Behavioural economics - New Economics FoundationBehavioural economics: seven principles for...

Behavioural economics: seven principles for policy-makers

Theoretical new economics 1

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Theoretical new economicsThis Briefing forms part of nef’s wider programme of work on Theoretical NewEconomics, which looks at how non-mainstream economic approaches are ofrelevance to policy-makers. For more information on the programme look atwww.neweconomics.org or contact Emma Dawnay (Senior Researcher) [email protected].

Summary 2

Behavioural economics: seven principles for policy-makers 3

Principle 1: Other people’s behaviour matters 3

Principle 2: Habits are important 5

Principle 3: People are motivated to ‘do the right thing’ 6

Principle 4: People’s self-expectations 8influence how they behave

Principle 5: People are loss-averse 9

Principle 6: People are bad at computation 10

Principle 7: People need to feelinvolved and effective to make a change 12

Concluding comments 14

Further reading 15

References 15

This is the first in a series ofbriefings from the theoreticalnew economics programmeat nef. The aim of these is tosummarise the latestacademic work in thedifferent branches of more‘alternative’ economics into aform that is useful primarilyfor policy-makers. ThisBriefing summarises thebehavioural economicsapproach and contrasts itwith neoclassical economicswhere the assumption ismade that humans arerational and maximise theirindividual self-interest.

Contents

The aim of this Briefing is primarily to be an aid to policy-makers who useeconomic tools, by providing a summary of the latest thinking from behaviouraleconomics. It should also be helpful to the broader policy-making community byproviding a theoretical underpinning for many policy approaches that have, up tonow, been used intuitively.

The standard (neoclassical) economic analysis assumes that humans are rationaland behave in a way to maximise their individual self-interest. Whilst this ‘rationalman’ assumption yields a powerful tool for analysis, it has many shortfalls that canlead to unrealistic economic analysis and policy-making. This Briefing distils manyconcepts from behavioural economics and psychology down to seven keyprinciples, which highlight the main shortfalls in the neoclassical model of humanbehaviour.

The seven principles:

1 Other people’s behaviour matters: people do many things by observingothers and copying; people are encouraged to continue to do things when theyfeel other people approve of their behaviour.

2 Habits are important: people do many things without consciously thinkingabout them. These habits are hard to change – even though people might wantto change their behaviour, it is not easy for them.

3 People are motivated to ‘do the right thing’: there are cases where money isde-motivating as it undermines people’s intrinsic motivation, for example, youwould quickly stop inviting friends to dinner if they insisted on paying you.

4 People’s self-expectations influence how they behave: they want theiractions to be in line with their values and their commitments.

5 People are loss-averse and hang on to what they consider ‘theirs’.

6 People are bad at computation when making decisions: they put undueweight on recent events and too little on far-off ones; they cannot calculateprobabilities well and worry too much about unlikely events; and they arestrongly influenced by how the problem/information is presented to them.

7 People need to feel involved and effective to make a change: just givingpeople the incentives and information is not necessarily enough.

In the following pages these principles are described in more detail, the theory iscontrasted with that of neoclassical economics, further illustrative examples aregiven and finally the implications of these principles for policy-making arediscussed. Our aim is to change the analytical framework for policy as well as tomaximise the impact of policy interventions. We also hope to reduce unintendedoutcomes arising from making decisions based solely on a neoclassical economicanalysis.

2Behavioural economics

Summary

Much of our behaviour is stronglyinfluenced by other people’sbehaviour. Examples include theclothes we wear or whether wehaggle when shopping. Sociallearning is a process by which wesubconsciously take in the behaviourof others to learn how to behave. Inmore complex situations with whichwe are unfamiliar, we consciouslywatch and learn from the behaviour ofothers – known as ‘social proof’ – forexample, when using a new library forthe first time. When we must make aconscious decision on how tobehave, our sense of social identity isimportant – we think: how wouldother people from ‘my group’ behavein this situation? In situations wherethere is high social capital (i.e. wherethere are strong networks betweenpeople and a high level of mutualtrust), other people’s behaviour andour sense of social identity may beextremely important in influencing ourown behaviour. We are particularlyopen to influence from people inauthority or from people whom werespect or like. The influence ofpeople’s behaviour on social norms –which themselves influence yet morepeople’s behaviour – gives rise to anever-evolving system of shifting socialnorms. Illustrations of the importanceof other people’s behaviour abound,including fashion, the films we watch,stock market prices and the pursuit ofstatus, which is always sociallydefined and changes through time.1

What neoclassical economic theory would sayThe standard economic theory isknown as neoclassical economics.Neoclassical economics stops shortof trying to explain where people’spreferences come from, so it does nottake account of the direct influence ofother people’s behaviour and socialnorms on our behaviour. The theoryassumes we independently knowwhat we want and that ourpreferences are fixed. This standardtheory is very good at explainingshort-term decision-making (I wantgreen vegetables and choose beansas they are on special offer) butcannot explain longer-term changesin preferences (I now only chooseorganic food). Along the same linesthe importance of institutions – bothformal institutions such as regulations,and informal ones, for example, howpeople organise markets – and theevolution of the whole economicsystem are not subjects ofneoclassical analysis. This hassignificant implications for policydesign.2

What behavioural economic theory would sayThe standard neoclassical model alsoassumes that people carry out a fullrational analysis of all their availableoptions. This is not what we do; weoften just copy the actions of otherpeople. For example it would requiretoo much effort to look up all the ruleswhen driving in a new country, to findout all the fines/punishments forfailing to meet the rules, to work outthe probability of being caught and

the possible costs, before decidinghow to drive there. Instead we justcopy other people, and perhapsadjust our behaviour according to thefeedback we receive (if someonehoots when I pull out of a junction,next time I might give way at a similarjunction).

In contrast to neoclassical economics,many models from psychologyattempt to show how social normsinfluence us. For a useful survey ofthese, see Tim Jackson’s reportMotivating Sustainable Behaviour.3Related theories from the psychologyliterature include:

P Social learning: Psychologist AlbertBandura showed that people learnby observing what others do.4 Hisfirst experiment showed thatkindergarten children were likely toviolently attack a ‘bobo’ doll afterhaving been shown a film ofsomeone attacking a bobo doll.Experiments have been repeatedwith adults in a wide variety ofsettings with similar results.

P Social proof: Social psychologistCialdini has shown that we look toothers to see how to behave,especially in ambiguous situations,in crises, and when others areexperts.5 He had someaccomplices stare upwards on astreet pavement as if looking atsomething – other people quicklyjoined in and a large group stayedlong after the accomplices hadleft. Another example of how welook to other people to know how

3 Behavioural economics

Behavioural economics: seven principles for policy-makers

Principle 1: Other people’s behaviour matters


to behave comes from anexperiment where people whodidn’t know each other were sittingin a waiting room where it wasarranged that smoke would pour inthrough a vent. It was found thatthe more people sitting in theroom, the less likely anyone was toraise the alarm – the people alljust looked at each other to try towork out what to do.6

P Social identity theory:Psychologists Tajfel, Billig andTurner have shown that part of oursocial identity comes from thosegroups with whom we associate.7We show a strong bias in favour of‘in-group’ members, even whengroups are arbitrarily formed. Tajfeldemonstrated this in anexperiment where he assignedpeople randomly into groups but,although everyone had seen theassignment was random, theysoon showed a preference formembers of their group over otherpeople, even giving rationalarguments about how unpleasantand immoral the ‘out-group’people were.

P Key influencers: Psychologistshave identified that we are open toinfluence from people in authorityor people we like. When we areinfluenced by authority (an expert,someone with legitimate power todirect our actions, someone whocan either reward or punish us) theeffects are less likely to be lastingthan when we are influenced bysomeone we like.8 However, careshould be taken when usingpersuasion: knowing that someoneis trying to persuade us generallymakes us take the opposing view.A famous example of the influenceof authority is an experiment byMilgram.9 A doctor toldparticipants to increase the level ofelectric shocks apparently beingapplied to a patient – whoscreamed louder and louder andshowed more and more signs ofdistress as the level of shock wasincreased. The participants,however, went on increasing thelevel as directed by the doctor.

Although they have no independenttheories of human behaviour, the‘new’ disciplines of system dynamicsand agent-based modelling ineconomics (these are outside the

realms of neoclassical economics)can incorporate behavioural traits,and, in particular, dynamic ‘feedback’from other people’s behaviour intosocial norms. In systems withfeedback – where the output (thetypical way people behave in aparticular instance) affects the input(how people choose to behave) –there is no single stable equilibrium(as in neoclassical economics), buttemporary equilibria occur whichdepend on the history of the system.For examples of such modelling seePaul Omerod’s book ButterflyEconomics.11

What does this mean forpolicy-makers?Policy-makers focusing only onneoclassical economic analysis mayoften devise a system that has animmediate effect; however, this maynot last. For example, knowing thatthere is a fine for speeding and a highlikelihood of getting caught I willprobably drive more slowly – but I willdrive just as fast once I realise thechance of being caught is low.However, if policy-makers can changethe social norm – perhaps in thiscase by encouraging us to frown onothers who drive dangerously fastwith campaigns against dangerousdriving – then less enforcement willbe needed after the change. In otherwords policy-makers might want totake preferences as fixed in the shortterm, but, as part of a sustainableintervention, they should considershifting preferences in the mediumterm. An example where policyappears to have successfullychanged people’s preferences in theUS is banning smoking in publicplaces. This change appears toreduce the ‘social proof’ (which in

some way reinforces smokingbehaviour as pro-social) therebyreducing the amount people smoke inprivate.12

Once policy-makers have identifiedthe particular behaviour they are tryingto change, they can evaluate the rolethat social norms play in influencingthis behaviour. If other people’sbehaviour plays an important role, thiscan be leveraged. Malcolm Gladwelldescribes how small numbers of keypeople can have a big impact in hisbook The Tipping Point.13 He dividessuch people into three groups: theMavens, the Connectors, and theSalesmen. The Mavens are peoplewho have such expert knowledge thatyou would take their advice if given it(and Mavens enjoy giving it for free).The Connectors have manyconnections, so information they havehas the potential to be distributed to alarge number of people. TheSalesmen are people with the powerto persuade us to change ourbehaviour. Policy-makers may find ituseful to focus their efforts to createbehaviour change on these specifictypes of people who will help promotewider change.

Box 1: Why do you wear a seatbelt in your car?

Most of us wear seatbelts as it has become normal behaviour – everyonedoes it. We neither evaluate the likelihood of having an accident, nor thechance of getting caught without our seatbelt on and incurring a fine. Theenforcement of seatbelt wearing is now hardly necessary, as it has becomea social norm.

When the compulsory wearing of seatbelts in cars was introduced in the1970s, there was widespread public resistance. By 2002, when a survey wascarried out to assess public support for state intervention, about 94 per centof the people asked supported compulsory wearing of seatbelts.10 Thisshows that policy can affect behaviour and create a new social norm thatneeds little enforcement to maintain.

When we do something out of habit,we use little or no cognitive effort.Most of us do not spend a long timeeach morning deliberating on what toeat for breakfast or how to travel towork: such daily routines quicklybecome ingrained habits. Even whenwe consciously think about what wedo, it can be difficult to change ourbehaviour. Perhaps I think it is a goodidea for people to use publictransport, but I don’t know where thebus stop is or when the bus runs. Ithink I should find out, but I don’tknow how, so I continue using mycar. The rewarding feeling – myjourney by car was easy and hasslefree – reinforces my old bad habit.

What neoclassical economic theory would sayIn neoclassical economics theassumption is made that, given theirparticular preferences, people actrationally to maximise their utility(utility broadly means happiness orsatisfaction). Doing something out ofhabit, for example, choosing mynormal coffee in the usual-sized jarwhen shopping, is outside ofneoclassical theory, in which I woulddo a full analysis of all the availablecoffee/jar-size/price options.

What behavioural economic theorywould sayAs in the case of social norms,psychologists have long acceptedthat the frequency of our pastbehaviour influences our currentbehaviour (again see Tim Jackson’sreport Motivating SustainableBehaviour14). Just as neoclassicaltheory does not recognise theexistence of habits, it does notacknowledge the effort we need toexpend in overcoming them.Psychologists, on the other hand,have done lots of work in this area.They have found a habit is moredifficult to change:

P If it is repeated often (it is moredifficult to change something I dodaily than something I doannually).

P If there are strong related rewards(the reward from smoking acigarette is a satisfying feeling).

P If the reward comes very soonafter the action (the cigarette isimmediately satisfying).

Psychologists’ theories on changinghabits generally involve firstunfreezing the subconscious actionand raising it to a conscious levelwhere we can consider the merits ofalternative behaviours. This is followedby adopting the new behaviour,which, with time, becomes frozen asa new habit. We are more likely tothink consciously about something(and thus be able to break our habit)when:

P What we are trying to do iscomplex.

P The consequences of ourdecisions/actions are important tous.

P We have enough time, cognitivecapacity and knowledge to do so.

Sometimes visual cues can helpremind us to change our behaviour.For example, actions such asrecycling rather than just throwingeverything in the rubbish can becomehabits. However, when we are used tojust throwing things away, it takes alot of mental effort to think aboutwhether the empty jar in our hand isrecyclable or not, and what to do withit if it is. In this case cues, such asvisible recycling facilities, or beingprovided with coloured bins, can helpremind us to recycle, as well asmaking it easier to recycle.15

What does this mean forpolicy-makers?When aiming to change people’sbehaviour, the role habits play shouldbe considered. Are there any habitsthat are likely to be barriers tobehaviour change, and if so, howstrong are they likely to be? How canany such habitual behaviour be raisedto people’s conscious awareness?What incentives, financial and nonfinancial, can people be given to helpthem change their behaviour, andwhat feedback can be given to helpreinforce the new behaviour andcement it as a new habit? Can thisfeedback be tailored to occur close intime to the action to maximise thislearning effect?

For example, a habit-changing policywith extremely successful results hasbeen the introduction of a smallcharge (15p) for plastic shoppingbags in Ireland. Since the introductionalmost everyone brings their ownshopping bags when groceryshopping. Although most peoplecould easily save a little money ontheir shopping basket by carefullychoosing which brands and quantitiesto buy, most people don’t bother (dueto habit). However, when they mustexplicitly pay 15p extra for a plasticbag, this acts as a strong incentive(cue) to bring their own bags.


Principle 2: Habits are important

Box 2: When did you last change your electricity supplier?

Many of us could reduce our electricity bills by changing supplier; however,we simply have not bothered to do it. Why?

The deregulation of the utilities companies and the increase in choice ofsupplier was meant to reduce prices through competition. This policy hasnot been as successful as expected as people have been reluctant tochange supplier. It appears that habit is key to people’s behaviour here, andthe barriers to changing these habits are higher than expected: there is thehassle associated with changing (identifying which new supplier, filling outforms, and so on) and there is a perceived risk – perhaps the new supplierwill not be so reliable. Conversely, the financial gain, which was expected todominate, is not immediate but comes as a small decrease in future bills.

There are many cases where we dothings for other people for which wewould be insulted if they paid us; forexample, when we invite friends for ameal. In such cases it is clear that afinancial reward would be thoroughlyde-motivating to continuing thebehaviour. Even in less extremecases, such as doing volunteer work,money can be de-motivating as itdetracts from the warm feeling ofhaving done something good.

In cases where we are naturallymotivated to ‘do the right thing’ wefeel bad and have a guilty consciencewhen we fail. This guilt can be offset ifwe receive a punishment (e.g. a fine)because after being punished we feelwe have paid for our misdeed and wehave a clean conscience. This canresult in punishments having counter-productive effects: we continue withour bad behaviour together withaccepting the punishment.

People also have an inbuilt sense offairness. In situations where oneperson clearly has a strongerbargaining position, very often theywill not use this and will split the gainfrom the transaction 50/50 rather thandemanding more for themselves. Oursense of fairness also drives us topunish the wrongdoing of others,even at a personal cost to ourselves.

What neoclassical economic theory would sayA standard neoclassical analysiswould add up the financial costs andbenefits, so financial rewards wouldalways be expected to encourage andfinancial fines would always beexpected to discourage. People wouldalso be expected to take advantageof any bargaining position that theyhad. Further, the fact that people arewilling to punish the wrongdoing ofothers at considerable cost tothemselves, without any obviousbenefit cannot be explained byneoclassical analysis. In short:altruism in any form is difficult toexplain.

What behavioural economic theory would saySocial scientists accept we haveintrinsic motivations where we doactivities for their own inherent reward,as well as extrinsic motivations where

we do things for some external(possibly financial) reason. They find,however, that it is possible forextrinsic motivations to ‘crowd-out’intrinsic motivations and thus becounter-productive.18 That means thatfinancial rewards, deadlines, and thethreat of punishment can decreaseintrinsic motivation and thus can becounter-productive as motivationaltools. An example of this is whensmall fines were introduced forparents who arrived late to collecttheir children from a nursery school inIsrael. The result was that the parentsarrived late more often than beforethe fines where introduced.19 Itappears that by making a paymentthe parents no longer felt guilty about

arriving late, and treated the situationas if they were paying for a service.

Experimental economists have foundthat ‘fairness’ is often important, whichis not a concept that is expected tohave any significance for the rationalman modelled in neoclassicaleconomics. For example, people’swillingness to pay for a public goodhas also been shown to bemoderated by fairness – peoplebelieve that costs should be fairlydistributed between those responsiblefor the necessity of the public good,and those who will benefit from it.With higher perceived fairness, peopleare willing to contribute more.20


Principle 3: People are motivated to “do the right thing”

Box 3a: Would a monetary payment make you more likely to give blood?

In the 1960s the demand for blood in hospitals was growing rapidly. Toinvestigate how best to meet this demand, the Institute of Economics Affairscommissioned an investigation resulting in a report entitled The Price ofBlood by Cooper and Culyer.16 The authors, applying ‘the simplest tools ofeconomics analysis’ conclude:

P Human blood is an economic good.

P Paying donors for blood would increase supply.

P Supplies would be provided at a cost advantage in the future, if demandcontinued to rise.

In his classic work The Gift Relationship published in 1970, Richard Titmusspresents strong evidence to the contrary.17 At that time, blood donors whereunpaid in England and Wales, but they were paid in various different ways inthe US. Titmuss compares the statistics and shows that not only did morepeople give blood voluntarily compared to donations made with financialincentives, but also that the voluntarily donated blood was of a higher quality(it appears that people who give blood for financial reasons have a strongincentive not to be honest about diseases that they may have which wouldrender their blood inadmissible). He concludes “commercialisation of bloodand donor relationships represses the expression of altruism” and that:

P in terms of economic efficiency, it is highly wasteful of blood;

P it is administratively inefficient and results in greater overhead costs;

P in terms of price per unit of blood the American (commercialised)system results in prices 5 to 15 times higher than the British (voluntary)system; and

P commercial markets are more likely to distribute contaminated blood.

Following the publication of this book, blood donations remained voluntaryin Britain, and the World Health Organisation adopted a resolution in 1975urging member states to “promote the development of national bloodservices based on voluntary nonremunerated donation of blood”.

What does this mean forpolicy-makers?Policy-makers should consider howpeople perceive the behaviour they aretrying to change. If it is normallyconsidered shameful, it might becounter-productive to introduce fines; ifit is normally considered the right thingto do, it might be counter-productive tointroduce financial rewards. The size ofany financial (dis)incentives shouldalso carefully be considered – a bigenough fine will be a disincentive, andpaying a volunteer a high enoughsalary may be an incentive.Consideration should also be given toappealing to people’s sense offairness, and conversely care shouldbe taken not to make people feel apolicy is unfair, even if it is of overall

benefit. Also, the institution itselfshould be seen to be fair, as this willhave an impact on future compliance.

Several examples relevant to policy-makers are given in the paperIntroducing Procedural Utility: Notonly What, but also How Matters byBruno Frey, Matthias Benz and AloisStutzer:22

P The treatment of taxpayers: Takinginto account of the probability ofbeing caught evading taxes, andthe size of the punishment ifcaught, a neoclassical analysisindicates that taxpayers shouldevade taxes more than theyactually do. It appears that peopleare motivated to ‘do the right thing’

and further, the more fairly andrespectfully the tax authorities treatthem, the more willing they are topay their taxes.

P Public good allocation: Toovercome the problem of NIMBY(not-in-my-back-yard) projects,neoclassical economics has asolution: as the benefits to thewider community are greater thanthe costs, the prospective gainersshould be taxed and this revenueredistributed to the prospectivelosers. It has turned out, however,that this approach meets withmuch resistance as people feelthey are being bribed to accept theproject, thus undermining theirmotivation to ‘do the right thing’.A more successful approach is todirectly address people’s concerns.For example, if people object to anew airport being built nearby, thenthey could be helped to insulatetheir homes against the noise.

P Law: A study of the acceptance ofawards from court-orderedarbitration found that the litigantswho judge the arbitration processas fair are much more likely toaccept the award from thearbitration process and not takethe case to formal trial, irrespectiveof the outcome.


Box 3b: Would small payments encourage you to dovoluntary work?

When questioned about volunteering, 97 per cent of respondents believedthey were fulfilling an important task for society and less than 25 per centthought that the work should be rewarded financially. This is consistent withintrinsic motivation – people feel the task is worth doing for its own sake,rather than for reward – and as such this feeling can be offset by extrinsicmotivations, such as pay, which can reduce the overall incentive. This iscorroborated by a study of Swiss volunteers. The average volunteering timewas fourteen hours per week but those who were paid did approximatelyfour hours less volunteering work a week than unpaid volunteers.21

We have expectations about our ownbehaviour, and perceptions about theexpectations other people have aboutour behaviour. We don’t like to feel ouractions are out of synch with theseexpectations or our own values orattitudes – it makes us feeluncomfortable. If we find ourselvesoften doing something that sitsuncomfortably with our attitudes,values or expectations of ourselves,then we may well change ourattitudes and values to justify ouractions. Where we have expressedour beliefs openly, however, we aremore likely to change our behaviourto remain consistent with theseexpressed beliefs. In this way,commitments can be very important:when someone has promised to dosomething, they are likely to stick tothis even without rewards orpunishments. Who makes thecommitment and how it is made canalso have a strong influence: when awhole group with high levels of socialcapital publicly makes a commitment,this is likely to be more influential onthe individuals than when anindividual makes the commitment byhimself/herself. The more publiccommitments are, the stronger theyare, and written commitments arestronger than spoken ones. Peoplewho have made a small commitment(for example, signing a petition)appear to change their view ofthemselves, and if asked a few dayslater to make a much largercommitment (for example, donatingmoney) are more likely to agree.

What neoclassical economic theory would sayA standard neoclassical analysiswould disregard self-expectations andcommitments, as these are expectedto influence our preferences; butpreferences are taken as ‘given’ in thisanalysis. Promises are irrelevant inneoclassical theory unless they arebacked by sanctions.

What behavioural economic theory would sayThe psychologist Leon Festingerdeveloped the cognitive dissonancetheory, which proposes that peoplefeel uncomfortable when they feel aclash or ‘dissonance’ between theiractions and attitudes or values.23

Daryl Bem postulated that we infer

our attitudes from observing our ownbehaviour, which means that whenour behaviour is out of synch with ourattitudes, we may well change ourattitudes (rather than our behaviour).24

Higgins’s self-discrepancy theory hasbuilt on the cognitive dissonancetheory.25 He maintains we have threeviews of ourselves: actual, ideal andought-self (how we have a duty tobe). We have correspondingperceptions of how we think otherpeople assess these three views ofourselves, thus we have six distincttypes of self-concept. Differencesbetween these give rise to different(negative) emotions, such as guilt,shame or disappointment.26 It wouldappear that making commitments,especially publicly, strengthens thefeeling of how we should behave, andthe shame we feel if we fail to live upto them. A useful guide to usingcommitments in changing behaviouris given by a psychologist, DougMcKenzie-Mohr.27

What does this mean forpolicy-makers?Policy-makers should considerwhether it could be practical to getpeople to make commitments, and ifso, how to make the commitment asstrong as possible. The followingexamples have been taken from DougMcKenzie-Mohr’s book FosteringSustainable Behaviour:

P Emphasise written over verbalcommitments.

P Ask for public commitments.

P Seek group commitments.

P Actively involve the person.

P Consider cost-effective ways toobtain commitments.

P Use existing points of contact toobtain commitments.

P Help people to view themselvesas environmentally concerned.

P Don’t use coercion (commitmentsmust be freely volunteered).

For large businesses the threat ofexternally imposed regulation has, insome cases, precipitated self-imposed voluntary agreements.28

Policy-makers could consider whetherit would be beneficial to use suchtactics more broadly to encouragesmall businesses (or better stillgroups of small businesses) to makecommitments. Another alternativecould be to get business owners tomake a written commitment and thento use the threat of naming andshaming those who don’t keep thecommitment. In particular,consideration should be given to‘stepping’ commitments from the veryeasy to the more demanding, thuschanging identity and self-expectations in the process. Forexample, small businesses may beasked to register for free informationon how to improve their environmentalimpacts. They might then be invited toa meeting, and then asked to committo certain actions.

For example, a Canadian programmeusing a combination of publiccommitments and visible signals wasused to establish a strong communitycomposting-norm. Several monthsafter the start of the project anexceptionally high proportion (80 percent) of the people originallyapproached were found to becomposting.29


Principle 4: People’s self-expectations influence how they behave

People naturally have inbuilt biases:

P People are loss-averse, whichmeans they will go out of their wayto avoid losses, while at the samethey would not bother to go out oftheir way to gain something. Thiscan mean people may take largerisks to avoid losses whilst at thesame time avoiding even smallrisks to make gains.

P People try to keep something thatthey consider is ‘theirs’, even whenit is quite arbitrarily given andwhere the beneficiary’s pre-established preferences wouldindicate that they would prefer toswap it. It is as if as soon as Iconsider something ‘mine’, I confersome extra value onto it.

What neoclassical economic theory would sayIn neoclassical theory people areexpected to have a preference on risk(i.e. be either risk-takers or risk-avoiders) but it is usually assumedthat people are neutral to loss or gain,meaning that the amount of effort Ishould put into saving £100 of mymoney should be the same as theamount of effort I would put intogetting £100.

It is also usually assumed inneoclassical theory that someone’s‘willingness-to-pay’ is the same astheir ‘willingness-to-accept’. This

means they would sell somethingthey own for just about the sameprice as they would be willing to buyit, if they didn’t already own it.

What behavioural economic theory would sayKahneman and Tversky’s ProspectTheory developed in 1979 shows thatpeople are not impartial to whether aloss or a gain is involved: they putmore effort into preventing a loss thanwinning a gain. They also show thatpeople generally use a relativeassessment of losses and gains

(rather than considering their totalwealth position) and that they valuelosses more than gains.34

The endowment effect shows thatsomeone’s ‘willingness-to-pay’ is notthe same as their ‘willingness-to-accept’.35 In practise, it is usual forthe selling price or willingness-to-accept to be up to 20 times thebuying price or willingness-to-pay.36

An example of a study in whichpeople were willing to pay only a littleto have something (or in this casemaintain it) compared to demandinga lot to give it up concerns duck-


Box 4: Do commitments change how you behave?

If a stranger asks you to watch over their belongings, and you agree, doesthis make you more likely to protect their belongings from obvious theft? Formost people, the answer seems to be yes. In a staged crime, individualswho had agreed to watch over a bag were four times more likely to attemptto prevent a theft as individuals who were aware the bag was being stolenbut who had made no commitment to watch over it.30

Suppose someone asks you if you are going to vote in the forthcomingelections. You consider, and decide that it is the right thing to do as a goodcitizen, so you tell the questioner yes, you will vote. Will this commitmentmake you more likely to vote? The answer for most people is again yes, itwill. When voters in the US were asked the day before an election “Do youexpect you will vote or not?” they all agreed and this action appeared toincrease the likelihood of them voting by 41 per cent.31

Principle 5: People are loss-averse

Box 5a: You hold some shares in a firm that has gonedown in value. What do you do?

Many people hold on to their shares in this situation, in the hope that theywill recoup their losses. Conversely, when shares have gone up in value,people are happy to sell them to realise their gain. A similar behaviour is alsoobserved for professional traders who tend to hold on to shares with a lossfor longer than those with a gain. The traders who exhibit this type of lossaversion to a lesser degree tend to be the more successful ones.32

Box 5b: How much would you need to be paid to mowyour neighbour’s lawn?

Is this more than how much you would pay your neighbour to mow yourlawn? Most people would need to be paid much more to mow someoneelse’s lawn than they would be willing to pay to have their own lawn mowed.This thought experiment is taken from Richard Layard’s book Happiness:lessons from a new science.33

We are naturally very bad atcalculating things, especiallyprobabilities, and our choices arestrongly influenced by how a problemis presented to us. Our usual internalbiases are:

P Salience: We overestimate thelikelihood: of something that wecan easily imagine, especially if itwould be particularly frightening,like a plane crash, or particularlyexciting, like winning the lottery; ofsomething that has given us ashort-lived extreme experience; orof something we have recentlyexperienced. Likewise weunderestimate the likelihood ofthings that happen relatively often.

P Discounting: We oftenunderestimate the importance orrelevance of something that mighthappen in the distant future. Ourpreferences are inconsistent overtime: if asked to do either 5 hoursof an unpleasant task todaycompared with 51/2 hourstomorrow, we often put off the

unpleasant task; if asked, however,whether we would choose 5 hoursin a month’s time, or 51/2 hours ina month and a day’s time, wewould choose the former. Thisoften manifests itself in peoplechoosing short-term gratificationover longer-term rewards, leadingto policy issues, such as obesity orlack of savings for old age.40

P Framing: If we must make adecision between two actions, weare strongly influenced by how thetwo possible outcomes arepresented to us. If one is dressedup as a loss, and the other asneutral or as a gain, then we willavoid the apparent loss – evenwhen the two outcomes aremathematically identical. Framing,although often combined with lossaversion, can be applied togetherwith any of the other six principles.For example, a toothpasteadvertisement from a few yearsago used the slogan “moredentists choose Colgate”. Thiscombines framing with the

principle that other people’sbehaviour matters.

P Defaults: We are stronglyinfluenced by ‘defaults’ set for usby authorities. For example, whenmoney is transferred into avoluntary pension scheme bydefault, few people choose to optout, and the pension contributionsare much higher than whenpeople have to opt in.41 Sunsteinand Thaler argue strongly in favourof using this bias when designingpolicy, which they call LibertarianPaternalism.42

P Intuition: We jump quickly tointuitive answers, which can bewrong, even to very simplemathematical questions. However,where an outcome is particularlyimportant to us, we are more likelyto engage our active consciousthinking to evaluate the situationand get the right answer. Anexample of such a mathematicalproblem where our intuition isoften wrong is given in

hunters in the US. It was found thatthey would pay $247 each to maintaina wetland suitable for ducks, butasked for $1044 to give up thewetland.37

This discrepancy betweenwillingness-to-pay and willingness-to-accept can lead to an intriguing effecton indifference curves, a key conceptin neoclassical economics.Indifference curves plot how much ofone good we are willing to give up toget more of another good. An earlylesson from neoclassical economicsis that they should never intersect. Inone experiment, however, studentswere randomly given either pens ormoney and from observing thesubsequent trade, intersectingindifference curves were generated.This was because the group ofpeople who were given (‘endowedwith’) pens wanted more dollars perpen than the group given moneywere prepared to pay.38

What does this mean forpolicy-makers?This is a case where the theory isdirectly applicable within economiccost-benefit-type analyses thatinclude valuations of non-marketgoods, such as valuations of pollutiondamage. Policy-makers have a choiceas to whether to use willingness-to-pay or willingness-to-accept, and asthese may vary by up to a factor of20, the outcome of such an analysismay well depend on which value ischosen. David Pearce has written auseful paper addressing this issue.39

He proposes that where peoplereasonably have a ‘right’ to somethingthat might be taken away from them,the willingness-to-accept value shouldbe used. On the other hand, whenpeople only reasonably have a ‘right’to the status quo and animprovement is proposed, then thewillingness-to-pay is the correct valueto use. (An alternative approach is notto use a cost-benefit approach, whichpeople can find alienating, but aparticipatory negotiation process –see Principle 7.)

More generally, when punishments orrewards are being planned, policy-makers should consider theimplications of this Principle. A fine isa much stronger disincentive than asimilar-sized reward is an incentive.The threat of loss of reputation canalso count as a strong incentive not todo something. The risks that peopleare likely to take to avoid a loss canbe large, so punishments designed tocurb slightly-bad behaviour couldhave the adverse effect ofencouraging people to do somethingmuch worse to avoid being caught.For example, to avoid being caughtwith an old bottle of a pollutingchemical that is now banned, peoplemight well do something drastic (forexample, pour it down the drain)rather than admitting to having it.

Loss-aversion has implications for taxcollection: taxes taken at source maycause less resentment and thereforebe easier to introduce than taxes thatmust be actively paid.


Principle 6: People are bad at computation

Kahneman’s paper:43 “A bat and aball cost $1.10 in total. The batcosts $1 more than the ball. Howmuch does the ball cost?” Mostpeople answer 10 cents, including50 per cent of Princeton students.This answer is wrong!

P Fundamental attribution error:We like to think we have controlover situations, so we oftenassume that when somethinghappens to someone it must betheir fault – rather than it being anunfortunate random event.44

P Price can signal value: Whenoffered ‘something for nothing’ wetend to undervalue what we areoffered. For example, in Australia,when a course on socialentrepreneurship was offered freeto a number of governmentpeople, no one signed up. When itwas re-advertised three monthslater for AUD$2,500, however,more than 20 people enrolled.

What neoclassical economic theory would sayIn standard neoclassical theory theassumption is made that people actrationally and logically. As well ashaving all the necessary informationat their fingertips, they are fullycapable of making the complexcalculations to compute their optimumbest choice from the many possible

choices available to them. In otherwords, the biases above are notexpected to be significant.

What behavioural economic theory would sayPsychologists have long establishedthat people do not make decisions inthe way assumed by neoclassicaleconomics. In particular, DavidKahneman – who went on to win theNobel Prize in Economics – showedthat people use ‘rules of thumb’ to

make decisions, and these give rise tothe internal biases listed above.47

Frederick, Loewenstein andO’Donoghue have published athorough review of studies on people’spreferences regarding time discountingand they conclude that the discountedutility model, which continues to bewidely used by economists, has littleempirical support. They propose amultiple-motive approach which takesaccount of the interplay between thedisparate and often competingpsychological motives.48


Box 6a: Would you agree to undergo a medical operationif your doctor told you: “of those who have this procedure,10 per cent are dead after five years”?

Would it have made a difference if the question had been phraseddifferently: “of those who have this procedure, 90 per cent are alive afterfive years”? Redelmeier has researched this and he finds that more people(including doctors) agree to undertake the risky procedure when thequestion is positively framed.45 This shows that framing makes a difference:the prospect of a 90 per cent chance of living is, for most people, better thana 10 per cent chance of dying.

Box 6b: What would you expect as financial compensationfor lending $15 for periods of one month, one year or tenyears?

The median answers are $20 in one month (i.e. $5 interest), $50 in one year,or $100 in ten years.46 The standard economic theory would predict that ifyou are happy with $100 after ten years, then you should be happy with $18after one year or $15.24 after one month.

What does this mean forpolicy-makers?Policies that involve financialincentives or disincentives should takeaccount of people’s biases andintuition about probabilities, andpositively make use of framing effects:

P If punishments are to be used fornon-compliance, informationpublished about them should bevividly described to trigger theimagination into thinking ‘howhorrible’ it would be to be to bepunished. Conversely, if rewardsare to be used to enhancecompliance, these should also bevery salient.

The Royal Mail has successfullyused salience to encourageemployees not to take sick leaveby entering all staff who had nottaken sick leave for a six-monthperiod into a lottery to win a car ora holiday.49 This reducedabsenteeism in the 170,000-strongworkforce from 6.4 per cent to 5.7per cent meaning approximately1,000 more people were workingevery day. The cost of the prizeswas about £500,000. Aneoclassical analysis wouldwrongly predict that as theexpected value of the lottery ticketis small (about £6) compared tothe utility of an extra day’s freetime when ‘taking a sickie’(presumably a day’s pay) then notmany people would be influenced

by the incentive, unless peopleplaced a huge value on the ‘fun’ ofparticipating in the lottery. Thebehavioural economics approachis that we are influenced bysalience: as with all lottery prizesour imagination is caught by theidea of winning the holiday or thecar thus we overestimate thechances of winning.

P Immediate losses are strongerincentives than long-term rewards.Programmes should, if possible,be devised to avoid immediatelosses.

For example, in Barry, Canada, awater conservation scheme thatavoids up-front costs has provedvery successful. To encouragepeople to install ultra-low-flow toiletsand showerheads, the City offeredpurchasers an interest-free loan tobe paid off as part of the water bill.As the water is metered, the watersaving offset the cost of therepayments making the equipmentappear effectively free. The addedincentive was that water bills wouldbe cheaper in the future.50

An interesting medical exampleconcerns women’s behaviourrelating to breast self-examination.51 As detectionbehaviour can lead to theundesirable knowledge that theyhave a lump (which can bethought of as a type of loss), the

short-term incentive is not to havea test. Of course, taking account ofthe longer-term outcome andchoosing to do detection tests isby far the most rational approachfor women who value longevity.Research on messages topromote detection behavioursfound that framing the message toemphasise the possible long-termloss (of not doing detection tests)is particularly effective in this case.

P The use of libertarian paternalismdevices could be very influential.Default options for individualscould be set to promote therelevant policy, for example,smaller servings of food inrestaurants to counteract obesity.Further, in order to help peoplecounteract the natural tendency tooverly discount the future, smallbarriers, or what Avner Offer hascalled “commitment technologies”,can be created or should bepreserved.52 (An example of this isthat students find it easier to writean essay with an externallyimposed deadline.) This mightsuggest, for example, that peopleshould not be allowed to raid theirpension funds easily for present-day expenditure.

People hate feeling helpless and outof control and, when they have suchfeelings, they feel incapable of doinganything to change the situation.Conversely, when they feel in control,they can be highly motivated tochange things for the better. This hasimplications on information, choiceand the importance of participation:

P Information overload: Too muchinformation can lead to a feeling ofhelplessness and inaction. Forexample, I care about the planetand climate change, but it is alljust so complicated to solve that Idon’t know where to start, so I willcontinue behaving as before.

P Too much choice can also have a counter effect. We feeloverwhelmed and don’t know what to choose, thereby often notmaking any choice at all. Evenwhen we do choose something,we are often dissatisfied, thinkingwe have probably made the wrongchoice.53

P A participatory approach toproblem solving can be highlymotivational and effective inencouraging behaviour change, aswell as making people happier.

What neoclassical economic theory would sayIn neoclassical theory, people areexpected to rationally make the ‘best’choices given their preferences,independent of how these choicesare presented. Therefore, moreinformation and choice is alwaysconsidered good. Using this theory,policy-makers should ensure thatpeople always have as muchinformation and as many things tochoose between as possible; theprocess of introducing policy isirrelevant. Ideas from behaviouraleconomics indicate, however, that thisis not the right approach.


Principle 7: People need to feel involved and effective to make a change

What behavioural economic theory would sayWe know from experimentaleconomics (see example in Box 7)that more choice and more informationcan be overwhelming and lead to afeeling of helplessness or reducedself-efficacy. In 1977 Bandurapublished a theory on how self-efficacy or “people’s judgments of theircapabilities to organize and executecourses of action required to attaindesignated types of performances”affects our behaviour.55 He argues itaffects the choices we make, howmuch effort we put into what we do,how long we persist with a task beforegiving up, and how we feel. Kaplan, apsychologist, has proposed aparticipatory approach to problemsolving.56 He suggests that tellingpeople what to do is demotivating(reducing self-efficacy), is likely toencounter resistance, and ignores thepossibility that the local knowledgepeople have may yield better solutionsto a problem. Instead, providing peoplewith “opportunities for understanding,exploration and participation” engages“powerful motivations” for“competence, being needed, making adifference, and forging a better life”. Insummary, people’s self-efficacyincreases and they are motivatedtoward implementing the solutions –i.e. changing their behaviour in adesired way.

A participatory approach not onlyimproves policy, it also makes ushappier. This is the finding of researchcomparing Swiss cantons (districts),

which differ in the extent to whichthey use referenda for making majordecisions.57 Most interesting of all,around two-thirds of the well-beingeffect can be attributed to actualparticipation itself, and only one-thirdto the improvement in policy as aresult of the participation. This wasdiscovered through looking at thewell-being of foreigners resident inSwitzerland, who get the well-beingbenefit from the improved decision-making, but not from the participationitself. This implies that an increasedability to participate may have positivewell-being dividends.

What does this mean forpolicy-makers?Policy-makers should note that,contrary to standard theory, too muchinformation or choice could becounterproductive. They should makesure that the target individuals are notbombarded with information or longmanuals of regulations. In particular,policy-makers should be aware thatpeople do not necessarily want morechoice. The freeing-up of the marketfor telephone directory enquiries is anexample of counter-effective choice.Since the introduction of over 100new directory-enquiry numbers to tryto promote competition, the use ofthe service has fallen. This is thoughtto be due to increased confusion andperception of higher costs, althoughincreased use of Internet services isalso thought to play a role. Also, mostresidential customers are paying morethan they did before (although aquarter of the new numbers offer


Box 7: How does having more to choose from affect your choice?

Have you ever felt so daunted by the amount of different things to choosefrom, that you ended up not choosing anything at all? If so, you are not aloneas the results from the following experiment show. A stall was set up in asupermarket for jam tasting. On one day the stall had twenty-four jams, andon a different day only six jams. Although the stall with more jams attractedmore attention (60 per cent of the people passing by stopped, comparedwith only 40 per cent for the small-selection stall), of the people whostopped only 4 per cent at the stall with the extensive selection subsequentlybought a pot, whereas 30 per cent of the people who stopped at the small-selection stall went on to buy a pot.54

cheaper services), with no increase inthe quality of the service.58

Emphasis should be placed onhelping people to believe that theyhave it within their power to changetheir behaviour in a desired way. Thisis confirmed by a study onenvironmentally friendly behaviour.Out of a group who expressed theywere interested in environmentalissues, the most important factor inwhether they actually behaved in anenvironmentally friendly way was“personal control” which was definedas “the extent to which participantsfelt their actions could benefit theenvironment”.59 Another studypublished by the National ConsumerCouncil on ways to promotesustainable behaviour analyses 19

case studies and finds that in everycase “once enlisted, people havebeen persuaded to make majorchanges in their lives” and that in theUK:

“Consumer-facing policieshave largely been limited totraditional information provisionand awareness-raising. Thesepolicies have not had atransforming effect onmainstream society. Only nowis it being recognised thatpreaching to people is a poorsubstitute for enlisting them asactive partners.”60

Where possible government couldidentify problem areas and encouragegroups of people affected by the

issue to work together with experts toclarify the problem and find solutions.In particular, government should buildon existing groups and initiatives,rather than creating new processesand structures without buy in.

These seven principles have beendistilled from the many observedhuman traits coming from the fields ofpsychology, behavioural andexperimental economics. They havebeen chosen as they are thought tobe the most relevant to policy-makers.

In most cases these principles cannotbe used directly as part of anymathematical economics analysis, buthighlight situations where thisstandard analysis will not accuratelydescribe human behaviour andtherefore might have unintendedconsequences when implemented inpolicy.

The academic research is welldeveloped to support the theorybehind the seven principles. Thereare, however, research gaps aroundthe reality of the application of theprinciples. These fit around threerelated areas:

1 Consideration of the relevanceand materiality of the principle –Relevance (is one or more of theprinciples applicable?) could beleft to the judgement of the policy-maker. Materiality (does theprinciple make a significantdifference?), however, requiresjudgement to be informed by morecase studies and research.

2 Work on the different policyinterventions that flow from theprinciples, and their efficacy –The sections on policy implicationsin this Briefing are indicative. Theacademic research has notfocused particularly on thetranslation of the principles intopractice. There is a need for farmore systematic work to takeplace looking at how to besttranslate the principles into policy,and how to make them mosteffective. Our research review doessuggest, however, that the policyimplications could be quitepowerful as the behaviouralapproach provides quite differentlines of analysis to the standardeconomics model.

3 Understanding of the interplaybetween the principles – There islittle research on how theprinciples interact, where theymight conflict and how they canbe combined to maximum effect.However, many successfulinterventions combine several ofthese principles.61

It is heartening to see policy-makersfocusing more on the psychology ofbehaviour when devising policy. Thereare a number of recent indications ofmore sophisticated consideration ofthe kinds of approaches put forwardin this Briefing. The Prime Minister’sStrategy Unit has put together a paper

on behaviour change.62 TheGovernment’s new sustainabledevelopment strategy Securing theFuture has one of its seven chaptersdevoted to “helping people to makebetter choices”.63 Similarly, the publichealth white paper launched in 2004is called Choosing Health: makinghealthier choices easier.64 Our hopeis that this Briefing will enable thiskind of approach to be taken up morebroadly by policy-makers through theuse of the seven principles. Webelieve that this will lead to better andmore cost-effective policy.

Further reading Tim Jackson’s report MotivatingSustainable Consumption has anextensive survey of models ofconsumer behaviour and behaviourchange, most of which are applicableto a far wider field than sustainableconsumption.65

David Halpern’s report PersonalResponsibility and ChangingBehaviour: the state of knowledgeand its implications for public policygives theories of behaviour changeand examples of where these arebeing applied to public policy.66 Heargues that: policy outcomes will bemuch enhanced with the participationof citizens; there are strong moral andpolitical arguments for protecting andenhancing personal responsibility;and behaviour-based interventions


Concluding comments

can be significantly more costeffective than traditional servicedelivery.

Doug McKenzie-Mohr has developeda tool, Community-Based SocialMarketing, to change people’sbehaviour towards environmentallyfriendly behaviour.67 This isunderpinned by psychologicaltheories of human behaviour.

A useful text on bounded rationality isDavid Kahneman’s Nobel Prize lectureMaps of Bounded Rationality: APerspective on Intuitive Judgementand Choice.68

Many relevant papers from behaviouraleconomics can be found through JoePomykala’s website BehaviouralEconomics: a crash course.69

The paper, Libertarian paternalism isnot an oxymoron, by Cass Sunsteinand Richard Thaler, references many

psychological and behavioural-economic texts to argue that choiceshould be allowed but the defaultoption should be what the authoritythinks is ‘best’.70

In the paper, Regulation forConservatives: BehaviouralEconomics and the case for“Asymmetric Paternalism” by ColinCamerer, Samuel Issacharoff, GeorgeLoewenstein, Ted O'Donoghue andMatthew Rabin the authors argue thatregulations should be ‘paternalistic’and take account of behaviouraleconomic ideas (especially Principles5, 6 and 7 in this Briefing) when thebenefits to less-rational people – whomay take decisions that are not intheir own self interest – are muchlarger than the costs of suchregulation to fully-rational people.71

Licencing professionals, such asdoctors, is an example of this: thereare low implementation costs borneby taxpayers and otherwise no extra

costs for the people who would haveanyway chosen someone competentto give them medical treatment, butthere are large benefits for the peoplewho would not.

The paper, A better choice of choice,by Roger Levett, Ian Christie, MichaelJacobs and Riki Therivel argues thatthe choices that consumers makelead to other choices no longer beingavailable.72 For example, givingpeople the choice of shopping at anout-of-town superstore as well ashaving local shops can lead to thelocal shops shutting down, whichthen reduces the choice of shopsavailable – an outcome no individualwould have chosen.73 In this caseallowing ‘freedom of choice’ candisadvantage the elderly and peoplewithout cars. This effect cannot bemodelled with the static approachtaken by neoclassical economics, buthas significant implications for policydesign.

1 de Botton A (2004) Status Anxiety (London: Hamish Hamilton).

2 For example see Levett R, Christie I, Jacobs M and Therivel R (2003) A Better Choice of Choice (London: Fabian).

3 Jackson T (2005) Motivating Sustainable Consumption, available from the Sustainable Development Research Network at www.sd-research.org.uk

4 Bandura A (1977) Social Learning Theory (Englewood Cliffs, NJ: Prentice Hall).

5 Cialdini R (1993) Influence: Science and practice (3rd edn), (New York: HarperCollins).

6 Darley J and Latane B (1968) ‘Bystander intervention in emergencies: Diffusion of responsibility’ in Journal of Personality and Social Psychology,8: pp. 377–383.

7 Tajfel H, Billig M, Bundy R and Flament C (1971) ‘Social categorization and intergroup behaviour’ in European Journal of Social Psychology, 1:149-77. Tajfel, H, and Turner, J (1986) ‘The social identity theory of inter-group behavior’ in S. Worchel and L. W. Austin (eds) Psychology of IntergroupRelations (Chicago: Nelson-Hall).

8 Halpern D et al (2004) Personal Responsibility and Changing Behaviour: the state of knowledge and its implications for public policy, CabinetOffice publication available at: http://www.strategy.gov.uk/files/pdf/pr2.pdf

9 Milgram S (1974) Obedience to authority (New York: Harper and Row).

10 Halpern et al (2004) op. cit.

11 Omerod P (1998) Butterfly Economics (London: Faber and Faber).

12 Trotter L, Wakefield M and Borland R (Dec 2002) ‘Socially cued smoking in bars, nightclubs, and gaming venues: a case for introducing smoke-free policies’ in Tobacco Control, 11(4): 300–4 available at www.tobaccocontrol.com

13 Gladwell M (2000) The Tipping Point (Boston: Little, Brown and Company).

14 Jackson (2005) op. cit.


16 Cooper MH and Culyer AJ (1968) The Price of Blood Hobart Paper 41. (London: The Institute of Economic Affairs).

17 Titmuss RM (1970) The Gift Relationship (London: Allen and Unwin).

18 Frey BS and Jegen R (2001) ‘Motivation Crowding Theory: A Survey of Empirical Evidence’ in Journal of Economic Surveys, Vol. 15 (5), (2001) pp. 589–611.

19 Gneezy, U and Rustichini A (2001) ‘A Fine is a Price’ in Journal of Legal Studies, Vol. XXIX, 1, part 1, 2000, pp. 1–18.

20 Ajzen I, Rosenthal LH and Brown TC (2000) ‘Effects of Perceived Fairness on Willingness to Pay’ in Journal of Applied Social Psychology (2000)30(12): pp. 2439–2450.

21 Frey, BS and Goette, L (1999) Does Pay Motivate Volunteers? Working Paper No. 7 (Institute for Empirical Research in Economics, Universität Zürich).

22 Frey BS, Benz M and Stutzer A (2004) ‘Introducing Procedural Utility: Not only What, but also How Matters’ in Journal of Institutional andTheoretical Economics 160, pp. 377–401.

23 Festinger L (1957) A Theory of Cognitive Dissonance (Stanford: University of California Press).

24 Bem, D (1972) ‘Self-perception Theory’ in Berkowitz, L (Ed.) Advances in Experimental Social Psychology 6, pp. 1–62 (London: Academic Press).

25 Higgins, T (1987) ‘Self-discrepancy: a theory relating self to affect’ in Psychological Review 94, pp. 319–340.


27 McKenzie-Mohr D and Smith, W (1999) Fostering Sustainable Behavior: An Introduction to Community-Based Social Marketing (New SocietyPublishers). Also see www.csbm.com


References

28 Khanna M (2001) ‘Non-mandatory approaches to environmental protection’ in Journal of Economic Surveys, Vol. 15 No. 3.

29 McKenzie-Mohr D (2000) ‘Promoting Sustainable Behaviour: an introduction to community-based social marketing’ in Journal of Social Issues56(3) pp. 543–554.

30 Halpern (2004) p. 19 op. cit.

31 Greenwald, A, Carnot, C, Beach, R, and Young, B (1987) ‘Increasing voting behavior by asking people if they expect to vote’ in Journal of AppliedPsychology, 72, pp. 315–318.

32 Locke PR and Mann SC (2000) ‘Do Professional Traders Exhibit Loss Realization Aversion?’ Working paper, Texas Christian University.

33 Layard R (2005) Happiness: Lessons from a New Science (London: Penguin Press HC).

34 Kahneman D and Tversky A (1979) ‘Prospect theory: An analysis of decisions under risk’, Econometrica, 47, pp. 313–327.

35 Kahneman D, Knetsch JL and Thaler RH (1991) ‘Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias’ in Journal of EconomicPerspectives, Vol. 5, No. 1 (Winter 1991), pp. 193–206.

36 Pearce D (2002) The Role of ‘Property Rights’ in Determining Economic Values for Environmental Costs and Benefits, Report to the EnvironmentAgency (2002) http://www.environment-agency.gov.uk/commondata/103599/wtawtp_paper_778397.doc

37 See p. 665 in Kagel JH and Roth AE (1995) in Experimental Economics (Princeton: Princeton University Press).

38 Kahneman et al (1991) op. cit.

39 Pearce (2002) op. cit.

40 O’Donoghue T and Rabin M (2000) ‘The economics of immediate gratification’ in Journal of Behavioral Decision Making, 13(2), 233-250 (2000).

41 Madrian B and Shea D (2001) ‘The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior’ in Quarterly Journal of Economics116: pp. 1149–1525 (2001).

42 Sunstein CR and Thaler RH (2003) Libertarian Paternalism is not an Oxymoron, Chicago Public Law and Legal Theory Working Paper No 43http://www.law.uchicago.edu/academics/publiclaw/resources/43.crs.paternalism.pdf

43 Kahneman (2002) Maps of Bounded Rationality: A Perspective on Intuitive Judgement and Choice, Nobel Prize Lecture, 8 Dec 2002.

44 Ross, L (1997) ‘The intuitive psychologist and his shortcomings: Distortions in the attribution process’ in Berkowitz, L (ed.) Advances inexperimental social psychology, Vol. 10 (New York: Academic Press).

45 Redelmeier D, Rozin P and Kahneman D (1993) ‘Understanding patients’ decisions: cognitive and emotional perspectives’ in Journal of theAmerican Medical Association 72, p. 73.

46 Frederick S, Loewenstein G and O’Donoghue T (2002) ‘Time discounting and time preference: A critical review’ in Journal of Economic Literature,40(2), pp. 351–401.

47 Kahneman (2002) op. cit.

48 Frederick, Loewenstein and O’Donoghue (2002) op. cit.

49 Kwan Yuk P (2005) ‘Royal Mail to continue rewarding healthy staff’ and Gilies C ‘Simply sums play part in lottery’s success’ in the Financial Times,Tuesday 26th April.

50 Holdsworth M and Steedman P 16 pain-free ways to help save the planet a National Consumer Council report available athttp://www.ncc.org.uk/responsibleconsumption/16ways.pdf

51 Rothman AJ and Salovey P (1997) ‘Shaping Perceptions to Motivate Healthy Behaviour: the Role of Message Framing’ in Psychological BulletinVol. 121 No 1 pp. 3–19.

52 Offer A (2004) ‘Passions and Interests: Self-Control and Well-being’ Chapter 3 from manuscript draft of Challenge of Affluence, (Oxford: All SoulsCollege).

53 Schwarz B (2004) The Paradox of Choice: Why More Is Less (New York: Harper Collins Publishers Inc).

54 Iyengar S and Lepper M (2000) ‘When choice is demotivating: Can one desire too much of a good thing?’ in Journal of Personality and SocialPsychology, 79, pp. 995–1006.

55 Bandura A (1977) ‘Self-efficacy: Toward a unifying theory of behavioral change’ in Psychological Review, 84, pp. 191–215. Seehttp://www.emory.edu/EDUCATION/mfp/self-efficacy.html for further references.

56 Kaplan S (2000) ‘Human nature and environmentally responsible behaviour’ in Journal of Social Issues, 56(3), pp. 491–508.

57 Frey B and Stutzer A (2002) Happiness and Economics (Princeton University Press, Princeton).

58 Directory Enquiries – From 192 to 118 National Audit Office Report 18 March (2005) http://www.nao.org.uk/pn/04-05/0405211.htm

59 Kaplan S (Fall 2000) ‘Human Nature and Environmentally Responsible Behaviour’ in Journal of Social Sciences.

60 Holdsworth (2005) op. cit.

61 See examples in Holdsworth (2005) op. cit.

62 Halpern (2004) op. cit.

63 UK Government Strategy Unit Securing the Future can be found athttp://www.sustainable-development.gov.uk/publications/uk-strategy/uk-strategy-2005.htm

64 UK Department of Health Choosing Health: making healthier choices easier can be found at http://www.dh.gov.uk


66 Halpern (2004) op. cit.

67 McKenzie-Mohr and Smith (1999) op. cit.

68 Kahneman (2002) op. cit.

69 Pomykala J (2005) Behavioural Economics: a crash course, website:http://www.altruists.org/static/files/A%20Page%20on%20Behavioural%20Economics.htm

70 Sunstein and Thaler (2003) op. cit.

71 Camerer C, Issacharoff S, Loewenstein G, O’Donoghue T and Rabin M (2003), ‘Regulation for Conservatives and the Case for “AsymmetricPaternalism,”’ in University of Pennsylvania Law Review 151, pp. 1211–1254.

72 Levett et al (2003) op. cit.

73 Simms A, Oram J, MacGillivray A and Drury J (2002) Ghost Town Britain: The threat from economic globalisation to livelihoods, liberty and localeconomic freedom (London: nef).



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Written by Emma Dawnay and Hetan Shah. It is based on the report Extending the “rational man” model of humanbehaviour: seven key principles commissioned by The Environment Agency.

We are very grateful to Tim Jackson, Ian Christie, Rajat Sood, Perry Walker and Andrea Westall for their helpfulcomments.

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Behavioural economics - New Economics FoundationBehavioural economics: seven principles for...

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