Topic_in_Quant_Financial Theory explained .pdf
- 1. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Nudge : Improving Decisions about Health, Wealth, and Happiness Richard H. Thaler and Cass R. Sunstein Presented by Meichen Fan Sep 2019 Richard H. Thaler and Cass R. Sunstein Nudge 1 / 19
- 2. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Contents 1 Basic Concepts 2 Why We Need Nudges 3 How Nudges Influence 4 Example : Saving for Retirement 5 Opinions Richard H. Thaler and Cass R. Sunstein Nudge 2 / 19
- 3. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Basic Concepts Choice architecture The environment in which people make decisions. Nudge Features of the choice architecture that influence the decisions people make without changing either objective payoffs or incentives. Richard H. Thaler and Cass R. Sunstein Nudge 3 / 19
- 4. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Three Reasons Human Fallibility Social Impact Benefit from Nudges Richard H. Thaler and Cass R. Sunstein Nudge 4 / 19
- 5. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Human Fallibility Humans not Econs Automatic system and Reflective system People make biased judgments. Richard H. Thaler and Cass R. Sunstein Nudge 5 / 19
- 6. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Human Fallibility Heuristic Overconfidence Inertia Framing Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19
- 7. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Human Fallibility Heuristic Anchoring heuristic You start with some anchor you know, and adjust in the direction you think is appropriate. Overconfidence Inertia Framing Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19
- 8. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Human Fallibility Heuristic Availability heuristic People judge how likely something is, by how easy it is to recall examples of that type. Overconfidence Inertia Framing Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19
- 9. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Human Fallibility Heuristic Representativeness heuristic How likely A belongs to category B = How similar A is to their image or stereotype of B Overconfidence Inertia Framing Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19
- 10. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Human Fallibility Heuristic Overconfidence People are unrealistically optimistic. Inertia Framing Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19
- 11. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Human Fallibility Heuristic Overconfidence Inertia Loss Aversion People are loss averse. Framing Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19
- 12. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Human Fallibility Heuristic Overconfidence Inertia Status Quo Bias People have a more general tendency to stick with their current situation. Framing Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19
- 13. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Human Fallibility Heuristic Overconfidence Inertia Framing Choices depend, in part, on the way in which problems are stated. Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19
- 14. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Human Fallibility People are nudge-able. Choices are influenced in ways that would not be anticipated in a standard economic framework. Richard H. Thaler and Cass R. Sunstein Nudge 7 / 19
- 15. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Social Impact Humans Learn from others or are easily nudged by others. Information If many people do something or think something, their actions and their thoughts convey information about what might be best for you to do or think. Richard H. Thaler and Cass R. Sunstein Nudge 8 / 19
- 16. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Social Impact Humans Learn from others or are easily nudged by others. Peer Pressure People think others are closely paying attention to what they are doing. Richard H. Thaler and Cass R. Sunstein Nudge 8 / 19
- 17. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Social Impact Humans Learn from others or are easily nudged by others. Priming Subtle influences can increase the ease with which certain information comes to mind. Richard H. Thaler and Cass R. Sunstein Nudge 8 / 19
- 18. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Social Impact The three social influences that we have emphasized — information, peer pressure, and priming — can easily be enlisted by private and public nudgers. Richard H. Thaler and Cass R. Sunstein Nudge 9 / 19
- 19. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Benefit from Nudges Situation in which people are least likely to make good choices Lack of self-control Rare, difficult choices Lack of feedback Inability to forecast for the unfamiliar Richard H. Thaler and Cass R. Sunstein Nudge 10 / 19
- 20. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Why We Need Nudges Benefit from Nudges People will benefit from nudges for decisions that are difficult and rare, for which they do not get prompt feedback, and when they have trouble translating aspects of the situation into terms that they can easily understand. Richard H. Thaler and Cass R. Sunstein Nudge 11 / 19
- 21. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions How Nudges Influence Choice Architecture iNcentives Understand mappings Defaults Give feedback Expect error Structure complex choices Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19
- 22. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions How Nudges Influence Choice Architecture iNcentives Good choice architects can take steps to direct people’s attention to incentives. Understand mappings Defaults Give feedback Expect error Structure complex choices Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19
- 23. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions How Nudges Influence Choice Architecture iNcentives Understand mappings A good system helps to improve their ability to map and hence to select options that will make them better off. Defaults Give feedback Expect error Structure complex choices Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19
- 24. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions How Nudges Influence Choice Architecture iNcentives Understand mappings Defaults Good defaults are selected to make the chooser’s life easier or better. Give feedback Expect error Structure complex choices Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19
- 25. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions How Nudges Influence Choice Architecture iNcentives Understand mappings Defaults Give feedback Well-designed systems provide feedback to help Humans improve their performance. Expect error Structure complex choices Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19
- 26. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions How Nudges Influence Choice Architecture iNcentives Understand mappings Defaults Give feedback Expect error A well-designed system expects and forgive its users to make mistakes Structure complex choices Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19
- 27. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions How Nudges Influence Choice Architecture iNcentives Understand mappings Defaults Give feedback Expect error Structure complex choices As choices become more numerous and more complex, choice architects are much more likely to influence choices. Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19
- 28. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions How Nudges Influence Benefit from Nudges With an eye on these NUDGES, choice architects can improve the outcomes for their Human users. Richard H. Thaler and Cass R. Sunstein Nudge 13 / 19
- 29. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Example : Saving for Retirement 401(k) Plans Defined-contribution plans in the United States Completely portable, flexible, But require initiative Richard H. Thaler and Cass R. Sunstein Nudge 14 / 19
- 30. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Example : Saving for Retirement Standard Economic Theory People solve complicated mathematical problems easily. People have enough willpower to implement relevant plans. Econs do, but Humans DON’T ! We need nudges. Richard H. Thaler and Cass R. Sunstein Nudge 15 / 19
- 31. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Example : Saving for Retirement Nudge Helps Enrollment Automatic enrollment plans Forced choosing plans Richard H. Thaler and Cass R. Sunstein Nudge 16 / 19
- 32. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Example : Saving for Retirement Nudge Helps Enrollment Automatic enrollment plans With default option Enrolled in the plan, unless actively asking to opt out. Forced choosing plans Richard H. Thaler and Cass R. Sunstein Nudge 16 / 19
- 33. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Example : Saving for Retirement Nudge Helps Enrollment Automatic enrollment plans Forced choosing plans Without default option Require to make an active decision about whether to join the plan. Richard H. Thaler and Cass R. Sunstein Nudge 16 / 19
- 34. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Example : Saving for Retirement Nudge Helps Low Saving Rates Three behavioral biases People have more self-control regarding future plans than immediate behavior. People are loss averse in nominal dollars. Retirement savers display strong inertia. Three solutions Workers were asked whether to join a program that in a month or two, not today. Increases in the savings rate would be timed to coincide with pay increases. Once joined, remained in place until actively opted out. Richard H. Thaler and Cass R. Sunstein Nudge 17 / 19
- 35. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Example : Saving for Retirement The Role of the Government The primary role government needed to play was getting out of the way by reducing the barriers to adoption of these programs. Richard H. Thaler and Cass R. Sunstein Nudge 18 / 19
- 36. Basic Concepts Why We Need Nudges How Nudges Influence Example : Saving for Retirement Opinions Opinions It is legitimate for choice architects to try to influence people’s behavior in order to make their lives longer, healthier, and better. Universality and particularity Designer’s self-discipline Richard H. Thaler and Cass R. Sunstein Nudge 19 / 19