BEHAVIOURAL ECONOMICS –

APPLICATION AND EVALUATION

To apply BE in the form of policies and to

evaluate their effectiveness
VOCABULARY

 Nudge
 Choice architecture
 Mandated choice
 Utility maximisation theory
 Default rule
 Cognitive bias
 Bounded rationality
 Framing
 Heuristics
Clear the deck with BE
 https://www.tutor2u.net/economics/reference/behavioural-
economics-clear-the-deck-key-term-knowledge-activity
Policies
 Why Do We Do the Things We Do?
 https://www.youtube.com/watch?v=ku4Cmmhu7lI
BE policies in action
 SPEED DATING THE NUDGES

 You all have 1 card with one example of a nudge you need
to share it with the other people in your group
 Change nudge every minute
 Timer:
 https://www.google.co.uk/search?safe=strict&q=timer&oq
=timer&gs_l
=psy-ab.12..0i67k1l4.4643.5301.0.7251.5.5.0.0.0.0.119.5
57.0j5.5.0....0...1.1.64.psy-ab..0.5.546...0j0i131k1.0.rxAe
L5z4eqY
HEALTHY EATING

Numerous nudges have also sought to improve diet,

physical activity, and obesity. The first example
given in the book Nudge concerns changing the
choice architecture (i.e., the environment in which
choices are made) in school cafeterias to improve
children’s diets. Subsequent research has found that
minor alterations to school cafeterias to increase
the convenience and appeal of healthier options can
increase fruit and vegetable consumption of
schoolchildren (e.g., changes as simple as giving
interesting names to the vegetable options),
although there is little information of the durability
of these effects. In addition, some restaurant chains
have altered the default drinks and side dishes in
children’s meals to healthier options. (e.g.,
changing the default beverage from soda pop to
water, or the default side from French fries to apple
slices).
SMOKING

CARES was a voluntary

commitment product to help
people quit smoking. Smokers
got a savings account in which
they put their money for 6
months, after which they take
a urine test. If they pass, their
money is returned without
interest. If they fail, the money
goes to charity. The authors
found those offered CARES
were 3% points more likely to
quit smoking after 6 months.
VACCINATION
A field experiment prompted people
to form implementation intentions
about influenza vaccination.
Those who received the prompt to
write down just a date had a
vaccination rate 1.5 percentage
points higher than the control
group, which was statistically
insignificant. Those who received
the more specific prompt to write
down both a date and a time had a
4.2 percentage point higher
vaccination rate, a difference that
is both statistically significant and
of meaningful magnitude.
WEIGHT LOSS
In the treatment group, a person steps on
the scales in the morning. The subject’s
weight is calculated & sent to a server
comparing it to his weight-loss goals.
The subject receives an email about his
weight and a text message regarding
the daily lottery. Success in meeting
weight-goals enters the subject into a
daily lottery with a 20% chance of
winning $10 & a 1% chance of $100. If
a person doesn’t meet their goal, they
are still entered in the lottery. But if
they win, they are notified by text what
they could have won, a use of regret
aversion as a motivational tool. Those
in the treatment group lost 13.1lbs on
average compared to 3.9lbs in the
control after 4 months.
PENSIONS
The authors, reasoning that people may fail
to sufficiently identify with their future
selves to encourage them to save
enough for retirement, showed
participants (n=50) realistic age-
progressed renderings of themselves to
make the need to save more salient.
Participants could decide how much
they wanted to save on a slider: if they
indicated a low amount, they saw a age-
progressed rendering of themselves
frowning. If they indicated a high
amount, they saw the same figure
smiling. Results showed those who saw
the age-progressed renderings allocated
on average more than twice as much
($172 v $80) as those who saw non-age
progressed renderings in a hypothetical
account.
Social norms
Law Abiding Behaviour 90. When
nudges go wrong. In an attempt
to reduce the theft of wood from
Arizona’s Petrified Forest
National Park the authors put up
a sign with the descriptive social
normative message “Many past
visitors have removed petrified
wood from the Park, changing
the natural state of the Petrified
Forest”. This led to a near 8%
increase in wood theft, as people
interpreted the salient message
to be “theft is common” rather
than “theft is bad”.
THE NHS

8. The Behavioural Insights

Team looked at reducing the
problem of ‘did not attends’
(DNAs) for NHS
appointments. Trials have
suggested DNAs can be
drastically reduced through a
combination of behavioural
approaches; for example
prompting patients to
verbally repeat their
appointment time to staff and
using normative messages
indicating how many patients
usually turned up on time for
their appointments.
PAYING TAXES

 The Nudge Unit has been running

dozens of experiments and the early
results have been promising*. In one
trial, a letter sent to non-payers of
vehicle taxes was changed to use
plainer English, along the line of
“pay your tax or lose your car”. In
some cases the letter was further
personalised by including a photo of
the car in question. The rewritten
letter alone doubled the number of
people paying the tax; the rewrite
with the photo tripled it.
LOFT INSULATION
 Another set of trials in Britain focused on energy
efficiency. Research into why people did not take up
financial incentives to reduce energy consumption by
insulating their homes found one possibility was the
hassle of clearing out the attic. A nudge was designed
whereby insulation firms would offer to clear the loft,
dispose of unwanted items and return the rest after
insulating it. This example of what behavioural
economists call “goal substitution”—replacing lower
energy use with cleaning out the attic—led to a threefold
increase in take-up of an insulation grant.
SOCIAL NORMS
 All this experimentation is yielding insights into
which nudges give the biggest shove. One question
is whether nudges can be designed to harness
existing social norms. In Copenhagen Pelle
Guldborg Hansen, founder of the Danish Nudging
Network, a non-profit organisation, tested two
potential “social nudges” in partnership with the
local government, both using symbols to try to
influence choices. In one trial, green arrows
pointing to stairs were put next to railway-station
escalators, in the hope of encouraging people to
take the healthier option. This had almost no effect.
The other experiment had a series of green
footprints leading to rubbish bins. These signs
reduced littering by 46% during a controlled
experiment in which wrapped sweets were handed
out. “There are no social norms about taking the
stairs but there are about littering,” says Mr Hansen.
Insurance claims
 Reminding people about their moral standards brings their good
intentions to the surface, and they are less likely to cheat. That’s the idea
behind honour codes, and it works.
 An insurance start-up company called Lemonade leveraged this powerful
insight to design their claim process so that they are able to
approve a claim in just 3 seconds. When filing a claim, Lemonade users
sign an “honesty claim” in the very beginning, before they go on to
describe what has been stolen from them and other details. Signing a
form to attest the truth of your claim is nothing new in the insurance
business, but doing it at the beginning of the form rather than in the end
is. It is based on the behavioural insight that priming people about
honesty will encourage honest behaviour. Leveraging the behavioural
economics perspective, Lemonade has already disrupted the billion
dollar insurance business. So yeah, we would call that a pretty strong
argument on how behavioural economics can be good for business.
Plastic bags – when a tax is a nudge
According to The Economist, after Ireland introduced a plastic-
bag charge in 2002 (at €0.15 each) usage dropped by 90%. Marks
& Spencer, which introduced its own 5p charge in 2008, found
that it prompted a fall of 70%. Most economists would expect that
the impact of a plastic bag tax is likely to be determined by price
elasticity of demand.
Why might such a small charge have such a big impact? The
answer probably lies somewhere in Behavioural Economics.
That such a tiny fee can prompt so big a change implies that the
charge is really more of a “nudge” towards something that people
would be willing to do, if only they had the willpower.

https://www.tutor2u.net/economics/blog/a-nudge-to-reduce-plasti
c-bag-use
Personal goals
On StickK, users select a goal and commit to achieving it
signing a commitment contract to forfeit a certain amount of
money if they don’t. By the end of the period, if they
achieved the goal they get their money back. If they don’t,
the money goes to their predefined anti-charity, like the
National Rifle Association (for gun violence activists) or
The Clinton Foundation (for Republicans). StickK is based
on several behavioural insights, like loss aversion and
optimism bias. And it’s been proven to be a powerful tool.
So, check it out if you’ve tried everything and your gym
card still hasn’t been put to good use lately.
Using BE in an essay
 In 2018, the UK Government will impose a new tax on sugary
drinks, aimed at tackling obesity. Behavioural economists
believe that taxation alone is unlikely to be very effective in
reducing consumption. By 2050, obesity is predicted to affect
60% of adult men, 50% of adult women and 25% of children.
It is associated with a range of health problems including
type 2 diabetes, cardiovascular disease and cancer.

 Evaluate the view that imposing a tax is the most effective
government policy for reducing the market failures arising
from overconsumption of unhealthy food and drink.
 [25 marks]
ESSAY STRUCTURE
 Introduction – Sugar as a demerit good, negative
externality in consumption diagram. Effect on people and
society (AO1, AO2, AO3)
 Indirect taxation – Diagram, explanation, evaluation:
elasticity
 Subsidies on healthy drinks, analyse the implications
(AO3) – evaluate the effectiveness
 Regulation - a limit on the amount of sugar in drinks and
a fine if exceeded
 BE -
 Final conclusion -
 Therefore, as a result of the effectiveness of tax as a method to
alter behaviour around the consumption of demerit goods, it is a
very efficient policy.
 However, behavioural economics would argue differently. They
would claim that taxation would not alter consumer behaviour as
consumers are not rational and therefore may not respond in the
expected way to the sugar tax. This will be the case especially if
unhealthy goods are a habit forming good or eating unhealthily
is a social norm. This will limit the effectiveness of the tax and
may lead to government failure. However, on the whole, a sugar
tax has been highly effective in countries such as Mexico ,
indicating that it will be the most effective government policy to
reduce the market failure arising from unhealthy foods.
EVALUATING BE
ADVANTAGES DISADVANTAGES
THE ECONOMIST EVALUATES NUDGES
 It remains to be seen how the most promising trials of nudge theory
can be scaled up. Critics of big government remain suspicious of
nudging: Mr Sunstein used a recent essay in the University of
Chicago Law Review to endorse its less inflammatory virtues of
reducing the regulatory burden and increasing government
transparency. And not every policy works as planned: Mr Oullier
wants the European Union to test the anti-smoking warnings it puts
on cigarette packets, for instance, after research found that those who
say they are most shocked by the more graphic images were also
those who most craved a smoke after seeing them. But the initial
signs are promising. If nothing else, the nudge revolution encourages
the use by government of plain language; favours the design of
policies that actually take account of real-world behaviour; and
allows the testing of ideas on a small scale before wider
implementation. It deserves to be pushed.
EVALUATING BE
ADVANTAGES
Taps into the unconscious brain
Does not coerce people into doing things
Can be sampled on a small scale first
It is cheap to implement e.g. framing
It can help change social norms
A small impact on a large number of
people is always worth it if the costs are
low
Works well with Merit Goods such as
pensions, loft insulation and organ
donation
DISADVANTAGES
May be less effective when dealing with
addiction such as smoking, gambling and
junk food (demerit goods) but work with
littering.
Its effectiveness may not last
Some people react against it because they
feel tricked
Businesses can use to make us by stuff we
do not need
POSSIBLE QUESTIONS
1. The UK’s savings ratio is estimated to be 5.6% of disposable income.
Evaluate how useful the concepts of loss aversion and anchoring might
be in helping to increase the savings ratio in the UK.
2. Asset prices often experience “bubbles”. Evaluate the role that herd
behaviour and heuristics play in influencing people’s decisions in
spending on assets such as shares and houses.
3. Traditional economic theory assumes that businesses aim to maximise
their profits. Assess the role of choice architecture techniques such as
framing, nudges and default choices in helping businesses to increase
profits.
4. The basic economic problem is concerned with how to manage scarcity
as a result of infinite wants and finite resources. Assess the view that
behavioural economics is more useful than traditional neoclassical
economics in helping us to understand how consumers and producers
make decisions.
POSSIBLE QUESTIONS
5. The government would like to reduce obesity in the UK – around 70% of
adult men and around 60% of adult women are regarded as obese.
Evaluate policies that the government could use to reduce obesity, referring
to classical solutions such as taxes, subsidies and regulations, and
behavioural solutions such as nudges and default choice.
6. British roads are the most congested in Europe. Using your knowledge of
behavioural economics and neoclassical economics, evaluate the possible
policies that could be used to reduce congestion in the UK’s cities.
7. Assess the usefulness of behavioural economics in tackling market failure.
8. Nearly half of young adults have no plans to save for retirement. Evaluate
how behavioural economics techniques could be used to encourage more
people to save for retirement.

 Source;
https://www.tutor2u.net/economics/store/behavioural-economics-example-es
says-volume-1-for-a-level-economics
EXIT SLIDE
 You are meeting Boris Johnson (before he goes).

 Explain to him;
 1) why people do not always make rational decisions
 2) what merit and demerit goods are
 3) How nudges and choice architecture can help improve
the economic welfare of UK citizens by helping them
make better choices
SOURCES

 THE ECONOMIST
 http://www.economist.com/node/21551032

DATABASE OF NUDGES
https://www.stir.ac.uk/media/schools/management/document
s/economics/Nudge%20Database%201.2.pdf