framing

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From a speech last week by Congressional Budget Office Director Peter Orszag at the Retirement Research Consortium:

Distribution of the Age at Which Primary Beneficiaries Claim Social Security Benefits by Birth Year

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Last month USA Today said gas stations were bringing back the cash discount. Indeed they were. The Nudge blog shot this picture at a Shell station in northern Virginia today.

The regular price was $3.99 a gallon. USA Today makes no mention of why gas stations are advertising a cash discount instead of a credit card surcharge – an old retailing trick – but good behavioral economists know the answer. Humans view discounts differently from surcharges. The first is an opportunity cost; the second a cost outlay. In Toward a Positive Theory of Consumer Choice, Thaler wrote:

Until recently, credit card companies banned their affiliated stores from charging higher prices to credit card users. A bill to outlaw such agreements was presented to Congress. When it appeared likely that some kind of bill would pass, the credit card lobby turned its attention to form rather than substance. Specifically, it preferred that any difference between cash and credit card customers take the form of a cash discount rather than a credit card surcharge. This preference makes sense if consumers would view the cash discount as an opportunity cost of using the credit card but the surcharge as an out-of-pocket cost.

In Choices, Values, and Frames, Kahneman and Tversky argued that the distinction is one of framing. The discount is seen as a gain while the surcharge is seen as a loss. Since humans are loss averse, we are more likely to give up the discount (the gain) than accept the surcharge (the loss).

The fact that the cash discount is applied to gas provides an interesting wrinkle to the original credit card discussion which ignored the good itself. The sharp increase in the price of is especially painful to loss averse humans whose purchasing power at the pump has slipped considerably. Filling up anywhere, with cash or credit, feels like a raw deal. On a good like this, does the gap between those who forgo the discount and those who pass shrink? In other words, if a pair of a jeans and a gallon of gas both have the same cash discount on a percentage basis, would the number of people taking each be similar?

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External rewards and punishments are counterproductive when it comes to activities that are meaningful — tasks that telegraph something about a person’s intellectual abilities, generosity, courage or values. People will voluntarily perform intellectually arduous work, for example, because it gives them pleasure to solve a puzzle or win a game of wits.

You could read the rest of Shankar Vedantam’s column on internal and external motivation. And then consider Gary Becker’s provocative idea to charge $50,000 a person for the right to become an American citizen.

Yes, there is a lot of framing in this post.

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For the last few years, AT&T has offered customers the ability to rollover unused minutes from one month to the following month (for up to 12 months). The company has advertised the service as a way help customers avoid paying extra charges in those months when they go over their plan’s minute allowance. By framing rollover as an insurance against future overages, the option seems to have the possibility for nudging people to buying one plan above what they think they might need on a monthly basis. The rollover frame suggests that unused minutes aren’t actually “lost.” They are actually “saved” to be used for a rainy day in the future. We bet AT&T knows the answer to this question. We wish they would give their data to a behavioral economist for some analysis.

Why not let cell phone customers buy used minutes from each other?

Here’s another idea for AT&T, or for any other interested cell phone company: Create a market where customers can buy unused rollover minutes from each other. Overage charges are a giant revenue source for cell phone companies, but they could advertise the internal minute market as a way to grow their customer base. And, of course, companies could charge a percentage fee for each exchange a la Ebay. Companies might consider putting some limits on the amount of minutes that could be purchased or sold by their customers.

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If you are like most people, you are impatient. You’ll take a small reward now over a larger reward in the future. The near future. You’ll pick $5 today over $6.20 in 26 days. That’s a 25 percent return in a month! But most people take the $5 now because they focus on the $1.20 difference, which is much less than $5. Psychologists consider this an example of framing. In the language of Nudge, a choice architect’s choice of frame affects individuals’ final choices. In this month’s Psychological Science, Eran Magen, Carol Dweck, and James Gross have a short paper that puts a twist on the common finding of human impatience with a laboratory experiment. They frame the today-next month choice in way that increases the likelihood that someone will pick the delayed payoff.

They introduce an element of uncertainty in the decision making process. Some participants in their experiment faced the standard choice described above. Magen, Dweck, and Gross call this the “hidden zero” format. Others were given the option to receive “[A] $5.00 today and $0 in 26 days OR [B] $0 today and $6.20 in 26 days.” The amounts of money are the same in each of these situations. All that is different is the introduction of a 0 – what the authors call the “explicit zero” format – that reframes the gains and losses associated with waiting.

Despite the fact that the hidden-zero and explicit-zero formats of presentation were logically equivalent, the latter resulted in lower rates of impulsive choice, possibly because the explicit-zero format caused each choice to appear as a sequence, thereby encouraging people to select the improving sequence (i.e., the larger, later reward). The explicit-zero format may also draw attention to the opportunity cost of each choice, thereby encouraging people to choose the alternative that incurs a lower opportunity cost (i.e., to forgo the smaller, sooner reward)…

The way alternatives are represented matters: By simply mentioning the “obvious” downsides of alternatives, one can help decision makers choose in a more informed and balanced manner, thereby helping them place more weight on the achievement of their long-term goals, rather than on immediate gratification.

Hat tip: (We’re Only Human)

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So says MSN’s Health and Fitness section:

A visual nudge can help–but only if you notice it, says Paddy Ekkekakis, PhD, an exercise psychologist at Iowa State University. In one study, a sign urging people to use the stairs rather than the nearby escalator increased the number of people who climbed on foot by nearly 200%. Put your prompt near a decision point, Ekkekakis says–keep your pile of Pilates DVDs next to the TV; put a sticky note on your steering wheel to make sure you get to your after-work kickboxing class. Just remember: The boost you get from a reminder is usually short-term, so change the visuals often.

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Our colleague at Chicago’s Graduate School of Business, Noah Goldstein, has co-penned an excellent study (which we mention in Nudge) in this month’s Journal of Consumer Research. Goldstein and his co-authors manipulated appeals on the shiny information cards we all see in hotel bathrooms reminding us to save the environment by reusing our towels. Some guests were urged to join other “citizens” in reusing their towels and saving the earth. Others were urged to join other “men and women.” Others read a sign that simply told them what percentage of users of the room they were staying in reused their towels. Guess which appeal was most successful?

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Smokers are deterred by the warning labels on cigarette packages about health risks. Would warning labels about the effects of airline flights on global warming be as effective? The Institute of Public Policy Research thinks so. In a report, it recommends giving per person emissions data about flights to passengers, along with comparisons of energy consumption for similar trips on alternative transportation, like trains. Given that trains are, in general, more environmentally friendly than airplanes, it’s unlikely that any of the major carriers will want to advertise for their competition, but simple warning labels about airline energy usage might be feasible.

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