4. Behavioural economics and economic policy

choice architecture

The way choices are presented can influence the decisions made by people

framing

how the presentation of information can influence peoples decisions

example of framing

if the government offer a discount for paying a tax early, some people will take the option and pay early.

however if the government say there will be a penelty for late payment - this has shown to significantly increase early payment rates

in both cases the monetary cost is the same but people are moved into action by the prospect of a penelty over a discount, loss aversion

default choice

an option that is pre decided shuch that individuals can choose by taking no action

restricted choice

intentionally limiting the available options to guide individuals towards making a particular choice

example of restriced choice

A school cafteria only offering a limited selection of healthy meal options to encourage students to make healtheir choices

mandated choice

requiring individuals to make a descion, even if they may prefer not to choose

examples of default choice

Pensions used to be encouraged but workers had to choose to enrol in a pension scheme. New pension schemes are different, you are automatically enrolled in pension scheme as a default choice – and a worker would have to opt out. Workplace Pension Scheme

organ donation - opt out instead of opt in → changed in 2020 in england

organ dontaion case study

The opt out organ donation system came into effect in 2020

The % of people opted in is 40% compared to 3% of people opted out

therfore by creating a default choice the number of organ doners increases form 40 to 97%

why do behavioral economic policies work

consumers do not always make rational decsions, they are often influenced by cognitive biases and heuristics.

Kahnemans dual process theory can explain this

Human decision-making is shaped by two distinct models of thinking system 1 and system 2

system 1 - fast, emotional and intuitive; system 2 - slow and deliberate

when people make quick decisions system 1 is engaged over system 2 as it operates systematically
behavioural economic policies leverage the dominance of the system 1 model to influence consumer choices and improve decision-making outcomes

Kahnemans dual process theory

humans descion making is shaped by two distinct models in decsion making

System 1 - fast, emotional and intuative

system 2 - slow, analytical and deliberate

System 1 opperates subconsionsly, is easier and effortless so people tend to rely on it. System 1 is more prone to biases and heuristics

Unless people are motivated and cognatively able to egage system 2 they tend to go with the intuative and flawed judgements of system 1

why do people rely on system 1 thinking

people need to be motivated and cognatively able to egage system 2 so they tend to go with the intuative, effortless and flawed judgements of system 1

how does the government use behavioural economics

In the Uk, the behavioural insights team (nudge unit) uses insights from behavioural economics to help the government design more effective policies that influence economic descion making

critics of behavioral economic policies

• ethical concerns about manupulation and interference with an individuals freedomn to choose

• debate on effectiveness eg a nudge agains smoking vs a complete ban on cigarettes

• they should not be used to entirely replace traditional economic approaches and policies.

why does restriced choice often result in more decsions made

when people are presented with too much information and too many choices they experience descion fatigue which can lead to avoidance of making decisions. In contrast, restricted choices simplify the decision-making process and make individuals more likely to engage with the options available.

general pros of behavioral economic thoery

easy to implement

low cost

can complement traditional policies

nudge

a subtle intervention that encourages individuals to make decisions that are in their self-interest, while preserving their freedom to choose.

examples of nudges

framing and default choice

liberal paternalism

the idea that it is possible to influence peoples behavior using nudges without compromising their autonomy or freedom of choice.

evaluation on the ethics of behaviorial economics

1) can be considered manupualtive and removes freedom of choice

2)however if people are always influenced by the context of ther choices, complete freedom of choice is not feasible

3) libertarian paternalism suggests that it is justifiable to guide choices in beneficial directions without eliminating options.

nudge policy for promoting healthy eating

placing fruit and veg at eye level or close to the entrence of supermarkets while keeping unhealthy otions further away

nudge policy to reduce smoking

law to ensure graphic warning labels to ciggerette packets (framing and nudge) (2015)

% of population that smoke fell by 2% of the population from 2015 to 2016