#46. A Summary of ‘The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life’ by Uri Gneezy and John A. List

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‘The Why Axis: Hidden Motives and the Undiscovered Economics of Everday Life’ by Uri Gneezy and John List (PublicAffairs; October 8, 2013)

Table of Contents:

i. Introduction/Synopsis

PART I: ECONOMICS GOES TO SCHOOL: USING CONTROLLED FIELD EXPERIMENTS TO IMPROVE EDUCATION

1. Dropping Out in America

2. The Stay-in-School Experiment

  • a. Prelude
  • b. The Experiment
  • c. The Results

3. The School Violence Experiment: The Culture of Calm Program in Chicago

4. Maximizing Academic Achievement

  • a. Prelude
  • b. The Griffin Early Childhood Center (GECC) Experiment
  • c. The Results

PART II: ECONOMICS GETS CHARITY: HOW CONTROLLED FIELD EXPERIMENTS CAN HELP MAXIMIZE DONATIONS

5. The Seed Money Experiment

  • a. Prelude
  • b. The Experiment

6. Brian Mullaney and Smile Train

7. The Direct Mail Experiment: The Power of the ‘Once and Done’ Option

8. Raffles, Lotteries and Tontines

  • a. Raffles and Lotteries (and the Beauty Effect)
  • b. Tontines

9. The Matching Effect Experiment

PART III: ECONOMICS AND BUSINESS: HOW CONTROLLED FIELD EXPERIMENTS CAN HELP MAXIMIZE PROFITS

10. Netflix

11. The Price of Wine Experiment

12. Field Experiments in the Business World: Intuit

  • a. Prelude
  • b. Intuit

13. Conclusion

i. Introduction/Synopsis

Until quite recently, the field of economics was dominated mainly by theory-making. Specifically, economists applied their intellects to the human world, and developed abstract models to explain (and predict) the unfolding of economic events. At the heart of all this theory-making stood homo economicus—a narrowly self-interested individual who responded to incentives and disincentives in a perfectly rational way.

In the past half century, though, various economists have added new wrinkles to the field’s repertoire. To begin with, pioneering economists such as Amos Tversky and Daniel Kahneman introduced controlled lab experiments (among other things) into the fold. And these experiments succeeded in adding nuance to our understanding of economic-man (he’s not quite as one dimensional and rational as he was once taken to be), as well as texture and complexity to our understanding of economic phenomenon.

More recently, economists such as Uri Gneezy and John A. List have stepped in and showed that controlled field experiments also have a place in economics. For Gneezy and List, the world is their laboratory: the two go about slyly manipulating the natural environment in a controlled way (often fiddling with incentives and disincentives of all types) to see how we humans respond to the tweaks. Gneezy and List have been practicing this approach for upwards of 20 years now, and in this time they have helped shed light on everything from how to decrease crime rates; to how to improve school success; to how to encourage more charitable giving; to how to promote healthy living and decrease obesity; to how to set prices on products (so as to maximize profits); to how to understand (and limit) discrimination (to name but a few lines of research of theirs). And in their new book The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life the two catch us up on their experiments and their results (while also touching on the experiments of other like-minded practitioners).

Take education, to begin with. Gneezy and List have gained a fair bit of attention recently for showing how monetary incentives can be used to help improve grades and graduation rates (particularly with at-risk students)—and even curb school violence; and here we are apprized of the ins and outs of the experiments that were used in this research. What is less well-known is that the authors have also recently become involved in a massive longitudinal study that is designed to test the effectiveness of different approaches to pre-kindergarten education. Though still in its infancy, the study has already yielded some very interesting results; and given that the researchers intend to follow their experimental subjects throughout their lives, the study should help shed a great deal of light on just what approach to early childhood education is most effective.

When it comes to charitable giving, Gneezy and List’s experiments have worked wonders in showing just how to encourage as much charity as possible—and have challenged many of the industry’s long-held beliefs in the process. The authors cover everything from how much seed-money is needed for a project to maximize donations; to how to approach follow-up requests made to established donors; to how to leverage raffles, lotteries and tontines for best success.

On the topic of business, Gneezy and List remind us how a failure to use an experimental approach can lead to business disaster (as illustrated by Netflix’ 2011 decision to modify its business model without experimental research—a decision that drove hordes of customers away, sent the company’s stock plummeting, and nearly sank the business outright). The lesson: business tweaks (including changes in pricing) should be tested in a controlled way in a small market (say a given city) before being adopted across the board (an approach that has been utilized to great effect by such companies as Intuit and Humana).

What follows is a full executive summary of The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life by Uri Gneezy and John A. List.

*To address all of the lines of research that Gneezy and List have involved themselves in would mean that I would be able to touch on each in only a very cursory way. Thus I have decided to limit myself to discussing 3 lines of research of theirs that I deem to be most wide-ranging and important: education, charity and business.

PART I: ECONOMICS GOES TO SCHOOL: USING CONTROLLED FIELD EXPERIMENTS TO IMPROVE EDUCATION

If Gneezy and List’s work may be said to be about one thing it is this: demonstrating that controlled field experiments can be a very effective way to learn about the human world, and identify practises that will help improve it. This sounds reasonable enough, but the fact is that Gneezy and List’s experimental approach has really found very few adherents in most fields of human endeavor.

Take education, for example. While enormous amounts of money are pumped into education all over the world, very little of this money has ever found its way into controlled experiments meant to determine just what methods of education work best. And this is a real pity, because in many countries (including the United States) the education system may be said to be churning out some fairly lackluster results.

1. Dropping Out in America

One of the very saddest things about the education system in America is how it is failing its most impoverished students. Indeed, the dropout rate among schools in poorer neighborhoods is frighteningly high. As Gneezy and List explain, “dropout rates for low-income Americans hover four to five times higher than for students from high-income families. For example, in 2008, 2 percent of high-income students dropped out, compared to 9 percent of low-income students. And dropout rates for inner-city schools often exceed 50 percent” (loc. 936).

Unfortunately, dropping out has negative knock-on effects that last a lifetime. Just in terms of future earnings alone, the numbers are staggering. As Gneezy and List explain, “dropping out is like throwing away a lottery ticket. The data tell us that for each year of school that a student misses, his or her earning power drops by roughly 12 percent. Indeed, the average annual income for a high school dropout in 2009 was $19,540, compared to $27,380 for a high school graduate. Multiply that number by twenty years, and you see an earnings differential of $156,800. That’s a real winning lottery ticket—enough to buy a house outright in many parts of the country (loc. 1011).

And that’s not all. The fact is that high school dropouts are also much more likely to get in trouble with the law, and spend time in jail; and thus dropping out not only negatively affects the dropouts themselves, but all of society (loc. 2088-91).

Given the damage that a high dropout rate causes, Gneezy and List decided to see if they couldn’t find a way to help keep potential dropouts in school (loc. 1005). Specifically, the two decided to run an experiment to see how monetary rewards might help potential dropouts stay in school.

2. The Stay-in-School Experiment

a. Prelude

Gneezy and List chose to carry out their experiment in an impoverished district south of Chicago known as Chicago Heights. This community, “located thirty miles south of Chicago… has an average per capita income well below the poverty line… 50 percent of the students are Hispanic and 40 percent are African American. More than 90 percent come from poor families on food stamps; many come from foster homes; and most receive free or reduced-fee lunch. As is the case in other urban schools, roughly 50 percent of the high school students drop out before graduation, many between the ninth and tenth grades” (loc. 985).

*For prospective buyers: To get a good indication of how this (and other) articles look before purchasing, I’ve made several of my past articles available for free. Each of my articles follows the same form and is similar in length (15-20 pages). The free articles are available here: Free Articles

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