Behavioral economics in design of public policy..

A comprehensive and must read review on how behavioral economics can help in public policy. It is by Saugato Datta and Sendhil Mullainathan.

It looks at how  behavioral research findings can be made to use economic policy more meaningful and effective:

Successful development programs rely on people to behave and choose in certain  ways, and behavioral economics helps us understand why people behave and choose  as they do. Approaching problems in  development using behavioral economics thus leads to better diagnosis, which in  turn leads to better-designed solutions.  This paper sketches how to use behavioral insights to design development programs  and policies. It distills the key insights  of behavioral economics into a simple framework about the constraints under which people make decisions. It then  shows how this framework leads to a set of behavioral design principles whose use can  improve the reach and effectiveness of a  variety of development programs.

After looking at behavioral revolution, they look at the policy design:

Behavioral economics affects program design in three steps.

First, it changes how we diagnose problems. For example, when we see parents failing to vaccinate their child we may be  tempted to conclude that they do not understand the value of vaccination. Behavioral  economics forces us to consider another possibility: they want to vaccinate, they understand the benefits, but they don’t get around to doing it. Vaccination may be one of many behaviors, such as savings or going to the gym, where what we do fails to match up with what we want to do.

Secondly, it changes how we design solutions to problems. In some cases it  may suggest that something as simple as a reminder can have an unreasonable impact on  behavior. In others it may suggest a different way to offset our tendency to plan our  spending poorly.

Finally, it changes how we define the scope of the problem. Problems we  overlooked may suddenly become interesting ones to solve. We often focus on access  (“Make sure people get the drugs they need at low cost”). Behavioral economics suggests  important problems that remain even after access is solved (“Make sure that people actually take the drugs they are given”).  

One important idea pervades our approach. Applying behavioral economics is not simply  about intuition or about trial and error. It is a scientific, systematic approach to defining, diagnosing and designing solutions to problems in many different areas.

They show an example from Fertilizer Use. The problem is little fertilizer use by farmers:

  • The usual explanations are fertilizers are expensive, Access is a problem, unwillingness, incapable farmers etc.
  • Beh eco disagrees. Experiments show fertilizer not used where access is easy. Infact farmers say they want to apply fertilizers ahead of the season but fail to do so and spend on other items. So the desire does not translate into action. The diagnosis is thus very different in this case. It is about lack of self control and suffering from  procrastination.
  • The solution could be home delivery to farmers ahead of the season (to tackle procrastination) and some accounts which help farmers save for fertilizers upfront (to help self control).

The authors then point to a key insight- humans have limited mental resources. Scarcity which is a key concept on which economics is based. The same applies to human mind as well:

To help navigate the large set of findings, we condense the behavioral literature using one  simple perspective about the constraints under which people make decisions. Economists and  policymakers – indeed all of us – understand constraints all too well. Resources are limited:  there is only so much money, time, staff, or even enthusiasm to go around. Yet we often do not realize that mental resources are also limited (Thaler and Mullainathan 2000). While we  understand that physical resources must be carefully doled out, we are often blind to our  finite mental resources. Without realizing, we often design programs assuming that people  have unbounded cognitive capacity. We assume that they can think through complex problems effortlessly and quickly arrive at the “correct” choice. We often assume unbounded self-control, which leads us to expect people to always resist temptations and do what they  intend to do. These assumptions are often unstated, implicit, or even unconscious, but they  show up in the way we design programs and policies.

Behavioral economics can be understood as identifying a few more limited resources. In  practice, we have found it helpful to think about the limits on four basic mental resources, each of which we discuss below. For each, we will look at one problem. Then we will show a  few other problems where thinking about each limited resource leads to new ideas about why problems occur and how we can solve them.

Superb insight this. They point to four such scarcities of human mind:

  • Scarcity of Self-Control
  • Scarcity of Attention
  • Scarcity of Cognitive Capacity
  • Scarcity of Understanding

Explained superbly with examples. Based on these scarcities we have following behavioral design principles:

  • Principle 1: Facilitate Self-control by Employing Commitment Devices
  • Principle 2: Reduce the Need for Self-control
  • Principle 3: Remove Snags to Choosing
  • Principle 4: Use Micro-Incentives
  • Principle 5: Reduce Inattention: Reminders and Implementation Intentions
  • Principle 6: Maximize the Impact of Messaging: Framing Effects, Social Comparisons, Norms
  • Principle 7: Frame Messages to Match Mental Models

What does this mean for policy?

For donors, this means selecting projects where successes can be scaled. This affects the  kinds of problems chosen for experimentation. The most useful problems to work on would affect people in countries or regions beyond the one initially chosen, for instance because  they are pervasive across a number of developing countries

For researchers, this focus on impact at scale means privileging projects that build on existing government or large-scale non-profit programs rather than collaborations with  small, boutique NGOs or service providers.

Finally, this means that governments need to be open to involving behavioral experts when programs are first designed as well as to experimenting on existing programs. As important  is openness to exploring new (and sometimes surprising) pathways to impact that emerge in  the course of the detailed problem and behavioral analysis.

It isnt surprising that paper has most examples from India. I have always believed India to be the behavioral experiment lab of the world with such large diversity. However, we hardly see behavioral experts in Indian public policy. We need to heed the third point well and Indian govt should consult behavioralists more actively like UK is doing.

Superb reading. It is so simply and nicely written. Should be made part of syllabus on public policy and economics..

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