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Among economists, Pay-as-you-Drive (PAYD) automobile insurance has been an intriguing idea for a number of years. The idea is straightforward: Drive more, pay more. Proponents say PAYD can lower the social costs of driving—think carbon emissions and traffic congestion—by leading people to shoulder the true burden.

On the industry side, Progressive has been one of the most aggressive innovators with PAYD insurance. It first began offering a voluntary PAYD program called MyRate in six states in 2008. Three years later, thanks to inexpensive, if not quite cheap wireless technology, the idea is now available nationwide through an initiative called Snapshot. Progressive gives a discount to policyholders based on information about their driving habits collected over a month-long period. Drivers put a sophisticated little tracking device in their cars for six months. At the end of the first month, certain “good drivers” may be eligible for a discount of up to 30 percent based on that “snapshot” of driving behavior. (At the end of the six months, Progressive uses all the data to calculate a renewal rate.)

As Steven Levitt notes, the interesting part of PAYD insurance programs, which are voluntary, has always been how to structure the incentives for participation. The concern is that only low-mileage drivers will sign up.

The clearest winners are (low-mileage users), who can drive the same distance they used to drive and pay less. What’s less obvious is whether Progressive will be a winner; there are, in fact, a couple of situations in which Progressive could lose out. If all (PAYD) accomplishes is to give Progressive’s low-mileage customers the rate cut they deserve, then Progressive is doing little more than lowering its own revenues. It could, of course, try to compensate by raising rates on all its high-mileage (drivers), but then there’s nothing to stop (them) from buying…insurance elsewhere. (Of course, losing its riskiest customers to other companies might also prove profitable for Progressive.)

Where Snapshot is most likely to give Progressive an edge is if it can help the company better forecast the future liabilities it will be on the hook for. That means better predicting accidents. To do that, however, Progressive needs to get all kinds of drivers, not just low-mileage users, to try it and feed the data back to home base. To appeal to all drivers, Progressive has had to move beyond traditional economics and consider behavioral economics as well.

To encourage customers to test out Snapshot, Progressive draws from the lessons of overconfidence and loss aversion. Humans are overconfident creatures, especially when it comes to driving. Ninety three percent of people think they are above average drivers. Even among bad drivers, accidents are not the modal driving experience, and there’s always someone else to blame for them.

Snapshot is primarily a program about usage, but it’s sold as a program about “good driving.”

On its web site, Progressive doesn’t shy away from calling Snapshot “usage-based insurance.” But its media advertisements headlined by cheery customer service rep “Flo,” refer to driving behavior more generally. “Just plug it in and it keeps track of your good driving habits,” Flo explains. “So the better you drive, the more you save.”

What makes a good driver? The speed you drive at and the locations you drive to and from are not part of the equation. Taking speed off the table eases some customer fears since speeding is the most salient mark of good (or bad) driving. Taking driving location off the table eases fears of those who worry about privacy and whether Progressive is tracking their every move. The device doesn’t have a GPS.

Instead, “good driving” depends on 1) Time of day you drive, 2) Number of miles you drive, and 3) How hard you brake (“bad drivers” brake hard). What’s common about all three items? Drivers have very little control over them. When and how far your drive depends largely on where you live and work, which are both quite sticky in the short term. And how hard you brake is primarily an automatic reaction built up over years of commuting. For any single braking experience you can push the pedal more smoothly, but maintaining that consistency over an entire month if you are a hard braker is a bit like trying not to blink for a minute.

According to the Wall Street Journal, a Progressive executive admitted that one of these items predicts accident potential as well as all the usual demographic markers like age, gender and marital status. Although the executive didn’t say which one, the peak time for accidents is between midnight and 4 a.m. If there is one habit worth trying to change over your month with Snapshot, it could be the itch to party. At least think about taking a taxi or hitching a ride with your friend.

Progressive doesn’t think overconfidence, by itself, is enough to get people to try out Snapshot. So it has to remove any risk of losses by promising drivers they won’t pay any more for insurance than they are paying now. Freed of potential losses, overconfidence can kick in, prompting “good” and “bad” drivers to give it a shot and see what kind of a discount they get. After all, they can’t be penalized for any “bad” behaviors. But since Snapshot is about “good” and “bad” driving risk, not “good” and “bad” driving skill, Progressive doesn’t even care if you are involved in an accident while using the device since your risk profile is determined by calculations based on driving patterns. (Theoretically, you could be involved in a minor fender bender with Snapshot and Progressive would never know.)

In essence, Progressive doesn’t want a snapshot of your driving habits. It wants a snapshot of its overall customer base, assuming that base looks a lot like the overall car insurance market. It wants Snapshot to work less like a camera and more like a random sample. From that perspective, the success of economists’ preferred auto insurance depends on whether some non-economists can get the behavioral economics of offering the product just right.

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1) More overconfidence. Spotting drunk people.

2) More calories tomorrow. Calorie counts, that is.

3) More productive employees. Just say thank you to them. Hat tip: Simoleon Sense.

4) More mail. Gmail’s inbox gets smarter.

5) More bang for your buck. In Massachusetts, a 30 percent food stamp discount for buying fresh fruits and vegetables. But will the discount be visible enough?

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1) The Washington Post asked a series of economists what the appropriate tax rates for the richest Americans should be. Time magazine then asked three leading behavioral economists (Richard Thaler, David Laibson, and Dan Ariely) to read those responses and weigh in.

2) People spend more when it’s sunny. Are retailers going to start experimenting with artificial sun lamps? Hat tip: Five Minute Economist.

3) The Department of Health and Human Services releases a computer widget to help you find affordable health insurance.

4) Why is your garage, your pantry, or your office filled with stuff you never use? Overconfidence.

5) When financial executives offer a range for stock market returns with 80 percent confidence, they turn out to be right just one-third of the time.

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We shouldn’t expect that the competition to become a top manager will weed out overconfidence. In fact, the competition may tend to select overconfident people. One route to the corner office is to combine overconfidence with luck, which can be hard to distinguish from skill. C.E.O.’s who make it to the top this way will often stumble when their luck runs out.

From Richard Thaler’s latest Economic View column.

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1) A disloyalty card for coffee drinkers. Produced by a really over-confident coffee shop owner.

2) Tech coalition presses Obama to give consumers better access to energy usage information.

3) In Norway, there’s a new word for nudging: Dulting.

4) A self-service bike rental company promotes what it can do for your city in calories burned, money saved, pounds lost, carbon cut, and gas saved.

5) Motivating workers is more complicated than just paying them more.

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Richard Thaler and Daniel Kahneman are interviewed for an NPR story about lessons from behavioral economics. Long before he was a psychologist at Princeton, Kahneman was a psychologist in the Israeli army where one of his major tasks was evaluating soldiers and deciding which ones were likely to make good officers. To separate the good from the bad, Kahneman had groups of 8 soldiers figure out how to lift a giant telephone pole over a wall. The idea was that leaders, followers, and quitters would emerge. The telephone poll test turned out to be useless, however. There was no relationship between Kahneman’s evaluations and the evaluations at officer school based on six months of performance. Even after learning about the non-relationship, Kahneman initially didn’t believe it.

“The next day after getting those statistics, we put them there in front of the wall, gave them a telephone pole, and we were just as convinced as ever that we knew what kind of officer they were going to be.”

Listen to the story here.

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Investors with an “overconfidence” bias often trade too much and manage their portfolio on a stock-by-stock basis—while assuming they can beat the market, which the University of Chicago’s Mr. Thaler says probably won’t happen.

Mr. Thaler recommends a little test for the presence of an overconfidence bias. “Write down 10 traits [such as ‘investment skill’ or ‘ability to make good stock picks’], then ask yourself how you rate compared to your co-workers. If you rate yourself above average on all of them, plead guilty,” he says.

From the Wall Street Journal

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Our home city of Chicago is the most paternalistic city in the U.S., according to Reason magazine.

Feedflix is a tool for Netflix subscribers to figure out how much each rental is costing you.

Impressive online choice architecture from Olay. If only the Medicare prescription drug web site was this user-friendly.

Mostly Economics thinks overconfidence is in our genes, and links to a funny paper (that is intended to be serious) for Excel users – overconfidence among spreadsheet creators.

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Overconfident entrepreneurs are the most likely to fail in new businesses, according to new University of Leicester research.

CEOs develop overconfidence with each merger and acquisition decision, playing up their own role in the successes, thus leading to more deals, many of them bad, according to new University of Iowa research. CEOs are so overconfident they shift their stock portfolios prior to the deals.

Overconfident CFOs “tend to use lower discount rates when valuing cash flows and assign higher values to projects,” according to University of Chicago research. The companies they work for invest more, use more debt, and are less likely to pay shareholder dividends. Seven thousand CFOs were asked, in a survey, to make predictions about the S&P 500 from 1-10 years. Just 38 percent got it right – and they were usually the least confident CFOs.


The U.S. government keeps trying to fix the airport mess. In an effort to speed up congested terminals, the Transportation Safety Administration recently unveiled its plan for 21 airports to split the standard single security line into three “self-select” lines that people can choose between. The lines, modeled after ski slope categories, are for “families and special assistance” (marked in green), the “casual traveler” (in Aspen ice blue), and the “expert traveler” (black like the diamond). According to the New York Times, TSA officials have now learned what Thaler’s business school students know all too well: As humans, most air travelers are overconfident.

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