2.4 Behavioural economics and economic policy

Define choice architecture

A framework setting out different ways in which choices can be presented to consumers and the impact that presentation on consumer decision making

Why do governments use choice architecture?

Government can use behavioural insights to design choice architectures so that citizens are nudged to opt for choices that are deemed to be in their best interest, so as to achieve a socially desirable outcome.

Example of choice architecture?

The layout and design of a canteen affects menu choices of some individuals when purchasing a meal

Define default choice?

An option that is selected automatically unless an alternative is specified

Example of default choice?

Opt-in or Opt-out of organ donation

Benefits of opt-out over opt-in?

The supply of donated organs rises to be closer to the demand for them and the nation's public health improves

Define framing

How something is presented (the 'frame') influences the choices people make

Example of framing?

Labelling food as 90% fat free instead of 10% fat so it sells better

Define mandated choice?

People are required by law to make a decision

Example of mandated choice?

Microsoft software installations boxes that force computer users to make a choice and select various options before they complete the installation process

Define restricted choice

Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation. If there are too many choices, people may make a poorly thought-out decision or not make any decision

Example of restricted choice

Requiring energy companies to simplify their pricing structures and restrict the number of options offered to consumers

Why is restricted choice used?

Because most people cannot, or cannot be bothered to evaluate a large number of choices

What is nudge theory?

A nudge tries to alter people's behaviour in a predictable way without forbidding any options or significantly changing economic incentives. A nudge is not a legal requirement. Neither is it an economic sanction. Fines, taxes and subsidies are not nudges.

What must a government do if using a nudge as government policy?

When used as part of government policy, nudges must be open and transparent to the general public. Governments should be honest with the public and ensure that they explain why they have introduced a nudge, but still allow individuals to make a choice.

Nudge vs Shove

Nudge

- provides info for people to respond to

- creates positive social norms

- opt-out schemes rather than opt-in schemes and default choice

- active choosing by individuals

Shove

- uses taxation and subsidies to alter incentives and on occasion, in the case of taxes, to punish people

- uses fines, laws banning activities and regulations