Melbourne Institute Policy Briefs Series

Policy Brief No. 4/15Beyond Nudge:

The Potential of Behavioural Policy

Reuben Finighan

THE MELBOURNE INSTITUTE IS COMMITTED TO INFORMING THE DEBATE

Beyond Nudge: The Potential of Behavioural Policy*

Reuben Finighan

Melbourne Institute of Applied Economic and Social Research The University of Melbourne

Melbourne Institute Policy Brief No. 4/15

ISSN 2201-5477 (Print)

ISSN 2201-5485 (Online)

ISBN 978-0-7340-4385-6

July 2015 * I thank Deborah Cobb-Clark, Paul Jensen, Guyonne Kalb and Mike Pottenger for useful comments and suggestions. For correspondence, email <reuben.finighan@unimelb.edu.au>.

Melbourne Institute of Applied Economic and Social Research

The University of Melbourne

Victoria 3010 Australia

Telephone (03) 8344 2100

Fax (03) 8344 2111

Email melb-inst@unimelb.edu.au

WWW Address http://www.melbourneinstitute.com

Melbourne Institute Policy Briefs Series

The Policy Briefs Series is a collection of research publications that examines current policy issues and provides an independent platform

to examine pertinent issues in public debate.

Log onto melbourneinstitute.com or follow @MelbInstUOM for more details on this and other series from Australia’s leading and longest

standing research institute in the field of economics and social policy.

2  

Abstract

Policymakers often mistakenly see behavioural policy as synonymous with “nudging”. Yet

nudges are only one part of the value of the behavioural revolution—and not even the lion’s

share. This policy brief looks at the full potential of behavioural policymaking. Using

examples in cigarette regulation, retirement savings, and poverty, it makes three arguments:

1. Trade-offs between social welfare and individual freedom of choice affect both

nudges and conventional policy tools (like mandates, taxes and transfers). Nudges are

not special tools that avoid such trade-offs.

2. Nudges typically sacrifice social welfare in favour of individual choice, and for this

reason many well-known nudges will be unattractive in Australia. Some nudges can,

however, play a complementary role by fine-tuning conventional policy regimes.

3. Conventional policy tools will continue to be the most powerful tools for countering

behavioural biases, and have the most promise for driving major, behaviourally-

informed reforms in Australia.

Policymakers should not ask “can we nudge this?”, but should instead ask how behavioural

evidence changes the way they think about all the options in the policy toolkit.

JEL classification: D03, D60

Keywords: Behavioural economics, behavioural policy, public policy, nudges, regulation,

paternalism

3  

Behaviouraleconomicsisbeinghotlydebatedinpolicymakingcirclesacrosstheworld.In

Australiatoo,ithasbeenwelcomedwiththeblendofenthusiasmandscepticismthatisrightly

duetoanyparadigmshift.Whilethefieldhaswonsubstantialacademiccredibility—with

economistswidelyacceptingthatbehaviouraleconomicscanimproveuponthestandard

analysisinimportantways—itfacesanewsetofcontentiousquestions.Whatarethefield’s

practicalpolicyimplications?Doesbehaviouralpolicymakinghavethepotentialtocontribute

bigideasandstimulateimportantreforms,orwillitmerelytinkerattheedges?

Intryingtoanswerthesequestions,manypublicservantssubstitutethemwithanother:“what

isthepotentialofnudges?”Thisisanerror,andapotentiallyseriousone.Nudgesarenot

synonymouswithbehaviouralpolicymaking,butrepresentjustonepartofitsvalue.Theclose

identificationofnudgeswithbehaviouraleconomicsislargelyahistoricalquirk:Sunsteinand

Thaler’sgroundbreakingNudge(2008,YaleUniversityPress)wasthefirstbooktopopularise

behaviouralpolicymaking,andhaspowerfullyframedthediscussion.

Thispolicybriefaimstotakeamorecompletelookatthepotentialofbehaviouralpolicymaking,

payingspecialattentiontopolicytoolsbeyondthenudge.Nudges,itargues,largelytinkeratthe

edges.Majorreforms,especiallyinAustralia,aremorelikelytocomethroughusingbehavioural

evidencetoinformtheuseofconventionaltools,liketaxes,transfersandmandates.Behavioural

policymakingdoesnotmeanasking,“canwenudgethis?”Muchlikeconventionalpolicymaking,

itinvolvesweighingeachoftheoptionsinthepolicytoolkittofindthetoolthatbestbalances

thevalueofindividualchoicewiththemagnitudeofpotentialwelfaregains.Whatisnewabout

behaviouralpolicymakingisthatittakestherichbodyofbehaviouralevidenceintoaccount.

Thebriefbuildsthiscaseuponthreekeyinsights:

1. Trade‐offsbetweenagencyandwelfareaffectbothnudgesandconventionaltools.

Nudgesarenotspecialtoolsthatcanachievemajorwelfaregainswithoutinterfering

withchoice.Inpractice,theyareaffectedbythesametrade‐offsasconventionaltools.

2. Nudges,whichSunsteinandThalerpointouthavebeeninuselongbeforeNudge,

havegenerallybeenbestsuitedtodrivingmodestchangesinbehaviouratlow

cost.Theytendtoplayacomplementaryrole,extendingtheeffectofconventional

policyregimes.Onlyunderidealconditionsaretheypowerfulbythemselves.

3. Conventionalpolicytoolslikemandates,taxesandtransfershavebeen,andwill

continuetobe,themostpowerfultoolsforcounteringbehaviouralbiases.The

major,prosperity‐enhancingreformsthatbehaviouraleconomicswilldriveinthe

comingdecadeswill,forthemostpart,employconventionalpolicytools.

4  

Theoreticalfoundations:Behaviouralbiasesandmarketfailure

Thebehaviouraleconomicsliteratureexplainsobservedbehaviourastheinteractionoftwo

factors:normativepreferences(whattheindividualactuallywantstoachieve,orwhatwould

actuallymaximisetheirwelfare),whicharethendistortedbybehaviouralbiasestoform

revealedpreferences(theactualchoicesobserved,whichoftenfailtomaximisewelfare).The

literaturedescribeshundredsofdifferentbehaviouralbiases,andamultitudeofthemcould

applytoagivenpolicyproblem.Forexample,thetypicalindividualholdsanormative

preferencetosaveenoughtohaveacomfortableretirement.Intheabsenceofasupportive

policyregimelikesuperannuation,thispreferencemaybedistortedbypresentbias,analytic

errors,forgetfulness,inattention,andmanybiasesbeyondthese.Foracomplex,intertemporal

choicelikesavings,thislistofbiasescouldgoonandon.

Biasesareusuallyorganisedintothreecategories:first,imperfectoptimisation,comprisingthe

biasesthatpreventusfromcalculatingtheconsequencesofourchoices,suchasthebiastoward

forecastingexponentialgrowthasthoughitwerelinear;second,boundedself‐control,including

psychologicalphenomenalikeprocrastination,emotionsandimpulses,whichpreventusfrom

implementingournormativepreferences(andguaranteethefailureofourNewYear’s

resolutions);andthird,non‐standardpreferences,wherewesimplywantthingsthat

conventionaleconomistsdonotexpectustowant,suchastoavoidexperiencingpainfullosses

evenifthismeanswinninglessoverall.Notethislastcategoryincludessomephenomenathat

canbegenuinedesires,likeconformitywithsocialnorms,althoughthesetooareregularly

exploited—forexample,bymarketerspayinghandsomeactorstosmokecigarettes.

Whenbehaviouralbiasesdistortnormativepreferences,thedecisionswemakemaybefarfrom

welfare‐maximising.ScholarslikeBrigitteMadrianarguethatbiasesshouldthereforebe

regardedasanewclassofmarketfailure.1Behaviouralmarketfailures,likeotherkindsof

marketfailure,openuppotentialroomforgovernmentintervention.Wherepolicyiswell‐

designed,itmayimprovetheefficiencywithwhichthemarketproducessocialwelfare.

Conventionalpolicytoolstypicallyaddressmarketfailures,orindeedachieveotherpolicygoals,

byshiftingmonetaryincentivesorrestrictingwhatpeoplecanchoose.Theyincludetaxesand

subsidies,mandatesorregulations,andvariouskindsofmaterialtransfers.Nudges,onthe

otherhand,eschewmonetaryincentivesorstrongrestrictionsonchoice,andinsteaddepend

uponsmallchangesin“choicearchitecture”thatgentlyguidechoicesinthedesireddirection.

Nudgesareonlyeffectivebecauseofthewaysinwhichreal‐worldpeoplearedifferenttothe

5  

rational,self‐interestedagent—inRichardThaler’sterms,goodnudgeswillaffectthereal‐world

“Humans”ofpsychology,butnottheperfectlyrational“Econs”ofeconomics.Notethat

conventionaltoolscanbestrengthenedbehaviourally,suchthatanEconwouldnotnoticethe

change(e.g.reframeanincentiveasaloss,morepainfulforHumanssubjecttolossaversion).

Importantly,abehaviouralpolicyproblemdoesnotnecessarilycallforanudgesolution.Aswe

shallsee,nudgesandconventionalpolicyinterventionscanbeusedtoresolveeither

behaviouralorconventionalpolicyproblems.Table1illustratesthiswithamatrixoffour

possibilities—althoughnotethatpolicyproblemsareoftenamixoftheconventionalandthe

behavioural,andinterventionsareoftenamixofnudgesandconventionalapproaches.

Table1:Therangeofapproachesavailabletothebehaviourally‐informedpolicymakertoresolve

bothconventionalandbehaviouralpolicychallenges

Conventionalpolicyproblem Behaviouralpolicyproblem

Conventionalintervention

E.g.alignteacherinterestswithstudentlearningbyprovidingapaybonusforbetterstudentperformance.

E.g.toovercomesavingsmyopia,useamandate(e.g.superannuation)orafinancialincentivetoincreasesavings.

Nudgeintervention

E.g.alignteacherinterestswithstudentlearningbyprovidingsocialrewards,likerecognitionandthanks.

E.g.toovercomesavingsmyopia,useanudge‐likeinterventionsuchaspre‐commitmenttosaving.

InsightOne:Bothnudgesandconventionaltoolsaresubjecttotrade‐offs

betweenagencyandwelfare

Nudge‐likepoliciesarenotnew.Policymakershavelongintuitedthatpeoplearenotperfectly

rational—thatframingisimportant,thatwefollowsocialnorms,thatwetendtostickwith

defaults,andsoon.Whatrecentadvancesinbehaviouraleconomicshavedoneisdramatically

enrichedourunderstandingofhownudgesworkandhowtheyshouldbedesigned—and,

notably,increasedtheirsalience.Asimportantly,orperhapsevenmoreso,behavioural

economicshasimprovedourunderstandingofwhenconventionaltoolsshouldbeusedand

howtheyshouldbedesigned.Why,then,hasalltheemphasisbeenonthenudge?

Theanswerispartlypolitical.SunsteinandThalerwroteNudgewithintheuniquepolitical

contextoftheUnitedStates,wherethelibertarianismofpoliticalentitiesliketheTeaPartyisa

powerfulforcetobereckonedwith.Theypromotethepoliticalphilosophyof“libertarian

6  

paternalism”asawayofresolvingthetensionbetweenlibertariansandprogressives—onthe

onehand,thedesiretopreserveindividuals’agencyinbeingabletochoosewhattheyprefer,

andontheother,thegrowingrecognitionthatindividuals’choicesarestronglyshapedby

cognitivelimitationsandcontextualfactors,withsometimessevereconsequencesforwelfare.2

Nudgesaresupposedtoinfluencechoicesinwaysthatincreasewelfarebutthatavoidcoercing

choices,lettingpolicymakerssteerasafecoursebetweenthesewarringtribes.

Iftheideaofavoidingpoliticallychargedtrade‐offsbetweenwelfareandagencysoundstoo

goodtobetrue,unfortunatelythisisbecauseitistoogoodtobetrue.Thedistinctionbetween

nudgesandconventionaltoolsturnsouttobeexaggerated,withnudgessubjecttomuchthe

sametrade‐offs.Taketwoexamples:first,theSaveMoreTomorrownudgescheme,whichhas

beentoonon‐coercivetobeeffective;andsecond,effortstoreducesmoking,anexampleof

nudgesthatareeffectivepreciselybecausetheyarecoercive.

Savingsbehaviourisstronglyaffectedbyarangeofbiases,andthecelebratedSaveMore

Tomorrowschemeusesasetofcleverlydesignednudgestocounterthem.Thescheme’smost

importantinnovationisadefaultautomaticescalationinsavingsovertime,soindividualswill

savemoreinfutureyearswithoutexperiencingalossinincometoday.Inanearlytrial,average

savingsreachedalmost14%.Yetactualimplementationhasbeenlessimpressive:amajorityof

employersofferedautomaticescalationby2011,butonly11%ofemployeeschosetoenrolin

theplan.Theescalationdefaultwas3%over3years,withnofurtherincreasesthereafter.The

US‐widesavingsrateincreasedbyafeeble0.33%,3atinyfractionoftheeffectachievedby

schemeslikeAustralia’ssuperannuation—withenormousimplicationsforwelfare.

Theproblemwithagency‐preservingnudgeslikeSaveMoreTomorrowisthattheycontinueto

relyuponthediscreditedrationalmodel.Peoplemustchoosetoparticipateandmustchoose

therightsettings,butthesearechoicesthatthebehaviouralevidenceclearlyshowswecannot

reliablymake.YetifanudgeschemelikeSaveMoreTomorrowwasstrengthenedenoughtobe

effective—say,allemployersarerequiredtoplaceemployeesinopt‐outsavingsescalation

schemes,withahighdefaultsavingsrate,andpenaltiesforthosewhodoopt‐out—thenit

effectivelybecomesacoercivemandatewithacostlyescapeclause.Evidencefromthe

behaviouralsciencessuggeststhateventhisschemecouldbewelfarereducing,becausepeople

whochoosetoopt‐outoftendosoirrationally,withsometimesenormouswelfarecosts.

Anoppositecaseisillustratedbycigarettesmokingnudges,whicharesubstantiallymore

coercivethantheSaveMoreTomorrowscheme.Plainpackagingrulesmakecigarettes

7  

unattractive;theQuitcampaignprovidesservicesthatpromptsmokerstoplanaheadandmake

commitments;removingcigarettesfromviewandsellingthemataseparatecountermakes

themhardertoaccess;healthwarningsplacedatthepointofsalemakeforatimelyand

emotionallypowerfulreminder;andsocialstigmapitssmokersagainstthepowerfulforcesof

socialconformity.Peoplearestillfreetoexercisethechoicetosmoke,buteverynudgeinthe

bookispointingintheotherdirection.Thoughthisisanudgeregime,itisclearlyhighly

coercive—anditispreciselythehighcostsimposedonsmokersthatmakestheregimeeffective.

InsightTwo:Nudgesarebestsuitedtodrivingmodestchangesinbehaviour

atlowcost,andcanenhancetheeffectsofconventionaltools

Nudgesarenotspecialtoolsthatevadeagency‐welfaretrade‐offs.Theyare,nonetheless,very

usefulundertherightconditions.Thispolicybriefwillnotattempttoimproveuponthemany

excellentoverviewsthatalreadyexist.Amoreimportantquestionforthebriefisthis:given

nudgessometimescompletelyshiftaggregatebehaviour,andonotheroccasionsareentirely

ineffective,whenshouldpolicymakersbeparticularlyenthusiasticaboutthepotentialof

nudges?

Awell‐designednudgemaybeaparticularlypowerfulpolicyoptionwhere:

1. individualunderlyingpreferencesarerelativelyhomogeneousandarealreadyaligned,

oronlyweaklymisaligned,withthedesiredbehaviour;

2. thecognitivebiasesthatdistortunderlyingpreferencescanbeeasilyovercome,orused

tothepolicymaker’sadvantage;and

3. eitherindividualchoicecannotbeavoided,oragencyisvaluableandthebenefitsof

preservingagencyarenotoutweighedbywelfarecosts—ineitherofthesecases,the

useofstrongerpolicyoptionsisnotpossible.

Organdonationnudgesaretheposterchildforsuchsuccess:(1)alargemajorityofpeoplehold

normativepreferencesthatarealignedwiththesociallyoptimaldecisiontodonate;and(2)the

decisiontodonateisnotfixedbypowerfulbiases,butislargelytheresultofadefaultbiasthat

policymakerscaneasilyharness.Theseconditionsallowanudge—aswitchfromanopt‐intoan

opt‐outdefault—tocompletelytransformoutcomes,suchthatamajorityratherthanaminority

choosetodonate.Onpoint(3),anudgeissuperiortoamandateherebecauseagencyiscrucial:

peoplecannotreasonablybeforcedtodonatetheirorgans,andthebenefitsofpreservingchoice

arejudgedtooutweighthecosts.

8  

Amoremodestexampleisaprogramaimedatimprovingdrugprescriptionchartstoreduce

medicalerrorsinhospitals:(1)doctorsandnursesholdanormativepreferencetoenter,and

read,therightdrugandprescribeddosagefromtheprescriptionpaperwork;(2)theproblemof

illegiblehandwritingcaneasilybeovercomewithbetterdesignedforms;and(3)thisisacase

wherethebehaviourisalreadymandatedtothehilt—medicalpractitionersfacestrong

incentivestodeliverthecorrectdrugsanddosages.Nudgescanhelpstaffcomplywiththe

mandate(and,formostpractitioners,theirownpreferences).Indeed,thenewchartsvirtually

eliminatederrorscausedbyconfusionbetweenmilligrams,or“mg”,andmicrograms,or“mcg”.4

Inmanycasestheseconditionsarenotmet,andnudgeswillproducerelativelysmallgainsat

themargin—albeitusuallyatverylowcost.Theywillbeauseful,butlimited,partofawider

policymix.

InsightThree:Conventionalpolicytoolswillcontinuetobethemost

importanttoolsforcounteringmanybehaviouralbiases

Policymakersdonottypicallythinkofconventionalpolicyinstrumentsascentraltobehavioural

policymaking,yettheyshould.Thissub‐sectionprovidesexampleswhereabehaviouralanalysis

ofapolicyproblemfavourstheuseofaconventionalpolicytool,withexamplesprovidedunder

mandates,standardincentives,andtransfers.

Mandatesandregulation

Mandateshavebeenthetoolofchoiceformanyimportantwelfareoptimisationproblems—

seatbelts,bicyclehelmets,cigaretteadvertising,rentalpropertystandards,fairmortgage

contracts,waterfluoridation,milkpasteurisation,superannuation,minimumwages,andmuch

beyond.Regulationsarethemostpowerfulinstrumentsforshapingbehaviour,withthelevelof

interferenceincreasingastheymovefromrequirementsorrestrictionsimposedonmarketing

(e.g.paydayloanadvertising),toproductattributes(e.g.unfairinterestrates),andfinally

behavioursorwholeproducts(e.g.paydaylending).

Theirstrengthgivesthemhighpotentialforbothbenefitandharm,soitisunsurprisingthat

theyareoftencontroversial.Benefitismostlikelywherenormativepreferencesarerelatively

homogeneoussothataone‐size‐fits‐allmandatecanproducebenefitsformostpeople;where

choiceerrorsarecommonandcostlyintheabsenceofamandate;andwhereagencyisnottoo

9  

highlyvalued.Harmislikelywherenormativepreferencesareheterogeneous,andindividuals

areblockedfromundertakingbehavioursthatgenuinelyenhancetheirwelfare.

Mandatescanimprovewelfareincasesofboundedself‐controlorimperfectoptimisation.

Beshearsetal.(2014)provideanexampleofhowmandatescanaddressboundedself‐control:

theystudyamodelofretirementsavingswhereindividualsaresubjecttodifferentdegreesof

presentbias,andthereforedifferentlevelsoflikelihoodforwithdrawingfromtheirsavingstoo

early.Whatlevelofpenaltyonearlywithdrawals,todiscouragethebehaviour,wouldmaximise

welfare?Theiranalysisfindsthewelfare‐maximisingpenaltyis100%—thatis,withdrawing

shouldbeimpossible.Alowerpenaltydoesallowasmallnumberofpeopletowithdrawearlyin

arationalway,buttheirwelfaregainsarecompletelyoverwhelmedbythewelfarelosses

experiencedbythosewhoirrationallywithdrawduetopresentbias.5

Thisisoneweaknessofnudge‐basedsavingschemesthatallowopt‐outs,likeSaveMore

Tomorrow:thepeoplewhoopt‐outofsuchschemesmaybelievetheycandobetterwithoutit,

butthisistypicallynotthecase.Onaverage,theyexperiencesignificantwelfarelosses.Indeed,

theUSInternalRevenueServiceimposesa10%penaltyonearlysavingswithdrawalfrom

401(k)plans,butevenso,forevery$1thatissaved,$0.40iswithdrawnprematurelyat

substantialcost.

Australia’ssuperannuationpolicyusefullyhighlightsanotherpropertyofasuccessfulmandate:

popularconsent.Becausemandatesareopentochargesofpaternalism,theydependheavily

upondemocraticlegitimacy.Mandatesaremostlikelytosucceedwhentheyareunderstoodto

havebeenimposedbyacommunityuponitself,withoutmarginalisingunderrepresentedsub‐

groups;andwhentheyenactmostindividuals’normativepreferences,withouteliminatingany

cherishedchoices.Inthecaseofsuperannuation,mostpeopledowishtosaveadequatelyand

over80%ofAustraliansareinfavourofthescheme.

Standardincentives

Incentivesaremostusefulwhenchoicesareshapedbyself‐controlbiases.Theliteratureisthus

focusedheavilyuponpolicyproblemslikethepromotionofhealthybehaviours,suchasquitting

smokingorgoingtothegym;educationaloutcomes,likestudentperformance;andlabour

marketoutcomes,likeincentivesforfindingajoborforworkingharder.Somepeoplerecognise

thattheylackself‐control,andwillwillinglyimposecostsuponthemselvesinwaysthatwould

bebizarreforarationalagent.Forexample,studieshavefoundthatdataentryworkers

10  

willinglysubjectthemselvestopaymentschemeswithhighpotentialdownside,butnoobvious

upside—forexample,theythreatenthemselveswithsubstantialmonetarylossiftheyfailto

reachadailydesiredtarget,say,1,000entriesinaday.Peoplechoosesuchschemesas

commitmentdevices,andtendtoworkharderundersuchself‐imposedthreats.

Letusreturntocigaretteaddictionasaprimeexampleofindividualsstrugglingtoimplement

theirnormativepreferences.Around70%ofsmokerswouldliketoquitatanygivenmoment,

butonly3%succeedinagivenyear.Researchsuggeststhatsmokingimposescostsonone’s

futureselfofaroundUS$35perpack,afigurethatisvastlyhigherthanwhatpeopleeverpayfor

apack.Eventhemostcoercivenudgescannotprovideasignalthatreflectsthiscost.Cigarette

taxes,ontheotherhand,canprovideamotivationalcountertoaddictionthatstudiessuggestis

oneofthemoreeffectivepartsofapolicymixforreducingsmoking.6

Whileataximposeshighercostsonsmokersandhasbeencriticisedasregressive,behavioural

evidencesuggeststhatitmayreducesmokingsufficientlythatitslong‐runeffectonmost

individualsisnetpositive.Acigarettetaxcanthereforebeprogressiveratherthanregressive.

BehaviouralstudiesofUSandCanadiansmokershavedemonstratedthatincreasingtaxeson

cigarettescanactuallyincreasethewell‐beingofcigarettesmokers,byassistingthemtoexert

self‐control.7

Incentivesarealsousedtoencouragepro‐socialbehaviour,andbehaviouralevidenceturnsout

tobecrucialforsuccessfuldesign.Incentivesaremessages.Themerepresenceofanincentive,

whichattachesapositiveornegativesignaltoachoice,canbemoreimportantthanthe

magnitudeoftheincentive.Individualsinterpretthismessagewithinaparticularsocialcontext,

andincentivesthusinteractwithsocialpreferencesinimportantways.Carelessuseof

incentivescanbackfirebydisplacingand“crowding‐out”beneficialsocialpreferences,while

well‐designedincentiveswillinstead“crowd‐in”andstrengthensocialpreferences.

Whethercrowding‐outorcrowding‐inpredominatesisdeterminedbytheinterpretationofthe

incentives.Incentivesaremorelikelytobackfirewhentheyareseenasmanipulativeor

imposedfromabove;whentheyarearbitrary,difficulttoactupon,orunfair;whenthey

encourageselfishmaximisationbehaviour;orwhentheysuggestthatanactivityisunpleasant

andthereforemustbecompensated.Individualsaremorelikelytoseeanincentiveas

legitimateiftheyunderstandandendorseitspurpose,andiftheyperceivetheincentiveas

imposedbytheirpeersforthegoodofthegroupasawhole.Pro‐socialpreferencescanbe

strengthenedwhensmallincentivesareusedtoreiterategroupnorms.

11  

Finally,notethatincentivestendtobelesseffectiveforaddressingimperfectoptimisation

biases.Anexcellentexampleisthedesignofanaircraftcockpit:earlydesignswereextremely

complex,withhundredsofbuttons,leversandinstruments.Clearlypilotshaveeverypossible

incentivetoflywell,giventheirverysurvivaldependsuponit—andyetthecomplexityofthe

environmentledtocriticalerrors.Insuchacase,furtherincentivesareclearlyfutile.

Optimisationbiasesarebettercounteredbynudges(suchasmakingthechoiceproblemeasier,

ortheincentiveseasiertounderstand),aswellasmandatesandinsomecasestransfers,

althoughincentivesmaybeusedtosuggestausefulstrategyforsolvingacomplexproblem(e.g.

smallincentivesforinvestorstodiversifytheirportfolio).

Transfers

Therationalmodelholdsthattransfers,suchasthoseprovidedasunemploymentbenefits,

shouldcomewithasignificanthasslecostinordertodisincentivisetheiruseandpreventmoral

hazard.

Acognitivescarcitymodelsuggestssomethingquitedifferent.8First,transfersshouldbe

evaluatednotonlyfortheirwell‐beingbenefitsbutalsotheirimpactoncognitiveresources.

CashinfusionsthatliberateIndianfarmersfrompoverty,forexample,produceincreasesinIQ

ofnearlyafullstandarddeviation—adramaticeffectthatwouldbetheenvyofanyeducational

system.Second,thehasslecostofmeetingtherequirementsofwelfareservicescanperversely

imposea“cognitivetax”thatonlyaddstothecognitivechallengesofpoverty.Policymakers

shouldbecarefultodesignschemesthatdonotposeexcessiveburdensonalreadycomplicated

lives.9

Wherebehaviouralevidenceandtherationalmodelagreeisonhowindividualsspendsuch

transfers:studiessuggestthatspendingisrelativelyrational.Thenumberofvicegoods

purchasedasaproportionoftotalspendingtendstodecreasewhentransfersareprovided,

whilespendingonpolicymakers’preferredgoods,likenutritiousfoods,tendstoincrease.10

Utah’shomelessnessstrategymakesforaninterestingcasestudy.In2005,“no‐stringsattached”

housingwasfirstprovidedtothechronichomeless,withoutrequiringdrugtestsandwith

minimalrent.Therewerefearsthattheprojectwould“incentivisemooching”,asperthe

rationalmodel.Utah’schronicallyhomelesspopulationhassincefallen90%,andbytheendof

2015“maybevirtuallygone”.11Mostrecipientssuccessfullymakerentpayments,andcostsare

12  

muchlowerthanthatofprovidingservicesforthechronicallyhomeless.Whilenobehavioural

analysishasyetbeenperformed,theprojectmayhavepowerfulcognitiveeffects:providing

housingsimplifiesthelivesofthehomeless,providesabufferagainstshocks,andfrees

cognitiveresourcesforchallengingtaskslikequittingdrugsandfindingemployment.

Conclusion

Behaviouraleconomicshaspeeledawaytheaxiomsoftherationalmodeltorevealthelayersof

psychologicalcomplexitylurkingunderneath.Policymakerscanusethisricherunderstandingof

humanpsychologytoimprovethedesignofnudges,mandates,incentivesandtransfers.These

toolsareessentialpartsofthepolicymix,andinpracticeareoftencomplementary.

Conventionaltoolslikelyprovidethemostsubstantialpotentialforsignificantwelfare‐

enhancingreforms,whilenudgestendtobemosthelpfulforfine‐tuninginstitutionsinorderto

bringefficiencygainsatlowcost.Whichevertoolisemployedforagivenpolicyproblem,

policymakersshouldseektobalanceindividualagencywithsocialwelfare.

Unlockingthispotentialwillrequirenewpracticesofpolicydesignandevaluation,focusedon

generatingandapplyingnewevidence.Behaviourdepartsfromtherationalmodelinmyriad

ways,andthereisanequallylargearrayofoptionsforsettingbehaviourontherightcourse.

Suchawideandcomplexfieldofpossibilitymustbenavigatedwithaninterdisciplinarymixof

methodsfromtheappliedbehaviouralandeconomicsciences,toidentifythecausalrelations

thatunderliepolicyproblemsandthatmakeinterventionswork.Thisisbehavioural

policymaking—theweighingofallpolicyoptionsinlightofthefullbodyofevidence.

                                                            1Madrian,B(2014)“Applyinginsightsfrombehavioraleconomicstopolicydesign”,WorkingPaperno.20318,NationalBureauofEconomicResearch.2Sunstein,C&Thaler,R(2008)Nudge.YaleUniversityPress.3Benartzi,S&Thaler,R(2013)“Behavioraleconomicsandtheretirementsavingscrisis”,Science,339(6124),1152–1153.4 King,D,Jabbar,A,Charani,E,Bicknell,C,Wu,Z,Miller,G,Gilchrist,M,Franklin,B&Darzi,A(2014)“Redesigningthe‘choicearchitecture’ofhospitalprescriptioncharts”,Healthservicesresearch,4(12).5Beshears,J,Choi,J,Clayton,C,Harris,C,Laibson,D&Madrian,B(2014)“Optimalilliquidity”,paperfortheRetirementResearchConsortium,September26.6E.g.seeLewit,E&Coate,D(1982)“Thepotentialforusingexcisetaxestoreducesmoking”,JournalofHealthEconomics,1(2),121–145.7Gruber,J&Mullainathan,S(2005)“Docigarettetaxesmakesmokershappier?”,TheBEJournalofEconomicAnalysis&Policy,5(1).8Mani,A,Mullainathan,S,Shafir,E&Zhao,J(2013)“Povertyimpedescognitivefunction”,Science,341(6149),976‐980.9Mullainathan,S&Shafir,E(2013)Scarcity:WhyHavingTooLittleMeansSoMuch.Macmillan.10Evans,D&Popova,A(2014)“Cashtransfersandtemptationgoods:areviewofglobalevidence”,WorldBankPolicyResearchWorkingPaper6886.11Rascon,J&NBCNews(2015)“Utah'sstrategyforthehomeless:givethemhomes”,NBCNews,May3.