New Review of practical Behavioral Economics by Cass Sunstein

New insights on behavioural economics by Cass Sunstein of Harvard Law School – the co-author (with Richard Thaler) of Nudge. Applying real-world behavioural economics, using choice architecture and default rules to beat biases

In September 2010 David Cameron established a Behavioural Insights Team, nicknamed the “Nudge Unit” to see how to make practical use of Richard Thaler’s ideas. Thaler, a professor at Chicago, is advising. The Team has now been running dozens of experiments, with encouraging results. The aim is to use technology better, to have better information on customers’ own needs and preferences, and to encourage helpful collaboration. Overall it proposes (better choices : better deals) a shift towards regulation that empowers consumers to send the right signals to businesses, rather than simply dealing afterwards with damage that has been done.

When plain English was used in a letter to drivers who had not paid their vehicle tax, making it clear that the option was “pay your tax or lose your car”, payments doubled. Another version additionally included a photo of the car in question and actually trebled payments. Other applications include telling high users of energy how consumption compares with neighbours.

Sunstein highlights a range of areas where behavioural economics can improve regulation, law and public policy at low cost. These cover a very broad range of areas, with the most common being savings, health, the environment and education.

The research has shown a number of factors that matter. Policies should be designed to take account of real-world behaviour, tested on a small scale before wider application, and set out in plain language.

It is important to clearly explain salient information on the risks involved in a decision. Individuals make the best decision when presented with unambiguous specific options rather than vague or abstract goals. Phrases like “healthy eating” achieve little.

Framing – the way in which information is presented – matters. As Sunstein puts it “attention is a scarce resource”. Vivid and salient presentations are more likely to be effective in encouraging appropriate information to be given the right weight. Individuals can focus too narrowly on less important data. Salience can be increased by providing the relevant frame or context for information. Effective warnings are needed.

Social influences also matter; we pay attention to behaviour of our peers. This can result in some positive informational cascades and new social norms which can create compliance by themselves. For example; use of seat belts and abhorrence of drink driving have become social norms, and individual behaviour has changed.

Individuals can have an unrealistic optimism. Availability bias – highlighting less relevant information or preventing a holistic view, can create a misunderstanding of probabilities and risks. The way in which choices are presented – choice architecture – also matters. Small incentives or nudges can be effective. Individuals often focus on short term costs, neglecting long term benefits. The benefits need to be made real.

In summary, government action should focus on disclosure policies, simplifying choices and using default rules when appropriate, increasing saliency and promoting social norms. Disclosure should be concrete and straightforward. The key is that information should be simple, meaningful, timely and salient. It is important to avoid abstract statements like “good diet”.

Rather than long term ideals, individuals should be offered clear immediate and practical steps to that goal. For example, “make half your plate fruits and vegetables” is a more meaningful guide to diet and health, than simply saying “healthy eating”.

Information should be put in understandable and credible ways. Presenting a choice of cars in terms of fuel savings over five years or gallons per mile, is more effective than mpg figures. The aim is to show costs and outcomes more clearly.

Default rules can be helpful in savings and health, tackling inertia and procrastination. It is important that those determining public policy have the right information to present correct default rules. These rules can also have the benefit of offering an implicit endorsement of the default decision and provide a reference point. However, there is a warning that extreme defaults may not stick – there are definitely limits to nudging. It is important the default rule is well informed and credible.

Sometimes rather than default rules, presenting clear active choices can work. It is important to structure the choice correctly – too much information, or too many options can create a choice overload.

The paper is a good review of current work in applying behavioural economics