Anyone who studies markets, particularly anyone who trades, knows that human psychology plays a huge role in seemingly random market movements. The same line of thinking opens up the possibility that there might be smarter and more cost-effective ways for governments to interact with the general public on a whole range of issues. The obvious example of “behavioural economics,” often cited in the literature, is the different outcomes you get when people are auto-enrolled into workplace pension schemes, versus having the option to opt-in to those schemes. Many more people end up saving in pension schemes with auto-enrolment.
Why? Clearly inertia plays a huge role in human behaviour, meaning we are substantially more likely to continue sitting on our behinds than we are to get up and act, which is probably why the good Lord put a decent selection of carnivores into the world, to ensure that our ancient forebears stayed nimble and on their toes.
Alas, the sabre-toothed tiger is now long gone and we must make do as a species with behavioural economists, it seems, to nudge us along. However, keeping the debate at the effort-versus-inertia level would not produce a very rich inspirational source for government policy, so bringing economics into the frame looks promising.
One of the foremost theorists on this emerging intersection between government policy and behavioural economics is Cass Sunstein, a US law professor with an interest in the overlap between law, policy, and economics. He co-authored a book, Nudge: Improving Decisions about Health, Wealth and Happiness, with the economist Richard Thaler, and heads up the Obama Administration’s Office of Information and Regulatory Affairs.
In a recent paper, “Empirically informed regulation,” Sunstein draws on work designed to incorporate empirical findings about human behaviour into economic models, in order to suggest how regulation could be designed to be lower cost and more effective. Lawmakers can achieve this by going with the grain of predicable behaviour, rather than against it, so to speak. A general lesson, he argues, is that small, inexpensive policy initiatives can have large and highly beneficial effects.
For instance, the more complex the choice you lay before people, and the more perceived barriers they have to work through to enable that choice, the less likely you are to get them to move through that particular gate. “Complexity can have serious adverse effects by increasing the power of inertia,” Sunstein writes.
Simplifying choices and removing the amount of paperwork that people have to fill in, makes them much more likely to act. Obviously, if you are highly motivated to buy a house, you will battle through the mortgage application form, come what may, but if the form was simpler, the dropout rate would be lower. The same is true of loan applications and so on and so forth.
How The UK Government Helped Its Citizens Make “Better Choices”
Actually, of course, the British Civil Service has known about and exploited the power of inertia for decades, possibly centuries. When ministers come up with a plan of which the Civil Service disapproves, they smother it in paper.
Sunstein wants to go in the other direction, and one has to grant that, in the context of government bureaucracy, this kind of thinking is, if not novel (people have, after all, been banging on about cutting red tape for a very long time) at least helpful.
One of the main factors that Sunstein wants to take into account is the fact that people in fact tend not to behave like the ideal “rational citizen” upon which the rational model is predicated. People procrastinate and neglect to take steps that impose small, short-term costs but that promise large, long-term gains. They delay starting to exercise until they are so overweight they couldn’t start if they wanted to, or they delay seeing a doctor about a nagging cough until their lungs are beyond salvation with lung cancer. Many still smoke!
So what can government do? Government programs and funding should be channelled not just to informing people what they should do, but also towards designing programs that make it easy for people to act on the choices government wants them to make. The more specific and focused the message, the better.
The idea has caught on to the point where the UK Government now has a specific policy-making unit focused on behavioural economy and its implications for government policy.
In 2010 the UK Coalition Government, impressed by what it knew of behavioral economics, decided to set up a group of 13 academics as an adjunct to the Cabinet Office. Called the Behavioural Insights Team, or the Nudge Unit, this group was given the task of finding smart ways of "encouraging and enabling people to make better choices for themselves." The Nudge Unit's output was sufficiently impressive for Government to seek to make the unit the first policy unit to spin off from Central Government as a profit-making venture.
The whole idea initially was to use behavioral economics to improve the effectiveness of government programs and to find ways of getting more people "doing the right thing", i. e. giving increased traction to public policy implementation. The list of ways in which citizens could be less of a drain on the public purse is fairly extensive. Refraining from binge drinking would be one example, taking more exercise and eating better would be another, and so on.
When the Government announced the spin off of the Unit back in May, it praised the Nudge Unit fulsomely:
"The team was established to find ways of encouraging, supporting and enabling people to make better choices for themselves. Since then it has delivered rapid results - identifying tens of millions of pounds of savings, spreading understanding of behavioural approaches within government, and developing a reputation as a world leader in its field."
In other words, as far as the UK Government is concerned, behavioural economics works. One has to remember that this comment was made in the context of inviting bids from interested parties as the Government tries to spin out the Nudge unit, so a certain amount of egging the pudding is inevitable. But the Unit itself has a number of successful projects it can point to.
One of these was when it was tasked to help the government improve the take up of loft insulation by householders. The team found that one of the reasons for the slow take up was that lofts, as everyone knows, are wonderful places for storing all those things that you don't really want to part with but are unlikely ever to want again. They are the archetypal "file and forget" zone. The Unit came up with the idea of providing householders with low cost labour to clean out their rubbish-filled lofts, which then made it easy for the householder to move to the next step, namely installing loft insulation.
The Unit has produced several research papers, which stand up to scrutiny. The team's most recent paper, "Applying behavioural insights to charitable giving", provides yet another example of how "nudge theory" works in practice.
The team started by focusing on understanding what the behavioural science literature suggests would work in practice by way of increasing charitable giving, and then conducted a series of trials and tests to see how these insights panned out in practice through the use of controlled randomised trials.
They identified four "behavioural insights": People give more when you make the process of giving easy, as for example, building in an option to automatically increase future payments in line with inflation (you get increased giving without the need for the individual concerned to take additional action); using auto enrolment as a workplace mechanism for higher paid staff to donate, with clear opt outs (again this uses the power of inertia); drawing on beneficial peer effects by making acts of giving more visible to others in the same social group and fourthly, establishing group norms to provide an "anchor" for subsequent donors. Another point was getting the timing right for charitable appeals - timing matters, i.e. December is a better giving month than January, for obvious reasons.
There is no space here to go into the results of the trials, but a quick summary is that nudging definitely works, not with everyone, perhaps, but given a reasonable population size for a trial, you get improved effects by doing things "smarter", going with the flow of behavioural patterns, rather than ignoring them or unwittingly cutting across them.
Can we expect governments generally to start getting smarter about policy implementation? Definitely, I would say. The Nudge Team has already attracted international attention and they are not the only ones exploring this road. The advertising industry, of course, would say that they have been blazing the trail here for donkey's years, since their whole game is to influence behaviour. One can only hope that government policy makers do not become as annoying as whole swathes of the advertising industry!
By Anthony Harrington
Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.
Behavioral economics: New trick for government financing? Part 1 & Part 2 are republished with permission from the QFinance Blog.
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