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Hi. You might have noticed that I have half a beard. It's not because I lost a bet. Many years ago, I was badly burned. Most of my body is covered with scars, including the right side of my face. I just don't have hair. That's just how it happened. It looks symmetrical, but almost. Anyway, now that we discussed facial hair, let's move to social science. In particular, I want us to think about where is the potential for humanity and where we are now. If you think about it, there's a big gap between where we think we could be and where we are, and it's in all kinds of areas.
So let me ask you: How many of you in the last month have eaten more than you think you should? Just kind of general. OK. How many of you in the last month have exercised less than you think you should? OK, and for how many of you has raising your hands twice been the most exercise you got today? (Laughter) How many of you have ever texted while driving? OK, we're getting honest. Let's test your honesty. How many people here in the last month have not always washed your hands when you left the bathroom? (Laughter) A little less honest. By the way, it's interesting how we're willing to admit texting and driving but not washing our hands, that's difficult. (Laughter) We can go on and on. The problem, the topic, is that there's lots of things where we know what we could do -- we could be very, very different -- but we're acting in a very different way. When we think about how do we bridge that gap, the usual answer is, "Just tell people." For example, just tell people that texting and driving is dangerous. Did you know it's dangerous? You should stop doing it. You tell people something is dangerous, and they will stop.
Texting and driving is one example. Another very sad example is that in the US, we spend between seven and eight hundred million dollars a year on what's called "financial literacy." And what do we get as a consequence of that? There was recently a study that looked at all the research ever to be conducted on financial literacy -- what's called a meta-analysis. What they found is that when you teach people financial literacy, they learn and they remember. But do people execute? Not so much. The improvement is about three or four percent immediately after the course, and then it goes down. At the end of the day, the improvement is about 0.1 percent -- not zero, but as humanly close to zero as possible. (Laughter)
So that's the sad news. Giving information to people is just not a good recipe to change behavior. What is? Social science has made lots of strides, and the basic insight is that if we want to change behavior, we have to change the environment. The right way is not to change people, it's to change the environment. I want to present a very simpleminded model of how to think about it: think about behavioral change the same way we think about sending a rocket to space. We want to do two main things. The first is to reduce friction. We want to take the rocket and have as little friction as possible so it's as aerodynamic as possible. The second is to load as much fuel as possible, to give it the most motivation and energy to do its task. Behavior change is the same thing.
Let's first talk about friction. In this case study, there's an online pharmacy. Imagine you have a long-term illness, your doctor prescribes you a medication, you sign up for this online pharmacy, and you get your medication in the mail every 90 days. This online pharmacy wants to switch people from branded medication to generic medication. They send people letters saying, "Please, please, please, switch to generics. You will save money, we will save money, your employer will save money." And what do people do? Nothing. They try all kinds of things and nothing happens. So for one year, they give people an amazing offer. They send a letter saying, "If you switch to generics now, it will be free for a whole year." Free for a whole year. Amazing! What percentage of people do you think switched? Less than 10 percent. At this point, they show up to my office to complain. Why did they pick me? I wrote a couple of papers on the "allure of free." In those papers, we showed that if you reduce the price of something from 10 cents to one cent, nothing much happens. You reduce it from one cent to zero, and now people get excited. (Laughter) They said, "We read these papers on 'free,' we gave 'free.' It's not working as we expected. What's going on?" I said, "Maybe it's a question of friction." They said, "What do you mean?" I said, "People are starting with branded. They can do nothing and end with branded. To move to generic, they have to choose generic over branded, but they also have to do something. They have to return the letter." This is what we call a "confounded design." Two things are happening at the same time. It's branded versus generic, but it's doing nothing versus doing something. So I said, "Why don't we switch it? Why don't we send people a letter and say, 'We're switching you to generics. You don't need to do anything. If you want to stay with branded, please return the letter.'" (Laughter) What do you think happened? Lawyers happened. (Laughter) It turns out this is illegal. (Laughter) By the way, for brainstorming and creativity, doing things that are illegal and immoral is fine, as long as it's just in the brainstorming phase. (Laughter) But this was the purity of the idea, because the initial design gave the branded option the no-action benefit. In my illegal, immoral design, generic had the no-action benefit. They agreed to a fair design instead: send people a letter saying, "If you don't return this letter, we will be forced to stop your medications. But when you return the letter, you could choose branded at this price, or generic at this price." Now people had to take an action. They were on even footing. What percentage do you think switched? The vast majority switched. So what does it tell us? Do people like generics, or do we like branded? We hate returning letters. (Laughter) This is the story of friction: small things really matter. Friction is about taking the desired behavior and asking where we have too much friction slowing people down from acting on it. Every time the desired behavior and the easy behavior are not aligned, we want to try to realign them.
Now let's talk about motivation. In this study, we were trying to get very poor people in a slum called Kibera in Kenya to save a little bit of money for a rainy day. If you're very, very poor, you have no extra money, you live hand to mouth, and from time to time, bad things happen. When something bad happens, you have nothing to draw on, so you borrow. The Kibera people can borrow at sometimes up to 10 percent interest a week, and then it's really hard to get out of it. Something bad happens, you borrow, things get worse and worse. So we wanted people to keep a little bit of money for a rainy day, and we asked what motivation, what fuel, we needed to add. We tried all kinds of things. Some people we texted once a week and said, "Please try to save 100 shillings" -- about a dollar -- "this week." Some people got a text message as if it came from their kids: "Hi Mom, hi Dad, this is little Joey" -- whatever the name of the kid was -- "Try and save 100 shillings this week for the future of our family." I'm Jewish, so a little bit of guilt always works. (Laughter) Some people got a 10 percent match: "Save up to a hundred shillings, we'll give you 10 percent." Some people got 20 percent. Some people got 10 percent and 20 percent matches, but delivered with loss aversion. What is loss aversion? It's the idea that we hate losing more than we enjoy gaining. Think about someone in a 10-percent condition who puts 40 shillings in. We give them four more, and they say thank you very much. But that person gave up six. They could have gotten six more if they saved a hundred, but they don't see it. So we created what we call pre-match: we put the 10 shillings in at the beginning of the week and said, "It's waiting for you!" Then if somebody puts 40 in, we say, "You put 40 in, we're leaving four, and we're taking six back." In both cases, pre-match or post-match, people get 10 percent. But in the pre-match, they see the money they did not match leaving their account. So we had texts from kids, 10 percent, 20 percent, pre-match, post-match. And we had one more condition. It was a coin about this size, with 24 numbers written on it. We asked them to put the coin somewhere in their hut, and every week, take a knife and scratch the number for that week -- week one, two, three, four -- scratching it like a minus if they didn't save, and up and down if they saved.
Which of those methods do you think worked best? Text, text from the kids, 10 percent, 20 percent, beginning of the week, end of the week, and the coin? I'll tell you what the average people think. We've done these prediction studies in both the US and Kenya. People think 20 percent will get a lot of action, 10 percent less, and the rest will do nothing -- kids, coin, it doesn't matter. People think loss aversion will have a small effect. What actually happened? Sending a text reminder once a week helps a lot. Good news! This program lasted six months, and people forget. Reminding people is great. Ten percent at the end of the week helped some more. Financial incentives work. Twenty percent at the end of the week was just like 10 percent, no difference. Ten percent at the beginning of the week helps some more. Loss aversion works. Twenty percent at the beginning of the week was just like 10 percent at the beginning of the week, no difference. And the text message from the kids was just as effective as 20 percent plus loss aversion -- which is amazing. It's amazing how motivating messages from kids were. One conclusion is that we don't use kids enough. (Laughter) I don't mean in a child labor sense. But parents are the best they can be for their kids, they think about the future, and I think we should think about how to use that source of motivation to get parents to behave in a better way. But the big surprise of this study was the coin. The coin basically doubled savings compared to everything else. So the question is: Why? What was it about the coin?
I'll tell you how I started thinking about the coin. When I do research on, say, buying coffee, I don't need to go anywhere. I can sit in my office. I've bought enough coffee; I know how it works. When you do research in some of the poorest places in the world, you have to go and visit and see what's going on and get insight about how the system works. On that particular day, I'm in Soweto in South Africa, sitting in a place that sells funeral insurance. In the US, people spend crazy amounts of money on weddings. In South Africa, it's funerals. People spend up to a year or two years of income on funerals. Before you judge South Africans as irrational for this, I just want to remind you that spending a lot of money on funerals compared to weddings, at least you know for sure you only have one. (Laughter) I sit in this place that sells funeral insurance, and a man comes in with his son, who is about 12, and buys funeral insurance for a week. It will cover 90 percent of his funeral expense only if he dies in the next seven days. These are very poor people; they buy small amounts of insurance and small amounts of soap and such. He gets the certificate, and in a very ceremonious way, he gives it to his son. As he gives it to his son, I think to myself, why the ceremony? What is this father doing? Think about the breadwinner who decides that day to direct some money into insurance or savings. What is the family going to see tonight? They're going to see less. At that level of poverty, there'll be less food, less kerosene, less water -- something less tonight. What his father was doing, and what our coin was trying to do, is say: yes, there's less food on the table, but there's another activity. Many good, important economic activities, like savings and insurance, are invisible. The question is: How do we make them visible?
Let's go back to our rocket model. First, we look at the system and see where there are little things we can fix, where we can remove friction. Then we think broadly about the system and ask what other motivations we can bring in. That's a much more difficult exercise, and we don't always know what will work best. Is it going to be money? Loss aversion? Something visible? We don't know, so we have to try different things. We also have to realize that our intuition sometimes misleads us. We don't always know what would work best.
If we think about this gap between where we could be and where we are, it's a sad thing to see. But the good news is there's a lot we can do. Some of the changes are easy, some are more complex. If we attack each problem directly, not by just providing more information but by changing the friction and adding motivation, I think we can... Can we close the gap? No. But can we get much better? Absolutely, yes. Thank you very much. (Applause)