Psychological framing in behavioral economics

People act on the spur of the moment, most of the time. So, as you can see from this example below, psychology can be more important than economics.

Senthil Mullainathan worked with a bank in South Africa that wanted to make more loans. A neoclassical economist would have offered simple counsel: lower the interest rate, and people will borrow more. Instead, the bank chose to investigate some contextual factors in the process of making its offer. It mailed letters to 70,000 previous borrowers saying, “Congratulations! You’re eligible for a special interest rate on a new loan.” But the interest rate was randomized on the letters: some got a low rate, others a high one. “It was done like a randomized clinical trial of a drug,” Mullainathan explains.

The bank also randomized several aspects of the letter. In one corner there was a photo-varied by gender and race-of a bank employee. Different types of tables, some simple, others complex, showed examples of loans. Some letters offered a chance to win a cell phone in a lottery if the customer came in to inquire about a loan. Some had deadlines. Randomizing these elements allowed Mullainathan to evaluate the effect of psychological factors as opposed to the things that economists care about, i.e., interest rates-and to quantify their effect on response in basis points.

“What we found stunned me,” he says. “We found that any one of these things had an effect equal to one to five percentage points of interest! A woman’s photo instead of a man’s increased demand among men by as much as dropping the interest rate five points!

  1. […] (the background). This concept, presenting the same object in different formats, is known as framing, and is one of the most well-known biases used by Behavioral Economists. For example, if I asked […]

  2. bala says:

    i have written a tamil book on behavioral economics it can be downloaded
    from the link http://www.scribd.com/doc/88128740
    the book குகைமனிதனும் கோடிரூபாயும் நூல் 1000 வாசகர்களுக்கு மேல் வாசிக்கப்பட்டுள்ளது
    may you go through it and give your comments. and forward to your friends if it is good
    thank you

    bala