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Behavioural economics: an insight into the future of policy making?

Ashley Hibben reflects on how behavioural economics could influence policy making in the future.

Ashley Hibben

Last week the Institute for Government hosted Richard H. Thaler, Professor of Behavioural Economics at the University of Chicago and co- author of Nudge, as he discussed his latest book with BBC Newsnight presenter Evan Davis. Ashley Hibben reflects on their discussion and how behavioural economics could influence policy making in the future.

“Behavioural economists look for ‘quirky’ behavioural patterns – it is only in the eyes of economists that these are misbehaviours."

Richard Thaler began with a number of anecdotes from his time as a graduate economics student. He and others began to observe several quirky behaviours exhibited by those around him, including the economics professor who collected and drank fine wines without having any intention of buying or selling those vintages. It was these ‘misbehaviours’, as an economist might view them, which gave Thaler his inspiration and encouraged him to begin testing his ideas.

Richard Thaler, Economist

“A famous US senator once said ‘a billion here, a billion there, it soon adds up to real money’.” 

Have these quirks contributed much to policy formulation?

Evan Davis pointed out that so far the most celebrated successes of behavioural economics in the UK—automatic enrolment for pensions and tax letters—had not made a significant dent on public spending. But Thaler defended the potential of focusing on what look like marginal gains. He argued that while a 2- 3% increase in revenue might not sound like much, “if we can speed up getting unemployment levels from 8% to 6% to 5%, or increase the rate of retirement saving from 3% to 6% per annum, then it is going to make a big difference to people’s lives.”

Thaler thought it unsurprising that behavioural insights have yet to produce ‘blockbuster’ policy initiatives that tackle the stubbornly high unemployment rates across Europe, or encourage people to lose a few pounds. Behavioural economics is still in its infancy compared to the economics of Adam Smith. But looking forward, he foresaw big impacts from the work currently being developed in JobCentres by the Behavioural Insights Team.  

Evan Davis and Richard Thaler

“Behavioural insights help people to achieve their goals, rather than telling them what those goals should be.”

Effective nudges have two principles: make it easy and make it fun. Thaler attributed the success of the pensions initiative to how easy it was made for people to comply, calling it a “zero- click solution- without doing anything else, good things happen.”

For Thaler it was also proof that the rational economic model failed to understand how humans act. While most people recognised the need to save for retirement, and economists say it’s the rational thing to do, three quarters of people also said they weren’t saving enough. Davis questioned whether many of the nudges used so far would work as people get used to them. To date, the testing was only over short periods and there was a difference between a nudge that encouraged new habits and a repeat nudge which might wear off. Thaler argued that people, by nature, are absent- minded and will always need reminders. His solution was simply to keep testing more ideas until the optimal nudge is found.

“Let’s think about the world’s big problems- climate change and health. These are behavioural issues, and until we realise this we won’t make much progress.”

Many in the audience wanted to use behavioural insights to help solve policy challenges from obesity to welfare. Thaler speculated whether insights could be used to encourage richer Greeks to pay their taxes, or if future technology (beyond primitive FitBits) could be used to deliver nudges that discouraged overeating.

The ensuing discussion showed that while behavioural economics is able to challenge the rational assumptions of conventional economics, it still lacks its own “scientific” framework for understanding which insights could have a lasting impact on a specific issue. Behaviour economics is still dependent on experimentation. In the light of this, Davis asked if there were any areas where some theoretical insights will almost certainly work in practice. Thaler was confident about the potential because, as he put it, all humans are “conditional co-operators” and can be convinced to follow others. However, he conceded that at present most insights only work in a specific context.

Beyond the fringe

Davis cited Thaler’s presidency of the American Economic Association in 2015 as evidence that behavioural economics has joined the mainstream of economic thought. Thaler thought the next big advance was for behavioural economics to influence macroeconomic policy, although the rarity of crises means that demonstrative data is scarce. However, Thaler did predict a future where behavioural economics became part of policymakers’ approach to solving complex problems:

“I hope in 50 years that behavioural economics will cease to exist. I want economic advisors and ministers to be behaviourally informed.”

For more on influencing behaviour through public policy, read the IfG report MINDSPACE. For further information about the Cabinet Office’s Behavioural Insights Team, see their 2015 annual update.

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Institute for Government

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