rotmanmagazine.ca / 17to call ‘supposedly-irrelevant factors’ (SIFs) — things that stan-
dard economic theory says should not influence choices: It
should not matter that the savings rate is increased in a few
months rather than right now; nor that the increases are linked
to pay increases; nor that the default is to stay in the plan; but of
course, all of these features matter. Putting off the increase in
saving to the future helps those who are present-biased; linking to
increases in pay mitigates loss aversion; and making staying in the
plan the default puts status quo bias to good use. More than half of
large plans around the world now use automatic enrollment and
automatic escalation.
When are nudges most needed?
People need a nudge most when a choice and its consequences
are separated in time, and as a result, both investment goods and
sinful goods are prime candidates for nudges. ‘Investment goods’
include dieting, exercise and flossing your teeth. In each case, the
costs are borne immediately, but the benefits are delayed, and as
a result, people tend to err on the side of doing too little. ‘Sinful
goods’ include things like cigarettes, doughnuts and alcohol;
basically, you get the pleasure now and suffer the consequences
later. Nudges are also needed most when decisions are difficult
or rare — especially when there is no prompt feedback.
My number-one mantra for choice architects is, ‘Make it
easy’. If you want to get someone to do something, make it easy to
do that thing. For instance, if you want them to eat healthier food,
put healthier options in your cafeteria, make them easier to find,
and make them taste better.
Many people believe that the financial markets are the most
efficient of all markets. Are they?
I would agree — but they will never be perfectly efficient, because
like all markets, humans are involved. As a result, there are pe-
riods where they get overly excited and periods when they get
overly depressed. Also, the lack of predictability in stock market
returns does not imply that stock prices are ‘correct’. The infer-
ence that ‘unpredictability implies rational prices’ is what Robert
Shiller once called “one of the most remarkable errors in the his-
tory of economic thought.”
What about the Efficient Market Hypothesis (EMH)?
EMH has been essential to the history of research on financial
markets, but the danger it presents is when people consider it to
be literally true. If policymakers believe bubbles are impossible,
for instance, they will fail to take appropriate steps to dampen
them. Looking back at what was happening in 2007, it would
have been appropriate to raise mortgage-lending requirements
The SEEDS of Bias
Dr. David Rock and his colleagues at the Neuroleadership
Institute have developed the SEEDS Model, which shows
that biases fall into five key categories. Below are samples
for each catagory.SSIMILARITY BIASES
In-group Bias: Perceiving people who are similar to you
(in ethnicity, religion, socioeconomic status, profession, etc.)
more positively. (“We can trust her; her hometown is near
mine.”)
Out-group Bias: Perceiving people who are different from
you more negatively. (“We can’t trust him; look where he
grew up.”)EEXPEDIENCE BIASES
Confirmation Bias: Seeking and finding evidence that con-
firms your beliefs and ignoring evidence that does not. (“I trust
only one news channel; it tells the truth about the political
party I despise.”)
Halo Effect: Letting someone’s positive qualities in one area
influence overall perception of that individual. (“He may not
know much about people, but he’s a great engineer and a
hard-working guy; let’s put him in charge of the team.”)EEXPERIENCE BIASES
False Consensus Effect: Overestimating the universality of
your own beliefs, habits, and opinions. (“Of course I hate broc-
coli; doesn’t everyone?”)
Hindsight Bias: Seeing past events as having been predict-
able in retrospect. (“I knew the financial crisis was coming.”)DDISTANCE BIASES
Affective Forecasting: Judging your future emotional
states based on how you feel now. (“I feel miserable about it,
and I always will.”)
Temporal Discounting: Placing less value on rewards as
they move further into the future. (“They made a great offer,
but they can’t pay me for five weeks, so I’m going with some-
one else.”)SSAFETY BIASES
Loss Aversion: Making a risk-averse choice if the expected
outcome is positive, but making a risk-seeking choice to avoid
negative outcomes. (“We have to take a chance and invest in
this, or our competitors will beat us to it.”)
Framing Effect: Basing a judgment on whether a decision
is presented as a gain or as a loss, rather than on objective
criteria. (“I hate this idea now that I see our competitors walk-
ing away from it.”)