Deck 23: Public Policy and Choice Architecture

Question 1

In each of the following scenarios, determine whether the change in people's behavior is the result of a nudge or a substantive change in economic incentives.a. A country with a low birth rate decides to offer free public child care for kids under the age of five.
b. A nonprofit organization runs a highly publicized campaign offering teenage girls a very small symbolic reward (say, $5) for each week that they stay in school, come to support group meetings, and avoid pregnancy.
c. A country with a rapidly growing population levies steep fines on any family that has more than two children.
d. A government agency runs an ad on television informing women about low-cost birthcontrol options.

Answer 1

Incentive:
Incentive is a type of inducement. On the basis of the structure of incentive offered it can be positive or negative incentive.
Nudge:
Nudge refers to the gentle advice to the people regarding things that need to do and do not to do in order to achieve the desirable target.a.
Provision of childcare:
The government provides free childcare if the birth rate is decreasing. This induces the people to reduce the population in order to avail the free health care. Thus, it is the example for economic incentive.
b.
Provision of $5:
The nonprofit organization provides $5 each week to the teenage girls who are staying in school, attending the group meetings and avoid pregnancy. This induces the teenage girls to attend the, group meetings and avoid pregnancy. Thus, it is example for economic incentive.c.
Fine:
The government imposes the fine for the family that has more than two children. Fine is the negative incentive. To avoid fine that reduces the wealth of the family, they would restrict the family with two children. Thus, it is example for economic incentive.d.
Advertisement:
Advertisement about low cost birth control is the kind of gentle advice for the people to use this measure to control the population. There is no legal enforcement in this advertisement. Thus, it is the example for nudging.

Question 2

Is instituting a $200 fine for anyone caught littering a nudge? Why or why not?

Answer 2

Inducement:
Inducements are certain processes that persuade an entity to perform in a particular way.Incentive:
Incentive is a type of inducement. On the basis of the structure of incentive offered it can be positive or negative incentive.
Negative incentive:
Negative incentive refers to the imposition of punishment or threatens to achieve the desirable target.Nudge:
Nudge refers to the gentle advice to the people regarding things that need to do and do not to do in order to achieve the desirable target.Choice architecture:
Choice architecture refers to the presentation of alternatives available to the person with the intension to impact on the decision making process.Fine and littering:
When the government advised or informed to people to do not litter, then people would not mind it; because there is no incentive for people to obey this. On the other hand, the imposition of fine $200 provides a negative incentive so that people would stop littering.

Question 3

Determine whether each of the following changes represents a shift in the choice architecture of a decision.a. After presenting the dessert menu to patrons, the waiter at a restaurant mentions that there's an additional option for dessert not on the menu.
b. A restaurant presents dessert menus to patrons before they have eaten.
c. A waiter shows patrons a menu without prices.
d. A waiter asks patrons whether they would like to order more fries after telling the couple that the plate of fries is very small.

Answer 3

Choice architecture:
Choice architecture refers to the presentation of alternatives available to the person for making decisions.a.
Provision of addition alternatives:
The provision of additional alternatives does not affect the decision making process. Thus, it does not change the choice architecture.
b.
Presenting menu before eaten:
The presentation of menu before eaten would change the preference of the people. Thus, it would shift the choice architecture.c.
Present menu without price:
Provision of information about the price of desert would not change the preference of people. Thus, it does not shift the choice architecture.d.
Ordering more fries;
Since the waiter induces the people to buy more food, it is example for shifting the choice of architecture.

Question 4

Suppose two parents present their 16-year-old with a list of the cars that they will allow him to buy. If the parents decide to add another vehicle to the list, is that affecting the choice architecture for their son? Why or why not?

Question 5

Label each of the following examples as a case of time inconsistency, limited processing capacity, statusquo bias, or framing.
a. A person buys a nice bottle of wine for $50 and leaves it in the pantry for 20 years. At that point, the wine has aged and the value has appreciated to $250. Although he would never be willing to buy a bottle of the same wine for $250, the person plans to drink his old bottle rather than sell it.
b. Every night, a person sets her alarm for 7 a.m. the next morning, and every morning, she hits the snooze button at least four times.
c. People who are told the survival rate for a surgical procedure are more likely to undergo it than people who are told the death rate (even though the death rate is actually the same in both cases).

Question 6

Suppose you have plans to save 5 percent of your salary next year. Then your company goes bankrupt, your pay gets slashed by 30 percent, and you end up not saving at all. Is this an example of time inconsistency? Why or why not?

Question 7

Determine whether each of the following represents loss aversion.a. Nearing retirement, an investor chooses investments with lower return and lower risk, because she wants to make sure she has a certain amount of money available in five years.
b. A gambler refuses to play a game in which if heads shows up after a coin toss he will win $40, but if tails shows up he will lose $50.
c. Offered a brand-new blanket that is twice as comfortable and cute as her old one- the only two criteria she cares about in a blanket-a toddler refuses to give up her old blanket.

Question 8

With his first paycheck, Steve decides to buy a car. After spending hours researching the many specifications each car has-from gas mileage to horsepower-he decides to give up trying to find the perfect car based on these metrics and buys the best-looking one on the first lot he visits. Explain one aspect of bounded rationality discussed in the text that this example exhibits.

Question 9

The following information applies to Problems 5, 6, and 7: Clocky ™ is an alarm clock that rolls off your bedside table and runs away when you hit the snooze button. When the alarm goes off again, Clocky will be hiding somewhere on the opposite side of your bedroom, so that you are forced to get out of bed to turn off the alarm.Clocky is a commitment device to help overcome time inconsistency. Which of the following are the time periods over which someone might have inconsistent preferences and need Clocky's help?
a. Between the time the person hits the snooze button and the time the alarm goes off again. b. Between the time the person sets the alarm the previous night and the time the alarm goes off.
c. Between the time the person actually gets out of bed one morning and the time he sets his alarm for the next morning.

Question 10

At the website stickK.com (started by one of the authors of this book), you can sign up for a contract in which you promise to meet certain weight-loss targets each week, and forfeit money that you put up as stakes if you fail to meet those targets. Describe why a rational person might be willing to pay money if he does not lose weight, and how this constitutes a commitment strategy.

Question 11

The following information applies to Problems 5, 6, and 7: Clocky ™ is an alarm clock that rolls off your bedside table and runs away when you hit the snooze button. When the alarm goes off again, Clocky will be hiding somewhere on the opposite side of your bedroom, so that you are forced to get out of bed to turn off the alarm.Which of the following are relevant areas of preference inconsistency that Clocky is able to help?
a. The optimal volume for an alarm.b. What time to go to bed at night.c. What time to wake up in the morning.d. Whether an alarm should be placed on the bedside table or across the room.

Question 12

One contributor to the rational demand for commitment devices is the time-inconsistency problem. Explain how limited processing capacity might also contribute to the demand.

Question 13

The following information applies to Problems 5, 6, and 7: Clocky ™ is an alarm clock that rolls off your bedside table and runs away when you hit the snooze button. When the alarm goes off again, Clocky will be hiding somewhere on the opposite side of your bedroom, so that you are forced to get out of bed to turn off the alarm.How much should someone with timeinconsistent preferences be willing to pay for Clocky?
a. Nothing, because a regular alarm will work just as well.
b. Something, because Clocky increases his utility by getting him up at the right time.
c. You'd have to pay him to use Clocky, because his utility is decreased by having to get out of bed and search around to shut off the alarm.

Question 14

Many online subscription services have "automatic renewal" policies, in which they will automatically bill you for another year's subscription when your current one runs out. Why is this default rule a savvy business strategy on the part of the online company?

Question 15

Which of the following is not a strictly rational reason for someone to be interested in a commitment device?
a. The device can eliminate the timeinconsistency problem.
b. By making the decision to restrict choices now, the person saves future effort in deciding among more, but undesirable, choices.
c. Restricting choice now eliminates the possibility of considering other, potentially better choices that can't be foreseen right now.
d. The device helps the person make the choice that she wants to make right now, but might not make in the future.

Question 16

Explain the psychological bias that causes people's decisions to be affected by default rules or the endowment effect.

Question 17

Which of the following are true statements about default rules? (You can choose more than one.)
a. Defaults have staying power because opting out of them is typically very costly, requiring people to hire lawyers or prove to authorities that they have sufficient reason for choosing another option.
b. The more difficult it is to opt out of the default option, the more likely people are to stick with it.
c. One reason default options might have staying power is that people often equate "default option" with "recommended option."
d. Default rules work to influence choices only if people are aware of the default option.

Question 18

Imagine a public service announcement on television that is intended to scare kids away from using drugs. A big focus of the PSA is that a lot of teens are already on drugs. The directors of the PSA intend this statement to emphasize the size of the problem. Explain why this strategy for framing the anti-drugs message to teenagers could backfire.

Question 19

In which of the following examples would we see the influence of a default option? (You can choose more than one.)
a. A doctor recommends continuing treatment, but the ultimate decision of whether to continue treatment is left up to the patient.
b. A website automatically checks the option "share my activity with my friends on Facebook" when users sign up.
c. Pets from an animal shelter are automatically spayed or neutered unless the owner would prefer them not to be.
d. A mobile phone user has to enter a choice at start-up between installing a special feature or not. The user is informed that most people choose to install the special feature.

Question 20

Suppose you're trying to get your friends to go to dinner with you. Would it be wiser to frame the decision as costing only $5 more than the food they'd make for themselves, or that it will cost $5 less than every other restaurant around town?

Question 21

A group of people is offered two scenarios and asked which they would prefer: (A) a 3 percent wage decrease in a world with no inflation, or (B) a 3 percent wage increase in a world with 6 percent inflation.
a. What is the increase or decrease in the real wage in option A? What about in option B?
b. Knowing what you know about framing and loss aversion, which option do you expect more people to prefer?
c. In light of your answer to b, if you were an employer trying to cut real labor costs, would you prefer to have some inflation or no inflation in the economy?

Question 22

Choose the statement that people are more likely to choose based on the framing of the choice.a. Stock investment:
i. Invest in a stock with low uncertainty of return.
ii. Invest in a stock with high certainty of return.
b. Car purchase:
i. Buy a car that costs $20,000, which is $5,000 cheaper than the next level for that maker.
ii. Buy a car that costs $20,000, which is $5,000 more expensive than the lower level for that maker.
c. Movie choice:
i. Go to the movie that 100 out of 150 people give a five-star rating.
ii. Go to the move that 50 out of 150 people give less than a five-star rating.
d. Choice of college class:
i. Take a class in which 50 percent of students get an A.
ii. Take a class in which 50 percent of students don't get an A.