Another popular model used by behavioral economists is dual-process theory. It postulates that people utilize two very different ways of processing information. Kahneman (2011) popularized this idea using the terminology,
“System 1” and “System 2.” System 1 processing is instantaneous or automatic, like the instinct to jump out of the way of a rapidly approaching car. System 2, in contrast, is deliberative: choosing, say, which model of car to purchase. System 1 decisions, by their nature, cannot follow the traditional economic framework of comparing the benefits and costs of alternatives to maximize utility—although this does not necessarily mean that the choices made are inferior to those made using more deliberative System 2 thinking (Gigerenzer and Goldstein, 1996). It is in System 2 decision-making that traditional economics would anticipate people to succeed in maximizing utility. Due to cognitive biases, however, discussed next, this is not always the case.2
costs that are closer to the current time period. But people’s behavior often shows an extreme present-bias. They overemphasize the present, largely because it is more certain and more salient.
Many of the health behaviors discussed in this book—both healthy and unhealthy ones—are affected by present bias. An example of a healthy behavior is exercise. The costs are immediate and often quite salient and therefore typically overweighted. For example, there are short-term physical, psychological, and economic costs (the cost of gym membership; time that could be spent on something else) associated with exercise. Benefits, in contrast, tend to be downstream and underweighted, such as reducing cardiovascular risk and depression (see Chapter 5). In the case of unhealthy behaviors, smoking, substance abuse, unsafe sex, and overeating are all examples in which near term benefits, generally in the realm of pleasure, tend to be overweighted and the associated long-term costs—lung cancer, addiction, sexually-transmitted diseases, obesity—underweighted.
Present bias can be rationalized by confirmation bias, in which one pays more attention to evidence that supports one’s current views or behaviors.
Because it is psychologically distressful to act in a way contrary to one’s beliefs, and moreover because it is easier to change the belief than change the behavior, people come up with rationalizations for their behavior (e.g., no one in my family got cancer; what harm could one cigarette do?).4
Status quo bias and loss aversion
A key implication of the traditional economic model is that if either the benefits or costs of a good or service change, making an alternative choice more likely to maximize one’s utility, then a person will alter her consumption behavior. Indeed, market economics is based on the notion that producers must continually strive to offer the best value or they will lose business to more efficient competitors. Behavioral economics, in contrast, argues that getting people to make changes in their behavior is often far more difficult.
Why might this be the case? One possible explanation is that there may be a good deal of effort involved in making a change: determining the alternatives, obtaining information on the most promising ones, and then actually deciding.5 The traditional economic model posits that a person
should not make a change if the effort involved is not worth it. However, behavioral economics suggests that people have a bias toward the status quo that goes beyond reluctance to incur search costs—indeed, people often fail to make a change when the benefits of doing so exceed the costs.
Prospect Theory offers guidance here. It hypothesizes that people evaluate whether to make a change, using their current position as a reference point.
Moreover, the theory postulates that they put much more stock in losses than in gains. As a result, when a person contemplates a change from their current state of affairs, he is likely to evaluate the loss resulting from the change to be greater than the gain.
These cognitive biases may play a role in health-related behaviors. An example from Chapter 9 relates to physicians’ inappropriate prescribing of antibiotics. If this is the way they have always practiced medicine, there is a status quo bias. It can be exacerbated by loss aversion—being overly concerned about losing the business of a patient who expects a medication every time he comes to the doctor, and by action bias—the feeling that it is better to do something than do nothing. Another example, from Chapter 12, is that people often fail to switch health insurance plans during open enrollment periods even though the plans they possess are inferior to other choices (Sinaiko and Hirth, 2011).
Misestimation of probabilities
While it is natural that people may not be able to accurately estimate probabilities—such as the chance of getting an illness or sustaining an injury
—behavioral economics research has found that they often make errors in a predictable direction. One way in which people misestimate probabilities is to overestimate small ones. An example pertains to the side effects of prescription medicines: someone may avoid a useful medication because he overestimates the chances that, in rare instances, it has serious side effects (Berry et al., 2002). Another way in which people misinterpret probabilities is through anchoring. This occurs when someone estimates probabilities based on an incorrect initial estimate. Behavioral economics has discovered downright weird manifestations of anchoring. For example, when people were asked to write down the last two digits of their Social Security numbers and then subsequently value a bottle of wine, their purchase bids differed
three-fold: those with high two digit numbers valued the wine substantially higher (Ariely et al., 2006). An example in the area of dietary habits relates to package size. Roberto and Kawachi (2014) report that research subjects “used 30% more pasta when they were given a 2-pound box compared to a 1-pound box, and 23% more oil from a 32-ounce bottle than a 16-ounce bottle when