Behavioral Economics

Behavioral economics has produced invaluable evidence about what motivates people to take actions that could promote their own well-being and the health of society and the environment. It can help explain why people act in seemingly irrational ways and how they respond to interventions designed to modify the ways people act and make decisions.

This report assesses the contributions of behavioral economics in the policy arena. It identifies interventions that can be applied across various policy domains. To ensure that policies are effective, policy makers should involve experts trained to guide the development of behaviorally based policy development.

What is Behavioral Economics?

The field of behavioral economics integrates insights from the behavioral sciences into economic models of human behavior and decision-making. These insights can be applied to policies in a broad range of domains, such as health, financial well-being, and criminal justice.

There is no one single definition of behavioral economics as the field arose from observations of a set of behaviors that deviate from traditional economic models. To better analyze the policy impacts and future directions of behavioral economics, this report identified five core principles that have helped guide research in this area.

What Affects People’s Decision-Making? Five Core Principles

The following five principles have been the basis for large bodies of research designed to test behavioral hypotheses and develop strategies to influence behavior.

• People can only pay limited attention to important aspects of their environment, often have a difficult time processing information, and make cognitive errors even in simple situations.
• The extent to which people understand, pay attention to, and process information is crucial in any decision.

• People often have incorrect perceptions of (or information about) the situations they are in, the incentives they face, their own abilities, and the beliefs of others.

• People tend to disproportionately focus on issues that are before them in the present moment, paying less attention to future payoffs and consequences.
• This has important implications for decisions about consumption, payments, and utility.

• People tend to evaluate risk decisions by considering how the options relate to a particular reference point.
• They assess whether an outcome would be a gain or loss by comparing possible outcomes to a single reference point, like the current status quo, instead of considering all alternative possibilities.

• People make comparisons between themselves and others, care about their social standing, and how they conform to social norms.
• An important aspect of decision making is perceptions of how one’s actions relate to those of others.

What Intervention Strategies Can Improve Beneficial Decision-Making?

While the above core principles have been used to design policies aimed at changing behaviors, how are these principles translated into interventions and behavior change strategies, including so-called nudges, in real-world settings?

Leading intervention strategies developed applying the 5 core principles

The following graphic depicts the five core principles (left) and their connection to a chosen list of intervention strategies (right). This list of interventions focuses on the most used strategies with evidence of their effectiveness. When implementing behavioral economics principles in the design of interventions aimed at changing targeted behaviors, it is important to match the tool to the problem, contextual factors, and the target population.

Leading intervention strategies developed applying the 5 core principles

• Commitment Contracts
  • Commitment contracts provide a means to counter present bias by committing a future self to an action that is difficult to evade or delay when the moment comes. One example of a commitment contract is a savings deposit that is forfeited if you fail to exert self-control over an undesired or unhealthy behavior (e.g., smoking).
  • Guiding individuals to state their implementation intentions to complete a behavior has been shown to boost completion of a task and overcome present bias.
  • Prompting individuals to make a plan can boost completion of a task and overcome present bias. For example, one study demonstrated that a simple prompt on a postcard to write in which vaccination clinic the employee planned to attend from the date options offered significantly increased use of the clinic in comparison with a postcard that only reminded participants of the clinic dates (see Chapter 4).
  • Pairing a more desired and a less desired action together, known as temptation bundling, can counter the tendency for individuals to put off the less desired action.
  • Lottery-based incentive programs leverage the fact that participants may be more motivated by the small probability of winning a large prize than by a guaranteed incentive of a much smaller prize (see Chapter 5 for examples of lottery-based incentives employed in health-related behavioral interventions).
  • Foot-in-the-door techniques invite individuals to agree to a smaller request before presenting a larger one, thus resetting the reference point for the larger decision.
  • The fresh start effect is the tendency to be more motivated to set or achieve goals related to key personal or cultural milestones, such as birthdays; holidays; or the start of a new year, month, or week. Sending a reminder or inviting goal setting at a fresh start moment can increase engagement. Framing (see below) a message around a fresh start can increase the intention to pursue a goal.
  • Switching costs are the monetary, psychological, effort-based, and time-based costs that are incurred when individuals change services, products, brands, etc. Individuals may delay making beneficial changes when faced with switching costs; reducing or eliminating these costs can counteract this tendency to procrastinate.
  • Because present bias leads people to focus on immediate costs and benefits of an action at the expense of future costs and benefits, an incentive that is delivered in the present can make benefits feel more immediate and can counter heavy weighting of immediate costs (time, hassle, etc.). Such incentives are also well-suited to incorporating other behavioral principles, including loss aversion, regret aversion, and reference dependence, into the design of interventions. For example, one study showed participants offered a $10 incentive to enroll in retirement savings increased their savings more than participants who received information about the future value of retirement savings (which far exceeded $10).
  • Setting a default (e.g., automatic enrollment and salary deduction for a retirement plan [i.e., action is not required for enrollment], or a healthy default side dish on a restaurant menu) is among the most powerful strategies for behavioral change. Defaults have been shown in several systematic reviews and meta-analyses to have larger effect sizes than other intervention approaches.
  • Scarcity of any kind (time, material resources, even social interaction), can make decisions about immediate tasks more costly and challenging, while also amplifying the negative consequences of poor or short-sighted decisions. Actions to mitigate scarcity factors, such as reducing the time required for a task, can improve task completion, decision quality, etc.
  • Interventions that simplify the presentation of information allow people’s limited attentional resources to be directed at a smaller amount of information. For example, simplification of a two-page notice sent from the IRS to taxpayers who were eligible for the Earned Income Tax Credit but had not claimed it increased take-up of this benefit by over 10 percent.
  • Reminders can counter the tendency to delay costly behaviors, especially when they mention a future goal or desired state. Reminders also cut through inattention, remedy prospective memory failures (i.e., forgetting), and increase salience of the desired behavior.
  • The importance of social relationships can also be invoked by interventions that point out the beneficial effects that an individual’s choices can have on others. Some laboratory experiments have successfully used altruism appeals to increase prosocial behavioral intentions (e.g., to get vaccinated).
  • People’s mental representations of how the world works can strongly influence decisions and behaviors in diverse domains, including health, climate change, and management. Techniques to revise or update mental models include visualization, experiencing surprise, analogies, simulation, and critical reflection (see Chapter 4 for references).
  • Social proof interventions provide information about other people’s choices and behaviors, such as the number of drinks most students consume at a party or how many other voters plan to vote or have already voted. Such interventions have been used to reduce risky or harmful behaviors, such as binge drinking, and to increase positive behaviors, such as voter engagement.
  • Social comparison interventions explicitly compare an individual’s performance with a relevant comparison or reference group. (See Chapter 4 for discussion of evidence about when this strategy is effective, and when it can create backfire effects.)
  • Present bias leads individuals to delay action when they experience friction, hassle factors, or administrative burden. Reducing or removing sources of friction, hassle factors, and administrative burden can counteract people’s tendency to procrastinate by reducing the immediate costs (in the form of time or inconvenience) of a behavior. Examples of such interventions include providing individualized information about a benefit so that people do not have to seek that information themselves, and allowing users to complete an action online rather than by mail or in person.
  • When inattention and cognitive load create barriers to behavior change, it can be an effective strategy to make crucial information or features of a choice set more salient (i.e., calling attention to particular information, such as grocery store price tags noting the tax rate applied to items, resulting in a decrease in the purchase of taxable items; see Chapter 3). Salience prime interventions have been shown to be effective in many domains.
  • Choice Sets - Limited attention for choices can be focused through the creation, arrangement, and framing through choice sets. Reducing the number of choices available has been shown to improve the selection process and increase people’s satisfaction with their choices. How options are described and displayed can influence the choice an individual makes. Choice sets can be designed to reduce comparison friction – the cognitive burden caused by having to compare choices across multiple attributes without sufficient information.
  • Active Choice - Active choice interventions create a stopping point in a process that requires an individual to make a choice before proceeding (e.g., being asked to choose whether or not to enroll in automatic prescription refill when calling a pharmacy customer service line). Active choice is useful for focusing limited attention when it is not possible (or perceived as not ethical) to implement a true default.
  • The way a choice is framed can significantly influence the outcome of the decision. This phenomenon, known as the framing effect, has been studied in a variety of settings. A common framing strategy for behavioral interventions is a loss frame, which leverages loss aversion by drawing attention to the negative consequences of inaction. Robust evidence shows that loss-frame messages are effective for screening or disease detection behaviors, while gain-frame messages are more effective for prevention behaviors and prosocial behaviors.
  • Social influence, also known as social modeling, involves having celebrities or respected opinion leaders endorse or model a desired behavior, such as recycling.
  • People tend to display reciprocity—responding to being treated generously by behaving more generously themselves and vice versa if they are treated unkindly. For example, one study showed that a reciprocity prime (the statement “I would accept an organ from a deceased donor in order to save my own life”) resulted in increased organ donor intentions.
  • Creating slack involves providing more space or flexibility for people’s responses, such as introducing buffers of extra time or extra financial resources and reducing the cost of errors.
  • De-biasing can be employed to correct mitigate the effects of inaccurate beliefs and biases. For example, presenting statistics related to past performance of either an individual or a relevant reference group can counteract overoptimism bias – the tendency for a person to believe they will perform better than average or that good things are more likely to come their way.

  Examples of strategies that have been shown to be effective:

  1. Defaults
     a default salary deduction for a retirement plan, or a healthy default side dish on a restaurant menu
  2. Simplification or removing of hassle factors
     allowing users to complete an action online instead of by mail or in person
  3. Immediacy
     offering an incentive for an action taken that is delivered immediately
  4. Framing of choice sets
     designing choice sets to reduce the cognitive burden caused by having to compare choices without enough information

  For a more comprehensive list of intervention strategies with explanations, please see Chapter 4

  Applying Behavioral Economics to Public Policy

  Intervention strategies appear to show effectiveness when they are tailored to specific circumstances and populations, especially in the six public policy domains chosen for this report. These domains represent areas of policy importance in which behavioral economics principles have been applied.

  • Health
  • Retirement Savings
  • Social Safety Net Benefits
  • Climate Change
  • Education
  • Criminal Justice

  

  Modest, low-cost interventions that target very specific challenges have the most value, along with the cumulative value of small-scale, low-cost interventions. Behaviorally based interventions can lower barriers to medication adherence; promote health practices like colorectal cancer screening, HIV prevention and treatment adherence, and vaccination; and strengthen providers’ adherence to practice guidelines. Chapter 5: Health

  

  Substantial research has shown the effectiveness of making retirement savings a default choice for employees; evidence from this line of research has been strong enough to influence federal legislation. Chapter 6: Retirement Benefits

  

  Evidence in this domain is mixed. Some interventions show modest effects on take-up, with others showing no significant effect (or any effect). However, a few more costly large-scale interventions, like those implemented for the Supplemental Nutrition Assistance Program (SNAP), have shown positive effects on take-up by simplifying application forms and reducing the administrative burden. Chapter 7: Social Safety Net Benefits

  

  With climate change, there evidence demonstrating high value in targeting specific concerns and the cumulative value of multiple small-scale, low-cost interventions. Providing consumers information that addresses their present bias, limited attention and cognition, and uses nudges related to social norms can encourage energy conservation, climate-friendly transportation decisions, and engagement in land use conservation programs. Chapter 8: Climate Change

  

  Interventions here have reduced the administrative burdens of applications; provided support to students; and set up default choices, like automatic registration for college admissions tests, leading to increases in college applications and applications for financial aid. Chapter 9: Education

  

  Behavioral factors influence all points of the criminal justice system: determinants of criminal behavior, policing practices, court proceedings, judicial decision making, and incarceration. Evidence for the effects of behavioral interventions at different steps of the criminal justice system are too scant to provide conclusive evidence on their effectiveness. More research is needed on the role of behavioral factors on the criminal justice system. Chapter 10: Criminal Justice System

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