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Home > Blogs > Anthony Harrington > Behavioral economics – new tricks for government financing? Part Two

Behavioral economics – new tricks for government financing? Part Two

Behavioral economics – new tricks for government financing? Part Two Anthony Harrington

In 2010 the UK Coalition Government, impressed by what it knew of behavioral economics, decided to set up a group of 13 academics as an adjunct to the Cabinet Office. Called the Behavioural Insights Team, or the Nudge Unit, this group was given the task of finding smart ways of "encouraging and enabling people to make better choices for themselves." The Nudge Unit's output was sufficiently impressive for Government to seek to make the unit the first policy unit to spin off from Central Government as a profit making venture.

The whole idea initially was to use behavioral economics, the basics of which are touched on in Part One, to improve the effectiveness of government programs and to find ways of getting more people "doing the right thing", i. e. giving increased traction to public policy implementation. The list of ways in which citizens could be less of a drain on the public purse is fairly extensive. Refraining from binge drinking would be one example, taking more exercise and eating better would be another, and so on. When the Government announced the spin off of the Unit back in May, it praised the Nudge Unit fulsomely:

"The team was established to find ways of encouraging, supporting and enabling people to make better choices for themselves. Since then it has delivered rapid results - identifying tens of millions of pounds of savings, spreading understanding of behavioural approaches within government, and developing a reputation as a world leader in its field."

In other words, as far as the UK Government is concerned, behavioral economics works. One has to remember that this comment was made in the context of inviting bids from interested parties as the Government tries to spin out the Nudge unit, so a certain amount of egging the pudding is inevitable. But the Unit itself has a number of successful projects it can point to. One of these was when it was tasked to help the government improve the take up of loft insulation by householders. The team found that one of the reasons for the slow take up was that lofts, as everyone knows, are wonderful places for storing all those things that you don't really want to part with but are unlikely ever to want again. They are the archetypal "file and forget" zone. The Unit came up with the idea of providing householders with low cost labor to clean out their rubbish-filled lofts, which then made it easy for the householder to move to the next step, namely installing loft insulation. The point here is that you take a grand policy, the need to conform to the Kyoto protocol, move to the next layer down, reduce the need for heating fuel, which lowers the UK's use of fossil fuels, then take a detailed look at what is preventing the take up of what looks like something households should be wanting to do - namely reduce the cost of heating bills. The approach produced a substantial increase in the take up of loft insulation grants by households.

The Unit has produced several research papers which stand up to scrutiny. The team's most recent paper, "Applying behavioural insights to charitable giving", provides yet another example of how "nudge theory" works in practice. The team started by focusing on understanding what the behavioural science literature suggests would work in practice by way of increasing charitable giving, and then conducted a series of trials and tests to see how these insights panned out in practice through the use of controlled randomised trials. They identified four "behavioural insights". People give more when you make the process of giving easy, as for example, building in an option to automatically increase future payments in line with inflation (you get increased giving without the need for the individual concerned to take additional action); using auto enrolment as a workplace mechanism for higher paid staff to donate, with clear opt outs (again this uses the power of inertia); drawing on beneficial peer effects by making acts of giving more visible to others in the same social group and fourthly, establishing group norms to provide an "anchor" for subsequent donors. Another point was getting the timing right for charitable appeals - timing matters, i.e. December is a better giving month than January, for obvious reasons.

There is no space here to go into the results of the trials, but a quick summary is that nudging definitely works, not with everyone, perhaps, but given a reasonable population size for a trial, you get improved effects by doing things "smarter", going with the flow of behavioural patterns, rather than ignoring them or unwittingly cutting across them. Can we expect governments generally to start getting smarter about policy implementation? Definitely, I would say. The Nudge Team has already attracted international attention and they are not the only ones exploring this road. The advertising industry, of course, would say that they have been blazing the trail here for donkey's years, since their whole game is to influence behaviour. One can only hope that government policy makers do not become as annoying as whole swathes of the advertising industry!

Further reading on economics and policy:

Tags: behavior , Kyoto Protocol , Nudge Unit , public expenditure , UK Government
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