Topic: Economic Analysis & Policy

Berkeley Haas launches O’Donnell Center for Behavioral Economics to lead the next generation of research

|By Mickey Butts

Established with a philanthropic investment of almost $17 million from Robert G. and Sue Douthit O’Donnell, the new center will bring together the best minds from a wide range of fields.

An aerial view of the Haas School of Business campus showing a wide staircase leading up to an arched entry between two buildings.

Berkeley, Calif.—Ever since Nobel laureates George Akerlof and Daniel Kahneman created a 1987 UC Berkeley course that broke the rigid barrier between psychology and economics, the university has led the way in bringing the once-disparate disciplines together into the field of behavioral economics.

More than 35 years later, the Haas School of Business is launching the Robert G. and Sue Douthit O’Donnell Center for Behavioral Economics to advance the field toward its next stage of evolution.

Portrait of a woman with shoulder-length dark blond hair and purple blazer.
Professor Ulrike Malmendier (Photo: Copyright Noah Berger)

“We went from neoclassical economics that considered humans to be perfectly rational, to behavioral economics that brought in social psychology,” says Ulrike Malmendier, the Cora Jane Flood Professor of Finance, who will serve as the center’s faculty director. “Now we want to move the needle further, bringing together the best minds for rigorous research on human behavior from the sciences more broadly—including neuroscience, cognitive science, biology, medicine, epidemiology, and genetics.”

Funded with a philanthropic investment of almost $17 million by Bob O’Donnell, BS 65, MBA 66, and his wife, Sue O’Donnell, the center aims to become the preeminent hub for the maturing fields of behavioral economics and finance, bringing together leading researchers from a wide range of disciplines for collaboration, conferences, and bootcamps, as well as funding promising PhD students and postdoctoral scholars. The center will also host the prestigious Behavioral Economics Annual Meeting (BEAM), co-founded by Malmendier, every three years.

A nexus for cross-disciplinary research

O’Donnell says he was inspired by the pioneering work of Kahneman, Akerlof, Malmendier, and others who gave Berkeley its leading position in behavioral economics. “UC Berkeley is dedicated to integrating business education with other disciplines on campus, which is essential in this area,” he says. “It should have a center devoted to continuing this work.”

The center, says Berkeley Haas Dean Ann Harrison, will create a far-reaching impact across UC Berkeley, a research powerhouse with many areas of strength. “The goal is to cut through barriers that traditionally hinder research across disciplines, such as different ways of presenting data and publishing results, and bring people together in a different way than what’s usually done,” she says. “The O’Donnell Center will be the nexus of a new form of cross-disciplinary collaboration that pushes behavioral economics toward the future.”

Beyond ‘homo economicus’

Traditional economics was based on the assumption that human beings are perfectly rational, profit-maximizing “robots”—sometimes referred to as “homo economicus” or “economic man,” Malmendier says. Behavioral economics brought in insights from psychology and human behavior to explore the predictable foibles in our thinking, such as decision-making biases, fears of losing out, lack of self-control, and overconfidence. A classic example is Kahneman’s pioneering work with Amos Tversky on loss aversion, which showed that people are willing to take greater risks to avoid a loss than to secure a gain.

These ideas have been integrated into economics and finance departments around the world and have deeply influenced public policy and practice. For example, after Nobel Laureate Richard Thaler and Cass Sunstein developed the concept of the “nudge”—interventions that spur people to act in their own self-interest, such as enrolling in a retirement savings plan—hundreds of “nudge units” were established in governmental and private-sector organizations around the world.

Many other Berkeley Haas researchers helped pioneer this intellectual revolution, including finance professor Terrance Odean, BA 90, MS 92, PhD 97, the Rudd Family Foundation Chair, who was convinced by Kahneman to pursue a doctorate in finance rather than psychology and whose work reveals investors’ flawed decision making.

O’Donnell, the center’s founding donor, says he often applied insights from behavioral economics during his career as a portfolio manager for a large mutual fund group. “It represents a further step in the evolution of financial theory comparable to the development of the efficient market hypothesis,” he says. “When combined with existing financial theory, I believe that its insights enhanced results for my clients.”

Yet, during the 17 years he taught an investment class in the Berkeley Haas MBA program, O’Donnell says he sometimes encountered skepticism when he introduced ideas from the field. “Indeed, one student asked, ‘Isn’t all this kind of woo-woo?’”, he says. “Several years later, that student told me how perspectives from behavioral economics had helped her career in finance.”

Experience effects

Now, after more than three decades of foundational work, it’s time to move behavioral economics past its adolescence, Malmendier says. “Behavioral economics made progress by including psychology, but we didn’t include all the other sciences.”

Malmendier, whose groundbreaking work on “experience effects” earned her a Fischer Black Prize in 2013 for the top economist under the age of 40 and a Guggenheim Fellowship in 2017, has focused on complex economic behaviors. She has studied how stressful experiences with recessions, layoffs, inflation, housing bubbles, and political repression make consumer and investor behavior more cautious and risk averse for years afterward, and she has explored how stress can affect our health, careers, education, and other aspects of life in dramatic ways.

To further that work, Malmendier aims to bring a wider range of researchers together and break down silos. For example, collaborating with neuroscientists, neuropsychiatrists, biologists, medical researchers, and epidemiologists who have studied stress and trauma could more precisely demonstrate how past experiences shape our actions today and across generations. Stress impacts the big variables that economists study, such as completing an education, choosing an occupation, and deciding to have a family, she says.

“As we walk through life, our outlook on the world changes, especially if we suffer trauma,” she says. “Neuroscience says our brain gets rewired. There may be a long-term impact of stress on our longevity, on our aging, and on our health.”

Questioning the status quo

Malmendier, who now serves on the German Council of Economic Experts, is passionate about the potential of behavioral economics to help leaders create better solutions to the most complex and urgent problems of our time—from fighting climate change to battling inflation and avoiding financial crises. “If leaders keep in mind people’s emotions, their personal histories, and their psychologies, they can engineer ways to make things more predictable and give people more control over events help them live better lives,” she says. “That is our ultimate goal.”

Photo of a man with light skin, short brown hair, and glasses, wearing a navy blue jacket with white collared shirt.
Professor Stefano DellaVigna

Moving the field forward will also involve rigorous research to reexamine what has come before. For instance, a recent paper by center co-founder Stefano DellaVigna, the Daniel E. Koshland Senior Distinguished Professor of Economics and professor of business, with Elizabeth Linos of Harvard, suggests that leaders should get more realistic about nudge policies—and better at incorporating them into practice. Two government nudge units opened their records to allow the researchers to look at all their interventions. By examining 126 randomized controlled trials of nudge policies involving 23 million people in the United States, the researchers found that nudge interventions are on average effective, increasing the desired outcomes by about 8%. However, the effects are less than those in published academic papers—about one-fifth the size. The authors attribute the difference to publication bias, or the tendency toward publishing only large, surprising results.

“Our study stresses the importance of research transparency,” DellaVigna says. “This transparent access is quite unique and shows a further innovative impact of behavioral economics, which has led to more evidence gathering within governments.”

In a second paper, DellaVigna and Linos, along with Department of Economics doctoral student Woojin Kim, found that even when nudge policies are found to be effective, public agencies implement them only about a quarter of the time, often due to organizational inertia.

In addition to Malmendier and DellaVigna, the center will include a host of affiliated researchers from Berkeley Haas and Berkeley Economics, as well as from across the university. They include Berkeley Haas professors Ricardo Perez-Truglia, Ned Augenblick, Don Moore, and Gautam Rao, PhD 14—who will join Haas in January from Harvard University—as well as Dmitry Taubinsky of Berkeley Economics and others. The founding gift will establish a permanent endowment to support the center and some of its ongoing activities.

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Media Contact: Laura Counts, [email protected], 510.205.9570

How Berkeley Haas research fueled a company that could save Medicare patients from costly mistakes  

|By Dylan Walsh

Choosing a Medicare plan is both complicated and consequential. Berkeley Haas research has fueled a new company that simplifies the process, promising to save money and improve health for millions of people.

Photo of a woman with gray hair in a ponytail smiling as she looks at a laptop screen showing the Healthpilot website.
Photo courtesy of Healthpilot

It’s Medicare open enrollment season, and the tens of millions of retirees who rely on the government program for health care are grappling with an abundance of options, a dearth of information, and no good way to personalize or compare plans.

“It is not a well-functioning market,” says Jon Kolstad, an associate professor at UC Berkeley’s Haas School of Business who studies the economics of health care. “And yet the choices people make have high financial stakes—consumers are typically on fixed incomes—and critical health implications.”

Kolstad has been studying this challenge since he was in graduate school and, with several academic collaborators, recently helped turn a broad foundation of research into a company centered on helping people make better decisions when choosing a Medicare plan. Healthpilot, which launched in late 2020, uses machine learning to compare Medicare plans and suggest options that are personalized to each person’s current circumstances, projected health needs, and risk tolerance. It’s also free to use.

“We recognized the power of this highly predictive algorithm developed to solve a critical unmet healthcare need for seniors who are evaluating Medicare plans,” says Healthpilot CEO Seth Teich. “We believe that Healthpilot’s platform is a transformative technology that empowers consumers to easily navigate through the complexity of plan choices to find, and enroll in, their best coverage option.”

A desperate need for innovation

People with questions about Medicare enrollment have long relied on phone calls to private agents who walk them through the decision. But there’s a problem: “In reality, these brokers, who are supposed to be experts, do no better at selecting a plan than the average person,” Kolstad says.

In a 2021 paper, Kolstad and several colleagues, including UC Berkeley economist Ben Handel, demonstrated that brokers are prone to the same flawed judgment as everyone else. For instance, they place too much weight on a plan’s premium while overlooking other costs, such as out-of-pocket expenses. The result is that consumers working with brokers pay $1,260 more per year on average than they would if they enrolled in the best plan.

This is not the result of brokers’ bad intentions but simply because solving which plan is best for which person “is a very complex computational problem,” Kolstad says. In fact, the 2021 paper found that when brokers were provided with an AI assistant to help them suggest a plan, they saved consumers about $300 per year. (This is a conservative estimate.)

Healthpilot’s promise lies with its ability to use AI to properly weight the many fixed and projected costs of every available plan, sifting carefully—and impartially—through these multidimensional relationships. The algorithm operates by comparing every Medicare enrollee with millions of similar people and then forecasting the likelihood of different medical complications. By pairing this forecast with known information—including, with users’ permission, secure access to the medications people take and the doctors they see, along with information they provide directly—Healthpilot then determines which plan is ideal and ranks the alternatives.

The algorithm also considers individual appetites for risk. “Some people have very little risk aversion, and they would rather have low payments now and gamble on how they fare,” Kolstad says. “The plan that gets recommended to this kind of person should be different than the plan that gets recommended to someone who is very risk averse, who wants a high premium now in order to know that they’ll be covered.”

Benefiting individuals and the marketplace at large

The financial benefits for individuals are straightforward: Choosing the right Medicare plan generally means better coverage and less expense. These savings also accrue to the federal government, which finances Medicare.

A subtler benefit are gains in well-being and even lower mortality rates. One working paper co-authored by Kolstad found that people who have to pay more out of pocket cut back on important health care services. A related paper, co-authored by Ziad Obermeyer of Berkeley Public Health with researchers at Stanford and Harvard, found that a $100 bump in per-month cost-sharing for drugs—exactly the kind of mistake people make without good guidance—increases mortality by 13.4%, as people forego essential drugs such as blood pressure medication.

Healthpilot is able to deliver these financial and health-related benefits to consumers for free because of the structure of the Medicare market. Since Medicare is a valuable source of revenue for insurance companies, the companies pay commissions to brokers for each person that they enroll. If Healthpilot sends someone to Humana, Humana pays; if instead the enrollee goes to Blue Cross-Blue Shield, then Blue Cross-Blue Shield pays.

That’s a crucial point: Because these commission amounts may vary by carrier, human agents may be biased in their plan recommendation based on the commission they are paid. Healthpilot’s algorithm does not factor commissions into its recommendations and does not steer people toward any particular plan or company based on financial incentives. “There’s no distortion in the platform or plan recommendation, which is unique in the industry,” Kolstad says.

This also has the potential to inspire greater innovation and efficiency in the insurance market as a whole—one of Kolstad’s main interests. As a point of comparison, consider the tech market: When a company like Apple creates a product that people like, they buy it; when it creates a product people don’t like, they don’t buy it. This is quickly reflected in the company’s revenue and share price.

Because insurance products are so much more complicated, consumer decisions rarely reflect clear notions about quality; people often enroll, and stay enrolled, in plans that don’t deliver value. Healthpilot, by sorting people into plans that genuinely benefit them, could bring much greater transparency into the marketplace and produce meaningful information for companies to build better plans, Kolstad says.

“For better or worse, we rely on competing private plans in Medicare. That’s the approach we’ve taken because we believe that a private market will offer innovation,” Kolstad says. “Giving customers a greater ability to match with plans that give them the coverage they want and need will reward innovators. That means Healthpilot isn’t just a digital enrollment solution for consumers but can be a tool to make the whole market function more as it should.”