This is the second interview in the series Research Spotlight, in which I share conversations that I have with faculty regarding their research, their journey within their field, and their field in a broader context.
Professor Syon Bhanot is a behavioral and public economist. He primarily uses field experiments to study decision making around cooperation, environmental conservation, personal finance, and various development topics.
This article is the second part of a three part interview with Professor Bhanot. You can find Part I here.
AIDAN REDDY: What are some of the most important insights from behavioral economics that people should consider in their everyday lives?
BHANOT: It helps to be aware of the biases that you fall prey to, how they shape the way you think about the world. Learning behavioral economics is valuable because you start to realize that you have these biases yourself.
We have a systematic habit of under appreciating things where we have to suffer now and get benefits later. You’re never going to go to the gym as much as you planned to. You’re generally never going to save enough for retirement. We tend to be very overconfident in our ability to get tasks done. For day-to-day life, that has a lot of important ramifications. There’s something called the planning fallacy, for example. You always think that it’s going to take you less time to do something than it ends up taking. This happens over and over. Even if you’re aware of the planning fallacy, it hits you anyway. I’m sure every student will have had this happen before. You think, “I’m gonna get this done by Tuesday,” and then you don’t. And you don’t seem to update your expectations about your ability to get things done. One useful takeaway is: don’t ignore the data from history and overestimate your ability to get things done. But also, don’t get down on yourself for failing to achieve what you expect to. You’re not hard wired to get things done as quickly as you think you will. I think some people give themselves a hard time. They have overly high expectations, they don’t meet them, and then they think they’re a failure because of it. That’s certainly not what behavioral economists would say. They would say, “You have problems with this because you’re a human being.” We are generally terrible at this, and even though we know we are overconfident about things, we can’t stop doing it, because it’s built into us. That’s one piece of what behavioral economics would tell you, to give yourself a break. You’re just a human being, and you struggle with a lot of the biases that everyone else does — just be aware of them.
Another thing to flag here is the important idea that people tend to look to others for information about what they should do. I would say students are definitely in this category, based on my interaction with them over the years. Social norms and peer pressure can be really powerful influences. In a rational model, you have your own preferences. You like doing the things that you like doing, and you’re not easily swayed by other people. There’s tons of behavioral economics research that suggests that we often don’t know what we truly want in life, in our relationships, what we want to major in, and we just get cues from people around us. That person says this thing is cool, so I guess I’ll go do it now. Sometimes, you can start drifting away from the life that you want because you were swayed by social influence. As a result, you don’t give enough thought to what you really want to do, what’s really important to you. I think students and people in general should go back and ask themselves, “ Well, what would I do if I didn’t have to do anything. Am I really pursuing the things that I think are fun anyway?” I think a lot of people find themselves at 27 or 28 thinking, “I’m doing something I don’t like. I’ve wasted my 20’s doing something that I don’t want to do.” So I would give everyone the same advice – “guard your preferences.” Guard the things that you like to do, because you will follow the crowd quite often in life. That’s fine, that can lead you to good places; but, it can also lead you astray, and you’ll have to have a life reset at some point (like Ben Stiller characters seem to have in like every movie he’s in). I think a lot of people are just living day-to-day, but they’re not really thinking about the big picture.
One model in behavioral economics involves the idea of multiple selves. There’s you in the present, there’s you in the future, and you almost can think about those as two different but related people. For example, you think “I’m gonna go to the gym next Tuesday.” You in the present is not going to go and you in a week is supposedly going to go, but, once that day comes, that person is probably not going to want to go. There are tools that you can try to use to “lock in” decisions for your future self. One classic example is savings behavior. Oh I’ll save… eventually! And then you hit 65 and you haven’t really saved enough. You can help yourself deal with this problem by setting up auto-withdrawal into a savings program that moves money to your savings account regularly. Sign up for things like that. Whenever you’re having a moment of lucidity or free time where you can think big picture, make commitments for yourself that lock you into things in the future. If you want to start investing, do it today. You might plan to buy more stock every week, but you’re not going to. You’re definitely going to forget. Have it auto-done for you. Compound interest will kick in for you, and it will be great. People tend to not understand compound interest and appreciate how much things grow if you consistently put money into an interest-bearing account. Take it out of your hands, to some extent. If you plan to go to the gym, get a buddy and say, “Do not let me not get up.” Create environments where you’ve bound your own hands, if you know it’s going to be something that’s better for you.
I’ll share another example. There was a study done by two professors at, Dan Ariely and Klaus Wertenbroch. One of them had this class, with three assigned papers. And they told the students that they could pick their own due dates for the three papers. The argument was that in a rational model, it’s best to have the latest possible due date for each paper. Everyone “should” choose to make all three due dates at the very end of the semester; it gives you maximum flexibility. You won’t be stunned to find out that essentially everyone picked earlier deadlines for some of the papers. Why would they choose that? Clearly, people are aware that they have self control problems. Even though it’s rational to choose the latest possible due date for all of the papers, people know themselves enough to know that they’re not going to be able to exhibit the self control needed to space the work out evenly over the course of the semester.
There’s a lot of common sense to some of these ideas in behavioral economics. There are interventions just using text message reminders. I have a couple with the City of Philadelphia. Just reminding people to do things makes it more likely that they’ll do them. In a rational model, if it’s important to you, you’ll do it. But people are really forgetful. There’s this great concept called scarcity. If you have cognitive scarcity — if you’re limited in how much psychological space you have to dedicate (like a student would be) — it’s really hard to make good decisions in your day-to-day life because you’re always distracted by short-run but ultimately minor stuff, but never really thinking big picture. A colleague had a really good piece of advice: block times off in your calendar for nothing. The author of the Scarcity book, Eldar Shafir, calls them “meetings with himself.” On any given day, you’re going to have two hours of stuff you didn’t expect to have to do. So, it really stinks if your whole schedule is full. You feel stressed out and burdened all of the time. If you had two hours every day in your schedule blocked off, it’s just time for yourself. Then if (and when) you have an inundation of random stuff that comes up, that’s your moment to do it. It becomes a lot easier to make the decision to spend the time and do it then. I always tell students to look at their calendars. They’re often really packed for the next two weeks, and then they free up after that, generally. So, fill in some of that with blank time. You can say, “This whole day, I don’t want to do anything.” Mark it on the calendar as a meeting with yourself. Then you can just go and do fun stuff and have a mental break. Block it off weeks in advance because you’ll always be able to work around it and it will never be a problem. Recognize that the present will always be “busy time.” As your schedule moves forward, it’s gonna get packed and every week around you is gonna be packed. You’ll never have a chance to take a step back and look at the big picture. That’s another practical tool: block off time in your calendar a few weeks from now, and you’ll find yourself with these amazing free windows of time where you can actually make rational, good decisions about what you want to do. That’s the moment where you can sign up for your savings program, or things like that.
REDDY: What are some of the most important takeaways from behavioral economics when it comes to large-scale policy decisions?
BHANOT: A lot of behavioral economists like me who do a lot of public policy work will often point to how we think about policy and other big picture issues and say that there are a lot of the rational assumption baked into how our policies our made. A lot of law essentially assumes rationality. There’s a whole field: rationality in law. If you think about, for example, we have all of these regulations that say you have to provide people with all of this information all of the time, because the rational model is that when people need to make decisions, they need information about those decisions. The more you give them, the better. That’s why when you sign up for anything, you have this 4,000 page document that you have to sign. They have to spell out everything for you, but this has not been designed by anyone with a behavioral economist bone in their body; it’s just sort of, “Here’s this laundry list of things, because once we’ve informed you, you now know how to make the best decision for yourself.” But, you do what everyone else does, which is scroll to the bottom and say “accept”. If we brought in a behavioral viewpoint, we might change the regulation about what that needs to look like. It can’t be a million pages long; it needs to highlight the key points, and make very clear what people are getting themselves into. For example, credit card statements. For the longest time, they were these massive, impenetrable documents. After a while, people realized that people weren’t understanding these forms. There are these elaborate credit card statements, and people are consistently paying the minimum payment, not understanding that they’re racking up debt in the process. There are new regulations, thanks to behavioral scientists, who said that the credit card form has to be much more clear regarding what people need to do to avoid debt. The information needs to be clear, visible, and not buried in small font. The rational viewpoint is that people will listen to the person speaking really fast at the end of the ad, or will read the tiny text at the bottom of a form. Nobody looks at that, because they’re people, and people don’t read those things; they only see what’s put in front of them in big letters. A lot of policies can be improved by just making forms simpler.
It’s not just micro decisions like that; there’s also the macroeconomic side. It’s smaller, but there’s a whole subfield of behavioral macroeconomics, which is basically looking into things like how people think about interest rates. So, a lot of macroeconomics models require that we, as people, have the right expectations of what inflation in the future is going to look like. So, when you get a student loan and an interest rate of 6%, it’s thought that you, on average, know what inflation is going to be, and therefore do the “rational” thing and use the real interest rate (the nominal rate minus inflation). Some behavioral science researchers have looked at this, arguing that people misunderstand inflation and interest rates. If you get a 5% student loan, you don’t think about it as “5%… minus inflation though!” – you think about it as 5%, because that’s the number you see. So, we might need to think differently about how people think about borrowing and lending decisions.
Another example is how we think about taxes. Do people have the right knowledge on how much income tax they even pay? There’s a marginal tax rate and an average tax rate, and you have to sum up all of the marginal to get the average, and it’s very confusing. So, do people really respond to the tax rate that we think they should be responding to (which is the marginal tax rate, for income) or are they responding to some notion of, “Well, last year I paid 12% of my income in taxes when I filled out my forms; that must be what I have to pay if I make $100 more this year than last, because that’s what I pay on average.” What really matters is what you pay on the margin, rationally speaking, but that’s not exactly the most salient thing to people. So again, that could affect how we respond to taxes, and it also affects how we set taxes on items in the store. In the standard economic model, it doesn’t matter if the tax is rolled into the price or added at checkout; either way, you’re paying the same amount of money. There’s some behavioral economics research that shows that people respond more to the numbers they see. They tend to underappreciate sales tax at checkout, for example.
This has important implications. There’s another great paper on electronic tolling, where they look at what happens when electronic toll booths are introduced. They found that, initially, toll rates stay low, but then they start going up more when there are more people using electronic tolling booths, because people aren’t aware of what the toll is on the road. So, as soon as you make taxes more “hidden,” it may actually be the case that a government can raise those taxes on people in ways that they aren’t even aware of. In an increasingly automated world, we need to be aware of the fact that people aren’t fully attentive to everything that’s going on, and if we assume that they are, we’re going to make bad public policy (or public policy that hurts people). We have to take seriously the idea that people aren’t going to act rationally in response to public policy. If you’re going to raise or lower the interest rate, you need to think about how people are going to respond to that, because that’s fundamental for our understanding of macroeconomics as a whole. There’s been a low level of appreciation for the biases affecting people, but I think that now, people are starting to think more seriously about integrating this stuff into what they’re doing so that can make better policy.
There’s one paper we’re working on right now in Kenya on TB. You’d think that, if you have TB, and you’re given medication by your doctor, the rational thing to do is to take your medication. It’s not rocket science. But, there’s a lot of adherence problems with people who have illnesses. Some colleagues and I helped develop this text-message based system in Kenya, where people who had TB were regularly getting support messages, and also had to verify via text that they took their medicine whenever they were required to. If they didn’t do it, a support team member (people we hired and who were themselves affected by TB in the past) would follow up with them immediately, and if they continued to ignore the texts, the clinic staff was called in pretty fast. We saw huge improvements in medication adherence and in successful completion of treatment, just from texting people and having a nice platform to apply social pressure from support staff. It almost created a form of a “buddy system” – here’s another person who you’re now responsible to. In a rational model, who cares about some random person texting you? You have TB! You need to take your medication; this shouldn’t affect you. But, we found these really large increases in positive outcomes from this simple system. These things matter and they can improve public health dramatically. Those are the kind of projects that I get really excited about. I could plausibly argue that we saved people’s lives. That’s where I get really enthusiastic about the work that we’re doing. If we saved one person’s life from that intervention, then my whole career is worth it. That’s great.
REDDY: Certainly, that’s awesome. To me, what’s interesting about it is that it’s these seemingly-trivial things that, when a bunch of people are doing them, have huge economic implications.
BHANOT: It’s funny that you say seemingly-trivial. There’s an idea called SIFs, (I think coined by Richard Thaler, who just won the Nobel Prize, but he certainly uses it a lot) – seemingly-irrelevant factors. That’s a lot of what behavioral economics is about. There are things that seem like they should be irrelevant but they actually affect your decision making, like getting a text message from some rando telling you to take your meds.
Next, stay tuned for how Professor Bhanot got involved in behavioral economics, and his take on the future of the field.
Featured image courtesy of Carnegie Mellon University.