Grants

University of Toronto

To study the behavioral welfare economics of how nudges affect financial decision making

  • Amount $474,606
  • City Toronto, ON, Canada
  • Investigator Sandro Ambuehl
  • Initiative Behavioral and Regulatory Effects on Decision-making (BRED)
  • Year 2017
  • Program Economics
  • Sub-program Economic Institutions, Behavior, & Performance

Suppose you observe people making economic decisions that do not appear to be in their own best interest. Say they are not saving enough for retirement. Policymakers may decide to “nudge” those people into saving more, following the precepts put forth by Sunstein and Thaler in their popular book about behavioral economics. But is this, on balance, a good idea? Perhaps some people have good reasons to “undersave” (e.g., perhaps the person has a wealthy spouse). Evaluating a policy “nudge” like programs to increase saving would involve asking if the net benefit to those targeted outweighs the cost of the intervention. Determining when this is the case is a problem in “Behavioral Welfare Economics” and involves important questions about when choices represent mistakes on the part of the chooser, when they do not, and how much choosers value the opportunity to correct mistakes they make.  This grant supports work by Sandro Ambuehl from the University of Toronto and Doug Bernheim from Stanford to study how to measure welfare losses incurred due to irrational mistakes. The team will field several experiments that give subjects two financial choices that look different but are actually the same and then measure both the subjects’ willingness to pay for one option over the other and their willingness to pay to have the choice between options simplified. The results promise to shed new light on how the choosers value the ability to make good decisions and how that value is related to the likely costs of a poor choice.

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