Behavioural Economics and Policy

Behavioural Economics and Policy Meeting 1 Introduction Katalin Kariko: Nobel prize, important for medicine/vaccine development. She was motivated by incentives outside of economics (unable to put into a contract), such as curiosity and selflessness.Biccheiri et al. (2021): Do people see other people comply with the rules, and do they believe that it is the right thing to do? -> We are social beings, what we see other people do motivates our behaviour and our belief in what is right.

A case of perverse incentives: electric cars and “statiegeld”

Requiring helmets when driving a fatbike reduces monitoring costs. Police can stop somebody when they are not wearing helmets. Without this law they can only stop people when they are driving too fast, but this doesn’t work as it is easy to slow down as soon as you see police. The goal of this law is to have less young people driving dangerous fatbikes, while not directly prohibiting them to.Even if these rules could be enforced, would you want rules such as respect to be forced?Behaviourally-informed policy making Public Economic Policy -response to social, economic and political problems faced by governments, -managed via regulations, subsidies, quotas, laws, and -implemented on behalf of the government by policy-makers assigned by the governments, and put in practice by public officials, but also non-profit organisations, sometimes in co- production with communities, citizens, experts, scientists and stakeholders, -with policy-targets being citizens, public organisations, firms Types of government interventions/policy instruments (AICO typology) -Authority:authoritarian instrument: command and control

-Incentive:incentivizing instruments (cost/benefit)

-Capacity:informational instruments / capacity (teaching/preaching)

-Organisation:(state-led or regulated) infrastructure

Each of them interacts with recipients’ behaviour/expectations/norms -Authority – bodily integrity importance, acceptance -Incentive – fairness, cost; reaction to incentives, crowding in/out -Capacity – openness, ability to absorb information; interaction of information with behaviour (expects, defaults) -Organisation – voluntary participation; structure, design

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Issues with different types of these instruments -Paternalism: the major in New York banned drinks with very high sugar content, but people and companies went to court and the decision was overruled.

-Incentives: can backfire

-Information absorption: ability/willingness to use, complexity, but also how is information presented? The design of incentive?-Institutional design: vacation money once a year/monthly affects financial health -Path-dependency: what is fair/acceptable is affected by the past; expected impact of current policies might prevent their use > Understanding how decisions are made (brain, cognition) allows to adjust policies to make them more effective (colour, font size, losses/gains, …) Behavioural science informed policy

Research informed: understand, translate, implement

Evidence-based: design, evaluate, adjust

Stakeholder-management:understand, explain, relate

Stakeholder managementhow you communicate with people who need your knowledge to achieve their goals.Standard economic model of decision-making Individual i at time t = 0 maximizes expected utility subject to a probability distribution p(s) of the

states of the world s ∈ S:

The utility function U(x|s) is defined over the payoff xit of individual i and future utility is discounted with a (time-consistent) discount factor δ

-Rational: (1), (3)

-Expected utility maximization: (1), (3) and (4)

-Selfishness: (4)

-Bayesianism: (3)

-Consistent time preferences: (2)

-Complete input fungibility: (4)

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Neoclassical vs Behavioural perspective on economic decision-making Neoclassical economicsBehavioural economics Well-defined, stable preferences (traditionally self-centred, but not necessarily!) Possible pro-social motivations, preferences beyond self-centred concerns, possibly not fully known, subject to change (e.g. due to framing), reference- point dependent, loss/gain asymmetry Optimizing individualNot always optimizing, e.g. satisficing, or heuristics driven choice; social context and identity matter (where I belong, what others think, what I think others think, what others know...) Unlimited cognitive capabilities to evaluate all available information Cognitively limited, filtering the available information through emotional states Bayesian updating under uncertainty, maximizing expected utility Biases and heuristics, ambiguity aversion Traditional vs Behaviour – informed policymaking Traditional approach assumptions: Rational decision-makers, markets without frictions can be designed. Or replaced by a benevolent regulator implementing the social welfare maximization.Decide & implement New approach: behavioural economics, experimental economics, RCT’s use insights on human decision-making (from economics, psychology) to inform policy-making, and new data sources.Inductive/adaptive way of policymaking

Toolboxes of behavioural insights: MINDSPACE, EAST, BASIC, DO IT

Making economics easier to understand for policy-makers.Examples are environment (product placement) and simplicity, for example in energy labels (instead of A+, A++, A+++, use A, B, C, etc.) Nudges, budges and boosts Nudge any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives.Budge governments recognizing that companies use nudges in their marketing. A budge protects a customer from nudges from companies. Governments reacting to nudges for companies (counter-nudge).Boost anything that has to do with increasing the capacity of decision-makers to act upon their own intentions. So no change of environment.Choice architecturethe way choice is presented to the decision-maker. Any choice has choice architecture, there is no neutral position.

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