with an assortment of unhealthy, yet tasty, chocolate bars alongside relatively healthier items including fruits and granola bars. As you contemplate which product to purchase, you recall that you have eaten healthy food and exercised regularly in the preceding days, and decide to purchase the chocolate bar thinking that you have earned enough ‘credits’.

The given scenario evinces an overlooked aspect of decision-making: previous virtuous actions granting the right to do otherwise, an effect referred to as moral licensing in the literature. The converse effect, where the evocation of previous immoral actions/selves/intentions induces individuals to behave socially responsible, is widespread in prosocial contexts. In a famous experiment, Sachdeva et. al. (2009) asked participants to list nine morally positive or negative traits, after which participants were given a chance to donate some of the amount of the received money from participating in the experiment to a charitable organization. It is remarkable that, consistent with the moral licensing effect, the average donation of individuals listing their positive traits was $1.07, whereas for the control group it was $2.71. What is more remarkable, however, is the observation that individuals listing negative aspects chose to donate $5.30, as if they were compensating for feeling immoral, i.e. morally cleansing themselves.

The provided examples reveal that, unlike the assumption of traditional economic theory, in which past decisions do not have an effect in the evaluation of current choices, people are significantly affected by them. However, the question regarding the underlying mechanisms that explain the delineated tendencies still persist.

Looking Under the Hood: Our Moral Bank Accounts

The explanation provided by the experts state that it does not pose a big problem to commit immoral actions as long as it is offset by prior virtuous actions of similar magnitude. Accordingly, individuals have a cognitive moral bank account in which previous good deeds establish credits that can be withdrawn to ‘purchase’ the right to do otherwise. The vending machine exemplifies this phenomenon, whereby, the individual knows that eating tasty chocolate bars is unhealthy, but previous deeds of exercising regularly and eating healthily have substantially increased the health accounts’ value such that the individual has earned the right, i.e. the license to do vice, to eat unhealthily. The effect of behaviours on the account’s value is illustrated below (Graph 1).

The graph emphasizes that previous virtuous actions increase the value of the account, and if the account value reaches above the expected average, the individual perceives him/herself to have a moral license and can perform activities that decrease the account value. Conversely, if the recollection of previous deeds gives the perception of underperforming in virtuous activities (the trough in the graph) in relation to his/her self-assessment of the correct amount (the average line in the graph), the underlying cognitive process induces the individual to partake in activities that increase the account value, i.e. cleanse him/herself. This occurrence is discernible in the self-trait example, where individuals who listed negative traits of themselves were given the perception that they are not as virtuous as they should be. Hence, to cleanse themselves they decided to donate almost twice as much as the control group. In a similar vein, for the positive trait group, the perception that they are overperforming in terms of virtuousness provided them a moral license, leading into a considerable decrease in the donation amount.

However, there remains yet another more general, though perhaps more important, question to be addressed: why did the donation amount change by so much more (35%) for the negative trait group? As we have highlighted in our post on valence-framing, the weights individuals give to negative and positive signs are skewed towards negative values, implying that negative values have the characteristic of being perceived as higher than an equivalent amount of positive value. In the pro-social experiment, the listing of negative traits can be thought of having a similar effect, increasing the donation amount disproportionately for positive and negative participants.

Adjusting the Sails: Implications for Non-Profit Organizations

When utilized correctly, the effects of moral licensing on pro-environmental and pro-social decisions can be influential. The examination of the underlying mechanism of licensing reveals that, since the past morally-laudable behaviour is perceived as providing a license to do otherwise, previous pro-environmental behaviour can inhibit future pro-environmental behaviour. Series of conducted experiments (Gholamzadehmir, 2019) concluded that people who received weekly feedback on their water consumption have substantially lowered their water use, however, they have also increased their electricity consumption, highlighting that moral licensing is in effect between categories of virtuous activities.

The key is to realize that there is not necessarily a trade-off in play, but actually a great potential for integration. The reason for individuals granting themselves licenses is that they view behaviours as an achievement of a goal, and the licensing provides them an opportunity to reward themselves. However, through effective framing and account integration, if the past behaviour is communicated in a way that it evokes that it is a progress towards the goal of sustainability, not the achievement of it, the problem of increasing pro-environmental behaviour in one category while decreasing it in another can be alleviated. However, whereas tackling moral licensing is useful for existing environmentalists, utilization of moral-cleansing will most probably be of high influence in actuating individuals who do not take part in pro-environmental actions.

‘Generation X is not saving enough’, ‘baby boomers are out of retirement savings’, ‘the student debt is at an all-time high and is continuing to increase’, and many similar headlines appear in the news every day. Have you ever wondered why the general public tends to continuously face financial problems? Or why financial problems persist despite the advances in the average quality of education? In this week’s post, we will explore some of the reasons for why such problems occur and provide potential ways to tackle them.

It turns out that economics is infamously hard to comprehend, and the human mind is not particularly equipped to think about the prevailing cause and effect relationships in the macroeconomy. Even then, the understanding of it does not translate into rational decisions. Furthermore, despite the apparent difficulty of understanding economics and utilizing the concepts in one’s decisions, the information provided to the public conveys that people are expected to understand it. There can hardly be an engineer found explaining to the public the precise technicalities that caused a building to collapse on the news, and yet, the newscasts continuously discuss economic matters such as daily stock returns and economic consequences of the US-China trade war, expecting people to understand and make significant life decisions based on the provided information.

Making sense of the unknown

Confronted with the implicit expectation to understand the intricacies of economics and take corresponding actions, individuals attempt to cohere information. In particular, they superimpose economic concepts into acquainted structures and utilise simple heuristics to understand unknown information. In doing so, distorted information – characterized by misconceptions and oversimplifications – is derived.

As Dan Ariely remarked, in this case, the mechanism used by the public to understand incongruous information follows a pattern, which, is predictably irrational. On the one hand, to provide a ground for their judgment, individuals consider changes in economic variables to be either good or bad. Subsequently, if one economic variable is perceived as bad, such as unemployment, people expect it to have a causal relationship with the other ‘bad’ variables. This thinking, good-begets-good heuristic, leads to drastic conclusions. For instance, since people dread unemployment and believe it is the result of inflation, undue support is given to erroneous political campaigns. On the other hand, individuals utilise metaphors – such as perceiving inflation as a ‘monster eating up the purchasing power of money’ – to assimilate unknown information.

Effects of having the wrong judgments

When one makes the wrong judgment, it is highly probable that an erroneous action will ensue. In the case of the general public, the piecemeal understanding of economic events translates into drastic financial decisions. It is of no coincidence that after the shift from Defined Benefits to Defined Contribution Plans, which gave the financial management authority to the individual, the number of Americans who are predicted to not have enough retirement savings increased from 49% to 64%. Reasonably, this will lead to increased borrowing in the future as individuals will want to preserve their standard of living, and create a debt-spiral, which, has already started to take place.

How to alleviate the problem: policy implications

Individuals give high importance to having freedom in their choices, and yet, when given the autonomy in the financial domain, they tend to make the wrong decisions. One solution proposed by academics to alleviate this problem is to increase the public’s financial literacy through educational programmes. Although education certainly needs to be promoted, the results of comprehensive academic research challenges the effectiveness of an educational approach in improving financial capacity. This is instantiated by the behaviour of Nobel Laureate Harry Markowitz, who has devised the modern portfolio theory of investing. When asked about his investment decision, he said that he doesn’t engage in high level stochastic mathematical calculations, but simply purchases certain stocks. In addition, as Thaler and Sunstein indicated, even the economics professors in the University of Chicago are not saving enough for their retirement. Hence, it can be deduced that financial education does not necessarily translate into correct financial decisions; statistical reports suggest that the translation is as low as 0.1%.

Therefore, another approach that – instead of going against – understands human nature should be taken. This will necessitate reverting back the way people make sense of the unknown. Even though the utilisation of metaphors can increase the level of understanding, this needs to be combined with the action stage. Accordingly, evidence from behavioural economics suggests that the best approach is to ‘nudge’ people, using different techniques such as default options, towards the right decision. In the upcoming blog post we will shed light on the nudge theory of behavioural economics.

What is the nature of time? Not the space-time of general relativity, but the time we perceive. Which factors induce us to choose $100 today over $200 in a year? Is it the desire for immediate gratification? If so, why do we prefer to store a bottle of expensive champagne instead of consuming it right away? These are some of the questions that will be answered in this blog.

Of the various assumptions underlying economic analysis of intertemporal choice (choices differing in payoffs and time), perhaps, the assumption of preference for today over tomorrow is the most widespread and non-controversial one. It makes logical sense to appraise more value to $100 today compared to $200 at a later time, since we do not know what goods and services can be bought next year with that amount. Our short-term preference for positive events bespeaks that we are maximizing our utility through the elimination of uncertainty. Likewise, we have a long-term preference for events incurring us costs, i.e. preferring paying $150 in 1 year over $100 today. However, it requires little effort to think of examples of behaviour in which the converse is apparent. The pleasurable deferral of a vacation, the speeding up of a dental appointment, and the prolonged storage of wines are all instances of this phenomenon. Therefore, the traditional economics approach misses an imperative element of intertemporal choices: anticipation of future events.

Anticipation in the Form of Present Utility

It is unequivocally correct that individuals, in their choices, attempt to attain the highest utility. However, the key is to understand that the sensation of the present is affected by the anticipation of the future. We often get positive feelings from anticipating an imminent event. In an experiment conducted by renowned behavioural economist, George Loewenstein, subjects were asked to specify the amount that they would pay now to obtain or avoid each of five outcomes, which were further grouped into time delays. The outcomes were: ( 1 ) obtain four dollars; ( 2 ) avoid losing four dollars; ( 3 ) avoid losing one thousand dollars; ( 4 ) avoid receiving a non-lethal 110-volt electric shock; and ( 5 ) obtain a kiss from the movie star of your choice. Time delays were: ( 1 ) immediate; ( 2 ) in twenty-four hours; ( 3 ) in three days; ( 4 ) in one year; and ( 5 ) in ten years. The subjects were also told that the outcomes were certain to occur at the designated time. The results are illustrated in the following graph.

It can be inferred that the two non-monetary items, the kiss and the shock, exhibit unusual patterns. The short-term preference implies that individuals would prefer to obtain positive outcomes as soon as possible. This prediction, however, is contradicted by the kiss item, for which, the highest value appraised to occurrence was 3 days. In like manner, the economist assumption asserts that negative outcomes are delayed whenever possible. Yet, in the shock outcome, subjects preferred to pay slightly more to avoid a shock that was delayed by 3 hours than 3 days.

Explaining the Phenomenon

The ostensibly contradictory phenomenon becomes unambiguous if we consider the affect of anticipation of future events on the present utility. In the experiment, the most valued time for the kiss was three days, as there was also a value from expecting the event to occur. Individuals actually increased their inner pleasure through savouring utility of both the event and the expectation of the event. Likewise, in the shock case, a negative utility arises from expectation of the event, exacerbating the total pain felt by the individual. These negative anticipatory feelings can be acute; researchers have found that in some cases the anticipation of an event may be worse than the event itself.

Evolutionary biology traces the source of this tendency to the aspects of innate mammalian system. In the acknowledged fight-or-flight response system that prepares the body to stay and fight or to flee, negative anticipation of a future event induces people to take the flight response. However, in the cases which the drastic future event cannot be avoided, the individual is propelled to fight now, as in the experiment subjects preferred the shock now instead of having it in three days.

In essence, the determinants of intertemporal choices are not limited to time preferences, and the feelings associated with expectation of a future event further affects individual choices. As the avant-garde economist Alfred Marshall remarked, “When calculating the rate at which a future benefit is discounted, we must be careful to make allowance for the pleasures of expectation.”

Imagine the following situation: a nun has just left the monastery and commenced her journey to the city centre to make weekly purchases. After she finished her shopping, on her way back to the monastery, she stumbled upon a homeless man sitting on the pavement, a small cup placed in front of him and a sign in his hands saying: ‘Homeless single father, need money for family’. The nun, placing her hands in her purse, hears the tinkling of change and decides to give it to him. She then accepts the blessings of the man with a slight nod and continues her way back.

In this article, we will explore the forms of altruism, leveraging insights from philosophy, behavioural economics and neuroeconomics, and probe into the motives of the nun to determine whether her act of giving was indeed selfless.

Defining Altruism

Prior to taking a stance in the debate on altruism, providing a definition of it is imperative. De Quervian et. al. (2004) distinguish between the biological and psychological definitions of altruism. The biological definition treats altruistic behaviour as ‘any costly behaviour that confers an economic benefit to other individuals’, regardless of the motives behind such behaviour. The psychological definition, in contrast, requires that such behaviour is driven by non-hedonic motives, i.e. without any benefit perceived or expected by the giver. In the given situation, even if the act of giving was motivated by the expectation of immaterial or spiritual reward, the nun’s act would still be altruistic under biological, but non-altruistic under psychological interpretation. However, we are concerned with altruism viewed through the lens of psychology, i.e. pure altruism.

Altruism – Egoism Dichotomy

One way to understand whether pure altruism can exist is to think about its antithesis – egoism, the motivational state with the ultimate goal of increasing one’s own welfare. The famous philosophers, Hobbes’ and Nietzche’s views concerning the dichotomy weigh heavily towards egoism. Nietzche, in his book Human, All Too Human, stated that “any social instinct (behaviour performed to help another) is said to be derived from the communal seeking of pleasure and elimination of pain”. A strong resemblance to this idea can be seen in Hobbes’ philosophy. In his classic work Leviathan, he indicated that “no man gives but with the intention of good to himself, because gift is voluntary… and the object is to every man his own good.” Therefore, motives, not consequences, must be used to differentiate altruism from egoism. The two main types of altruism on the basis of motives are warm-glow giving and pure altruism.

• Warm-Glow Theory: The recipient’s well-being is a means to benefit the donor
• Pure Altruism: There are no motives, intrinsic or extrinsic, benefiting the donor

In behavioural economics literature, the concept of egoism is accounted through warm-glow theory, in which the act of giving is a reward to the donor. This can be a mechanism that signals wealth, depicts the donor’s character under a positive light, satisfies the desire for self-assertion, overcomes the fear of retribution of God, or reduces guilt. In our nun example, the last two motives might be the dominant reasons for giving. Accordingly, the most fundamental question of our debate arises: How can we know if there are rewarding motives behind altruistic acts – whether the donor perceives internal or spiritual rewards from the act of giving?

What We Do Know: Insights from Neuroeconomics

Neuroeconomics attempts to answer our questions through investigating neural mechanisms in the human brain. Through the usage of functional magnetic resonance imaging (fMRI), we can identify the parts of the brain whose activity increases during the execution of an act. Therefore, if the activity of a reward centre increases whilst performing an altruistic act, we can argue that pure altruism does not exist.

The illustrated graph is taken from Harbaugh et.al. (2007) neuroeconomics experiment. The two contexts of giving were tax payments (red bars) and voluntary giving (orange bars) to a charity organization.

On the x-axis three parts of the brain (caudate, nucleus accumbens, and insula) are shown, which comprise the reward centre. On the y-axis, the standardized coefficients of activity are depicted. The researchers regard the condition of tax payment as pure altruism since they argue that the motives, in this case, are highly non-hedonic. This is due to both the emotional and physical disconnection between the donor and the recipient. However, a compromise could not be reached in the neuroeconomics literature, since other researchers argued that the incurrence of costs is what caused the activity of the reward centre. In the voluntary case, the increase in the reward centre’s activity emphasizes that the donor has received an intrinsic reward from the act of giving, which can be explained by the warm-glow theory.

Conclusion: Revisiting Motives of the Nun

In conclusion, although insights from numerous science branches concur that warm-glow giving exists, a conclusion has not been reached concerning pure altruism, as it would require the ability to know intrinsic motives behind altruistic acts. Hence, apropos of the nun, the determination of her altruistic stance is as elusive as ever. Hitherto, we do not have the tools which can determine whether she has engaged in the behaviour of giving due to intrinsic rewards or she has given for the sake of helping without expecting anything in return. Neither scientists nor philosophers could agree whether true altruism really exists; maybe it all comes down to your own perceptions of human nature.

Many of the modern economic theories are predicated on the assumption that people are self-interested, i.e. they only take courses of action that elicit pecuniary benefit. Accordingly, one would expect individuals to behave so as to maximise their benefits. Yet, there is a strong body of research evidence indicating that people are strongly motivated by other regarding preferences in their decisions, such as fairness and inequality. Think about the illustrated economic game:

A certain amount of money , say $20, are given to Person A. Person A (giver) can then share any amount at his/her discretion with person B (recipient), who has to accept the given amount. If you were in the place of Person A, would you share your money and, if so, how much?

The assumptions of conventional economics predict the answer to be zero, i.e. the giver keeps $20 for himself/herself. However, in reality, 64% of the participants, on average, shared one-fifth of their endowment. Remarkably, some participants gave away their entire amount. These results highlight that human behaviour is not solely dictated by monetary considerations.

Explaining the Phenomenon: Other-Regarding Preferences

The founding father of economics, Adam Smith, has long formulated the following idea – one who seeks happiness for oneself will not find it; one who helps others will. Individuals gain internal reward in the forms of pleasure, happiness and moral satisfaction from the act of giving, even in cases, in which monetary costs are incurred. In the given example, many people have chosen to give, since the perceived internal reward from giving surpassed the monetary amount given.

Evolutionary biology takes a different standpoint to explain the phenomenon of people’s willingness to give others when they are not obliged to do so. Through the process of natural selection, it may be that evolution favoured people who were co-operative and equitable in exchanges, as the fitness of the group, not the individual, was the essential requirement of survival in nomadic communities. Hence, there is a hard-wired tendency to co-operate, disguised as sharing in the economic game.

Incentivizing Giving: Implications for Non-Profit Organizations

As illustrated in the flow-chart below, in order to arrive to the decision to donate: ( 1 ) people need to recognize the need; ( 2 ) consider the possible impacts of the donation; and ( 3 ) act, if internal reward from giving surpasses monetary costs. Following this model, charity organizations can increase the amount of donations received through addressing the three broad stages of the decision-making process.

The first stage in this process is the recognition stage, in which attention and focus on those in need are imperative for eliciting empathy in potential donators. Hence, organizations need to continuously communicate the need for donation to the public. However, whereas many organizations are successful in the public outreach, only few are successful in increasing the effectiveness of the second stage in our model – consideration stage. Many make the mistake of providing holistic information about the impact of donations, e.g. total number of impoverished students helped. This results in individuals thinking that their donation would not have a substantial impact and perceiving it as a drop in the bucket. It has been consistently shown that willingness to donate is highest, when donations are made to a single person; it is often referred to as singularity effect. Christopher Hsee has found a creative solution to increase group donations by leveraging the singularity effect. A simple, yet powerful, trick consisted of requiring donors to specify how much one would want to give to a single person in need and then asking how many people he/she would like to help. This has significantly increased the size of donations.

Regarding the action stage, it is the step that non-profit organizations should consider with due attention. The fundamental importance of this stage stems from the availability of feedback – as a result of the donation itself – that could be fed back to the donor. In particular, this means providing concrete details about the usage and impact of the donated funds, which proved to substantially increase the tendency of people to donate again. In doing so, a virtuous circle can be established, in which the recognition of the need is re-communicated, and impact considerations are elucidated – simply by increasing the awareness about particular details of the donation outcome.

Altruism highlights that human beings are not purely self-interested, solely focusing on maximizing monetary gains. Instead, we are co-operative, helpful, and prosocial beings, from which we derive intrinsic reward through helping others. However, it is a different question whether true altruism exists, i.e. doing good without expecting anything in return (even in the form of intrinsic reward). The argument of whether pure altruism really exists will be addressed through a philosophical view in our upcoming blog.

Consider the following situations:

1. Imagine that you have decided to see a play where admission is $20 per ticket. As you enter the theatre, you discover that you have lost a $20 bill. Would you still pay $20 for a ticket to the play?

2. Imagine that you are going to the same play in the preceding example and you have paid the admission price of $20. However, as you enter the theatre, you realize that you have lost the ticket. The seat was not marked, and the ticket cannot be recovered. Would you pay $20 for another ticket?

From an economic standpoint, the two situations are identical; a certain amount of money ($20) has been irretrievably lost, and the only decision that needs to be made is whether the play is worth $20. The incurrence of loss in the form of a bill or a ticket is extraneous to the decision. Do people perceive the situations this way? As it turns out, many do not. 88% of the respondents presented with the first situation – loss of a $20 bill – said that they would still purchase the ticket, whereas 55% of the respondents presented with the second situation – loss of the admission ticket – said that they would not repurchase the ticket.

How can this phenomenon be explained?

In many instances, a theory cannot delineate the occurrence of an event, it is the assumptions of the theory that should be revisited.

Concerning the given example, economists have traditionally assumed that funds, regardless of mental representations and intended use, are fungible – dollars of money are substitutable – and irrecoverable costs should not affect future decisions. However, these assumptions certainly do not hold. Richard Thaler sheds light on this issue through introducing the concept of mental accounting – “the set of cognitive operations used by individuals and households to organise, evaluate, and keep track of financial activities.”

As depicted in the diagram above, funds are represented in mental accounts that, through the cognitive filter, are dictated by the funds’ mental representation, source, and intended use. This phenomenon occurs due to the tendency of individuals to categorise money and decision outcomes. In turn, it allows them to simplify aspects of the complex economic world along with imposing budget constraints, which helps individuals to keep control over their expenses. Hence, mental accounting arises as a coping function that sets budgets and facilitates spending for a specific purpose, which is analogous to tin-can household accounting, differing in the aspect that it occurs in the mind.

Revisiting the ticket problem, when the ticket was originally purchased, a “ticket purchase account” was set up through the source filter. In the first case, the lost $20 bill is not directly linked to the ticket, therefore, the majority of the respondents were willing to repurchase. In the latter case, the cost of an additional ticket is introduced to the still open “ticket purchase account”; hence, the price of a ticket was now perceived to be $40, leading to the decision of not repurchasing.

From Theory to Practice: Business Implications

The implications of mental accounting with regard to businesses are substantial, as it is the concept by which households and individuals’ saving and spending decisions are made. For instance, since individuals set budgets for their different needs, such as appliances and electronics, positioning a product that covers both accounts would increase budget reserved for the product, leading to a potential rise in sales. Another case where mental accounting plays an essential role is bonuses, often treated as “special money” by the receivers. Employees are commonly seen spending their bonuses on “irregular” expenses, such as an extravagant holiday or an expensive watch that has been on the wishlist for a long time. Potency of mental accounting further arises in the luxury business. It has been found that given gift vouchers, people’s tendency to buy luxury items substantially increases even if the gifted amount is relatively low. The implications also include non-profit businesses; for example, framing charitable donations as exceptional expenses can lead to the creation of a “new mental account”, considerably increasing collected funds.

The benefit of understanding mental accounting stems from its feature of reflecting the actual way of consumer thinking. Therefore, the identification of existing accounts along with shifting and creating new ones would prove to be of seminal importance in any context involving consumer behaviour.

For centuries, economists referred to the normative models when judging whether a decision is rational or not. Although the definition of rationality has been largely debated, there is a general agreement that rational choices should, among others, satisfy an invariance requirement. According to the invariance principle, regardless of the various framing options presented, people’s preference among certain options should not be influenced. However, an extensive body of evidence indicates that people do not conform with this principle, and they are, in fact, predisposed to persistent decisional biases. This phenomenon is referred to as loss framing effect in which, through loss-aversion, choice reversals or shifts occur when the expected outcome of a situation is communicated as either negative or positive.

Think about the illustrated study, taken from the work of Economics Nobel laureates Daniel Kahneman and Amos Tversky. In their study, Kahneman and Tversky asked participants to decide between two treatments concerning 600 people who contracted a fatal disease. The treatments were framed either positively, highlighting the number of lives that would be saved, or negatively, focusing on the loss of lives. If you are like most people (72%), in the positive frame case, you have chosen treatment A that saves 200 people with exact certainty. The interesting fact is that when the problem is communicated accentuating negative sides, the number of people choosing the certain treatment option significantly declines to 22%, leading to 50% choice reversal.

What explains this contradictory phenomenon?

The framing effect is a natural consequence of human cognitive psychology that ensured survival in the past. Through experience, we have learned to select the positive events that are certain, and take caution and try to avoid events with negative outcomes. Loss-framing has been extensively  discussed in Behavioural Economics, and it has been found that the weight given to the outcomes considerably differ depending on whether they are seen under positive or negative light – effects of equal amount of losses being two times greater than effects of gains. Accordingly, in valence framing effects, the way through which critical information is presented (framed) – in either positive or negative semantics – would lead to different decisions. In other words, by changing how it’s said, framing alters the perception of what is said.

What are some of the implications?

Implications of loss framing with respect to businesses are virtually boundless, with promising effects on behavior at no cost. For instance, many companies make the mistake of highlighting how much people would save (7%) by buying their products in their marketing campaigns. However, a more effective way to frame their campaign would be “buy now, do not lose 7%“, which includes both a call for action and loss framing technique, eliciting the common fear of missing out. Regarding non-profit organizations, particularly charitable ones, converting common positive messages of “save lives of children” to “do not miss the opportunity to save others” would have substantial impact. In addition, other types of framing, such as attribute framing, can alter perceptions for a particular product. A typical example is applied by meat producers via telling 95% lean beef instead of 5% fat beef.

The power of framing arises from the fact that it is extremely easy to apply, generating quick and effective results (eg. there was a 50% choice shift in the aforementioned study). It is usually the small things, with a cascading effect, that bring drastic changes. Hence, through changing how the information is presented, framing can be a potent tool to achieve the desired goals in numerous contexts, including consumer choices, perceptual judgments, and medical decisions.