Behavioral Economics in Public Policy

timthumbResearch by cognitive psychologists and economists has documented a number of systematic deviations in human thinking and decision-making, challenging the traditional assumption that we are rational agents.

As behavioral economics continues to gain acceptance, the insights from this discipline are increasingly considered as meaningful ways to improve policy discussions and decisions. According to Chetty (2015), behavioral economics insights can contribute to public policy in three ways: developing new policy tools, by improving predictions about the outcomes of existing policies, and creating new welfare implications. As the OECD report, the use of behavioral economics by national governments in the world is a growing trend, especially in the United States and United Kingdom, but it has also been employed in France, Denmark, Japan, Australia.. The British government even formed a Behavioural Insights Team which experiments interventions in local policy trials such as public health, energy conservation, or tax evasion, while in the US Barack Obama formed a special group called the Social and Behavioral Insight Team.

There are three main behavioural principles employed in public policy:

  • Simplicity of information
  • Default options
  • Salience

Complex information and the range of available options often negatively affect our decision-making in the process of evaluating which is the best choice. Hence regulations to simplify choices and obligations to information disclosure have been employed, particularly for financial services. However, results in this domain have been mixed so further analyses and trials are required.

Secondly, the way that people respond, definitely changes when a choice is presented as a default option or not. This insight has influenced policy in the area or organ donation. The countries that presume the consent to organ donation after death (as a default rule), obtain higher rates of donation compared to the countries that explicitly ask patients to choose. In Austria for instance, consent to organ donation is 99% while in Germany only 12%. This works because default rules offer a point of reference for decisions, and most people follow the automatic option. The EU  ban on online pre-ticked boxes was also informed by evidence on the default rule mechanism. The directive bans the selling tactic of manipulating consumers by requiring them to untick a box to avoid purchasing a higher product or an extra feature, as in the case of airline companies (e.g included travel insurance), hotels (e.g. purchase of meals) or delivery services.

Finally, we know that in every moment we are exposed to a variety of information and we are influenced by what we are looking at. Some things we notice, some others we do not. The role of governments is to make sure that some features are more visible than others. The principle of salience for policy purposes can be used to make official warnings, or relevant information more visible. Good regulation can be helpful to make costs of a behavior or of a product more relevant, as in the case of the US fuel economy labels that allow consumers to make more easily comparisons among the vehicles’ fuel efficiency.