Topic_in_Quant_Financial Theory explained .pdf

Discover the Quant Financial Theory

1. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Nudge : Improving Decisions about Health,
Wealth, and Happiness
Richard H. Thaler and Cass R. Sunstein
Presented by Meichen Fan
Sep 2019
Richard H. Thaler and Cass R. Sunstein Nudge 1 / 19

2. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Contents
1
Basic Concepts
2
Why We Need Nudges
3
How Nudges Inuence
4
Example : Saving for Retirement
5
Opinions
Richard H. Thaler and Cass R. Sunstein Nudge 2 / 19

3. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Basic Concepts
Choice architecture
The environment in which people make decisions.
Nudge
Features of the choice architecture that inuence the decisions
people make without changing either objective payos or
incentives.
Richard H. Thaler and Cass R. Sunstein Nudge 3 / 19

4. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Three Reasons
Human Fallibility
Social Impact
Benet from Nudges
Richard H. Thaler and Cass R. Sunstein Nudge 4 / 19

5. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Human Fallibility
Humans not Econs
Automatic system and Reective system
People make biased judgments.
Richard H. Thaler and Cass R. Sunstein Nudge 5 / 19

6. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Human Fallibility
Heuristic
Overcondence
Inertia
Framing
Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19

7. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Human Fallibility
Heuristic
Anchoring heuristic
You start with some anchor you know, and adjust in the
direction you think is appropriate.
Overcondence
Inertia
Framing
Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19

8. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Human Fallibility
Heuristic
Availability heuristic
People judge how likely something is, by how easy it is to
recall examples of that type.
Overcondence
Inertia
Framing
Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19

9. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Human Fallibility
Heuristic
Representativeness heuristic
How likely A belongs to category B = How similar A is to
their image or stereotype of B
Overcondence
Inertia
Framing
Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19

10. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Human Fallibility
Heuristic
Overcondence
People are unrealistically optimistic.
Inertia
Framing
Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19

11. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Human Fallibility
Heuristic
Overcondence Inertia
Loss Aversion
People are loss averse.
Framing
Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19

12. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Human Fallibility
Heuristic
Overcondence Inertia
Status Quo Bias
People have a more general tendency to stick with their
current situation.
Framing
Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19

13. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Human Fallibility
Heuristic
Overcondence Inertia Framing
Choices depend, in part, on the way in which problems are
stated.
Richard H. Thaler and Cass R. Sunstein Nudge 6 / 19

14. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Human Fallibility
People are nudge-able.
Choices are inuenced in ways that would not be
anticipated in a standard economic framework.
Richard H. Thaler and Cass R. Sunstein Nudge 7 / 19

15. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Social Impact
Humans Learn from others or are easily nudged by others.
Information
If many people do something or think something, their
actions and their thoughts convey information about what
might be best for you to do or think.
Richard H. Thaler and Cass R. Sunstein Nudge 8 / 19

16. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Social Impact
Humans Learn from others or are easily nudged by others.
Peer Pressure
People think others are closely paying attention to what they
are doing.
Richard H. Thaler and Cass R. Sunstein Nudge 8 / 19

17. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Social Impact
Humans Learn from others or are easily nudged by others.
Priming
Subtle inuences can increase the ease with which certain
information comes to mind.
Richard H. Thaler and Cass R. Sunstein Nudge 8 / 19

18. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Social Impact
The three social inuences that we have emphasized
information, peer pressure, and priming can easily be enlisted
by private and public nudgers.
Richard H. Thaler and Cass R. Sunstein Nudge 9 / 19

19. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Benet from Nudges
Situation in which people are least likely to make good choices
Lack of self-control
Rare, dicult choices
Lack of feedback
Inability to forecast for the unfamiliar
Richard H. Thaler and Cass R. Sunstein Nudge 10 / 19

20. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Why We Need Nudges
Benet from Nudges
People will benet from nudges for decisions that are dicult
and rare, for which they do not get prompt feedback, and when
they have trouble translating aspects of the situation into terms
that they can easily understand.
Richard H. Thaler and Cass R. Sunstein Nudge 11 / 19

21. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
How Nudges Inuence
Choice Architecture
iNcentives
Understand mappings
Defaults
Give feedback
Expect error
Structure complex choices
Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19

22. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
How Nudges Inuence
Choice Architecture
iNcentives
Good choice architects can take steps to direct people's
attention to incentives.
Understand mappings
Defaults
Give feedback
Expect error
Structure complex choices
Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19

23. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
How Nudges Inuence
Choice Architecture
iNcentives
Understand mappings
A good system helps to improve their ability to map and
hence to select options that will make them better o.
Defaults
Give feedback
Expect error
Structure complex choices
Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19

24. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
How Nudges Inuence
Choice Architecture
iNcentives
Understand mappings
Defaults
Good defaults are selected to make the chooser's life easier or
better.
Give feedback
Expect error
Structure complex choices
Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19

25. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
How Nudges Inuence
Choice Architecture
iNcentives
Understand mappings
Defaults
Give feedback
Well-designed systems provide feedback to help Humans
improve their performance.
Expect error
Structure complex choices
Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19

26. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
How Nudges Inuence
Choice Architecture
iNcentives
Understand mappings
Defaults
Give feedback
Expect error
A well-designed system expects and forgive its users to make
mistakes
Structure complex choices
Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19

27. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
How Nudges Inuence
Choice Architecture
iNcentives
Understand mappings
Defaults
Give feedback
Expect error
Structure complex choices
As choices become more numerous and more complex, choice
architects are much more likely to inuence choices.
Richard H. Thaler and Cass R. Sunstein Nudge 12 / 19

28. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
How Nudges Inuence
Benet from Nudges
With an eye on theseNUDGES, choice architects can
improve the outcomes for their Human users.
Richard H. Thaler and Cass R. Sunstein Nudge 13 / 19

29. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Example : Saving for Retirement
401(k) Plans
Dened-contribution plans in the United States
Completely portable, exible,
But require initiative
Richard H. Thaler and Cass R. Sunstein Nudge 14 / 19

30. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Example : Saving for Retirement
Standard Economic Theory
People solve complicated mathematical problems easily.
People have enough willpower to implement relevant plans.
Econs do, but Humans DON'T !
We need nudges.
Richard H. Thaler and Cass R. Sunstein Nudge 15 / 19

31. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Example : Saving for Retirement
Nudge Helps Enrollment
Automatic enrollment plans
Forced choosing plans
Richard H. Thaler and Cass R. Sunstein Nudge 16 / 19

32. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Example : Saving for Retirement
Nudge Helps Enrollment
Automatic enrollment plans
With default option
Enrolled in the plan, unless actively asking to opt out.
Forced choosing plans
Richard H. Thaler and Cass R. Sunstein Nudge 16 / 19

33. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Example : Saving for Retirement
Nudge Helps Enrollment
Automatic enrollment plans
Forced choosing plans
Without default option
Require to make an active decision about whether to join the
plan.
Richard H. Thaler and Cass R. Sunstein Nudge 16 / 19

34. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Example : Saving for Retirement
Nudge Helps Low Saving Rates
Three behavioral biases
People have more self-control regarding future plans than
immediate behavior.
People are loss averse in nominal dollars.
Retirement savers display strong inertia.
Three solutions
Workers were asked whether to join a program that in a
month or two, not today.
Increases in the savings rate would be timed to coincide
with pay increases.
Once joined, remained in place until actively opted out.
Richard H. Thaler and Cass R. Sunstein Nudge 17 / 19

35. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Example : Saving for Retirement
The Role of the Government
The primary role government needed to play was getting out
of the way by reducing the barriers to adoption of these
programs.
Richard H. Thaler and Cass R. Sunstein Nudge 18 / 19

36. Basic Concepts
Why We Need Nudges
How Nudges Inuence
Example : Saving for Retirement
Opinions
Opinions
It is legitimate for choice architects to try to inuence
people's behavior in order to make their lives longer,
healthier, and better.
Universality and particularity
Designer's self-discipline
Richard H. Thaler and Cass R. Sunstein Nudge 19 / 19