Behavioral Economics and Financial Decision-making

Deborah Kozdrasdkozdras@usf.edu

Http://stavros.coedu.usf.edu

Generously funded by State Farm and the Coca Cola Foundation

Cass Sunstein: NudgeWhat do people notice and what do they miss?

https://www.youtube.com/watch?v=vJG698U2Mvo

And did you see the gorilla?

http://theinvisiblegorilla.com/gorilla_experiment.htmhttps://newrepublic.com/article/108153/show-me-the-moneyhttp://www.economist.com/node/21551032

Nudge

Contrary to the prediction of standard economic theory (that people act rationally) behavioral economists have found that outcomes are much affected by whether people are automatically enrolled in a program (for savings,) and asked if they want to opt out, or instead, not automatically enrolled and asked whether they want to opt in.

If people are automatically enrolled in a program, many of them tend to stay in; if they are not automatically enrolled, many of them tend to stay out.

Fast and Slow Thinking

https://www.ssa.gov/policy/docs/ssb/v70n4/v70n4p1.html

Informational Issues

Herd Behavior

Informational Issues and Teaching About Financial Literacy

• Jump Start Survey: no correlation between financial education and test performance.

• Math is a key: science and engineering students score better than business and economics students.

• Knowledge-based programs are not effective in changing behavior.

• Financial literacy may correlate with problem solving ability.

https://www.newamerica.org/asset-building/policy-papers/the-effectiveness-of-youth-financial-education/

Decisionomics

• Evidence-based decisions

• Criteria

Overconfidence

http://confidence.success-equation.com

Financial Literacy Quiz

http://www.usfinancialcapability.org/quizzes.php

Financial Knowledge + Decision-making

Heuristics and Biases

Over confidence +Heuristics and Biases

• From home/background knowledge: My dad said that . . .

• From limited reading of evidence: But it says that natural gas is the cleanest . . .

• From evidence outside of the text: We use the most X so that is the one we should choose.

• More information-based, but when emotion gets involved . . .

Intertemporal Choice: Emotions, Procrastination, Self-control,

Hyperbolic Discounting

Your Favorite Book or Movie Character for President

Anchoring

Confirmation Bias

Decision Context: Framing

Framing

• Alternatives + Criteria

• What did the company say?

• What do they want?

Loss Aversion

http://neilbendle.com/books/BehaviouralEconomicsForKidsWeb.pdf