Tuesday, October 5, 2010

Choice Architecture: Capitalizing on Competition

     Computer technology has increased in an exponential fashion throughout the last 50 years, whether it be in the form of laptops, cell phones, internet software, bluetooth devices or sensory equipment. Unlike technology involving advanced weaponry or biological manipulation, new computerized devices are almost always welcomed with open arms by the American public, and have not posed many ethical issues (except perhaps in the context of law enforcement). Of course, that doesn't mean there has not been a good deal of concern about its uses voiced by academics and writers. The words written by George Orwell in his seminal work 1984 [1], in which the government used advanced technology to monitor and control its citizens, should have perhaps been regarded as emerging facts rather than imaginative fiction. The internet, for example, has proved to be an excellent data-mining source for governments and corporate institutions that seek to gain information about their citizens and customers, and this reality should be cause for a lot of concern. Check out this video entitled the "Most Disturbing Presentation Ever: Our Tech Nightmare", which presents a new form of computerized commercial technology which may easily cross the line of clever corporate gimmicks, and enter the realm of unethical social manipulation:




     Indeed, the presentation does illustrate a harrowing picture of advanced technology in the hands of large retail corporations. American companies constantly strive to manufacture new consumer "needs" through psychosocial manipulation (a.k.a. marketing and adverting), since production capacity generally exceeds the existing market's ability to absorb it. What better way to achieve this goal than exploit the competitive "gamer" culture that has evolved in American society? The last two decades have seen an explosion in the proliferation of video game consoles, computer games, competitive reality shows, game shows, casino rewards programs and various point systems in general. Americans obviously spend a great deal of time and money watching sporting events, and many sports bars actually have trivia or poker games for people to play while they watch a game. If Kellogg's can successfully convert something as simple as eating cereal into an interactive competition, then it can guide its existing customers towards consuming more of its products and also capture new customers who would have otherwise abstained from consumption.

    The presentation makes some very good points, but unfortunately it tends to lump every form of technologically-based social manipulation under the same label of "disturbing stuff". The presenter quickly mentions that governments could use a competitive point system to encourage the use of public transportation, and leaves us with the implication that this may be an undesirable outcome. Perhaps the more times an individual puts money on a metro card and uses it, the more instant points are accumulated on that person's "environmentally-friendly scoreboard". At the end of the year, an individual's points can be translated into a tax credit for a portion of the money spent that year, and special prizes could be given to "players" who score in the top 5%. This example should not be glossed over as another degrading intrusion of people's privacy, or unethical form of manipulation, because it actually reveals an important function that our governing institutions could perform. Our modern society has been characterized by an increasingly large federal government that creates more and more regulatory mandates and bureaucracy to address real or perceived problems. This process has led to enormous amounts of waste, misguided dependence, unintended consequences and a general loss of freedom, but that doesn't mean our governments have no role to play in formulating public policy.

     The field of behavioral economics analyzes the economic decisions of agents within a complex society using social, cognitive and emotional factors. Two prominent writers in this field are Richard Thaler and Cass Sunstein, who produced a book in 2008 entitled Nudge [2], in which they question the mainstream view (mainly of neoclassical economists) that people make economic decisions in a rational, self-interested manner. They clearly show that people respond to subtle environmental cues when making decisions, whether it's a  relatively harmless choice about what magazines to buy or the more serious choice of which retirement plan to choose from an employer. In our complex society that presents dozens of choices to be made on a daily basis, many of these cues are not accidental but have evolved as a part of carefully designed structures, which Thaler and Sunstein  term "choice architecture":
"Choice architecture is the context in which you make your choice. Suppose you go into a cafeteria. What do you see first, the salad bar or the burger and fries stand? Where's the chocolate cake? Where's the fruit? These features influence what you will choose to eat, so the person who decides how to display the food is the choice architect of the cafeteria. All of our choices are similarly influenced by choice architects. The architecture includes rules deciding what happens if you do nothing; what's said and what isn't said; what you see and what you don't. Doctors, employers, credit card companies, banks, and even parents are choice architects." [From Amazon Interview]


     In an American economy where 70% of the GDP is comprised of consumer activity [3], it's unsurprising that the most influential choice architects are corporations. American corporations collectively spend billions of dollars every year on market research (focus groups, public opinion surveys, psychological studies, statistical analysis, etc.) to construct the choice architecture that best aids them in selling their goods and services. The incorporation of advanced sensory technology into products, for the purpose of creating competitive consumption games, would establish a significantly more dominant architecture than we already have. Although it seems unlikely that corporations will be able to financially justify the costs of widespread implementation of this technology during an economic depression, in which the wealth of consumers' is being rapidly destroyed, they may still find limited ways to exploit it. Either way, why should private corporations  get all of the benefits from the latest research in computer technology and behavioral economics? Now is a better time than ever for the people, through their local representatives, to utilize modern scientific insights into guiding economic decisions in a complex society.

      To be effective and avoid counter-productive consequences, I strongly believe that most implementation of choice architecture must be done at the local or state level.  Unlike the federal government, localized governments can more appropriately tailor policies for their specific populations and implement these policies without too much waste or corruption. The federal government may be able to take a passive role and help fund research for state initiatives, but the process of formulating and implementation should be largely left to localized institutions. It may seem counter-intuitive that smaller governments are less likely to be captured by corporate interests, but the decreased size and complexity is exactly what limits corruption. The daily actions of local representatives are more visible than those of their federal counterparts, and they have to live and work among their constituents. There has certainly been some corrupt dealing by local and state officials in the past, but it's less likely these officials will be willing to cross their distrustful populations in the near future.

     When it comes to the imminently desirable goals of protecting environmental, ecological and biological systems from climate change and promoting the development of mass transit, the public may need more than just a small nudge. The competitive point system mentioned above, which gives significant tax breaks to individuals using public transportation, would more appropriately be considered financial coercion by the state. The power to tax, after all, is the power to destroy, and the same could be said of the power to give tax breaks (the power to destroy the competition). Still, our society is at the point where there's no more time left to procrastinate, and individuals should be significantly rewarded when they sacrifice convenient transportation to help create a more healthy environment for current and future generations. A choice architecture built into the tax code may be the most influential means of accomplishing these goals, short of creating strict, mandated limits on people's carbon footprints. The latter would not only be politically unfeasible, but would also create additional bureaucracy, unintended consequences and resentment in our society. Perhaps state governments could also display fancy television and billboard advertisements for their new mass transit competitions, similar to those that car companies bombard us with every day.

     There are many other areas in which a carefully designed choice architecture could nudge our society to beneficial results, without requiring signficant financial incentives. Of course, we must first establish what is "good" for society, because definitions will vary based on the definer's worldview and expectations for the future. Personally, I believe the best thing our leaders can do at this point is promote localized resilience and passively manage a transition to reduced complexity in our societal structures. This goal would  include helping people become less dependent on government handouts or the products of multinational corporations to survive and have a decent existence. As a subset of resilience, people should be encouraged to produce their own food, maintain good health, consume less energy and preserve their wealth without exposing themselves to huge risks. Therefore, the following examples of competitive choice architecture (with or without a technological twist) will primarily focus on the areas of food production/consumption, energy use and financial decisions.

Food Production and Consumption

     A crucial element of local resilience is the ability of people within a community to produce their own food. A volunteer group in Peru called San Francisco Saludable is currently working with community members to transform waste products into compost for gardens. Citizens are encouraged to submit their recyclables to the group, which transforms them into compost and delivers it back to the community free of charge. [4]. Local governments in America could institiute a similar program and encourage their citizens to take full advantage of it. Participating members could be rewarded with points based on the amount of compost created from their submitted waste, and also gain bonus points for using that compost to grow a vegetable garden. It would certainly be a cheap, efficient process for members of the community, and could create enthusiasm and a sense of pride for the people who use their garbage to grow their own food. The "waste-to-compost players" who contribute the most to local food resilience could receive recognition for their efforts in the local media.

     Many local communities across the country rely on several mega-lithic grocery stores to provide their citizens with food, and it can become an extremely complex process for shoppers to pick out healthy and/or environmentally-friendly items. These communities could borrow an idea from institutions in the UK, Japan and France, where certain producers and retailers are placing "carbon footprint labels" on food items. [5]. These labels provide a simple, uniform way for people to determine exactly how energy-intensive the items were to produce and distribute. Maybe a degree of health consideration could also be included by making the label green (healthy) or red (unhealthy) based on an established local standard that is familiar to residents of the area. The communities could also utilize computerized reporting technology that would allow residents to compete for the lowest carbon footprint, and give some of the highest scores (proportionately inverse to the carbon footprint) a mention in the local paper. The informative labels and friendly competition would help nudge consumers towards purchasing items that are better for their environment and their health.


      The Department of Health in New York recently conducted research on how to increase sales of fruits in school cafeterias. While the government primarily focused on price, the actual researcher decided to be a bit more creative and focus on choice architecture. After noticing that several schools placed their fruits in steel bins in dimly-lighted areas of the lunch line, he purchased a cheap fruit rack and a lamp to shine on the fruits. The sales of fruits in this school went up 54% after two weeks of implementing the new architecture. [6]. Here we have a great example of a simple, cheap modification that could encourage healthy meals in school districts across the country. Of course, we could always increase the nudge effect by giving the students an electronic scorecard that racks up points whenever they purchase fruits and/or vegetables. The points leaderboard could be displayed on a screen in the cafeteria and be updated each day. At the end of each school week, the student with the most points gets a small prize... and possibly a decreased chance of congestive heart failure in the future. Any student who gets caught cheating by purchasing fruits and dumping them is disqualified for the entire month, and also gets a weekend in detention!  

Energy Use

     There has already been a lot of buzz about communities and utility companies across the country using "smart meters" and "smart grids" to gather daily data about energy use, report it back to households or even communicate the data to "smart appliances", which adjust their settings accordingly. Much of this technology is expensive to develop and install, however, and may be coming to fruition at a time when communities and consumers are least able to afford it. A Virginia company called OPower has decided to focus on a much simpler and cheaper way of promoting energy conservation, by combining the lessons of behavioral economics with some neighborly competition. The company develops monthly energy reports for a household that compares it's energy use with that of its neighboring homes, makes suggestions about how to improve energy efficiency and, last but not least, places smiley faces on the reports of those households which have used less energy than the prior month. OPower found that more than 75% of the households receiving these reports did something to reduce their energy use in the future. [7]. Many American communities could require their utility companies to provide these types of reports, and they could also combine the smiley faces with a scoreboard that would be available for all members of the community to see (provided that the household consents to disclosure).



     A more technological nudge could be provided by obtaining energy use data from "real-time monitors" and posting it to a public website. The U.K. government has implemented this great idea for energy conservation by monitoring real-time energy use of all government departments and posting the data to a wesbite that can be accessed by the public. This incentivizes the departments to "practice what they preach" in terms of energy efficiency, since they can be held publicly accountable for wasted energy, and helps address the problems of both excessive public debt and accelerating climate change. [8]. The relatively affluent communities in America may be able to institute a similar program, where citizens who choose to participate will have their energy use monitored in real-time and published on a public website. A public display of energy use and a little competition can go a long way towards saving people money, making them less dependent on external sources of energy and helping to maintain the environment everyone must live in.

     A Spanish architect and design lecturer, Uriel Fogue, presents an interesting nudge in the area of energy resilience. He designed a workshop for students in which they had to initially contribute $15 to a pool, and each day they would bet a portion of that money on their ability to answer questions about solar arrays. The student with the most correct answers at the end of each day would win the collected money. This "energy bets" workshop led to an increasing amount of correct answers, and increasing accuracy, as the days progressed. [9]. Local governments could implement a similar betting scheme for participating residents that focuses on increasing knowledge about the technical and financial aspects of coverting to solar-generated electricity. Each player could contribute a relatively small sum to the community pool and log onto a website each day to answer detailed questions about solar technology. At the end of the month, the entire pool can be divided between a few players with the most correct answers, and perhaps the winner will receive free installation of solar panels on his/her home.

Financial Decisions

     The tendency of people to enjoy gambling and their cognitive bias towards overestimating the probabilities of rare events are typically bad things at a craps table, but could be used to create a very useful nudge in local communities or states. A fundamental factor that has contributed to the unsustainable nature of the American economic system is the choice architecture which has incentivized excessive consumption and low savings. A Harvard professor named Peter Tufano recently designed a program called "Save to Win", operating in Michigan, which enters people into a monthly lottery if they invest a minimum of $25 into a certificate of deposit. The CDs earn less than average interest (1-1.5%), but offer savers the opportunity to win $400 each month and $100,000 each year. [10]. Other states and communities could implement a similar "CD-lottery" program administered by not-for-profit credit unions, and savers could receive points for referring others to the program. Those people with the most points each month could be given an extra "ticket" to the big annual prize.



     Richard Thaler wrote an article in the New York Times this year exploring the reasons why so many people continue to make payments on mortgages that are significantly "underwater" (outstanding debt obligation is more than the home is worth), despite it being against their financial interests. One factor is that people feel a moral obligation to "honor" their debt contracts, thanks to the propaganda of bankers and politicians who helped place them in this precarious situation. [11]. Businesses frequently commit "efficient breaches" of their contracts when the liability cost of doing so is outweighed by the benefits of getting out from under future obligations, and they would give you a very strange look if you told them these breaches were unethical. The moral obligation argument is especially weak in states with non-recourse mortgages, where homeowners initially have to pay more for the benefit of the loan being secured only by the home, so that banks cannot go after any other assets in the event of default. [12]. Communities in non-recourse states, or the states themselves, could require their banks to explain the concept of "efficient breach" on mortgage documents to their customers. They could also use flyers and television advertisements to reinforce the message and present some options for homeowners who wish to proceed with default (local apartments to rent, legal aid offices to consult, etc.). No competition here, just a small nudge.


Households in Negative Equity or Near Negative Equity by State

     Another interesting nudge towards a debt-free existence is a "net worth monitor", proposed by a former financial adviser named Julia Thompson. She proposes that financial institutions implement this monitor on their websites, allowing customers to dynamically link to all of their asset balances and oustanding loan balances, using Kelley Blue Book value for their cars and Zillow estimates for their homes. Tax-deferred retirement accounts could also be included, but the site would advise people against doing so since these accounts are usually not appropriate for paying down debt. The monitor would instantly calculate a person's net worth, update the number each time the person logs on and also provide a "thermometer-type chart" showing red (negative net worth) or green (positive net worth). [13]. Taking this idea a step further, states could require financial institutions and brokerage firms that serve their citizens to allow the customers to link to their accounts on a website run by the state government. All of the customer's accounts would be on a single page that updates in real-time, and the customers could be rewarded points based on how much debt they pay down as a percentage of their assets. Although there may be a few cases in which assets should be maintained rather than used to pay off debt, on the whole this competitive nudge will prove to be useful in the current deflationary economy.

Conclusion

     The field of behavioral economics is not as straightforward as it may seem, especially in our complex global economy, so some of the nudges described above will be more successful than others. Every state or community should perform adequate investigation and experimentation before implementing choice architectures. It is also true that the competitive nudges through advanced computerized technology may simply be financially impractical for many communities to implement. Still, our state and local governments need to seriously consider the numerous ways in which they can passively guide their citizens towards increased resilience. There are currently too many people who rely on the federal government to simply get by from day-to-day in this economy, and this dependence has atrophied their ability to make any meaningful changes. Many people may view nudges by local institutions as just another form of psychosocial manipulation by a centralized authority, and they would be largely correct. However, we must realize that our complex socioeconomic structures will lead to a certain amount of manipulation no matter what. Human beings should embrace the fact that they are not rational, coldly-calculating creatures, at least not in every context, and should welcome some guidance in their lives. At the end of the day, the government will not be threatening anyone with physical or financial punishment for failing to participate, and the people will still have the opportunity and freedom to make the decisions they feel are best. 

6 comments:

  1. It's been estimated that 50% of jobs today will be able to be replaced by automation/machinery/robots/computers by 2050. How do you see the increasing loss of jobs due to technological progress being played out? Don't you think we need a new form of an economy? We can either have people destitute due to not being able to find a job (and all its related crime) or we can do something similar to what has been proposed...a national dividend that provides the basics for everyone.

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  2. I think it's very hard to figure out what will be happening in the economy by 2050, given the variety of complex issues we face (financial crises, trade wars, peak oil, climate change, etc.). That being said, technological displacement of workers has been a huge factor up to this point, and I think the "new form of an economy" you mention should be one where people are not so dependent on technology, central governments or large corporations to get by on a daily basis.

    That means employment should be more oriented towards production and services on a localized level. I don't think at this point the federal government can even afford to provide basic services to such a large population and even if they could that may not be desirable, so as I said in the article, we should turn to state and local governments instead (and not for handouts, but guidance).

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  3. I certainly agree with you (as I do on most things) that it would be very hard, if not impossible to figure out where the economy will be in 2050. My point is that this is an ongoing and growing dilemma, where technology continues to displace workers daily. With each new advancement, less workers are needed. Whether we like it or not, we *are* "dependent on technology, central governments and large corporations to get by on a daily basis". I for one welcome our new robot overlords. :) So how do we transition to a world where the work is done mostly by machinery i.e. how does society function where 50% of the population no longer needs to work? I don't see that as a handout. I see it as a benefit of living in a technologically advanced society.

    The way I see it is to first end the FED and fractional reserve lending and return to Franklin's vision of government, where money was created by government spending it into existence rather than the money supply increasing every time a loan is made (and the opposite, money being destroyed as loans are paid off or defaulted on as we are experiencing now). The problem isn't that government is spending money on its citizens, it's that they're borrowing money to do it. Ending this Ponzi fraud is the first step to a sustainable culture. The power to create money, the oil that lubricates our economic engine, does not belong in the hands of those who will use it for their personal benefit. Our society has a terrible misunderstanding of the nature of money. That power MUST belong to the people. Any other way will always lead to the concentration of wealth into fewer and fewer hands as we are seeing now.

    Richard Cook's book lays out the plan for a National Dividend to fill the gap between production and income. The Green Party has a plan for a Basic Income Guarantee and there are plans to introduce the American Monetary and Financial Security Act into Congress. There are more plans listed at sovereignmoney.com

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  4. I agree that we should abolish the Fed and return the power of money creation to a sovereign authority accountable to the people, instead of using a debt-money system where private banks determine the money supply. However, this only addresses the financial aspect of our predicament and not the issue of too much complexity in the face of decreasing net energy (peak oil).

    The latter is why I believe we need a "re-localization" movement in addition to a "de-financialization" one. I don't think technological progress will continue increasing exponentially and displace 50% of the population simply beacause energy and vital resources are being depleted exponentially at the same time.

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  5. I agree with you that we need a "re-localization" movement but I disagree about energy. We are on the downslope of peak oil and it's true other vital resources are being depleted however I think we will be forced into creating new sources.

    Considering that LFTR reactors are just sitting there, waiting for some small government or company with a few billion to take advantage of, we could enter a new shift in the transfer from a society based on scarcity to a society based on abundance.

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