Behavioral Economic Naturalist Assignment Adapted from Robert Frank
Your assignment is to use a principle, or principles, discussed in the course to
explain some pattern of events or behavior that you personally have observed. Your space limit is one page, single-spaced at 12 point font. Many excellent papers are significantly shorter. Please do not lard your essay with complex terminology. Imagine yourself talking to a relative who has never had a course in economics. The best papers are ones that would be clearly intelligible to such a person, and typically these papers do not use any algebra or graphs. You need not include a bibliography.
This assignment is not a PhD dissertation. You are not expected to do voluminous
research in support of your argument, although a relevant fact or two might help convince yourself and others that you are on the right track. It makes no difference whether your topic is “important,” but try, as best you can, to choose something interesting. A really successful paper is one that begins with a really interesting question (one that makes the listener instantly curious to learn the answer) and then uses a behavioral economic principle or principles to construct a plausible answer.
I expect that most of you will come up with an original question to use for this assignment. You may use a question presented in the textbook, etc., but if you do, I’d like to see you take a unique perspective, and not just reiterate what has already been written.
Your explanation should be plausible and should draw from behavioral economic principles. It does not have to be the “best” answer but should be plausible and not contrary to any obvious facts. Your answer should explain why the particular behavioral economic principles you cite imply that the observed behavior is likely to happen. Do not fall into the trap of arguing that “because people are irrational, anything can happen! So this behavior could happen.” The question you plan to address is due October 31. Submitting your question for review is part of your grade. Your submission should be typed and submitted online and is due November 14. I will not accept physical hand-ins for this assignment.
Rubric: 1 point out of 10 is for turning in your topic/question in on time (no late work allowed for this one!)
For the other 9 points:
9 points: An interesting behavior with a convincing explanation of why your chosen behavioral principle explains that behavior, demonstrates an understanding of the behavioral principle, and shows why your behavioral principle is a more plausible explanation than the rational model.
7-8 points: This could be a fairly obvious behavior being explained (perhaps one already used as an example for that behavioral principle in class), or could be a largely accurate but imperfect application of the behavioral principle, or an incomplete explanation of why the rational model does not work
6 points: Major misunderstandings in the behavioral principle being applied
5 or below: Completely fails to satisfy any of the primary requirements of the paper
Tips:
Be clear what question you are answering. I suggest making the question the title.
Be creative! Some of the best papers explain some very curious behavior.
Make sure you can argue that particular behavioral economic principles you can reference are likely to lead to that particular observed behavior.
You should be able to explain why the rational model would have a very difficult time explaining this behavior, or at least why your explanation is more plausible. Don’t skip this part.
This paper is an analytic exercise, not a research paper, experiment, or vocabulary test. You don’t need an extensive bibliography (or one at all, really), nor do you need to include a bunch of vocabulary terms from the course. However, what vocabulary terms you do use, you should be sure that you are using them correctly. If you misunderstand the behavioral economic principle you’re basing your paper on, you’re unlikely to get a good score!
EXAMPLE:
Why do cell phone companies offer to pay cancellation fees?
Many cell phone companies charge their users a substantial fee to end their contract before it runs its course. These fees can run several hundred dollars. Verizon currently details a cancellation fee of $175 or $350 depending on the contract. Some carriers, such as T-Mobile, offer to pay the cancellation fee of customers who switch to their service from another one. T-Mobile advertises this service prominently in their print and television commercials.
The rational model of choice is fully capable of explaining why a cell phone company might offer an incentive, discount, or bonus payment to new enrollees. Simply put, the company knows that by offering a discount it can attract some customers who otherwise might have chosen to stay with their original company. If the discount is small enough they will profit from these new customers. However, the rational model has more difficulty explaining why these carriers put this discount in the form of paying a cancellation fee. Why offer this incentive rather than offering other benefits, such as several up-front free months of service or free phones? The company would likely be able to provide these alternate benefits at levels that would offer equal or greater monetary benefit to the customer, but at lower cost to themselves, since their cost of production is lower than the listed price.
The behavioral economics principle of loss aversion can explain the offer to pay cancellation fees. From the point of view of a customer, the cancellation fee is a loss that they would incur as a result of switching phone companies. An alternate benefit, such as free months of service or a free phone, would instead be viewed as a gain incurred by switching companies. Loss aversion suggests that customers will weight a loss much more heavily than a similarly-sized gain.
Because of loss aversion, a cancellation fee of a certain size would be a significant barrier to switching, because the customer strongly wants to avoid a loss. The cell phone company can provide a much more convincing case to switch if they help the customer avoid the loss than if they provide a gain of equal value. A customer would regard the cancellation fee paired with a number of free months of service, of equal monetary value to the fee, as an overall loss, since the loss of the fee is weighed more heavily than the benefit of the free months. However, the nullification of the fee keeps the customer from feeling like they incur any loss. Loss aversion thus offers one explanation as to why phone companies offer incentives to new customers in this form.