Tag: Behavioural Insights Team

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Nudging for better or for worse

One of the key developments in economics in recent years has been the growing influence of behavioural economics. We considered some of the insights of behavioural economics in a blog in 2016 (A nudge in the right direction?). As the post stated, ‘Behavioural economists study how people’s buying, selling and other behaviour responds to various incentives and social situations. They don’t accept the simplistic notion that people are always rational maximisers.’ The post quoted from a Livemint article (see first linked article below):

According to behavioural economists, the human brain neither has the time nor the ability to process all the information involved in decision making, as assumed by the rational model.

Instead, people use heuristics. A heuristic technique is any approach to problem-solving, such as deciding what to buy, which is practical and sufficient for the purpose, but not necessarily optimal. For example, people may resort to making the best guess, or to drawing on past experiences of similar choices that turned out to be good or bad. On other accasions, when people are likely to face similar choices in the future, they resort to trial and error. They try a product. If they like it, they buy it again; if not, they don’t.

On other occasions, they may use various rules of thumb: buying what their friends do, or buying products on offer or buying trusted brands. These rules of thumb can lead to estimates that are reasonably close to the utility people will actually get and can save on time and effort. However, they sometimes lead to systematic and predictable misjudgements about the likelihood of certain events occurring.

In traditional models of consumer choice, individuals aim to maximise their utility when choosing between goods, or bundles of goods. The context in which the choices are offered is not considered.

Yet, in real life, we see that context is important; people will often make different choices when they are presented, or framed, in different ways. For example, people will buy more of a good when it is flagged up as a special offer than they would if there is no mention of an offer, even though the price is the same.

The recognition that framing is important to choices has led to the development of nudge theory. Indeed, it underpins many marketing techniques. These seek to persuade people to make a particular choice by framing it in an optimistic way or presenting it in a way that makes it easy to decide.

Governments too use nudge theory. In the UK, the Coalition government (2010–15) established the Behavioural Insights Team (BIT) (also unofficially known as the Nudge Unit) in the Cabinet Office in 2010. A major objective of this team is to use ideas from behavioural economics to design policies that enable people to make better choices for themselves.

The podcast linked below, looks at the use of nudge theory. The presenter, Mary Ann Sieghart looks at how we are being encouraged to change our behaviour. She also looks at the work of UCL’s Love Lab which researches the way we make decisions. As the programme notes state:

Mary Ann is grilled in UCL’s Love Lab to find out how she makes decisions; she finds taking the pound signs off the menu in a restaurant encourages her spend more and adding adjectives to the food really makes it taste better.

Walking through the Nudge Unit, she hears how powerful a tiny tweak on a form or text can get be, from getting people back to work to creating a more diverse police force. Popular with the political left and right, it has been embraced around the world; from Guatemala to Rwanda, Singapore to India it is used to reduce energy consumption, encourage organ donation, combat corruption and even stop civil wars.

But the podcast also looks at some of the darker sides of nudging. Just as we can be nudged into doing things in our interests, so too we can be nudged to do things that are not so. Politicians and businesses may seek to manipulate people to get them to behave in ways that suit the government or the business, rather than the electorate or the consumer. The dark arts of persuasion are also something that behavioural economists study.

The articles below explore some of the areas where nudge theory is used to devise policy to influence our behaviour – for good or bad.

Podcast

Video

Articles

Questions

  1. Explain what are meant by ‘bounded rationality’ and ‘heuristics’.
  2. How may populist politicians use nudge theory in their campaigning?
  3. Give some examples from your own behaviour of decisions made using rules of thumb.
  4. Should we abandon models based on the assumption of rational maximising behaviour (e.g. attempts to maximise consumer surplus or to maximise profit)?
  5. Find out some other examples of how people might be nudged to behave in ways that are in their own interest or that of society.
  6. How might we be nudged into using less plastic?
  7. How might people be nudged to eat more healthily or to give up smoking?
  8. To what extent can financial incentives, such as taxes, fines, grants or subsidies be regarded as nudging? Explain.
  9. Would you advise all GP surgeries and hospital outpatient departments to text reminders to people about appointments? What should such reminders say? Explain.
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How behavioural economics can help you stick to New Year’s resolutions

Many or us make New Year’s resolutions: going on a diet, doing exercise, spending more time studying. But few people stick to them, even though they say they would like to. So how can people be motivated to keep to their resolutions? Well, the experiments of behavioural economists provide a number of insights into the problem. They also suggest various incentives that can be used to motivate people to stick to their plans.

Central to the problem is that people have ‘time inconsistency’. They put a higher weight on the benefits of things that are good for them in the future and less weight on these benefits when they have to act now. You might strongly believe that going to the gym is good for you and plan to go next Monday. But when Monday comes, you can’t face it.

Another part of the time inconsistency problem is the relatively high weighting given to short-term gratification – eating chocolates, watching TV, spending time on social media, staying in bed. When thinking about whether you would like to do these things in, say, a couple of days’ time, you put a low weight on the pleasures. But thinking about doing them right now, you put a much higher weight on them. As the well-known saying goes, ‘Hard work often pays off after time, but laziness pays off now’.

So how can people be motivated to stick to their resolutions? Behavioural economists have studied various systems of incentives to see what works. Some of the findings are as follows:

•  People are generally loss averse. To get us to stick to New Year’s resolutions, we could devise a system of penalties for breaking them, such as paying 20p each time you swear!
•  Given people’s time inconsistency, devising a system whereby you get treats after doing something you feel is good for you: e.g. watching TV for 30 minutes after you’ve done an hour’s revision. Rewards should follow effort, not precede them.
•  Having simple clear goals. Thus rather than merely saying ‘I’ll eat less’, you devise a meal plan with menus that meet calorie and other dietary goals. Rather than saying, ‘I’ll exercise more’, you commit to going to the gym at specific times each week and doing a specific amount of each exercise.
•  Ritualising. This is where you devise a regime that is feasible to stick to. For example, you could always write a shopping list to meet your dietary goals and then only buy what’s on that list; or you and your flatmates could have a rota for household chores.
•  Social reinforcement. This is where people have a joint plan and help each other stick to it, such as going to the gym at specific times with a friend or group of friends, or joining a support group (e.g. to lose weight, or give up drinking or smoking).
•  Avoiding temptation. For example, if you want to give up chocolate, don’t have any in the house.
•  Using praise rather than criticism. People generally respond better to positive incentives than negative ones.

Behavioural economists test these different incentive mechanisms to see what works best and then to see how they can be refined. The testing could be done experimentally, with volunteers being given different incentives and seeing how they respond. Alternatively, data could be collected on the effects of different incentive mechanisms that people have actually used, whether at home or at work.

The advertising and marketing industry analyses consumer trends and how people respond to pricing, quality, display, packaging, advertising, etc. They want to understand human behaviour so that they can ‘direct’ it in their favour of their clients. Governments too are keen to find ways of encouraging people to do more of things that are good for them and less of things that are bad.

The UK government’s Behavioural Insights Team looks at ways people can be ‘nudged’ into changing their behaviour, see the blog A nudge in the right direction?

But back to New Year’s resolutions, have you made any? And, if so, have you thought about how you might stick to them? Have you thought about the incentives?

Podcast

Dan Ariely talks “Payoff” WUNC 91.5: North Carolina Public Radio, Dan Ariely talks to Frank Stasio (3/1/17)

Articles and blogs

50 New Year’s Resolution Ideas and how to Achieve Each of Them Lifehack, Ivan Dimitrijevic (31/12/16)
5 New Year’s Resolutions You Can Keep (With The Help Of Behavioral Science Research) Forbes, Carmen Nobel (3/1/17)
The science behind keeping your New Year’s resolutions BT, SNAP PA (30/12/15)
The Guardian view on New Year resolutions: fitter, happier, more productive The Guardian, Editorial (3/1/17)
The Behavioral Economics of Your New Year’s Resolutions The Daily Beast, Uri Gneezy (5/1/14)
The psychology of New Year’s resolution The Conversation, Mark Griffiths (1/1/16)
Apply Behavioral Economics for a Better New Year Wharton Blog Network, William Hartje (16/1/14)
The Kardashians Can Help Your New Year’s Resolutions Huffington Post, John Beeby (29/12/16)
Using economics to score with New Year resolutions The Hindu, Venky Vembu (4/1/17)
Be It Resolved The New York Times, John Tierney (5/1/12)

Goal-setting site

stickK ‘Set your goals and achieve them!’

Questions

  1. Explain what is meant by time inconsistent behaviour. Is this the same as giving future costs and benefits a lower weighting than present ones (and hence having to discount future costs and benefits)?
  2. Give some examples of ways in which your own behaviour exhibits time inconsistency. Would it be accurate to describe this as ‘present bias’?
  3. Would you describe not sticking to New Year’s resolutions as ‘irrational behaviour’?
  4. Have you made any New Year’s resolutions, or do you have any plans to achieve goals? Could you alter your own personal incentives and, if so, how, to make it more likely that you will stick to your resolutions/goals?
  5. Give some examples of ways in which the government could ‘nudge’ us to behave in ways that were more in our own individual interests or those of society or the environment?
  6. Do you think it’s desirable that the advertising industry should employ psychologists and behavioural economists to help it achieve its goals?
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A nudge in the right direction?

Behavioural economists study how people’s buying, selling and other behaviour responds to various incentives and social situations. They don’t accept the simplistic notion that people are always rational maximisers. As the Livemint article below states, “According to behavioural economists, the human brain neither has the time nor the ability to process all the information involved in decision making, as assumed by the rational model.” Instead, rationality is bounded: people use simple rules of thumb in making decisions – rules they have developed over time in the light of experience.

So can people’s behaviour be altered by understanding their limited rationality? Advertisers are only too well aware of a number of psychological ‘tricks’ to change people’s purchasing behaviour. For example, wanting to be approved of by your friends is used by advertisers to sell various fashion products and toiletries. Often, people need only a relatively small ‘nudge’ to change the way they behave.

And it is not just advertisers who are using the insights of behavioural economics. Governments are increasingly trying to find ways of nudging people to behave in ways that are better for themselves or for society.

In 2010, David Cameron set up a ‘Nudge Unit’, formally know as ‘The Behavioural Insights Team‘. It has produced a number of academic papers on topics as diverse as tax compliance, incentives for university attendance, charitable giving in the workplace and using SMS reminders to reduce missed hospital appointments. The academic evidence can then be use as the basis for policy.

Another nudge unit has been set up in Australia (see second article below). The USA, Singapore and various other countries are increasingly using the insights of behavioural economics to devise policy to affect human behaviour.

Two recent pieces of work by the UK team concern ways of discouraging doctors from over-prescribing antibiotics and using encouraging text messages to FE students to reduce dropout rates. Another nudge has been used by the tax authorities (HMRC) who have been sending out texts to remind people to pay their taxes on time and to make them aware that they are being monitored. The message read, “Most people pay on time to avoid penalties”.

The articles below look at these recent initiatives and how human behaviour can be changed in a relatively low-cost way. In most cases this involves a simple nudge.

Articles

Nudge-unit trials reveal best ways to prod people Sydney Morning Herald, Nick Miller (29/8/15)
Government ‘nudge unit’ to attempt to change people’s behaviours Sydney Morning Herald, Nick Miller (15/9/16)
New frontiers of human behaviour Livemint, Biju Dominic (15/9/16)
Doctors ‘nudged’ into prescribing far fewer antibiotics New Scientist (15/9/16)
GPs handing out fewer antibiotics after warning of over-prescribing, says study BT (15/9/16)
Study of colleges shows ‘encouraging’ texts dramatically cut dropout rates FE Week, Paul Offord (22/7/15)
The text messages getting teenagers better grades BBC Today Programme, David Halpern and Fiona Morey (15/9/16)
Ping! Pay your tax now or face a penalty. HMRC sends out ‘threatening’ SMS texts to taxpayers The Telegraph, Christopher Hope (15/9/16)

Publications of Behavioural Insights Team

Publications list BIT
The Behavioural Insights Team’s Update Report: 2015–16: overview BIT (15/9/16)
The Behavioural Insights Team’s Update Report: 2015–16 BIT (15/9/16)
Blog BIT

Questions

  1. Explain what is meant by bounded rationality.
  2. Give some examples from your own behaviour of decisions made using rules of thumb.
  3. Should we abandon models based on the assumption of rational maximising behaviour (e.g. attempts to maximise consumer surplus or to maximise profit)?
  4. Find out some other examples of how people might be nudged to behave in ways that are in their own interest or that of society.
  5. How might people be nudged to eat more healthily or to give up smoking?
  6. To what extent can financial incentives, such as taxes, fines, grants or subsidies be regarded nudging? Explain.
  7. Why, do you think, the message by an Australian hospital, “if you attend, the hospital will not lose the $125 we lose when a patient does not turn up” was successful in reducing missed appointments by 20%, while the message, “if you do not attend, the hospital loses $125” was not as effective?