4.1.2.4 - Behavioural Economics and Economic Policy

Choice Architecture

The intentional design of how choices are presented to consumers to influence decision making.

(i.e. the attempt to influence an individual's decision through the way in which choices are presented to the decision-maker)

Choice Architecture is often used in policy-making:

Marketing, Healthcare to promote beneficial behaviours, Encourage Savings, Increase Organ Donations, Promote Energy Conservation

Choice Architecture is more effective when...

it encourages simplicity in descisions. It aims to simplify the decision making process.

Framing

A form of choice architecture: The tendency for an individual's choice to be influenced by the context in which a choice is presented.

(i.e. the attempt to influence an individual's decision through the context in

which it is presented)

- The same information can be framed in a positive or negative way to evoke different responses.

(e.g. This medication has 90% survival rate (positive frame) vs This medication has 10% mortality rate (negative frame))

Types of Choice Architecture:

- Nudges

- Default Choice

- Restricted Choice

- Mandated Choice

Nudges

An aspect of choice architecture through gentle prompts to influence people's behaviour without limiting freedom of choice and changing economic incentives.

Default Choice

An option that is selected automatically if nothing is specified by the decision maker.

(e.g. When going on a website, the default choice for accepting cookies may be to Accept all, Pension schemes)

Restricted Choice

Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation.

- helps individuals make more rational decisions

Mandated Choice

People are required by law to make a decision; required to state whether they wish to participate in an action.

(e.g. Whether you wish to sign up for organ donation)1

Advantages of Nudges

- Maintains freedom of choice

- Cost effective - cheap to implement

- Fast-acting - no laws needed to be implemented

- Can change people's preferences over time

Disadvantages of Nudges

- Does not guarantee change of behaviour - may not be significant enough

- May only change behaviour briefly - people may become immune to nudging over time

- Nanny state / Ethical concerns - Arguably manipulative & gov interfering unduly with personal choice

Advantages of Behavioural Policies

- Cheaper to implement and administer than traditional policies (e.g. regulation)

- Maintains freedom of choice

- Does not require legislation and less bureucratic so can be implemented faster

- State seen as having smaller role in society compared to lots of new laws/taxes etc

- Positive and supportive messages of change are more effective than those that seek to shock or patronise

Disadvantages of Behavioural Policies

- Not effective in influencing most serious market failures - need a "shove" in these cases (i.e. regulation to deal with violent crime)

- Nanny state extending too far - ethical concerns - Arguably manipulative & gov interfering unduly with personal choice

- May only change behaviour briefly - people may become immune to nudging over time

- Requires constant modification to ensure still consistent and applicable - due to continuously changing nature of individual preferences

- "Poor" decisions may not be due to individual behavioural flaws, but because of poverty, inequality or lack of hope, which nudges won't affect.

- May be influenced by private pressure groups/businesses

- Government failure applies to behavioural eco policies just like traditional

Can behavioural economic policies replace traditional policies?

It is imperative to note that the behavioural economic concept is too flawed to replcae traditional regulation outright.

Instead, need to compare behavioural policies with traditional economic policies to consider how they might complement each other and work in combination to solve market failure.