Panel Paper: Everyone Believes In Redemption: Overoptimism and Nudges

Saturday, November 10, 2012 : 4:10 PM
Hopkins (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Robert Letzler, U.S. Government Accountability Office and Joshua Tasoff, Claremont Graduate University

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 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 interventions: (1) informing subjects about a previous cohort's redemption rates, (2) reminding subjects about the redemption deadline, and (3) reducing transaction costs. These interventions illuminate mechanisms that create overoptimism and suggest ``nudges'' that reduce overoptimism. Only the treatment that reduced transaction costs had any detectable effect, and it reduced overoptimism by approximately one half. It reduced overoptimism by increasing 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. Thus, weak cost-salience may be the mechanism for overoptimism.  We also test whether offering more time to redeem affected  redemption rates and cannot reject the null hypothesis that the deadline extension had no effect.