Presentation by Pete Lunn, ESRI, at the Behavioural Economics Workshop, OECD, Paris - 31 March 2014. More information at www.oecd.org/gov/behavioural-economics.htm

1. Behavioural Economics Workshop
OECD, Paris
31 March 2014

2. Initial example 1
•
Scientific studies show that decision-makers are drawn to default options
•
Companies can default consumers into additional products
•
New EU Consumer Rights Directive now prohibits this
•
Companies must offer an “active” choice

3. Initial example 2: fuel efficiency labelling
•
The “MPG” illusion (Larrick and Soll, 2008)
•
May distort product comparison
•
New US EPA label aims to “correct” the illusion
•
Possible to test empirically for effectiveness prior to adoption
0
10
20
30
40
50
60
70
80
90
100
10
15
20
25
30
35
40
45
50
55
60
Fuel Requirement (Gallons Per 1,000 Miles)
Miles Per Gallon (MPG)

4. What is behavioural economics?
Dictionary definition:
BE is the application of psychological insights to economic analysis.
For the purposes of this review:
BE is the application of the inductive scientific method to the study of economic behaviour.

5. Behavioural economics ≠ “nudges”
•
Thaler and Sunstein (2008)
–
Do not deny people choices
–
Manipulate the context to promote better choices, through “choice architecture”
–
Two initial examples are nudges
–
Note: they do involve some prohibition and restrictions on choice
•
This is only one way to use BE
–
Nudges may not be enough
–
BE findings can be used to support some bans or other limits on choice
–
Evidence may show that a more paternalistic policy is better
–
E.g. OECD recommends compulsory second tier pension

6. US example: CARD Act 2009
•
Credit Card Accountability Responsibility and Disclosure Act signed in May 2009
•
Behavioural evidence suggests consumers:
–
Discount or fail to attend to potential costs
–
Too optimistic about avoiding fees
•
New “behaviourally informed” regulations
–
Ban certain types of fee
–
Default to not honour limit-busting purchase
–
Calculations on bills to nudge repayments
•
Early evidence suggests large consumer gains from the act
–
More from the bans than the nudges
•
For other US examples of “empirically informed regulation” read Sunstein
•
Aim is often to avoid more regulation

7. UK Behavioural Insights Team
•
Internal unit of behavioural researchers based in the UK Cabinet Office... now “spun out”
•
Designs behaviourally informed policies and conducts experiments and trials

Fine collection

Subsidised loft clearance
•
Empirical approach integrates policymaking and evidence gathering
•
Some general principles emerge

8. Other examples
DG SANCO
Joint Research Centre
Productivity Commission
Competition and Consumer Agency iNudgeyou
Swedish Consumer Agency
•
Over 60 behaviourally informed policies cited in review as a whole
•
Many events designed to raise awareness of behavioural principles among policymakers
•
Influence of BE is often implicit rather than explicit
GreeNudge
Centre d’analyse stratégique
Office of Fair Trading Financial Conduct Authority
Consumer Financial Protection Bureau

9. Regulatory design: simplification
•
Two common forms of mandated simplification:
−
Simplified information (product descriptions)

In US, CFPB on mortgages, student loans, cards
−
Simplified choices (product ranges)

In UK, OFGEM’s plans to limit energy tariffs
•
Backed by evidence on “choice overload”
−
Complexity can reduce engagement
−
Complexity can result in poorer choices
•
Mixed evidence of positive effects

In UK, MCOB increased prices without reducing dispersion

In US, experiments found SEC “Summary Prospectus” had little impact on mutual fund choice

But in Massachusetts, standardisation of health insurance products appears to have been effective

10. Regulatory design: convenience
•
Decision-makers drawn to default options
−
Auto-enrolment into pensions

In NZ, led to greatly increased coverage

In Australia, aim to get workers onto good default policies
−
Organ donation

In UK, active choice required for driving licence
•
Decision-makers drawn to convenient options
−
Make as option easy and more people take it
−
Small frictions can have large effects

11. Regulatory design: salience
•
Need to get attention has long been understood

Consumer warnings on cigarettes etc.

In Sweden, “orange envelope” pension information
•
Salience can alter impact of taxes

In US, decisions affected by alcohol tax on tag or at till
•
Bigger issue may be “shrouding”
−
Hidden charges in financial products
−
Drip pricing
−
Mandated total cost pricing
−
Banning “hidden fees”, e.g. Card Act

12. Regulatory design: debiasing
•
Regulations can be designed to correct mistakes
−
Mandated worked examples of compound interest
−
Mandated disclosure of loan default probability
−
Disclosure of usage information in telecoms and energy markets
•
Big issue: how to identify mistakes?
−
“Biases” can counterbalance
−
One person’s unhealthy overeating is another’s personal choice
−
How do we know whether decisions after a debiasing intervention are better than before it?

13. Three (related) observations on regulatory design
1.
It is much easier to show a behavioural effect exists than to measure its overall impact on a market
2.
With decisions over risk detriment is likely but hard to show
−
Gambling
−
Insurance markets
−
Financial investment risk
3.
Regulators are becoming more empirical

14. Regulatory delivery: BE principles
•
Simplification, convenience and salience relevant to good regulatory delivery too
•
Conversely, complexity, inconvenience and inattention may frequently underlie breaches of regulations
•
Compliance depends on perceptions of fairness
–
People will act against their own interests when they perceive unfairness
–
Compliance may depend on whether others are seen to comply

E.g. Tax compliance experiments
•
Conduct of market studies requires behavioural skills
•
Empirical testing of regulations

15. Conclusions
•
BE is increasingly employed in regulatory policymaking in many countries
−
Including in exploring alternatives to rules
−
Especially in consumer and competition policy
•
BE suggests benefits to a more empirical approach
−
Context specific research
−
More integration of evidence gathering and policymaking
Thank You