Irrational me… Behavioural Economics hits its stride

Bill Below, OECD Directorate for Public Governance and Territorial Development (GOV)

As humans we sometimes invest poorly, accept software updates without reading the fine print, choose the wrong business partners, commit heroic acts, are optimistic when we should be cautious and pessimistic when we should be sanguine. We occasionally buy things we don’t really need, eat fatty foods and some of us even still smoke. We fail to systematically pursue our direct self-interest (erring at times on the side of altruistic cooperation), don’t save enough for old age, confuse the nominal and real value of money, believe an overheated economy will never crash and when it does, lose confidence for too long that things will ever be right again. It’s easy to see why neoclassical economists have preferred a pared down paradigm of human motivation largely free of human psychology. Human rationality is bounded, as some politely put it. The good news may be that, although people do many things they regret, they often do so in predictable ways.

Enter behavioural economics. The incorporation of behavioural, social and cognitive dimensions into economic thinking has grown in recent times as economists strive to improve their models, forecasts and policies. Much of the impetus for this trend can traced back to the ground-breaking (and Nobel Prize-winning) work of cognitive decision-making theorists such as Herbert Simon, Daniel Kahneman and Amos Tversky in the second half of the last century. That cognitive psychologists should receive the Nobel Prize in Economics is perhaps emblematic of this relatively new phase in economic thinking. In the intervening years, demonstrating the ways in which we humans are not always good utility maximizers has proven to be a rich vein of exploration.

Behavioural Insights and Public Policy: Lessons from around the world”, recently published by the OECD, demonstrates the extent to which the floodgates have opened, allowing cognitive and behavioural psychology as well as other social sciences to take their place at the policy table. Behaviourally informed policy, or Behavioural Insights (BI), makes use of insights from these disciplines while applying inductive scientific methodology to policy making and implementation. In other words, experimentation. In a context in which governments are seeking more efficient outcomes without resorting to additional rules and sanctions, these developments seem timely.

For a long time, policy makers have concentrated on what they want citizens to do, less on how citizens actually behave. The place for insights into human behaviour has been slim and often considered to be outside the purview of policy makers. After all, the blunt instruments of fines and enforcement were always there to ensure compliance to rules and policies. They still are, but today, an increasing number of policy makers are willing to consider a more nuanced approach; one in which likely human behaviours, and insights based on experimental data, inform the policy making process. It’s not so revolutionary. In product markets, scenarios of human behaviour play an essential role in design. When designers get it right, the result is a better fit between user and product, along with a slew of additional benefits such as ease of use, increased productivity, greater satisfaction and, in marketing terms, heightened preference. Just like products, policies are intended to elicit a human response. To ignore behavioural insights is to pass by some important opportunities to tap into existing human motivations. As any black belt will tell you, brute strength will only get you so far. The experienced judoka uses her opponent’s own energy, channelling it to achieve the desired result more efficiently. Policies that strive to capture citizen self-motivation tend to enjoy similar efficiency.

Take the example of tax compliance. Efforts to increase compliance typically consist of threats and interest penalties in addition to audits and enforcement. But the behavioural approach might begin with an open-ended question such as ‘Can the way in which we communicate with non-payers influence their willingness to comply?’ This in turn could be tested by drafting a number of different messages reflecting relevant behavioural insights, sending them out to the targeted population and measuring the results. Indeed, the government of Ontario, Canada, wanted to reduce the number of employers filing their tax returns late. Using findings from behavioural science, the government modified the standard collection letter to include concrete details of where, how, and when to file one’s overdue annual return. The outcome of the intervention was a 4.2 and 6.1 percentage point increase in tax filing relative to the unmodified letter in 2014 and 2015, respectively. In other words, a behaviourally informed “light touch” (in this case, a single paragraph added to an existing letter) outperformed costlier and more heavy-handed approaches in a significant number of cases.

The OECD’s Behavioural Insights group, partnering with the London School of Economics, the European Nudging Network (TEN) and Harvard University spin-off and non-profit ideas42, has collected 129 cases from 14 countries in North and South America, Europe, Asia and Oceania. Case studies are drawn from a number of sectors, including financial products, energy, environment, health and safety, tax, public service delivery and more. The cases offer a glimpse into a wide variety of policy issues and suggest the versatility and power of the behavioural approach. It’s a fascinating snapshot of BI as it enters the mainstream and provides a richly documented “idea book” that will surely spark new thinking.

Yet, according to the authors, if behavioural insights are to realise their full potential, standards must be set in order to gain the trust of public bodies and offset the perception of potential ethical issues. Experimentation and the use of academic findings are fundamental to behavioural practitioners in public policy. Scientific credibility, in turn, depends on reliable data and statistically significant samples that can stand up to public scrutiny and scale up as needed. Despite these challenges—and as Behavioural Insights and Public Policy shows—the behavioural revolution that began more than forty years ago is today making a measurable difference in policy effectiveness around the world.  It suggests that a behaviourally-oriented policy approach might be one of the most rational choices a government can make.

Useful links

Behavioural Insights and Public Policy: Lessons from Around the World

OECD work on Behavioural Insights

OECD work on Regulatory Policy

Economics’ massive magnet Professor K. Vela Velupillai discusses the theories behind behavioural economics on OECD Insights

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