Razib Khan One-stop-shopping for all of my content

July 1, 2012

Thinking like a behavioral economist (dentist edition)

Filed under: Behavioral Economics,Economics — Razib Khan @ 10:41 am

This clip with Dan Ariely telling off a dentist who tried to sell him on a more expensive item is classic. Would that we all behaved in such a manner, no? The problem when you interact with a particular set of professionals, in particular in healthcare, the information asymmetry is such that it is very difficult for you to make an informed choice as a consumer. I’ve had an experience very similar to Ariely with dentists.


The problem here though that is that dentists are professionals. In other words, they should be motivated by something other than the profit motive. Ergo, we (the public) confer upon the profession licensing for exclusive services. The problem is that professionals are not immune from incentives. On the conscious level it seems that professionals generally do perform services without the profit motive in mind (e.g., dentists and doctors encourage your toward good health).* The problem is that on the unconscious and implicit level is where subtle biases and preferences come to the fore.

Naturally professionals don’t want to admit that they have biases. I’ve listened to Dr. Thomas P. Stossel dismiss the possibility that gifts and perks by pharmaceutical companies might have an ...

December 16, 2010

Which nations think over the long term

One of the major parameters which shape individual success, and macroeconomic growth in the aggregate, is time preference. Time preference basically measures an individual’s future-time orientation. Would you for example take $1,000 in the present, or wait 30 days and accept $1,500 dollars? It doesn’t need to be money, children can exhibit time preference as well. Would you like one candy bar now? Or two candy bars in an hour? I also think time preference permeates our lives more concretely. Would you like to eat some greasy food now, or would you forgo epicurean pleasures in the present for a sleeker frame in the future?

Here’s an illustration of the correlates of time preference:

In one of the most amazing developmental studies ever conducted, Walter Michel of Stanford created a simple test of the ability of four year old children to control impulses and delay gratification. Children were taken one at a time into a room with a one-way mirror. They were shown a marshmallow. The experimenter told them he had to leave and that they could have the marshmallow right then, but if they waited for the experimenter to return from an errand, they could have two marshmallows. One marshmallow was left on a table in front of them. Some children grabbed the available marshmallow within seconds of the experimenter leaving. Others waited up to twenty minutes for the experimenter to return. In a follow-up study (Shoda, Mischel, & Peake, 1990), children were tested at 18 years of age and comparisons were made between the third of the children who grabbed the marshmallow (the “impulsive”) and the third who delayed gratification in order to receive the enhanced reward (“impulse controlled”).

The third of the children who were most impulsive at four years of age scored an average of 524 verbal and 528 math. The impulse controlled students who scored 610 verbal and 652 math! This astounding 210 point total score difference on the SAT was predicted on the basis of a single observation at four years of age! The 210 point difference is as large as the average differences between that of economically advantaged versus disadvantaged children and is larger than the difference between children from families with graduate degrees versus children whose parents did not finish high school! At four years of age gobbling a marshmallow now v. waiting for two later is twice as good a predictor of later SAT scores than is IQ.

The issue of causality is probably one which you will immediately bring up. There is a correlation between higher IQ and low time preference (consuming less in the present to have a potential for more consumption in the future), but who knows how the feedback loops here work? For example, unlike many males my age I gave up playing video games around the age of 16. I calculated that I was substituting video games for reading, and that that would have long term consequences which I was not pleased with. Video games were very pleasurable in the short term, addictive even. But I decided that there simply were not enough hours in the day that I could do everything I needed to do, so I stopped playing them (I am aware that many, many, very smart people are avid video game enthusiasts. I’m just using it to illustrate the trade offs one might make). How much less erudite, as Dr. Dan MacArthur might say, would I be if I did continue to expend many hours per week on video games?

A new working paper on the SSRN website has some interesting data on time preference cross-culturally. How Time Preferences Differ: Evidence from 45 Countries:

We present results from the first large-scale international survey on time discounting, conducted in 45 countries. Cross-country variation cannot simply be explained by economic variables such as interest or inflation rates. In particular, we find strong evidence for cultural differences, as measured by the Hofstede cultural dimensions. For example, large levels of Uncertainty Avoidance are associated with strong hyperbolic discounting. We also find relations between time preferences and risk preferences, like loss aversion. For instance, subjects with high loss aversion tend to show larger time discounting. Moreover, our analysis shows an impact of time preferences on the capability of technological innovations in a country and on environmental protection.

To get published in orthodox economics you need to do a lot of mathematical modeling, but I’m not too interested in that. Rather, let’s look at some of the descriptive results. The first two figures shows the percentage of participants who chose the $3800 option when they were asked to choose between $3400 this month or $3800 next month. The last figure has on the x-axis “time pace.” This is an overall-pace measure is calculated out of three measures: walking speed, postal speed, and clock accuracy.
timep1timep2timep3

Some of the text is very illuminating as to cross-cultural differences:

Even for the students from Princeton University, the percentage choosing the patient option is lower than the percentage of German students (80% vs. 89%). Actually some students from our Norway survey even complained that the question was ridiculous because everybody would choose to wait for one month given the high implicit interest rate.

Other results were not surprising:

This result suggests that although the wealth level (and hence a general level of a country’s economy) is crucial to stimulate innovation, the attitude towards future also plays an important role. For example, while 69% of Taiwanese participants prefer to wait in the one-month question, only 44% of our Italian students prefer to wait. The two countries have the same GDP per capita in 2007, but Taiwan scored much higher in the innovation factor than Italy (5.26 vs. 4.19). It is worthwhile to investigate further to what extent and under what mechanism a general attitude towards future is related to the innovation activity.

And yet some were (at least to me):

After controlling the macro-economic variables (GDP per capita, growth rate, inflation rate), participants from countries with higher degree of Individualism and Long Term Orientation are more likely to wait. In contrast, for the present bias and long-term discount factor, the country with higher Uncertainty Avoidance score tend to discount the next year more.

In other words, societies and individuals who were more individualistic tended to have low time preference (more future-time orientation). It would be interesting to further decouple confounding variables. I assume that more intelligent people are more individualistic as well, so that might be the source of the correlation.

I didn’t focus on the formal model too much here because this seems highly exploratory, and there were many non-significant results. But I think this paragraph is of some interest:

In summary, it seems that we need different models for waiting tendency and medium/long-term discount factor. The waiting tendency depends more on the fundamental economic variables such as the country’s wealth level, and on general attitudes in a society such as individualism and the mentality towards past and future. In comparison, the medium/long-term discount factor depends more on the dynamic factors such as growth rate, and the attitudes toward uncertainty.

June 17, 2010

Time & mind & tipping

Filed under: Behavioral Economics,Culture — Razib Khan @ 1:10 pm

I just got back from a European trip, and I have to say I did not miss tipping. I especially appreciated not having to do the song & dance typical of larger groups in sit-down restaurants in the USA where you figure out how much you’re going to tip on a communal basis, when everyone has different tipping set points and perceptions of service and such. The money is less of an issue than the extra wasted time at the end of a meal & drinks which are spent on the terms of calculation rather than more conventional conviviality. In fact now that I think about it way too much time in my life has been spent discussing the etiquette of tipping, often outside of a situation where people are going to have to tip imminently. I thought about this after seeing this post in The Atlantic on tipping. One correspondent observes:

I lived in Japan for a while. There is no tipping there, and it works great. If we could be like Japan, I’d be all for it. However, I don’t think we’d be like Japan. Anytime I have ever eaten somewhere that does not practice tipping, service has been abysmal. Customers herded through like cattle, dishes brought out late, then diners rushed through them, eyes rolled, etc. We just do not have the service culture that would allow us to disconnect pay from performance and continue to expect the same kind of service.

The point about national culture is well taken. I experienced some bad service in Italy and Finland, but the quality of badness was very different, in keeping what with you’d expect from the respective national cultures (though in general I experienced service as good as in the states in both places).* But the empirical observation about American restaurants without tipping having lesser service suffers from sampling bias. Establishments which don’t have tipping are generally lower-end, verging on cafeterias. So it’s not an apples to apples comparison. A better one would be looking at higher end restaurants which have mandatory gratuities for large groups vs. those which do not. Even here you have the peculiar distortion of the larger group, which can often be more difficult for a server to manage.

Of course one’s perspective on this probably varies by the amount of disposable income one has. If you don’t have much disposable income the small but repeated investments of time & energy which go into tipping might be worthwhile if you can manage to pay less than you would otherwise. If you have a fair amount of disposable income the marginal potential savings introduced by greater price variation which you can control at the cost of time & energy needed may not be worth it.

* I had to bargain very hard with a Finnish server on whether I could handle Indian levels of spiciness. This was obviously a well rehearsed conversation on her part, but I thought she should have updated her priors in my case. The lighting was dim, but not that dim. Usually American servers at Indian restaurants aren’t too resistant when I assert I can handle high levels of spice.

December 29, 2009

Why do we delay gratification even when there is no downside?

Filed under: Behavioral Economics,Psychology — agnostic @ 9:10 pm

Earlier this year, John Tierney reviewed several studies on how delaying gratification makes us feel better in the short term by preventing guilt but makes us feel more miserable in the long term by causing regret over missed opportunities. I added my two cents here, just to note that this sounds like part of the Greg Clark story about recent genetic change in the commercial races that adapted them to the emerging mercantile societies they found themselves in. What I had in mind was the delaying of vice — investing a dollar today rather than splurging, moderating the amount of drink or sweets you enjoy, and so on.

But now Tierney has another review of related studies which show that we delay gratification even for what should be guilt-free pleasures like redeeming a gift card, using frequent flier miles, and visiting the landmarks in your local area. And don’t we all have enjoyable books and DVDs we’ve been putting off? After indulging in these cases, there is no potential bankruptcy, no hangover, and no tooth decay — so why do we indiscriminately lump them in with genuine vices and put off indulging in them? Obviously this tendency too is a feature of agrarian or industrial groups — hunter-gatherers would never leave gift cards lying around in their drawers.

It must be because of how recent the change toward delaying gratification has been. Given enough time, we might evolve a specialized module for delaying gratification in vices and another module for doing so in guilt-free pleasures, which would be better than where we are now. But when our genetic response to a change is abrupt, typically we have broad-brush solutions that take care of the intended target but also leave plenty of collateral damage. Over time our solutions get smarter, but it takes awhile. Just look at how crude the responses to malaria are.

We see this domain-general taste for (or aversion of) risk in other areas. People who lead more risky lifestyles buy much less insurance than people who lead cautious lifestyles. Those who ride motorcycles without helmets would be richer and more likely to pass on their genes if they bought a lot of insurance, while those who play it safe would be richer by not buying all that superfluous insurance. Instead, daredevils are daredevils all the way — including a contempt for insurance.

This casts doubt on how easy it is to change our behavior so that we no longer postpone our indulgence in guilt-free pleasures. Because we have a domain-general delay of gratification, it will still just feel wrong. You can also argue the logic of buying lots of insurance to the motorcyclist who rides without a helmet, but that won’t change his mind because his tastes for risk is across-the-board.

Powered by WordPress