Chapter 23

In each of the following scenarios, determine whether the change in people's behavior is the result of a nudge or a substantive change in economic incentives. [LO 23.1] a. A country with a low birth rate decides to offer free public child care for kids under the age of five. b. A nonprofit organization runs a highly publicized campaign offering teenage girls a very small symbolic reward (say, \(\$ 5\) ) for each week that they stay in school, come to support group meetings, and avoid pregnancy. c. A country with a rapidly growing population levies steep fines on any family that has more than two children. d. A government agency runs an ad on television informing women about low-cost birthcontrol options.

Determine whether each of the following changes represents a shift in the choice architecture of a decision. [LO 23.1] a. After presenting the dessert menu to patrons, the waiter at a restaurant mentions that there's an additional option for dessert not on the menu. b. A restaurant presents dessert menus to patrons before they have eaten. c. A waiter shows patrons a menu without prices. d. A waiter asks patrons whether they would like to order more fries after telling the couple that the plate of fries is very small.

Label each of the following examples as a case of time inconsistency, limited processing capacity, statusquo bias, or framing. [LO 23.2] a. A person buys a nice bottle of wine for $$\$ 50$$ and leaves it in the pantry for 20 years. At that point, the wine has aged and the value has appreciated to $$\$ 250 .$$ Although he would never be willing to buy a bottle of the same wine for $$\$ 250$$, the person plans to drink his old bottle rather than sell it. b. Every night, a person sets her alarm for 7 a.m. the next morning, and every morning, she hits the snooze button at least four times. c. People who are told the survival rate for a surgical procedure are more likely to undergo it than people who are told the death rate (even though the death rate is actually the same in both cases).

Determine whether each of the following represents loss aversion. [LO 23.2] a. Nearing retirement, an investor chooses investments with lower return and lower risk, because she wants to make sure she has a certain amount of money available in five years. b. A gambler refuses to play a game in which if heads shows up after a coin toss he will win $$\$ 40,$$ but if tails shows up he will lose $$\$ 50$$. c. Offered a brand-new blanket that is twice as comfortable and cute as her old onethe only two criteria she cares about in a blanket-a toddler refuses to give up her old blanket. The following information applies to Problems $$5,6,$$ and 7 7: Clocky \(^{\text {Th }}\) is an alarm clock that rolls off your bedside table and runs away when you hit the snooze button. When the alarm goes off again, Clocky will be hiding somewhere on the opposite side of your bedroom, so that you are forced to get out of bed to turn off the alarm.

Clocky is a commitment device to help overcome time inconsistency. Which of the following are the time periods over which someone might have inconsistent preferences and need Clocky's help? \(\left[\mathrm{LO}_{23} .3\right]\) a. Between the time the person hits the snooze button and the time the alarm goes off again. b. Between the time the person sets the alarm the previous night and the time the alarm goes off. c. Between the time the person actually gets out of bed one morning and the time he sets his alarm for the next morning.

Which of the following are relevant areas of preference inconsistency that Clocky is able to help? \(\left[\mathrm{LO}_{23} .3\right]\) a. The optimal volume for an alarm. b. What time to go to bed at night. c. What time to wake up in the morning. d. Whether an alarm should be placed on the bedside table or across the room.

How much should someone with timeinconsistent preferences be willing to pay for Clocky? [LO 23.3] a. Nothing, because a regular alarm will work just as well. b. Something, because Clocky increases his utility by getting him up at the right time. c. You'd have to pay him to use Clocky, because his utility is decreased by having to get out of bed and search around to shut off the alarm.

Which of the following is not a strictly rational reason for someone to be interested in a commitment device? [LO 23.3] a. The device can eliminate the timeinconsistency problem. b. By making the decision to restrict choices now, the person saves future effort in deciding among more, but undesirable, choices. c. Restricting choice now eliminates the possibility of considering other, potentially better choices that can't be foreseen right now. d. The device helps the person make the choice that she wants to make right now, but might not make in the future.

Which of the following are true statements about default rules? (You can choose more than one.) \(\left[\mathrm{LO}_{23}, 4\right]\) a. Defaults have staying power because opting out of them is typically very costly, requiring people to hire lawyers or prove to authorities that they have sufficient reason for choosing another option. b. The more difficult it is to opt out of the default option, the more likely people are to stick with it. c. One reason default options might have staying power is that people often equate "default option" with "recommended option." d. Default rules work to influence choices only if people are aware of the default option.

In which of the following examples would we see the influence of a default option? (You can choose more than one.) [LO 23.4] a. A doctor recommends continuing treatment, but the ultimate decision of whether to continue treatment is left up to the patient. b. A website automatically checks the option "share my activity with my friends on Facebook" when users sign up. c. Pets from an animal shelter are automatically spayed or neutered unless the owner would prefer them not to be. d. A mobile phone user has to enter a choice at start-up between installing a special feature or not. The user is informed that most people choose to install the special feature.