Being Wrong is Sometimes Right: The BETA Project

Jul 22, 2013 in Blog

Sometimes it’s good to make mistakes. As soul singer Joss Stone says, “I’ve got a right to be wrong. My mistakes will make me strong.” In behavioral diagnosis, as in life, being wrong is sometimes helpful – especially when it stimulates new insights on the problem. One of our favorite strategies to test hypotheses in behavioral diagnosis is looking for clues to try and prove ourselves wrong.

Diagnosis Tactic #1: We try to prove ourselves wrong.

State the problem. At Cleveland Housing Network, we started off with the following problem:

Despite multiple payment options, residents in the Lease Purchase Program fail to pay their rent on time.

Generate ideas. Lease Purchase Program residents who pay their rent late are assessed fines, starting with a $25 late fee and going up to $150 in court fees if the resident enters the eviction process. One of our initial hypotheses was that some residents may not be fully aware of the amounts of the fees they incur when paying late. If residents don’t attend to how much they are paying in fees, we conjectured, they may not be motivated to make the effort to pay rent on time. We often ignore small fees when making decisions. For example, we will sometimes happily spend $2 in ATM withdrawal fees rather than walk across the street or plan our spending ahead of time.

Look for clues. Our site visit to Cleveland proved us wrong. Through interviews with a range of residents and employees, we discovered that residents are well aware of the amount and timing of the fees. In fact, some residents anticipate paying a late fee and consider it a minor cost to accompany their monthly rent check. For someone paying the median rent ($500), the additional fee might not seem like much. The difference between paying $500 and $525 seems trivial because they had anchored to the high cost of rent—even though it adds up over the cost of the year.

Revisit your initial ideas. We had discovered a new behavioral bottleneck: the fee may not deter some residents from paying late, even if they are fully aware of it. Residents were letting the extra $25 go because it didn’t seem like very much compared to the cost of rent. This is a common cognitive error that affects all people, as we have a tendency to think in terms of percentages, rather than totals. We’re happy to spend 5 minutes haggling for a $2 discount on a $5 pair of sunglasses, but fail to spend the same time negotiating for $10,000 off a $300,000 house. In the first case we are negotiating for 40% off, but we are only negotiating for 3% in the latter case. If we do not think about the actual monetary values involved, our intuitions can lead us astray. As a result, the loss—in CHN’s case, the late fees—had a minor impact on behavior.

Another interesting human reaction to fines may also be at play here. Fines can change the nature of the transaction, turning the undesirable behavior into something that a person can choose to engage in for a cost, rather than something they should try to avoid. In the absence of a fine, a resident may think that paying rent on time is something that “good” residents do and will pay their rent accordingly. However, when a fine for paying late is introduced, the resident may subconsciously think, “Great, it’s okay if I’m late with rent because I’m buying the privilege by paying the late fee.” The desire to pay rent on time so that they can remain a “good” resident is replaced by a cost-benefit calculation where it may be worth it to pay the fine for the ability to be late (especially since it probably seems like a small amount compared with the total rent payment).

With these new insights, it’s likely our original hypothesis was incorrect. But, we wouldn’t have known that if we hadn’t taken the steps to formulate an initial theory and seek information to prove ourselves wrong.

Next BETA Project Post: Look for the Unexpected

As mentioned in, Don’t Suppose, Diagnose we use a range of tactics to elicit insights during the behavioral diagnosis process. Our next post on the BETA Project will discuss another strategy we use in the field: looking for unexpected details. This post and other helpful insights from the BETA Project are available on CFED’s Behavioral Economics blog and BETA Project website.