How can findings from psychology and behavioral economics improve research and implementation of public policies?

“A lot of our policy models are traditionally based on a rather naïve understanding of what drives behavior. But if you have a more intelligent, nuanced account of how people make decisions, you can design policy that is effective, less costly, and makes life easier for most citizens.”

- David Helpern, director of the United Kingdom’s Behavioral Insights Team. Quoted in Bell, 2013.

Designing public policy and behavioral nudges

Numerous governments sponsor stimulus programs for employers, designed to increase the saving rates of their workers. However, about half of the employees do not use these types of stimuli packages. Instead, upon employment they delay their subscriptions into such savings programs. David Laibson, an economics professor at Harvard University, noticing this trend, conducted a study[i] in which, instead of the default option which required workers to voluntarily join the program, set the default option so that every worker was automatically subscribed, and if they wished to unsubscribe from the program, they had to specifically act on it. The percentage of employees that registered in the programs went up from 50% to 85%. The results of this research prompted the American administration to call for all employers to automatically include their employees in savings programs. The explanation for the sudden change in behavior is simple, and has been long known in psychology and economics: people have a tendency to appreciate current rewards more than future ones. Further, they avoid thinking about the future – a term known as “hyperbolic discounting” or present bias.

The above-mentioned example aptly illustrates what Richard Thaler and Cass Sunstein, in their seminal book Nudge from 2008, call a potential to apply findings from behavioral economics and psychology to improve the efficacy of public policies.[ii] The idea behind “nudge” is based on two simple premises:

1. a large body of research in psychology and economics shows that different biases contribute to the fact that people make irrational choices,[iii] and that most people approach decision-making in an intuitive manner,[iv]
2. seeing as how there are actual data and findings that point to these problems people have in decision-making, in the policy context, this means that in designing policies these findings should be taken into account.

In other words, the basic premise of “nudge” is that it is possible to design better public policies that are more efficient simply by taking into consideration findings that already exist in the domain of psychology and economics.

Approaches based on behavioral sciences can contribute to the design of policies, tailored and directed towards the person and the biases that impact her behavior in several ways. They can give examples of improving existing policies that have not managed to reach the targeted population or that haven’t reached set goals, supply us with post-hoc explanations for why certain policies failed (or succeeded), and why a certain constituency has reacted in a specific way towards a policy. The link between behavioral science and public policy is at most visible when some change of behavior is the desired goal of the policy, for instance, in cases where we want to increase savings, reduce smoking rates, reduce environmental impact and so forth.

Other situations where this link can be established is during the process of designing public policies, given the role, preferences, and manners of deciding of various actors in these processes. Understanding the biases that impact behavior while designing policies can help identify potential issues and problems that can pop up when the policy is implemented.

Applying behavioral science in practice

Using behavioral insights and nudges whilst designing public policies is becoming increasingly popular and is being used in several countries.[v]  The United Kingdom was the first country that established a governmental department – the Behavioral Insight Team focused purely on designing policies with the application of behavioral science findings. The White House, recognizing this potential, issued an executive order in which they stated that all federal agencies ought to rely on the findings of behavioral sciences in policy implementations. Other countries have also started to depend on this trend. Denmark, for instance, even though it does not have a centralized department for behavioral economics in the government, has several different departments that are part of the so called “Danish Nudge Network” consisting of a network of interested researchers and decision makers. In France, several initiatives, amongst them NudgeFrance, exist and are actively promoting the application of behavioral sciences in policy implementation. The European Commission has also readily accepted this trend. For instance, it has begun financing, through its FP7 grants, a project called Nudge-It, which is aimed at facilitating networking of scientists from 16 different institutions, with a goal of developing innovative tools that will be geared towards improving policies in the areas of nutrition and public health.[vi]

There are a few ways of applying behavioral insights in the process of development, implementation, and evaluation of policies. One of these are investigations which are implemented just like controlled experiments, that organize checks and possible improvements of certain public policy components. Such an approach can help governments in choosing the right strategy for their policies, to notice mistakes, as well as save money. For instance, analyses show that the United Kingdom government has saved over 20 times more than they invested in the Behavioral Insights Team. In the following paragraphs several examples will be given on how behavioral nudges and insights were used, in various policy contexts.

A great example is a study conducted by the European Commission towards helping investors understand various financial products. Mutual funds, investments based on insurance claims, and structural deposits are all examples of PRIP-s (Packaged Retail Investment Products), which are currently sold to private investors. It is estimated that the PRIP market alone is worth around 10 trillion Euros.[vii] PRIPs can be highly complicated to understand and can result in inefficient and suboptimal investments. The information that is shown within them is often long, complex, not easily understandable, and not suitable for comparison. In order to better understand the problem, the European Commission conducted a behavioral study on the processes of financial decision-making. The research team went through the literature regarding this issue and conducted several online and laboratory experiments in various member countries. The results have confirmed that the investors have significant problems in understanding investment choices, and that a simplification of the information on financial products significantly helped them improve decision-making. Because of this, the European Commission has suggested implementing so called KIDs, or “Key Identification Documents” for the PRIPs. These documents are shorter, easier to understand, and respond to several key questions that investors ask themselves – questions related to risks, expenses etc.[viii] These documents are now intended for use in all the member states where they allow for an easier comparison of investment opportunities in different areas of Europe.

Another classic example can be seen in designing policies for the promotion of healthy living. The government of Iceland recently, in an ingenious move, made a push towards motivating kids to exercise more and eat healthier. “Lazy Town” is a popular Icelandic kids program dedicated to health and nutrition. In cooperation with some TV programs and capitalizing on the popularity of the program, the government has started several initiatives. In one of them, in cooperation with a large supermarket chain, fruits and vegetables were marked as “sports candy” – a name that the television program uses for fruits and vegetables. This change resulted in a 22% increase in fruits and vegetables sales.[ix]

In other words, the way policy options are presented can significantly impact the preferences and behavior of people. For instance, research has shown that people make better decisions on fuel savings when the consumption is shown in the number of liters spent per 100 kilometers than number of kilometers-per-liter. The reason is because the connection between kilometers per liter is non-linear (i.e. the same increases in kilometers per liter are not equal to the amount of fuel saved) and behavioral research has shown that people are bad at making decisions based on non-linear thinking. Accordingly, the American Environmental Protection Agency has revised the way they present fuel consumption rates.[x] A similar phenomenon can be seen in the financial domain, where people have problems understanding the actual amount of cumulative interest rates on long-term loans. In the United States, the so-called CARD Act from 2009 stated that the loan users need to be notified differently in order to better understand the price of long term loans.[xi] Financial institutions now have to notify the client on the amount of time needed for the loan to be repaid with only minimal payments and how big the payments need to be in order for the debt to be repaid in three years. When information is presented like this, it helps the person to contextualize and better understand the risks connected to the loan. Finally, it helps them make better and more informed decisions.  

Researchers recently managed to influence the reduction of water usage in California during one of the worst droughts in its history. They did this by relying on descriptive social norms where information about the behavior of people in their neighborhoods was pointed out, e.g. how much water has been spent by each household. Upon seeing other peoples decreased consumption, others followed suit. Similarly, when the researchers of the Behavioral Insights Team worked on the problem of increasing tax payments they suggested changing the way the incoming notices are written. Instead of the usual threatening letters the new forms only reminded people that the majority of their neighborhood had already filed their taxes. This led to an increase of 15% in payments. Social norms worked again.

These are only a few examples that point to a widespread range of possibly ways behavioral sciences can be applied during the design, implementation and evaluation of public policies. As Maya Shankar, the lead scientist of the White House behavioral team says:

“It is not enough to design good federal programs. We must also take care that these programs effectively reach the people for whom they are designed. Behavioral science teaches us that even small barriers in access to various programs can have a negative impact on participation.”

Dilemmas and perspectives of applying behavioral science in designing public policies

Naturally, using insights from behavioral science does not always offer uniform results. For instance, cultural differences can play a significant role: when electrical energy users in the United States were told how much their neighbors spend, it led to a decrease in consumptions. However, when the same thing was tried in France, no visible impact was observed.

There are also a large number of critics that do not agree with the approach of “guiding” people and designing behavioral experiments. Political theorists remark that approaches such as these are in essence quite conservative and elitist, and they imply choice intrusion. Critics have also pointed out the ethical questions implicit in “controlling” or manipulating the situation of choice. There are certain fears that governments can use these findings in order to “program” the behavior of people.

However, advocates of the approach are adamant in their recommendations. Cass Sunstein, in a recent essay in the Chicago Law Review, said that the implementation of behavioral sciences can be used to improve the transparency of governments and even stop forced decisions by governmental officials. Other authors point to the fact that the very act of making and designing a policy is in itself non-distinguishable from impacting the choice people have, independent of the type of public policy.

Despite objections, it is to be expected that the behavioral sciences will be used more and more in researching and designing public policies. The application of behavioral insights, nudges, and findings from psychology and economics with the goal of designing, implementing, and testing public policies is a significant step in combining the applied sciences on the one hand and public policy on the other.