Some decisions invite undesirable behaviour, even if unintentional. Others can encourage desirable behaviour, but they have to be thought through. Think about taking the escalator, or taking the stairs.
These actions are challenging because they have an immediate cost, but generate long-term benefits, and because human decision-making can be skewed to a present bias. Behavioural economics studies these challenges, and was the subject of a State of the Art Lecture given by Philip Oreopoulos of the University of Toronto at the 50th meeting of the Canadian Economics Association. Here is a summary of his talk.
Some individuals focus too much on the present, some rely too much on routine, some are too influenced by others, and mistakes are more likely under stress and uncertainty. Habit formation can then kick in to compound mistakes in decision making. But this also implies that public policy can have meaningful and positive changes in behaviour. It might make sense to limit choice, to offset immediate costs with immediate benefits, or make actions more socially acceptable.
Individuals could take these actions on their own, or policy makers can encourage this behaviour through nudges, a deliberate attempt to influence choices without taking away the right to choose. Some may find this “creepy”, but organizations and policy makers can’t avoid influencing behaviour, one way or the other.
Here are some examples worth thinking about.
How to encourage people to save more for their retirement? For example, in some surveys 68% of respondents say they are saving too little, 24% say they are going to do something about it, and 3% actually do! An important US example concerns the default in employer-provided retirement plans. If the default is to enroll employees, then contributions to a savings plan rise, and they also rise when employees are presented with the opportunity to make an active choice to enroll or not.
In the Canadian case think of the Registered Education Savings Program, the RESP. Enrolling in this program requires some changes in routine, and about an hour of work in dealing with a bank. There is free money on the table for a child’s education, yet the take-up rate among low-income people is very low. Making applications easier is important. Experiments have shown that putting the onus on banks to do a lot of the paper work can increase participation rates by 20%.
Think also of organ donations, or flu shots. Defaulting citizens into donating their organs dramatically increases donation rates.
Education is also a particularly fruitful area for behavioural economics since kids are one group for which self-discipline is always an issue. Any parent knows that parenting is one continuous nudge! “Life after high school” is an example of an experiment that encourages Grade 12 students to apply to post-secondary education. With some basic assistance given in completing application forms and paying the fees, application rates rise by 15% . The impact is particularly important for enrollment in community colleges.
Behavioural economics has applications in the labour market, in particular in helping the unemployed find work. Changes in the messaging on a web site can speed up job search for many. Employment and Social Development Canada has a “Behaviorual economics and service innovation research unit” that has experimented with the department’s job bank web site. By making the site more user-friendly it has encouraged many more clicks, and likely sped up job search among many Canadians. This is the first experimental study in the department, and something to be excited about. This is a “low touch” nudge around simple communications and has a lot of potential.
Behavioural economics also has many applications to tax policy. For example, making voting registration automatic, or making applications to social transfer programs easier. Tax compliance has traditionally focused on penalties, but this is costly. But rewording in letters or notices to say that “most people” [like you!] pay their taxes on time, is an effective framing. The Canada Revenue Agency has been doing randomized pilots on compliance for some time. For example, the signature block has been moved to the beginning with a simpler text, and bolder font.
There has been a truly remarkable rise in the use of nudges, due in large part to the rise of the “nudge unit,” as David Cameron’s Behavioural Insights Team is affectionately called in the United Kingdom. By one count fifty-one countries now have centrally directed teams that involve some form of behavioural economics policy. Only a few months ago a US presidential order was issued to encourage departments to make use of behavioural insights, likely leading to more applications across many departments. In Canada, there have been inroads: in 2015 Ontario announced a behavioural insights team in the Treasury Board Secretariat. The team has been active in organ donations, license renewals, and has made its results available on-line.
There is a lot of momentum that should be encouraged.
What are the major take-aways?
Actions that involve immediate costs and long-term uncertain benefits can lead to sub-optimal lifetime outcomes. But there are many cost-effective opportunities in public policy for increasing program take up and improving efficiency and encouraging long-term benefits. Often these can be tested with randomized controlled trials. Many organizations are getting involved, and Canada should get on board. In doing so, we should recognize that the most successful policies involve some sort of personal interaction, with “social support” not simply a nudge.