Since the Institute published its MINDSPACE report in March, there has been an explosion of interest and activity around behavioural economics. Most notably, my co-author David Halpern now heads up a new Behavioural Insights Team in the Cabinet Office, which is tasked with ‘applying behavioural economics to policy in a systematic way’.
This is a massive yet vital brief: the vast majority of what government does is intended to influence our behaviour in some way, from murder laws to child trust funds. People often talk as if there is a clear division between “normal” policies on the one hand and “behaviour change interventions” on the other. That is misleading.
Rather, using behavioural economics does not mean giving up on conventional policy tools such as regulation, price signals or better information (as some commentators have implied). It means using them more effectively.
Nudge theory in the higher education debate
Under the Browne Review’s proposals, the entire university system will rest on the premise that prospective students are rational consumers, who will effectively weigh up costs and benefits to calculate a course’s ‘value for money’.
But behavioural theory provides plenty of evidence that this is not true. Our decisions are affected by our immediate environment far more than we realise, and often respond automatically to certain cues. Without realising it, we depend on certain, predictable, mental shortcuts that can lead us to make poor decisions.
The government has recognised these points through its acceptance of ‘nudging’ people to make better choices. But the book Nudge itself argues that nudges are most appropriate when decisions are inherently difficult, infrequently carried out, have delayed benefits, and require people to forecast their future preferences. That sounds a lot like choosing a university course.
What could such nudges look like?
Well, we know that we dislike losses much more than we like gains of an equivalent amount: we are powerfully motivated to avoid loss. But the current debate has stressed the losses from a university education, focusing on fees and debt. The result is likely to be that aversion to loss will override an effective weighing up of the costs and benefits of university.
What if loss aversion was countered by reframing loans as ‘learning accounts’ that the government supplies to new students? They would be seen as credit to be invested for the future, compared to the earnings forgone by not gaining a degree. Meanwhile, loan repayments could be seen as the means to allow future students to attend university.
This is not an argument for or against tuition fees. The point is that, if the government chooses to construct markets, it should build in what we know about behaviour.
In the past, many policy disasters have been caused by relying on assumptions or inaccurate models of how people will respond to government action, as we point out in our evidence to the House of Lords Behaviour Change inquiry. Behavioural economics can help prevent such disasters by offering empirical evidence of how we actually behave.
The real goal is to use these new insights about behaviour as a lens through which all policies are assessed and enhanced. To do so, behavioural economics needs to be seen as integral to all policy making, rather than as a shiny new tool to be used in certain agreed areas. The Behavioural Insights Team is leading the way - but ministers also need to give a clear signal that applying these insights is essential, not optional, for good policy making.