The World Bank World Development Report 2015 calls for behavioural-informed policy-making. The EC-JRC leads the change for EU affairs. This post tries to answer to the following: 1. Why should we care about Behavioural Sciences? 2. Why Behavioural issues in Development affairs? 3. Is it time for including behavioural insights into EU and domestic policies?
David Rinaldi, Brussels, 27 January 2015.
The recently launched World Bank’s flagship publication, the World Development Report 2015, was presented on Monday 26 January in Brussels, as one of the first events of the European Year for Development.
Differently from previous reports, which focused on hot topics in development economics or on specific sectors, the 2015 World Development Report (WDR) digs into methodology. The caption explains quite clearly the new approach: “Mind, Society and Behavior”.
In short, the World Bank decided to put behavioural issues at the core of the development policy agenda. They intend to look at behavioural aspects which relate to people’s thinking as well as to individuals’ social interactions.
Vladimír Šucha, Director-General of the EC-JRC, stated it clearly: the WB report is “very visionary”.
Despite being one of the youngest fields in economics, behavioral economics is now a mature discipline and has contributed widely to the set of knowledge brought up by academia in recent years. However, its links with policy design have been minimal. The WDR 2015 calls for behavioural-informed policy-making and is likely to speed up the passage of behavioural and experimental science from academia to policy.
Why should we care about Behavioural Sciences?
Behind every policy there is an assumption about why people behave the way they do. If those assumptions are not correct, the result is easy to say: ineffective policies.
As shown in the World Bank infographics, the behaviour of individuals cannot be completely understood by rational agent theory. Economic rationality assumes that we all take rational decision, that we collect all relevant information and we process them diligently to come up with the most logical and economically sound choice. Overwhelming evidence proves that there is something beyond the homo economicus and that, at most, we have a “bounded rationality”.
Our human minds are finite; we have scarce cognitive resources. Not always, we want to process all information we have to take the best decision; sometimes we rely on intuition or on emotions. Sometimes we just don’t make sense. Imagine you are confronted with a simple choice: “orange or banana?” and you pick the orange. Then you are asked “mandarin or banana?” and you opt for the mandarin. Economics says you have a preference citrus fruits on bananas. What if you are instead asked to pick one out of a choice of three? Orange, mandarin and banana. Given the similarity of two items, one may simplify his selection and just opt for the banana, contradicting his own system of preferences.
Behavioural experiments can help out in understanding all the non-economic components of our decision-making; as a consequence, if policy-makers have more information about citizens’ expected behaviour, it would be easier to shape more effective policies.
As economics says, price, information, asymmetries, availability of resources do matter, but they are not the only determinants of our choices. The aim is that of expanding the array of determinants of observed behavior in order to have a better understanding of intention to action gaps, salience, peer effect.
Straightforward example: why two culturally similar countries like Austria and Germany have an incredibly different rate of potential organ donors?
99,98% of Austrians are willing to donate their organs, whilst only 12% of Germans. Does it correspond to a truthful difference in citizens preferences? Of course not, it’s just that in Austria the default option is being a donor, whereas in Germany one need to make the effort of declaring it.
Obviously, experimental approaches are not meant to substitute economic analysis for policy, such as cost-benefit analysis and impact assessments, but they can complement traditional tools of policy-making to improve on policy design and effectiveness.
Why Behavioural issues in Development affairs?
The relevance of academic empirical research on development is undisputed. Over the last two decades, an increasing number of development programs have passed under the scrutiny of randomized control trials and applied development economists. The extremely influential work of Esther Duflo and Abhijit Banerjee among others, (have a look at Poor Economics, for an easy-to-read account of why randomized experiments are useful and what we have learnt from them) have paved the way to experimental research and have shown clearly that standard economic rationality is not to be considered that standard.
Besides the custom of dealing with empirical approaches to policy-making, development is the best setting to apply behavioral economics for at least a couple of reasons:
- In developing countries, the gap between policy design and implementation is particularly severe;
- Too often, policy advice is not specifically crafted on local conditions.
By taking into account behavioural responses, it may be feasible to understand a bit more about informal social norms and intention to action gaps affecting the targeted group. Policy effectiveness can gain a lot from this new empirical methodology.
Let’s use an example made in the WDR 2015. Imagine you have to advise public authorities in Kenya which are facing severe problems with road safety and an impressive number of crashes involving busses. What would you recommend?
- Improvements on infrastructure and traffic lighting?
- Training to bus drivers and citizens awareness campaigns?
Thanks to field experiment, Habyarimana and Jack (2011) find that the cost-efficient solution is: a sticker. A simple sticker inviting passengers to speak up in case the driver behaves irresponsibly or dangerously. Why wouldn’t you speak up anyway disregarding of the sticker? Well, the presence of the sticker makes it socially acceptable to speak up. The bus driver as well as other passengers know that you are allowed to complain, so that you end up demanding a safe drive. You feel entitled to voice your concerns. Our decisions are affected by what other people think; or better, by what is our expectation about their expectation on our behaviour. Clear?
Is it time for including behavioural insights into EU and domestic policies?
Introducing the publication, Director-General Šucha commented: “Of course no one will create labs tomorrow, it needs time, but it is the beginning of a process”.
A process that, slowly and silently, has already started. Have a look for instance at the Behavioural Studies for European Policies (BESTEP), jointly run by the EC-JRC and DG SANCO, and at the policy report ‘Applying Behavioural Sciences to EU Policy-making’, carried out by EC-JRC-IPTS, headquartered in Seville.
Not by chance, the presentation in Brussels had been organised by the Joint Research Centre Unit DDG02, which looks at “Foresight and Behavioural Insights”.
In 2010, the UK government launched the Behavioural Insight Team which collaborates directly with the Cabinet Office and has the objective of bringing together ideas from a wide range of disciplines, i.e. behavioural economics, psychology, social anthropology, to support policy-making in defining cost-effective policies. Their objective, taken from their website, is to “enable people to make better choices”, or rephrased, making it easier for people to stick with norms and socially accepted behaviours. They have been working to actively encourage UK citizens to enroll on to pension schemes, to pay taxes in due time and to find jobs during unemployment spans.
Big corporations already started to make use of behavioural experiments to interpret consumers attitudes and influence market choices. For instance, in 2012, thanks to a behavioural research conducted on the effect of drip pricing, commercial airlines voluntarily agreed to abandon payment surcharges for using debit card and included all charges in the headline price.
It is now up to public institutions to make use of experimental sciences to enhance policy design and get behaviourally informed regulation.
Too bad I didn’t do my PhD in experimental economics.
Food for Thoughts:
“Policy-making can greatly benefit from a better understanding of people’s behaviour. The assumption has been that people are fully rational. However, this assumption has been shown to be unrealistic, and perhaps explains the limited effectiveness of some policies” European Commission, JRC, Applying Behavioural Sciences to EU Policy-making (2013)
“The use of behavioural economics in the design and delivery of regulation is at the forefront of regulatory policy and governance.” Pete Lunn (2014), Regulatory Policy and behavioural Economics, OECD Publishing
Daniel Kahneman (2011), Thinking, Fast and Slow, Farrar Straus & Giroux
Dan Ariely (2010), Predictably Irrational: The Hidden Forces That Shape Our Decisions, Harper Perennial
Habyarimana and Jack (2011), Heckle and Chide: Results of a randomized road safety intervention in Kenya, Journal of Public Economics, vol. 95(11), pp. 1438-1446.
Esther Duflo and Abhijit Banerjee (2012), Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, PublicAffairs
Have a look at Daniel McFadden (2013), The New Science of Pleasure, NBER Working Papers No. 18687, National Bureau of Economic Research, for a review on the developments of consumer choice, from neo-classical theories to behavioural science.
World Bank (2015), World Development Report 2015: Mind, Society and Behavior, World Bank Group
The Economist, Irrationality, Rethinking Thinking, 16 December 1999