Wednesday, July 1, 2009

Nudging public policy

Behavioural economics seeks to explain the actions of human agents in terms of their cognitive responses to situations. Cass Sunstein and Richard Thaler have written an excellent book, Nudge, which seeks to bring out these and some other issues. The authors argue that people are passive, often mindless, decision makers, influenced by the contexts and available choices, and can therefore be coaxed into making specific choices.

Thaler and Sunstein define their theories as "libertarian paternalism", which help people make more "informed choices". This a much travelled territory, and the danger here is that there is a very thin line between any paternalism and "Platonic guardians", which can often be a euphemism for Government as big brother.

Nudge goes beyond the paradigms of both the right, incentives and disincentives, and left, tax and regulate, and proactively seeks to structure and thereby influence the choice or decision making context. An indication that it goes beyond the traditional left-right paradigm is the fact that it has been enthusiastically embraced by the British Conservative Party leader David Cameron and Democratic presidential candidate Barack Obama.

Experience from across the world provides ample proof that important social issues like obesity, littering and garbage segregation at source, drinking and smoking, can neither be regulated away nor be disincentivized away using traditional approaches. Positive nudges proclaiming large compliance with certain regulations can be more effective in ensuring outcomes than those expressing concern at large numbers of deviations. Similarly, it has been proved that people are more averse to risks than they are attracted to gains. When people have to give up something, they are hurt more than they are pleased if they acquire the very same thing.

Nobel laureates Amos Tversky and Daniel Kahneman, in their seminal study of systemic biases in decision making, focussed on anchoring, availability, and representativeness biases, which lead to biased assessment of risks. Anchoring bias forces us to make estimations with respect to some specific example, which serves as an anchor to nudge decisions. For example, it has been found that charities get larger donation amounts if they posit higher minimum amounts before potential donors.

Availability bias arises from the salience or immediacy of an experience or event. The more recent event has a greater impact on our behaviour, desires and fears. It is therefore natural that personal experience of an event increases the probability estimate of the event. Representativeness bias refers to the feeling that if something has been happening, whose occurance is random, then it is likely to repeat more frequently.

One of the biggest challenges any government faces relates to that arising from the need to raise taxes. Nudge approach seeks to overcome this resistance by default taxes. Under this arrangement, the tax or user charge would be raised on the condition that those unwilling to pay the same can opt out by filling in a (sufficiently time consuming) format.

Sunstein and Thaler argue that markets cannot provide good nudges for many reasons. First, market driven investment decisions are oriented towards front loaded benefits and back-ended costs. Second, many decisions involve evaluating complex choices, where markets fail. Third, we do not always get to practice or watch the outcomes of all the options, which could have helped us choose the best alternative. Fourth, markets do not always provide the best feedback. Finally, we do not always know what we like we the best.

The authors give numerous examples of nudges in public policy making - opt-in default clauses for organ donations in Spain, Save More Tomorrow campaign which commits savers to automatically increase their savings as their salary increases, default social security savings plan as in Sweden, hygiene cards that rank cleanliness in hotels in hospitals, pollution standard stickers on vehicles displaying the quantity of emissions from the vehicle, Give More Tomorrow campaign that automatically commits the donor to periodically increase recurring charitable donations, simplified tax procedures that mail pre-printed annual income tax return application formats customized for each tax payer etc.

Default options are one of the most powerful ways of structuring choices. Given the fact that humans are not exactly fully rational and are not generally competent in making complex calculations, good default choices are an excellent choice.

Appropriately tailored nudges can go a significant way towards addressing serious public policy challenges like getting teachers, doctors and nurses to attend schools and hospitals, and so on. It has been proved that positive messages that proclaim the achievements rather than negative ones that highlight the problems are more effective. Thus messages that claim that three out of four people conform to building regulations are more likely to be effective than ones that wail that one in four violate them.

e-Governance initiatives and commputer applications are a fertile ground for facilitative nudges, that seek to prod functionaries to achieve certain objectives using default options and mandatory fields.

Most messages on environment conservation tends to get lost due to its failure to relate the problem to the target audience. People fail to appreciate the impact of a far away event like Tsunami or deforestation of rain forests or a diffuse event like global warming or depletion of natural resources. It is necessary to frame these messages in a narrative that can be contextualized in the immediate surroundings of the audience. The messages can be more effective if it highlights the immediate cost of the problem for us.

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