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Jul 10, 2019

Ideas for Behavioral Finance In-Class Experiments

I spent a few hours recently researching various ways to bring behavioral finance into the classroom. I will be developing several of these ideas in the coming weeks but wanted to share as activity ideas.

 

Loss aversion

Which do you think has more effect and why on a person interested in purchasing a smart phone (from Acadly):

A. “They are having a sale and It costs only $300 now!" 

B. “FYI today’s the last day of the sale. If you don’t want to miss out on getting 100 bucks off on the iPhone, consider buying it now because the next sale is probably half a year away.”

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Endowment effect (from this set of experiments in this research study):

We conducted several experiments in which students randomly received one of a pair of goods. In one study, we used rolls of Top Drop or Top Gum (two types of licorice); in another study, we used Toblerone or Milka chocolate bars. We told the students that the product they had received was theirs to keep. When the students were offered the possibility of exchanging their good for the alternative, less than 20 percent wanted to trade (thus showing the endowment effect). Then we asked all students to justify their decisions.2 Of those who did not want to trade, a large majority stated that they preferred the candy they had in their hand to the alternative, even though the initial distribution had been random. Clearly, simply receiving some candy had the effect, for many people, of making it their “most preferred.”
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Prisoner's Dilemma: Disappearing lottery game (Gilad Feldman course on Judgment and Decision-Making)
 
The next experiment is not just fun, it will also be used for scientific research. During this research you are not allowed to talk or discuss. If this happens we have stop the experiment
and there will be no winner. We will play two rounds. In the meantime: be quiet. No questions can be raised during the experiment. It will take approximately 5 minutes.
In this classroom there are N pupils. Therefore the maximum amount to win will be N × 5 euros. Each pupil in the classroom will receive a sheet of paper. On this sheet you can indicate how many lottery tickets you want to play, minimum 0 and maximum 6. All sheets will be collected and one of the participating tickets will be the winner. The winning prize depends on the total number of participating lottery tickets. Make sure nobody sees how many tickets you play.
 
In the instruction you will see an example: Suppose a classroom with four pupils. A plays 3 tickets, B plays 2 tickets, C plays 0 tickets, and D plays 3 tickets. Now the average number
of playing tickets is 2 and the total amount to win is 8 euros. The ones who play the highest number of tickets have the biggest chance of winning; however, the higher the total number
of lottery tickets played by the whole classroom, the lower the prize. In this example the maximum prize could have been 4 × 5 = 20 euros, but the actual prize will be 20 ÷ 8 = 2.50
euros. Now we will distribute the sheets of paper. The exact procedure can be read on the sheets, as a reminder.
 
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Goal setting theory (in action):
 
http://mgto.org/inclass-experiments-1-goal-setting-theory/
 
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 The Decoy Effect (Prof. Gilad Feldman class notes)
 
Two choices of popcorn vs. three choices of popcorn 
 
Version A: Small/large
 
Version B: Small/medium/large (same price for medium/large)
 
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Regret and investing (Prof. Gilad Feldman class notes)
 
Everyone has a $10,000 investment
Group A gets opportunity to switch their investment (chooses option 1 or option 2)
Group B holds their investment for one year
 
After one year, all outcomes are $2,000 loss. Who feels more regret? 
 
Who feels greater regret? 
 
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Fun example of a Nudge: https://www.youtube.com/watch?v=2lXh2n0aPyw
 
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Moral decision making: https://moralmachine.mit.edu/
 
 
 

 

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About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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