Post-Conference presentation at the Predictive Modeling Summit held in Washington DC.
This talk focuses on applying behavioral economic principles to devise behavioral interventions and simulating such behavioral interventions using predictive modeling and agent-based simulation tools to provide managed care professionals and healthcare policy makers with a unique set of tools and techniques to address some of the critical issues of user adoption and controlling healthcare costs. In this talk, I examine the basic principles of behavioral economics, how it can be applied to devise behavioral interventions in the managed care area, and how to develop simulation models to understand the implications before testing and rolling out these interventions.
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Source: Diamond Analysis; Nudge by Richard Thaler and Cass Sunstein; Predictably Irrational by Dan Ariely
Rule of Thumb Description
Endowment EffectPeople place a higher value on objects they own relative to objects they do not
Relativity & Choice
Offering customers excessive options to choose from can result in purchase paralysis; People rarely choose something in absolute terms; they focus on the relative value amongst options
Hot vs Cold StatesPeople’s decisions under aroused or ‘hot’ states tend to be significantly different from ‘cold’ calculated decisions
Bandwagon EffectPeople have a strong tendency to conform to the social norms and often do things because others do
Loss AversionPeople prefer avoiding losses rather than acquiring gains. Studies suggest that losses are as much as twice as psychologically powerful as gains
Hyperbolic Discounting
Consumption now and in the near future is preferred to consumption into the farther future; The greater the uncertainty about this future the less the preference
Simple behavioral interventions can influence what people eat and how much they eat
Relevance of BE in Health/Wealth Decisions
1. Obesity causes at least 300,000 excess deaths
2. Obesity in adults resulted in health care costs of $93 billion in 2002
3. Lifetime costs related to diabetes, heart disease, high cholesterol, hypertension and stroke among obese are $10,000 more than the non-obese
OBESITY
31%
15%
<20 yrs 20-74 yrs
1. Placing candies three feet away from one’s desk reduced volume of chocolate consumption by 5 to 6 chocolates a day (Self-control)
2. Subjects provided with a bowl of M&Ms in 10 colors ate 77% more than people given a bowl with only 7 colors (Visceral effects)
3. Food stamp benefits raise food expenditure more than an equal amount in cash (Mental Accounting)
4. Pre-ordered healthy-pack options encouraged healthy eating by Food Stamp Beneficiaries in Connecticut and North Carolina (Defaults)
5. Having more unhealthy choices reduces the chances of health options being selected – Salad, Hamburger, Cake vs Salad and Hamburger (Choice Relativity)
BE Interventions
Source: Could Behavioral Economics help improve Diet Quality for Nutrition Assistance Program participants, USDA, Economic Research Service, Diamond Analysis
The five segments are clearly differentiated in terms of their health consciousness (e.g., regular exercise, health insurance cover, health risk during retirement)
The five segments are also differentiated in terms of their financial confidence (e.g., financial preparedness for retirement and healthcare issues, longevity risk)
Affluent Sophisticates
Aspirants Retired SettlersModerates Survivors
Increasing Financial Confidence
0% 3%
22%
57%
82%% confident of being financially prepared for retirement
1%10%
19%
43%
76%% confident of being financially prepared for healthcare issues that arise later in life
Agent-Oriented Behavioral Modeling
62%47%
51%
31%
17%
% who ranked finances as most at risk during retirement
Findings from Behavioral Economics, Market Research, and Predictive Analytics can be combined to model individuals as software agents
Agent-Oriented Behavioral Modeling
Intentions
Beliefs
• Informational state• Facts about the world• Beliefs about other
agents
Agent-Oriented Modeling
• Demographic data• Beliefs about diet & exercise• Impact of diet & exercise on cholesterol,
stroke, etc.• Current diet and exercise behaviors• Social influence on beliefs
Example: Cardiovascular Disease
Desire/ Goals
• Motivational state• Committed desires are
goals• Social influence on
individual goals
• Deliberative state• Commitment to abstract
sequence of goals or specific actions
• Diet and exercise goals• Level of commitment or self-control to
goals• Impact of social influence on goals
• Patterns of different diet and exercise patterns (e.g., regular vs sporadic)
• Varying impact of diet and exercise on cardiovascular events – stroke, Myocardial infraction (MI), etc.
Behaviors of thousands of consumers can be modeled and simulated to evaluate impact of behavioral interventions on individual well being as well as healthcare costs