TAILIEUCHUNG - Lecture Economics: Chapter 23 - Dean Karlan, Jonathan Morduch

Chapter 23 - Public policy and choice architecture. After studying this chapter you will be able to understand: How to define choice architecture, and how nudges influence individual decision making? In what ways human decision‐making does not conform to the model of full information and rational choices? How demand for commitment devices can be rational?. | Chapter 23 Public Policy and Choice Architecture © 2014 by McGraw‐Hill Education 1 What will you learn in this chapter? • How to define choice architecture, and how nudges influence individual decision making. • In what ways human decision‐making does not conform to the model of full information and rational choices. • How demand for commitment devices can be rational. • How default rules affect people’s choices and the implications for policy. • How framing affects the way people process information and its implications for policy. © 2014 by McGraw‐Hill Education 2 Choice architecture and nudges • Evidence suggests that people’s decisions can be influenced by how options are presented to them. • Choice architecture is the organization of the context and process in which people make decisions. • It focuses on factors that alter decisions and thus outcomes. Factors include: – Timing of choices. – How different options are described. • Implementing choice architecture into practice uses a nudge to alter people’s behavior in a deliberate and predictable way without changing economic incentives much. – Kenyan farmers were nudged into using fertilizer by allowing farmers to pay for fertilizer after harvests. © 2014 by McGraw‐Hill Education 3 1 Mistakes people make • A mistake is a choice that a decision maker later regrets, even though they were trying to act in their own self‐interest. • Often, mistakes happen in common and predictable ways. • Mistakes often occur due to biases in human decision making. 1. Temptation: Time inconsistency is a situation in which we change our minds about what we want simply because of the timing of the decision. – Preferences about the present are inconsistent with future ones, because future choices are more distant. © 2014 by McGraw‐Hill Education 4 Mistakes people make 2. Limited processing power: The opportunity cost of time spent researching choices may be too great to make the correct choice. – .

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