268 BEHAVIORAL ECONOMICS
People’s choices in multistage
games vary according to how
questions are framed. If they are
directed to ignore factors that both
choices have in common, such as
Stage 1 in this example, they may
make inconsistent choices.certainty of saving 200 people.
If the question is restated,
however, with the choice being
between program C, which
guarantees the death of 400 people,
or program D which offers a one-
third chance that nobody will die
versus a two-thirds chance that
600 people will die, most people
will pick the risky program D.
The ultimate outcomes of the
pairs of choices are the same: in
both A and C we definitely end up
with 400 dead, while with B and D,
there is an expected outcome of
400 dead. Yet now people prefer
the option that is more of a gamble.
People are more willing to take
risks to prevent lives being lost
(a loss) than they are to save lives
(a gain). We place more subjective
value on losing something than
gaining something—losing
$10 feels worse, apparently,
than gaining $10 feels good.
This tendency toward loss
aversion means that, when choices
for change are framed in such a
way that the consequences are
seen as negative, people are more
likely to perceive the change as a
problem. Knowing this can be used
to influence people. For instance,
if a government wants to encourageBehavioral economics in action
The new field of behavioral
economics has provided firms
with new ways to drive their
businesses. In 2006, a group
of economists devised an
experiment for a bank in South
Africa that wanted to grant
more loans. Traditional
economists would have advised
the bank to lower its interest
rate to stimulate demand.
Instead, the bank allowed the
economists to experiment with
various options to find out whichmight be most profitable for
the bank. They sent out 50,000
letters offering different interest
rates—some high, some low.
The letters also featured photos
of employees, and a simple or
complicated table showing the
different chances of winning a
prize if the letter was replied to.
By tracking which customers
responded, it was possible
to quantify the effect of
psychological factors against
the purely economic factor ofthe interest rate. The
experiment discovered that
the interest rate was only the
third most important factor
in stimulating demand, and
including a photo of a female
employee in its marketing had
an effect equal to dropping
the interest rate by five points.
This is a groundbreaking result:
identifying psychological
factors to stimulate demand
can be a lot cheaper than
lowering the interest rate.A: Ye s.Q: This is a two-stage
game. There is no choice at
stage 1, just a 25 percent chance
of moving on to stage 2.
Do you want to play?Q: At stage 2
you have two choices:
either A—a guaranteed $3,000,
or B—an 80 percent chance
of $4,000. But you have to decide
before you start stage 1 which
of these two options you want
to take at stage 2—if
you make it that far.Q: Final answer?
Do you realize that
Option A actually gives you
a 25 percent chance of winning
$3,000, while Option B gives
you a 20 percent chance of
winning $4,000?A: I’ll take A,
please—the
guaranteed $3,000.Really?...
In that case
I’ll take B!