Do you consider yourself a rational person? For the most part, you probably are. If something hurts, you’ll stop doing it. If you like something, you’ll buy more of it, but you’ll rethink your decision if it becomes too expensive.
While this rationality holds in general, research in psychology and related social sciences is increasingly showing us what marketers have known for years: people deviate from this rationality in predictable ways. We worry more about losing something than gaining something else of equal value (loss aversion). We value the short term more than the long term (discounting) and we value the present much, much more than any time in the future (hyperbolic discounting).
We often don’t go for the best option, but the good enough option (satisficing) or the option at the top of a list (defaults). Uncertainty and stress make it harder, not easier, for us to plan (cognitive load). And, most importantly, we take into account what others are doing to a very large degree when making decisions (social norms).
As one book famously labelled it, rather than being rational, we humans are better described as Predictably Irrational.
Using behavioral insights in policy
These behavioral insights are more than just intellectual curiosities. They are increasingly being used by policymakers inspired by Richard Thaler and Cass Sunstein’s bestselling manifesto for libertarian paternalism, Nudge.
Most of the attention so far has been on how behavioral insights could be employed to make people slimmer, greener, more altruistic or better savers. However, it’s time we started thinking and talking about the impact these ideas could have on social policy – programs and payments that aim to reduce disadvantage and narrow divergence in opportunity.
While applying behavioral insights can potentially improve the efficiency and effectiveness of social policy, unscrupulous or poorly thought through applications could be disturbing and damaging. It would appear behavioral insights inspired the UK government’s so-called “Nudge Unit” to force job seekers to undergo bogus personality tests – on pain of losing benefits if they refused.
The idea seemed to be that because people readily believe that any vaguely worded combination of character traits applies to them – which is why people connect with their star sign – the results of a fake psychometric test can dupe them into believing they have a go-getting personality.
In our view, this is not how behavioral insights should be applied. This UK example seems to be a particularly troubling case of the use of “nudges” in conjunction with, rather than instead of, coercion. This is the worst of both worlds: not libertarian paternalism, but authoritarian paternalism.
Ironically, this instance betrays a questionable understanding of behavioral insights or at the very least a very short-term focus. Research tells us that co-operative behavior depends on the perception of fairness and successful framing requires trust.
Dishonest interventions, which make the government seem both unfair and untrustworthy, should have the longer-term effect of undermining its ability to elicit cooperation and successfully frame information.
Some critics have assumed nudge is inherently conservative or neoliberal. Yet these insights could inform progressive reform in many ways.
For example, taking behavioral insights seriously would encourage a redesign of employment services. There is plenty of scope for thinking more rigorously about how job seekers’ interactions with employment services unintentionally inhibit their motivation to search for work.
Beware accidental nudges
More than just a nudge here or there, behavioral insights can be used to reflect on almost all government decisions. Too often governments accidentally nudge citizens in the opposite direction to where they want them to go.
Take the disappointing take-up of the Matched Savings Scheme, which is part of New Income Management in the Northern Territory. It matches welfare recipients’ savings dollar-for-dollar up to a maximum of A$500 and is meant to get people into the habit of saving regularly.
No doubt saving is extremely hard for people on very low incomes. But another reason so few people embraced the savings program may be a quirk in its design: people had to save money out of their non-income-managed funds, but the $500 reward they received from the government went into their income-managed account.
To some people this appears to have signaled the government’s bad faith. It said to them: even if you demonstrate your responsibility with money, we still won’t trust you.
The Matched Savings Scheme was intended to be a carrot, not a stick. It was supposed to complement the coercive element of income management by giving welfare recipients an incentive to improve their budgeting. Instead it was perceived as an invitation to welfare recipients to be complicit in their own humiliation.
The promise of an extra $500 would have been a strong lure for Homo economicus, but it wasn’t for Homo sapiens. People out of work or on income support are no more or less rational than merchant bankers or economics professors. Their circumstances and choices are different though.
The idiosyncrasies of human decision-making don’t mean that the human brain is fundamentally flawed. Most of the biases that we mentioned earlier are adaptive. But they do mean that policy makers need to appreciate how we differ from rational utility maximizers.
Real humans are not worse than economic man. We’re just different and we deserve policies made for Homo sapiens, not Homo economicus.