Behavioural Economics Update 2019
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This document discusses behavioral economics concepts and policy interventions. It summarizes key concepts like loss aversion, default choices, and herd behavior. It then examines several policies using behavioral insights, including the UK sugar levy, auto-enrollment pensions, and presumed consent for organ donation. It evaluates whether nudges can significantly impact behaviors at scale and addresses potential unintended consequences and limitations of behavioral policies.
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Behavioural Economics Update 2019
- 1. Behavioural Issues and Policy Interventions (2019 update) A Level Economics
- 2. Important Behavioural Concepts •Loss aversion •Bounded rationality •Present bias •Choice overload •Default choice •Presumed consent
- 3. Important Behavioural Concepts •Social norms •Altruism •Herd behaviour •Framing •Choice architecture
- 4. Some topical behavioural economics issues Impact of the UK sugar levy Tackling gambling addiction Pension auto enrolment Organ donation & presumed consent Risks from the rent to own market Behaviours during water scarcity
- 5. Do we need to move towards 2nd generation nudges in behavioural policy? Can nudges make a significant difference at scale?
- 6. The EAST framework for behavioural change Easy - harness the power of defaults, make change relatively costless Attractive – consider using financial rewards or other incentives Social – use the power of networks, encourage changes in social norms Timely - prompt people when receptive, focus on immediate costs & benefits
- 7. Impact of Sugar Levy in the UK Sugar levy Producers Reformulation Zero sugar drinks Consumers Relative prices and demand Herd behaviour effects
- 8. Is the Sugar Levy working? Sales of low and no sugar soft drinks have surged since the Sugar Levy was introduced – so too demand for milk-based drinks which are currently not part of the Sugar Levy. Many manufacturers have reformulated their products.
- 9. The Sugar Levy Distribution of soft drinks sales volume in England 2015-2017, by sugar levy group 65% 27% 8% 71% 23% 6% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% Less than 5g 5 to 8g Over 8g Shareofsales 2015 2017 The thresholds – 5g/100ml and 8g/100ml – were set because industry would be able to reformulate to meet them, substituting sugar without compromising the consumer price or quality of popular drinks. (Source: BIT)
- 10. Fixed odds betting terminals • 33,000 machines in Britain • Gambling from FOBTs = £1.7 billion in 2018 • A £2 max stake was imposed April 2019 • Will this policy nudge work? • The causes of problem gambling are very complex
- 11. Rent-to-own market 1. Rent to own is where you rent a product over a fixed period of time and eventually own it. 2. Many customers are on low incomes and are influenced by low monthly instalments (the anchoring effect) 3. Financial Conduct Authority (FCA) is now capping the interest charged in the UK rent- to-buy market New guidelines from FCA set a 100% credit cap, meaning rent-to-own stores can only charge interest up to the value of the product
- 13. Auto enrolment for pensions Auto-enrolment is the scheme set up by the UK government in 2012 to make sure that everyone, whether they work for a supermarket or the corner shop, gets a private pension to add to their state pension. Auto-enrolment changes the default choice for people. They can opt out if they want to. Aims of auto enrolment: • Increase household saving in a tax efficient way • Allow more people to retire early if affordable • Take advantage of compound interest over long term • Benefit from employer’s & government contribution Opt-out rate in UK is around 8-10%– implying 90%+ of people have chosen to stay in the system. But this may change if minimum contributions rise (loss aversion).
- 14. Move to presumed consent for organ donation From Spring 2020, all adults in England will be considered to have consented to be an organ donor when they die unless they had recorded a decision not to donate or are in one of the excluded groups There are more than 6,000 people currently waiting for an organ in the UK. Three people die each day while on the waiting list 80% of people in England support organ donation but only 38% have opted in.
- 15. Addressing challenges of water scarcity
- 16. Addressing challenges of water scarcity
- 17. Social norms and social recognition • Water map publicizing homes compliant within a 50L limit • Social learning through trusted influencers on social media Timely real time information and advice • Presenting daily water level in major dams on a dashboard • Creating and communicating proxies (one flush = 10 litres) Changing the default • Reductions in water pressure to reduce waste / leakage • Turning off the taps in rest rooms – hand sanitize instead
- 18. Behavioural interventions and unintended consequences
- 19. Evaluating behavioural nudges 1. Nudge theory may help change minor behaviours but less so in addressing deeper problems such as alcoholism, drug dependence and street/gang violence 2. Important to distinguish between soft nudges (changing choice architecture, providing more information) and harder nudges (i.e. controlling what is available for sale, limits on quantity) 3. The samples used in lab testing for psychological biases might be flawed e.g. relying on sampling mainly white, middle class students – not replicable in real world 4. Do nudges sustain? Or does the impact wear off with time? (diminishing returns) 5. Impact of nudges are rarely as significant as big decisions e.g. introducing a carbon tax
- 20. Behavioural Policies (2019) A Level Economics
Editor's Notes
- This revision update looks at some of topical behavioural economics issues and examples of nudge interventions designed to change the behaviour or households, customers and businesses. Richard Thaler, the 2017 Nobel Prize winner states that “Behavioural economists ask questions mostly about the way people make economic choices/ judgments or the way particular financial systems (retirement plans, tax codes, etc.) affect those responses.” There is certainly no shortage of economic and social issues and problems to which elements of behavioural science might be applied. There is no unique model of behavioural economics but what is emerging is an approach that relies more on accumulating evidence using field experiments and then adopting a more rigorous cost-benefit assessment of the impact of different behavioural nudges.
- We start this webinar by re-visiting some important behavioural ideas. Loss aversion - we attach a greater value to losses than a similar gain – people will often go out of their way to avoid a loss Bounded rationality happens when we can’t really process all the information especially in a world of complexity Present bias – is when we prefer immediate gain and gratification over long term benefits Choice overload - occurs as a result of too many choices being available to consumers for example in the savings market or when choosing insurance deals Default choice - default options are pre-set courses of action that take effect if nothing is specified by the decision maker – as we will see, changing the default choice can be an important behavioural intervention Presumed consent - presumed consent is alternatively known as an 'opt-out' system and is being used in England from 2020 onwards when presumed consent will be used for organ donations for all adults aged 18 or over
- Social norms - behavioural expectations or rules within a group of people Altruism - when people make sacrifices to benefit others without expecting a personal reward Herd behaviour - when people do what others are doing instead of using their own information or making independent decisions Framing - Choices can be presented in a way that highlights the positive or negative aspects of the same decision, leading to changes in their relative attractiveness Choice architecture - influencing choice by changing the manner in which options are presented to people; for example, by setting defaults, framing, or adding decoy options.
- We are seeing behavioural interventions across a growing range of markets from the products we consume such as sugar drinks to the tactics used by hotel booking web sites to nudge us into making a reservation.
- Richard Thaler was awarded the Nobel Prize in Economics in 2017 for his contributions to our understanding of how behavioural science can change orthodox economic models. The assumption of pure rationality has been a corner stone of traditional theory for decades but we can now challenge and question this in nearly every circumstance.
- Nudges are interventions to encourage behaviour change for better outcomes Humans are social beings whose behaviour is often strongly influenced and shaped by the behaviour of others especially in close-knit social networks / smaller communities. Behavioural economics does not assume that humans make choices in isolation, or to serve their own interest
- The sugar tax, officially known as the Soft Drinks Industry Levy came into effect in April 2018 and consists of two bands: one for soft drinks containing more than five grams of sugar per 100 ml and a higher band for drinks containing more than eight grams of sugar per 100 ml. Beverages that are exempt include pure fruit juices, milkshakes and yoghurt drinks. The sugar levy has nudged many companies to reformulate their products with lower sugar content so they are either no longer subject to the tax, or fall within a lower tax bracket. From a behavioural perspective, reformulation is appealing as it doesn’t require individuals to change their habits to improve their health Reformulation also means the benefits are shared widely across the population, and not just enjoyed by the most health conscious
- Year-to-date (up to end of October) receipts from the Sugar Levy were £153.8 million Classic Coke sales in the UK were down 14.8% in the 12 months to September 2018 AG Barr stopped making the original full-sugar version of Irn Bru last January – but the move prompted a backlash among Irn-Bru loyalists. The company incurred £1.4m of costs as part of its ongoing sugar reduction and reformulation programme, with Irn-Bru sugar-free variants now accounting for 40% of the total brand.
- Flavoured milk is exempt from the soft drinks industry levy
- Fixed odds betting terminals (FOBTs) are electronic machines, sited in betting shops, which contain a variety of games, including roulette. Each machine accepts bets for amounts up to a pre-set maximum and pays out according to fixed odds on the simulated outcomes of games. Critics point out that it is possible to lose large amounts of money and claim that the machines have a causal role in problem gambling. The gambling industry says there is no evidence of a causal link between B2s and problem gambling. It also claims that reducing the maximum stake to £2, as some critics have been campaigning for, would put betting shops and jobs at risk. Academic research suggests that the causes of problem gambling are complex and are not well understood.
- The Financial Conduct Authority (FCA) is now capping the rent-to-buy market. The Financial Conduct Authority (FCA) have said it wants to "reduce harm" to people who rent-to-own (RTO) - where you rent a product over a fixed period of time and eventually own it. While paying in instalments may help those who can't easily pay upfront, it often means customers end up paying much more, in some cases hundreds of pounds in interest. New guidelines will set a 100% credit cap, meaning rent-to-own stores will only be able to charge interest up to the value of the product, bringing costs down by hundreds. For example, if you bought a sofa worth £100, the maximum interest you could pay is £100, meaning £200 in total. The updated rules will also prevent firms increasing their prices for other goods and services sold with an RTO agreement – for example, theft and accidental damage cover, extended warranties, or arrears charges – to recoup lost revenue from the price cap.
- Humans have a strong scarcity bias. We unconsciously assume things that are scarce are valuable and things that are relatively abundant are not. The scarcity bias impulse frequently kicks in when we are told that a product such as a ticket to a sports event or a desired hotel room is in short supply and we might miss a great deal unless we book/pay now! Booking.com uses most of the behavioural tricks in the manual to accumulate orders. If it didn't work, they wouldn't do it! Now the Competition and Markets Authority - the UK's main competition watchdog has instructed hotel booking sites such as Booking.com to end 'misleading' sales. It will be interesting to see just what material changes are made to the design (or choice architecture) of these booking websites. The hotel booking and price comparison websites were manipulating the information they had on the number of bookings and type of bookings in order to exploit consumers and rush them into making bookings. Consumers have tended to trust price comparison websites and all of these firms marketed their sites very heavily. This is because asymmetric information exists between the two parties, and this was causing market failure in that consumers were rushed into making bookings and therefore over-consuming in the market.
- This is a classic example of how changing the default choice can have a big impact on outcomes Switching from an opt-in system (where people have to sign up) to an opt-out system (where people are automatically in) has led to 10 million people in the UK newly saving for retirement April 2019 - the minimum contribution levels will automatically increase from 5% to 8% (3% from employers and 5% from employees) "Women’s pension savings face a double whammy, as women typically earn less and are more likely to work part time and take career breaks to care for children or elderly relatives Auto-enrolment does little to address this inequality, as millions of women are prevented from saving altogether as they earn less than the £10,000 auto enrolment trigger.
- A recent study of opt in and opt out countries among OECD countries found that, compared to opt-in countries, opt-out countries had fewer living donors per million population (4.8 versus 15.7, respectively) with no significant difference in deceased donors (20.3 versus 15.4, respectively)
- Cape Town was set to run dry on April 12, 2018, leaving its 3.7 million residents without tap water. “Day Zero” was narrowly averted through drastic cuts in municipal water consumption and last-minute transfers from the agricultural sector.
- The City of Cape Town implemented significant water restrictions in a bid to curb water usage, and succeeded in reducing its daily water usage by more than half to around 500 million liters (130,000,000 US gal) per day in March 2018 Reductions in water pressure – a change in the default Appealing to social norms and giving people timely information 70% of water usage in the city is residential
- Increased demand for private boreholes Rising demand for hand sanitisers Increased demand for butts to collect rainwater
- There is no formal ‘behavioural economic’ model