Rob Letzler

PhD, Goldman School of Public Policy UC Berkeley

Research

Everyone Believes in Redemption: Overoptimism and Nudges (With Josh Tasoff) Journal of Economic Behavior and Organization, November 2014

We conduct a laboratory experiment which elicits subjects. beliefs about the likelihood that they will redeem a mail-in form. By comparing subjects. expected redemption rates to actual redemption rates we find that subjects are overoptimistic about their likelihood of redemption and thus .leave money on the table.. Moreover, we find that overoptimism is increasing with the belief in redemption, suggesting that the consumers who are most likely to select an option requiring future action make the largest errors. We then test the impact of three .nudges. on overoptimism: (1) informing subjects about a previous cohort.s redemption rates, (2) reminding subjects about the redemption deadline, and (3) reducing transaction costs. Testing the interventions helps to both uncover the mechanisms of overoptimism and provides preliminary evidence for potential policy. The third nudge was the only treatment that had any detectable effect, and it reduced overoptimism by approximately one half. It reduced overoptimism by in- creasing redemption rates but not by decreasing people.s mean belief. We find that redemption is sensitive to the payoff and cost of redemption but beliefs are almost constant. This suggests that weak cost-salience is the mechanism for overoptimism.

Knowing When to Quit: Default Choices, Demographics and Fraud (with Ryan Sandler, Ania Jaroszewicz, Isaac Knowles, and Luke Olson)

A long literature in psychology and economics has shown that default options influence consumer choices, but it is often unclear whether individual consumers are nudged to choose optimally or simply nudged to a different choice. We study the effects of default options in a novel setting where the optimal choice is clear: the decision to escape from fraud. We employ data from one of the largest telemarketing fraud cases ever brought by the Federal Trade Commission (FTC). The telemarketer enrolled consumers into costly membership programs, which the vast majority of consumers never used. A court order issued during the FTC lawsuit created a natural experiment whereby some consumers were sent "opt-in" letters informing them they had to take action to remain enrolled while similarly situated consumers received "opt-out'' letters that merely reminded them how to quit. We find that the "opt-in" letters increased cancellations by 63.4 percentage points, to essentially 100%. We then examine heterogeneity in the responses to the "opt-out" letters. We find that consumers residing in poorer, less educated Census blocks and those more likely to be minorities were more likely to cancel their subscriptions prior to the FTC lawsuit, but were relatively less likely to respond to an opt-out letter.

Applying Psychology to Economic Incentive Design: Using Incentive Preserving Rebates to Increase Acceptance of Critical Peak Pricing

Abstract: This project extends the idea that we should address policy problems by improving incentives to add that aligning the incentives' presentation with the way people make economic decisions can help people make better choices and help achieve policy goals. It applies ideas from behavioral economics to design practical electricity pricing policies. The cost of generating power fluctuates enormously from hour to hour but most customers pay time invariant prices. The mismatch between the fluctuating generation cost and the fixed retail price creates billions of dollars in deadweight losses. Customers who participate in Critical Peak Pricing (CPP) programs use less power during high-priced periods than do customers on traditional, time invariant rates. CPP customers report high satisfaction levels and often save 10% or more. Yet, roughly 99% of customers reject opportunities to switch to critical peak pricing. The psychology literature documents heuristics that people use to decide under risk. The conventional CPP presentation leads several of these heuristics astray. For example, customers using these heuristics would put too much weight on the risks and losses involved with paying more to get less during the high priced ``events'' relative to the weight they put on their steady stream of savings. This paper departs from the hypothesis that one or more of these heuristics underlies customer resistance. Hence, I suggest Incentive Preserving Rebates that change the presentation of CPP to address these heuristics. Incentive Preserving Rebates reframe events as opportunities to get rebates rather than as periods of extremely high prices. Incentive Preserving Rebates change the presentation, but change neither marginal incentives nor each customer's total annual payments. I then explore the implications of incentive preserving rebates for customers who participated in a California pilot program.

Media:

The Impacts of Residential Critical Peak Pricing: Evidence from California's Statewide Pricing Pilot

California's Statewide Pricing Pilot (SPP) explored the impact of switching residential customers from conventional, time-invariant electricity rates to Critical Peak Pricing (CPP). CPP lowers prices most of the time, raises prices modestly during weekday afternoon peak hours and raises prices dramatically during rare "critical" periods. CPP rates better reflect significant hour-to-hour variations in the cost of generating power. California SPP customers were socioeconomically diverse and lived in diverse climate zones. This paper takes a flexible, difference-in-difference approach to estimating the impacts of the statewide pricing pilot and provides evidence about who is likely to respond the most to CPP when. It finds that dynamic pricing led to larger consumption reductions on hotter days and for larger customers. It estimates that the benefits of dynamic pricing range from zero in cooler climates on cooler days to .3 (.4) kW every hour for increased afternoon ("critical peak") prices on the hottest days in hot climates. A program designed to address extreme electrical demand on hot summer days worked best in regions where most customers had air conditioning on days when temperatures above about 90 degrees prompted them to run their air conditioners. Thus, targeting marketing efforts at high-consumption customers in hot regions has the potential to increase the program's cost-effectiveness.

Full dissertation: Implementing Opt-in, Residential, Dynamic Electricity Pricing: Insights from Economics and Psychology

Other Research

Understanding Free Riding and Cooperative Types in Public Goods Experiments: Evidence from a Psychological Test

with George Athanasakopolous. Presented at the Economic Science Association, June 2006.

We provide experimental evidence that the set of subjects who are predisposed to free ride, reported in economics public goods experiments, are the high Machiavellian ("high Mach") types reported in the psychology literature. The public goods literature reports the presence of subjects who are predisposed to free ride ("free riding types") and the presence of subjects predisposed to cooperate and to punish free riders ("cooperative types"). Experiments suggest that institutional rules determine the balance of power between free riding and cooperative types and that this balance of power determines would-be free riders' contribution levels. We compare the behavior of high and low Machs in a voluntary contributions game and find that high Machs make a significantly higher number of unprovoked defections than low Machs. If free riding (cooperative) types are high (low) Mach types, economists can tap the psychology literature's descriptions of high and low Machs' social preferences and situation-dependent behavior to design better social preferences experiments and public goods institutions. For example, it means that the challenge of reaching good public goods deals is the challenge of creating tools to create and enforce norms that are strong enough that high Machs will not violate them.

Other interests

When I escape work, I am a serious amateur photographer and am a member of the GSPP Alumni Association where I served on the national board 2008-2014,


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