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0:10
um it might have been a little cognitive dissonance for those you who know the term because today is the lecture I tell you why everything I taught you this semester is wrong um and maybe I was a little reluctant to come in and do that but in all seriousness today we're going to talk about behavioral economics um we're going to talk about basically how we can bring this insights from psychology into understanding how we make the models in the semester more realistic now once again let's remember
0:39
the role of models the role of models remember the George boach saying all models are wrong but some are useful okay the goal of the models this semester were to figure out how to parsimoniously explain the world how to give you models that you guys could solve in a problem set that have enormous explanatory power for how the world functions and we've done that that said we can always make our models better and as you go on in economics your goal should be to think about how we enrich
1:05
these models and make them better but without losing the goal of parsimony without losing the goal of having models that are manageable can explain the world which means how do we sort of minimally extend our models to think about bringing much richer phenomenon so let's talk about so what behavioral economics does is essentially say look there's a set of realities from psychology that we ignore in economics behavioral economics is about how can we build models to bring in what
1:38
we know is true from psychological research and the best example of this is models of what we call time
1:53
inconsistency this is the best example of how we bring in an important Insight from psychology in a manageable way into our mind models okay so the idea of time Inc consistency is that a widespread phenomenon that is not only always shown in psychological experiments but in fact never rejected in psychological experiments is the human problem of self-control the human problem of self-control we have a problem controlling ourselves okay and what does this mean
2:27
in economic terms it doesn't mean that individuals are irrational it doesn't mean that the models we wrote down and the optimization assumptions we make itly wrong what it means is while we can make optimal plans we can't carry them out so in words think about the optimization problem done so far as having two parts you make an optimal plan and then you carry it out we haven't separated those we've just said you decide how many cookies in Pizza eat that many cookies
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in pizza but in fact there's two steps first you got to decide how many cookies in pizza pizza then you got to eat that many cookies in Pizza you might think well that's sort of irrelevant the Second Step it's trivial but it's not it's not trivial Whenever there are costs and benefits that differ in time okay and when there are costs or benefits at differ in time this can lead to self-control problems in particular when you have a decision that imposes a short run cost for a long run benefit
3:27
humans will undertake that activity when we have an activity that imposes a short run cost long-term benefit humans as a species I don't know maybe other species too will undertake that activity so for example smoking if you're a smoker 90% of smokers when surveyed say they'd like to quit yet 90% do not quit why because when you wake up in the morning you feel awful until you have that cigarette you have the cigarette and you're like okay I'll have a smoke to I'll quit tomorrow
4:00
okay the idea of I can quit tomorrow I'll solve that tomorrow that's a standard feature of self-control problems let's think about savings for retirement in our model of retirement savings we had someone deciding across C1 and C2 and they just optimized with some indifference curve and budget constraint we're not saying any of that math was wrong we're saying in practice it's actually hard to put the money away and save it because in practice once you have the money there's a lot of
4:25
attractive stuff I talked about how ge when you get the job you start saving right away but but right away when you get the job you want a new car and you want a party and things like that so it's hard to say well yeah I'm going to save for 50 years from now so and rather than going to the party tonight okay maybe not once again hard to each In This Crowd we're all we're all a very sort of self-controlled crowd Rel to most Americans but I think we all have experien with this okay think about
4:49
dieting or exercise things where there's a with dieting there's a short-run cost you cannot eat that piece of cake which is delicious for a long run benefit exercise the short run cost which is you've got to go work out it takes time it takes effort for a long run benefit now once again you all look very fit maybe you don't feel that way about dieting exercise but we all have things we have self-control problems over mine is biting my nails I cannot stop biting
5:13
my nails I'd like to stop biting my nails I make plans to stop biting my nails when I've got a deadline of paper on my favorite teams on TV I bite my nails okay I've tried things like the you can pain on your nails to make them taste terrible it just tastes terrible when I bite my nails okay I have a self-control problem with all all humans not all humans most humans suffer from self-control problems of one or another so the question is how do we build that into the models we use how do we take
5:41
the kind of parsimonious model we've used and add an element of time inconsistency well let's come back to the intertemporal choice model we had before the interal Choice model was someone trading off consuming today versus consuming tomorrow and and let's make that rather than sa vers tomorrow let's make it the whole Future Let's make someone's decision let's say that someone has a has a utility function that depends on the entire future path of their consumption okay all that matters to my
6:13
utility is consumption but the entire Future Path but here's the key thing let's also remember we learned about discounting that I care less about the future than I care about today okay this is remember with npv we talked about how money today is worth more than the money in the future which is why people would save the reason people don't save is because I care more about today than I do about the future and those humans have an inherent discounting of the future that offsets the return to
6:43
saving having putting money aside today is a benefit you get more tomorrow but it's a cost which is we'd rather have today than tomorrow that's the human nature we call that discounting and we tip the way we typically model this is we say look we can model your utility at as the sum from today till the end of time till you die of your consumption in each period you're let's say you're going to consume the same amount every time let's say consumption smooth so C's constant let's just lay
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say say soon same m forever times Delta to the IUS T Delta is what we call a discount Factor Delta is less than one greater than zero it's the discount factor it's how much less I care about consumption in the future okay so for example if Delta's 0.9 then that says consuming something next year makes me 90% as happy as consuming it today consuming something in two year and we assume Delta by this functional formulation is exponential okay so we assume consuming something in
8:02
two years is 09 squared so it's 081 okay so basically we assume that exponentially every period in the future is worth less so next year is worth 0. n of today two years is 081 of today Etc so we assume that basically the reason people don't my retirement saving sample is pretty compelling right save 15 years you're better off than to save for the next 33 years why don't people do it then UND do it CU at at a Delta even arbitrarily close to one 50 years from now is
8:36
irrelevant okay you know if you take you know 0. n to the 50 okay it's irrelevant okay or if you do you know even if it's 095 50 years around you don't care about as long as you're somewhat impatient the distant future doesn't matter and that's why people don't say for retirement okay that's why despite the incredibly strong incentives I laid out people people don't because they discount the Future Okay questions about why why question about that model okay that's our standard economics
9:08
model that's what I grew up with that's what you learn basic economics okay that's what you learn in the next level when you go on and do more economics this is the model you'll learn okay it's a multiversion period of the multiversion version of the two period model I taught you but it's wrong why is it wrong it's wrong because every single psychological experiment ever run shows that discounting is not exponential but rather hyperbolic which means that people the discounting of the
9:45
future is much much steeper than we get when just from a pure exponential function okay and here's a simple example of that okay I'm going to do let me say this example slowly it's important to get it right imagine I offer you the following okay $100 I offer you a choice $100 today or $125 in a year $100 say $125 in a year you can just don't don't vote just so guys feel about this Choice then I offer you a different choice I say $100 in two years versus $125 in three
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years now with this exponential function that's the same Choice it's only a 0. n factor between them it's a one-year Gap so it shouldn't matter if I if you today versus one year or two years versus three years it turns out it matters enormously people always take the this year but they'll delay it in the future that is people are willing are impatient today but willing to be patient in the future and that is an illustration of self-control problems that when it's it's about
10:58
having your hot little hands you want it if it's about well will you save in the future sure I'll save in the future that's great happy to do that okay and this example is exactly why this exponential model is wrong and the hyperbolic model is right that basically people feel differently about today than the future and so uh an economist Dame L named davidon at Harvard said look let's make a simple tweak to this model let's reite WR utility as the utility of today is today's consumption
11:36
C plus a factor beta times the sum from tomorrow next year till the end of time times C * Delta to the IUS t i minus t okay how is this different than this all I've done is I've pulled out today and add an extra Factor B to the rest of the future beta to the rest of the future so look at this function versus this function all I've done is pulled out one C from the sum kept the rest of the sum and add an extra factor beter in front of this what is that doing that's saying
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that starting next year I'm an exponential Discounter but with beta less than one that entire future is wor less than it today than it would be under an exponential model okay so let me let me um do this in a simple example okay let's say that um uh you have um let's say that uh you're offered 100 today versus 125 next year okay and then as I said so so 100 in t versus 125 and t+ 1 and 100 in t + 2 uh 100 and t+ 1 versus 125 and t+ 2 well from for this decision you use this part of the term
13:20
which is the same as exponential so as long as Delta isn't very small you're going to wait so let's say Delta's 0. n so that says that next year's is worth 125 time 0.9 which is still greater than 100 so you'd say I'll wait but for this decision you've got Delta and beta and the best s in the laboratory of beta is 0.6 so now it's 125 time9 time .9 time 6 because you've got the regular delay of a year but you also have this extra factor which is you really like it today
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and care less about tomorrow so now you reject the offer and that is a simple parameterization of how you could reject this offer but accept this offer you reject this offer because this offer has an extra feature that discounts at beta okay that is how that is how a very smart Economist builds a psychological insight in a relatively simple way into one of our models take the model tweak a little bit just pull the C out add a beta boom you can explain a phenomenal
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we couldn't have explained before that's good modeling now to be fair while this looks simple solving this model turns out to be a total nightmare okay I could not teach in this class I'm not sure I can do it okay even though it's simple because you've got all these iterative terms that gets very complicated okay and which is why we don't teach it even though it's probably a better model okay but it's an example of how you can relatively parsimoniously incorporate this
14:59
idea okay let me give you one final example let questions about this let give you one one other example to motivate this they did a really cool experiment in Amsterdam which is they went to people and they said um here's a snack that you can have in one week what would you like and there was healthy and unhealthy snacks mixed in the list they said you have snack in one week what would you like about 50% of people chose the healthy snack they then came back a week later and
15:31
saidou know here's what you chose but guess what today we're going to let you change your decision would you like to change it and almost everyone changed it to have the unhealthy snack that is when it was a week away they were happy to wait for the healthy snack but today they wanted the candy okay that is timing consistency that's what this captures that our standard model does it that's the only math I'm going to do today the only modeling I'll do today but that is the an example of
15:56
how we can take a deep psychological insight and build it into our economics model and enrich it to capture a whole new set of phenomena this is what and this is what we do in the course 1413 which is one of our most popular under grad course when 200 people take it a year incredibly great course which is behavioral economics which is teaching you how you take the next step from 1401 to incorporate these psychological phenomena into models okay yeah that is the the most difficult
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there's a lot of hard problems here what's the right time for frame is a really hard problem here's the even harder problem how do you do welfare how do you do welfare when people make mistakes we've said welfare is the sum the so welfare function is the sum of individual utility functions what if the people in individual utility functions are making mistakes does the government still just want to sum up their utility function does the government want to correct those mistakes hard question so
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that's exactly that's why 14 13 is fun you struggle with some deep philosophical issues like that okay now what I want to do now rather than writing down other models because I want to you can take 1413 for to do that I want to run through a set of fun insights that we get from behavioral economics okay and talk about what they apply so let me just sort of talk about some additional insights some other examples these are sort of other behavioral
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insights that we've worked on over the past few decades that we'd love to incorporate into our models to make a realistic model the first and one of the most is loss aversion and I mentioned this briefly we talked about uncertainty which is remember I gave you guys the gamble win 100 win 125 lose 100 and you mostly didn't take it then I said well what if it was win 1250 lose 10 more of you should take it not many more of you did but more of you should and ultim if I said it was win a125 lose
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a dollar everyone all of you should take it okay unless you're super risk averse that's a great deal no matter how wealthy you are but it turns out that that's not true it turns out that even that basically people turn down gambles that can be above and beyond what's explained by risk aversion okay and the best way to see this is um this great calculation that was done uh by The Economist Matt Ren so let's say someone would turn down someone of an average wealth so they've
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got you know thousands of dollars you offer them a 50/50 shot win 11 lose 10 and they turn it down you say well that's just risk aversion right but if you apply that risk aversion to other bets you see how ridiculous that is that says that you would also turn down win 2100 lose 800 it also means you would lose you would if I offered you the BET lose a win Infinity you would turn it down that if you're risk averse enough that you turn down win 100 lose win 110
19:08
lose 100 and you extend that same risk aversion that same parameter impli you would turn down lose a th win Infinity none of you would turn that down you sure if you did I'd be disappointed in you okay so basically the bottom line is risk aversion can't explain these decisions what can is the model of loss aversion which is that people have endowment effects that is I care more stuff I have already I care more about than stuff I might get so here's the best example of how we
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think about endowment effects which is that they did an experiment where they randomly selected individuals half of them they said here's a mug it says M or whatever how much would you pay for this mug and they got a demand curve and the average person would have paid $5 the other half the people I'm sorry so no let me go back it was a mug with a market price of $5 that how much people want to pay the people pay pay about $3 then they did a second experiment
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randomly they gave a set of other people they gave them the mug and said how much would I have to pay you to buy this back from you and the average person said $7 same decision right in the one case I just gave you the mug in other case I didn't but if the mug is worth $3 to you to buy why would you only sell it for $7 because once you have it you feel differently it's an endowment effect okay here's a great example from the from the Nobel prize winning Economist Richard Taylor okay imagine the
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following two questions a you have been exposed to a disease which if contracted leads to a quick and painless death within a week the probability you have this disease is .1% what would you be willing to pay for a cure that's question one question two is we need to research this disease if you're in the sample you'll have to expose yourself and risk yourself to a 0.1% chance of dying how much would I have to pay you to be in the experiment now I hope you could see that as the same
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question in both cases you're asking how much is it worth to you to take a 01 chance of 0.1% chance of dying yet if you ask people the first question question they'd be willing to pay $200 for a cure you ask the second question you'd have to pay them $100,000 to be in the study one so there's a 5,000 fold difference between what people or five 500 fold difference between these two framings and the only difference in framing is the endowment effect so obviously this is a clear thing we
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should ultimately want to build into our models the problem is it's like the question as this nice astute question asked here what's the right time period here here the question what's the right endowment how do I think about the endowment effect and that's where a lot of the exciting modeling is going on is how do I model the endowment people have what's their reference point is an important problem that's one example a second example which is even more mind-blowing is basically people have
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unstable preferences there was a professor MIT who ran the following informal experiment it's never published I can't I can't guarantee the reports are reported accurately but I love the story so I'm going to tell it anyway he taught two class in one day he went to the first class and he said to the first class how much would you pay me to sing a song and he took a survey in the class he got some demand curve and there was some average value they pay him let's say it was
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$5 he then to a second class same set of students and said how much would you pay me not to sing a song he got demand curve people would pay posit amounts the average is about $5 basically the way you ask the question affects how people feel about it that is inconsistent what we've modeled so far that is UN your preferences are literally determined by the questions asked welcome to marketing okay welcome to advertising any advertisers tell you duh of course that's why we advertise if preferences
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were stable we wouldn't advertise we want to change preferences okay we want to affect preferences that's why we say it's the number one best selling that's why we do all these things okay so preferences are unstable that's really mind-blowing because basically um uh that's says that a framing effect how you frame things can matter enormously and that's a lot of what advertising and politicians and others tried to do okay third example statistical
23:46
biases this is probably um my favorite my favorite fact of anything I've ever done in research so the cisal bi the IDE is we like to think we do uncertainty models that people understand the uncertainty they face and then how to process it but it turns out they don't so for example 80% of drivers think they're better than average that is impossible okay but 80% of drivers think they're better than average or my fact from my research I loved was there was a survey that asked High School seniors
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back in the 1980s when smoking was a lot more prevalent they asked High School seniors who smoked a pack a day what are the odds you'll be smoking in five years of those who said I will be smoking in five years 72% were smoking 5 years later so on average they did reasonable prediction of those who said I will not be smoking 74% we're smoking five years later zero predictive ability because it's just hard to figure it out it's hard to assess these statistics and
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probabilities okay this has enormous implications it says the teenagers may not be properly deciding whether to smoke it turns out if you ask smokers how bad is smoking for you actually smokers no actually if anything smokers slightly overestimate how bad smoking is for you it's not that smokers don't know how bad smoking is for you if anything think it's worse for you than it is but they think they're going to quit so you have smokers what is the effect on the average person's length of
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life for smoking it turns out by smoking you shorten your life by seven years smokers get that a bit right they're probably bit pessimistic they may say eight or nine years but if you ask them how how long do you expect to live they give the population average not a number eight years lower because they think it won't affect them either they'll quit or they're just superhuman or whatever okay so statistical biases are another example of that okay a fourth example extrinsic versus intrinsic
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motivation extrinsic versus intrinsic motivation okay for many decisions we make the right thing to do is obvious and yet we don't do it let's take the classic example which is inexpensive generic medication for life-threatening chronic disease if you have diabetes you can manage it with if you have type two diabetes you can manage with a with a product called metformin it's a dollar a day pill you can take that will keep you alive and if you don't take it you'll die it's not
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very complicated okay you won't die right away you'll eventually lose your leg and eventually die okay yet a huge share of diabetics do not take their metformin compliance with metformin is incredibly poor now you might think okay people are uninformed you know whatever you know nothing's ever 100% but if you run the follow experiment if you say to people of diabetes I will should lower your metform cost from a dollar day to zero a huge share start to take it now think about that for a
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second it is whether you're going to die or not and you're letting a dollar a day affect whether you take it and the answer is not that people are poor it's that in some sense zero matters in some sense these signals intrinsic versus extrinsic motivation matters these things matter this is sort of combining the two of sort of framing matters but basically um individuals uh essentially they have to believe it and that uh the framing matters okay let me talk about another example
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defaults this is probably the single most striking finding in all of empirical behavioral economics a former student of mine named Bridget madrian did a fascinating study when you go to join your firm when you got to get your job you get a good job you'll sign up there'll be a benefits package and they'll be like do you want health insurance do you want a 401k and as I sold to you should check yes you should put your money away stop partying save your money for your future
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okay you can still party too you can afford do both okay now if you look at most firms most new workers young workers do not choose the 401K about 20% of young workers sign up initially eventually time they're older it rises towards like 80% but initially it's about 20% so Bridget had a firm studied a firm that made one simple change they said we're going to roll you in the 401K unless you check here saying you don't want to be in it literally they just change check if you want to be
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in to check if you want to be out the participation rate among young people went from 20% to 80% with one wording change okay that can simply not be explained by anything we've learned in 1401 so far at least before today okay there's simply no rational model of the world of any type which would justify that okay the answer is that PE that things like presentation and defaults matter and once again that needs to be built into our models okay now why is this that's where
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you got to take 1413 what where the thing the place where Behavior economics is right now is we've documented a huge set of these what we call anomalies a huge set of strange examples that are Inc consistent with our standard model where we're struggling and where we need more work and where 1430 can help you is how do you write the correct models to explain those okay how do you write the correct model to explain those and so for example this defaults matter 401K thing
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could be a procrastination story it could be a lack of attention story there's lots of stories you can tell how do we write the right models and distinguish them that's what the exciting cutting edges in behavioral economics okay question about any of these examples I realized I went fast but question about any of this yeah perspective like I know America like if you want to be a heart donor they like op you out versus like other countries op you do you know why that is
30:08
that's a that's a great point a perfect example Oregon donations you're defaulted in in other countries in America you have to sign up they have organization rights that are dwarf ours there's no good reason other than individual Freedom uh but this is what's this is a great segue other questions that's a great segue to the last thing I wanted to talk about which is what does this all imply for policy where does this all lead us in terms of government policy and let me talk about a specific
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example then speak it out more generally okay the specific example is taxation of cigarettes we talked in the externalities lecture about how when there's a negative consumption externality you should tax the activity cigarettes are a classic negative consumption externality it's been measured to be around 40 to 50 cents a pack and that suggests that optimal policy would be to have a 40 to 50 cent a pack cigarette tax but that's actually a pretty small number it turns out and why is it so
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small it's so small for an interesting reason cigarettes have huge externalities uncovered medical costs smoker start fires Etc second smok Etc but it turns out cigarettes have a huge positive externality what's the positive externality well smokers have a convenient habit of dying at 65 why is that convenient that means they spent their lifetime paying taxes and never get collect the retirement benefits there's a positive that's a positive externality on us we benefit from those stupid
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smokers because basically they pay all the taxes we get the benefits that is a positive externality that's not a controversial comment it's a purely POS indeed the tobacco companies in court have defended themselves by arguing that smoking has a death benefit okay they quickly realized that was a winning argument and went away from it okay but that is a big reason why the ex numers is in bigger in fact if you took out that death F the ex number is more like two or three dollars
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a pack the reason so big is because there's this huge financial positive externality now I worked in Washington in the Clinton Administration and the thing I loved about that is economists are just so much smarter than lawyers we just whenever I was in a room unless I was in room with Larry Summers who was my mentor there I was the smartest guy in the room because we know how to not the smartest by IQ but the smartest by knowing how to think about how to frame a policy question our whole fields
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around how to frame policy questions and we're so good at it except one time which we had to stand up in front of a room of lawyers and say you know what we should tax cigarettes less because they kill people and lawyers looked at me like you're nuts and I realized I probably actually was not that the external math is wrong what was wrong was the model of smoking was wrong in particular the model of smoking should incorporate self-control problems there is vast evidence that smokers suffer
33:17
from self-control problems indeed what's the best what he conly is the best piece of evidence for self-control problems not what's in the lab because remember we believe what people do not what they say we think the best piece of evidence for self-control problems is that when people want to change your behavior they search for commitment devices for example if you look at all the recommendation to quit smoking it's all punish yourself if you smoke leave your dirty cigarette butts in water so
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you have to smell it make a bet with your friends so that you have to pay them if you smoke it's all activities where you punish yourself if you smoke that is not consistent with a rational model in a rational model you never punish yourself for some future act you just wouldn't do the future act the fact that people punish those for future Act is exactly cons people knowing they have a self-control problem perhaps the best example this is syrup ofac syrup aipac is something you drink
34:10
so that if you consume alcohol you vomit why would anyone do this because they think they know they're alcoholics and they can't stop consuming alcohol it's like painting my nails with that shitty stuff okay sikac is totally unjustified by any rational model but it's justified by a self-control model which is I know I can't stop drinking so I'm going to stop myself from drinking by setting up the self-control device this commitment device okay and that is evidence that
34:38
basically um people want have self-control problems well here's the thing as I said the AL tax on cigarettes with this model the exponential model is 50 cents a pack with this model it's $10 a pack why because cigarettes are so bad for your health every pack of cigarettes every cigarette you smoke lowers your life by seven minutes if you take that and multiply by the value of life that implies the Damage Done by a pack of cigarettes if you take Economist estimat the value of a life is about $40
35:17
a pack that is you lower your health by $40 a pack so if if none of that's a mistake if you're perfectly rational then that's irrelevant in the per AC doesn't matter what you're doing yourself you've made a decision you know that but what if you don't get it right then it counts then we don't just care about externalities but also internalities what my co-author and I label internalities which are the fact that the fact you're harming yourself does matter in a
35:48
standard econic model the fact you're harming yourself doesn't matter but once you make this minor tweak which is once again consistent with every experiment ever run in the history of psychology suddenly it does matter and it matters a lot for government policies the optimal tax goes from 50 cents a pack to $10 a pack now is $10 exactly right no but the point is that inter once internalities matter that up put a whole puts up a whole new space to think about policy think about the fact that
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policies which hurt people um uh might actually even if they don't hurt even on externalities might be things we want to address so for example so basically this comes back to thinking about the policy inies we talked about last time for health externalities and we talked about why would you ever ban a drug well this is why you'd never want to make a drug illegal if all we car about was externalities that is absolutely right there's no externality argument given the benefits and costs
36:52
for making drugs illegal not no but if you do the math it's hard to justify okay I don't be too strong it's hard to justify but once you permit internalities then it becomes easy to justify once you say the people doing those drugs are making mistakes it's easier to justify so the fact that we as a society ban drugs means we Society believe in internalities okay we believe that these kinds of inconsistent decisions are being made all these kinds of various behavioral
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problems exist and when all these exist then suddenly we we need to consider the fact that internalities might matter as well and that's a new ball game now what's interesting is that the internalities versus externalities debate plays out very differently in different spaces so let's take smoking versus drinking it turns out the internals from drinking are not very large you have to be a really really serious alcoholic do major health damage to yourself okay whereas the ex from
38:03
drinking are enormous as I said 12,000 people a year die in drunk driving accidents 50% of all violent crimes are linked to consumption of alcohol okay 50% of domestic a huge share of domestic abuse is L cons alcohol alcohol is huge externalities probably pretty modest internalities so any Economist who believes who didn't believe in this stuff even they like 1401 believe we should tax alcohol more alcohol is vastly under taxed it is quite frankly and my kid is upset that
38:33
every time I say this it is insane that you can get a beer for the same price as a Diet Coke okay that makes no sense at all okay basically there are external damages done by now you might say but wait a second John I drink sucessfully in my dorm room I might stumble from one dorm to another but I'm not driving I'm not committing crimes I'm not domestic abuse lay off buddy to which I say to you remember we're talking about is the cost to you of paying maybe 20 cents more a beer
39:06
versus the benefit to Society of maybe a few thousand people less dying in drunk driving accidents and less domestic abuse less crime and ultimately we want to use a social welfare function to evaluate that but for most social welfare functions that's a trade-off worth making now is it worth five bucks a beer of tax probably not is it worth some absolutely okay and so that's how we think about that okay but with cigarettes it's harder because social economics doesn't
39:34
work you need more internality arguments to make that now let's talk about let's conclude by talking about what I said is the most significant Health externality and also internality today which is obesity as I said about 35% of our country is obese in some states it approaches 50% obesity has both internalities and externalities the externalities arise because there's enormous medical cost associated with obesity in particular through the fact that obesity causes
40:09
diabetes type two and diabetes type two is incredibly expensive to treat the country of Mexico spends 1.1% of its entire GDP treating the complications from diabetes okay think about that one every $100 earned in Mexico more than that goes to just the complication of diabetes this is an enormous health problem it's a huge uh Health expenditure for our country and at the same time there's also internalities people don't have self-control around eating okay and so anytime you don't
40:44
have self-control once again what's amazing about that model is just a little bit of lack of self-control the tobacco cost said if there's big damage to your sell from eating too much a little bit of lack of self-control can cause a big effect internality so obesity causes both externalities in medical SP internalities being obese lowers your life expectancy by something other over four years it's not as bad as smoking but it's pretty bad so basically it's both externalities and
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internalities so what do we do about it well this is as I said where it gets hard the first thing we do that's obvious that anybody who believes in anything would say it's more information that's a clear one we should explain to people like things like nutritional calorie labeling fun fact about Cal I talked to one of the guys who was an owner of Dunkin Donuts says fast what happen they label calories they label calories of Dunkin Donuts doughnut consumption didn't change at
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all muffin consumption fell enormously why who knew muffins were like 500 calories each you know a Doughnut's bad for you but you don't realize a muffin that seems okay it's twice as bad as a doughnut nobody knew that so basically information matters okay so information is an obvious step but it's not enough we can do do taxation but the problem then is what do we tax we can't tax food poor people won't be able to eat we could try things like taxing sugar content okay but then the problem is
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what if they then just substitute towards fattier Foods instead of sugier foods substitute cigar out tobacco is easy you tax tobacco you're done food's harder because there's so many bad components and multiple components and food okay now really what we want to do is we'd like to tax body weight okay now we can't but in theory the externality is caused by being obese So in theory we could do that in practice politically we can't but actually in practice it's not obvious
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that would help and the reason not ofice it would help is because of self-control problems if you tax body weight so people in a year have to pay a higher tax that might not affect where they today whereas a tax on food is right in front of them it puts the cost of benefits together a tax on body weight puts the cost and the benefits future and that runs to self-control problems okay so that is um another solution the other solution just regulation so for example most European
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nations and now in the US we we've banned trans fats trans fats are particularly awful kind of substance that is yummy but is very bad for us and we have good substitutes but once again substitution makes that challenging that was an easy case because they were good substitute were all obviously better so anytime you have something where there's all the sub suits are obviously better that's easy to ban that what about some of the subss might be worse for you then that gets
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tricky okay another thing we do is regulate Supply a big problem we have in America is food deserts they're called we're basically the large areas of America we can't buy vegetables literally within any walking distance there's nowhere to buy vegetables with any biking distance you have to get in a bus and go a long way okay so we could solve that by making them more available it turns out so we could do that making it more available now it turns out we have tried all of these approaches I've
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said in individually and all of them work a little bit and none of them make a huge difference on Obesity the one policy intervention that seems to matter a lot comes from behavioral economics and it's what we call nudges which is changing the framework in a way where we're not lowering welfare because your choice set hasn't changed we're just changing the way it's presented to you like the default example so one now let me just say for here big caveat any of some of you who
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are I don't know if any of you there's there's a huge replication crisis in social sciences right now and a lot of the studies I'll site have not been successfully replicated okay but I believe in so much I'm going to tell you about them anyway because I think they offer some interesting insights but I just want to be clear on the evidence there's a there's a big replication crisis with these sort of fun nudge studies so more needs to be done but for for example one of the most famous
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studies was they took people that all eaten a meal at the same time put them in front of a movie and gave them buckets of stale popcorn and the buckets were full to different levels a third full a half full and full everybody ate the entire bucket of what was in their bucket okay despite the fact it was different amounts they were all equally hungry it was just in front of them they ate it okay or one study of Professor to man it's never been publisher so I don't
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I once again just a informal story but I love it but buffets create huge food waste because we all know how Buffet works you say first thing say oh that's good you take a bunch of it next oh that's really good you take a bunch of by third thing oh yeah I'll squeeze that in the corner of the plate because that looks good too you don't eat it all so they made a simple change of the buffet at her school they put the plates at the end of the row rather than the beginning of the
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row so you had to walk by the buffet to get your plate so you knew what was there and they lowered food waste by 20% because people then were like oh yeah I know this is coming so I won't load up so much on this okay these are once again we need more study of this but it suggests that the way we're really going to ultimately deal with problems like this is to lean to the behavioral biases that cause them if you find this interesting is a book called Nudge by the Nobel prize winning
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Economist Richard theor who talks about this and talks about the behavioral economics behind it and uh and all the all the policies behind it but once again the politics is hard perhaps the best nudge based policy suggestion of all time was what Mayor Bloomberg suggested in New York which was to ban large servings of soda he said look people buy a soda you guys don't know when I was a kid okay now when you go to buy soda you almost never can buy anything less than
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18 ounces and often can't buy some less than 24 ounces when I was a kid you the choice was typically 12 ounces you can't even buy those anymore size have gone up so Bloomberg said look let's just ban large soda sizes therefore Mak people work more to have to get those calories brilliant idea okay uh but the politics was ugly even including obviously conservatives appros it because it's interfering with the free market but liberals opposes too John Stewart made fun of him I'll never
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forgive John Stewart for that okay John Stewart made fun of me too I'll forgive him for that either okay but basically the bottom line is these behavioral nudges matter and we should think seriously about incorporating them into policy okay I'm going to stop there we're going to come back on Wednesday I'm not going to say I'm not going to give the answers to the finals on Wednesday I'm just not going to say that I'm not not going to give the answers to the finals on Wednesday so it's your
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decision whether you want to come or not
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