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Nudging NZ

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jeroen van der heijden

on 21 September 2018

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Transcript of Nudging NZ

Libertarian
Paternalism
VS.
Choice
Lottery 1:
10% chance
to win
Lottery 2:
90% chance
to lose
Choice
Lottery 1:



chance to
Lottery 2:



chance to
10%
WIN
90%
LOSE
Choice
Lottery 1:



chance to
Lottery 2:



chance to
10%
WIN
90%
Choice
Lottery 1:



chance to
Lottery 2:



chance to
10%
90%
Using behavioural insights for effective regulation
Nudging New Zealand
Professor Jeroen van der Heijden

jeroen.vanderheijden@vuw.ac.nz
|
www.regulatoryfrontlines.wordpress.com
Observation
Humans are predictably irrational
Solution
Modifications in choice architecture
Gain
Freedom of choice
From predictably rational to predictably irrational
Neo-classical rational choice theory
Homo oeconomicus will choose the alternative that maximises her/his individual utility
Stable, coherent and well defined preferences...
...rooted in self-interest and utility maximization...
...that are revealed through their choices.
McMahon, J. (2015). Behavioral economics as neoliberalism: Producing and governing homo economicus. Contemporary Political Theory, 14(2), 137-158.
Humans have
From predictably rational to predictably irrational
Bounded rationality
When individuals make decisions, their rationality is limited
The cost of acquiring information to make a rational choice
The mental capacity to process information
Traceability of the decision problem
From predictably rational to predictably irrational
Predictably irrational
People deviate, in predictable ways, from neoclassical assumptions of rationality
This results in suboptimal outcomes for them (behavioral market failures)
Humans rely on cognitive biases and heuristics when making choices
The time available to make the decision
Cognitive biases and heuristics
jeroen.vanderheijden@vuw.ac.nz
|
www.regulatoryfrontlines.wordpress.com

Texas sharpshooter fallacy
Diminishing sensitivity
Illusion of symmetry
Anchoring (neutral reference point)
Endowment effect
Representative heuristic
Status quo bias
Framing
Availability heuristics
Sunk-cost fallacy
Optimism bias
Present bias/time inconsistency
Information salience
Confirmation bias (theory bias)
Loss aversion
Central to
Nudge
Central to Prospect Theory
Cognitive biases and heuristics
Prospect theory - decision under risk
When making choice under uncertainty (1) people set a reference point from which they assess perceived gains and losses, (2) they become less sensitive to changes in probability as they move away from a reference point ("diminishing sensitivities"), and tend to (3) overweight small probabilities and (4) underweight large probabilities.
Get $9,500 with certainty, or
95% chance to win $10,000

Lose $9,500 with certainty, or
95% chance to lose $10,000

Get $500 with certainty, or
5% chance to win $10,000

Lose $500 with certainty, or
5% chance to lose $10,000

Fear of disappointment
RISK AVERSE
Accept unfavorable settlement

Hope to avoid loss
RISK SEEKING
Reject favorable settlement

Hope of large gain
RISK SEEKING
Reject favorable settlement

Fear of large loss
RISK AVERSE
Accept unfavorable settlement

Experienced utility theory
Daniel Bernoulli, 1738
When making choices under uncertainty people (1) are risk averse and (2) money (etc) has objective utility to people
Risk averse when faced with large probabilities of gain
Get $9,500 with certainty, or
95% chance to win $10,000

Fear of disappointment
RISK AVERSE
Accept unfavorable settlement

Risk averse when faced with small probabilities of loss
Get $9,500 with certainty, or
95% chance to win $10,000

Fear of disappointment
RISK AVERSE
Accept unfavorable settlement

Risk seeking when faced with large probabilities of loss
Get $9,500 with certainty, or
95% chance to win $10,000

Fear of disappointment
RISK AVERSE
Accept unfavorable settlement

Risk seeking when faced with small probabilities of gain
GAINS
LOSSES
HIGH PROBABILITY
"Certainty effect"

LOW PROBABILITY
"Possibility effect"

Are you really paying attention?
Theoretical support
Prospect theory
Political ideology
Libertarian paternalism
From behavioral insights to behavioral regulation
"A behavioral approach to law and economics offers a host of novel prescriptions regarding how to make the legal system work better"

- Jolls, Sunstein and Thaler, 1998
Jolls, C., Sunstein, C., & Thaler, R. (1998). A Behavioral Approach to Law and Economics. Stanford Law Review, 50(5), 1471-1550.
OECD. (2017). Behavioural Insights and Public Policy: Lessons from around the world. Paris: OECD.
Default rules
Disclosure of factual information
Warnings (graphic or otherwise)
Reminders
Increases in ease and convenience
Active choosing
Precommitment strategies
Default rules
Social proof heuristics
Opting in
Opting out
Achievement privileges
Disclosure of factual information
Technical information
Comparative information
System 1 (impulsive) and System 2 (reflexive) behaviour
Soft opt-out system, Wales, UK (2015)
Financial information leaflet, Netherlands (2002)
Warnings (graphic or otherwise)
Information about risk
Cigarette pack warnings, China (2011)
Reminders
Active external
Active internal
Passive
Bright pink (opt-in) reminders, Global (2011)
Increase ease and convenience
Design
IRS2GO tax app, USA, (2010)
Technology
Active choosing
Periodical
Donor registration at time of driver license renewal, NZ (1987)
On the spot
Precommitment strategies
Offering a delayed option
Save More Tomorrow retirement plan, USA (field study, 1998)
Social proof heuristic
Express social norms
Sticker on water bill, Costa Rica (RCT, 2014)
Express common behaviour
"A nudge ... is any aspect of the choice architecture that alters people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid"
"Nudges are specifically designed to preserve both agency and control. While nudges steer people in a particular direction, they permit you to go your own way. You can ignore them if you like."

- Sunstein, 2017
Sunstein, C. (2017). Human agency and behavioural economics: Nudging fast and slow. Cham: Palgrave Macmillan.
Almost there, but... libertarian paternalism
$1 utility increase
$1 utility increase
Identical increase in utility?
$400,000 utility
$400,000 utility
Identical utility result?
$1 to $2 =
100,000$ to 100,001$ =
$100,000 to $400,000 =
$1,000,000 to $400,000 =
LOSE
Behavioural regulation in practice: Does it work?
Behavioural regulation in practice: Guidelines
Behavioural regulation in practice: helpful links
Behavioural regulation in practice: Take home lessons
Often it does
Sometimes it does, but challenges across the board
www.behaviouralinsights.co.uk
e.g., Loewenstein, G., Sunstein, C. & Golman, R. (2014). Disclosure: Psychology Changes Everything. Annual Review of Economics 6(201), 391–419.
Behavioural regulation in practice: What is success?
Literature reviews indicate limited success
Office of Evaluation Sciences
UK Department for Work and Pensions, 2014/15
NSW Behavioural Insights Unit, 2012
Plymouth Council (UK), 2014
20%
increase in website visits
53.5% vs.
60.4%
2.0%
vs. 1.8% vs. 1.1%
www.nudges.org

www.iNudgeYou.com

www.YouAreNotSoSmart.com

www.journal-bpa.org
Behavioural regulation has promise
May work particularly well if
Clear cognitive failures
Homogenous target group
Synergy with other interventions
Not a panacea; it requires bespoke application
Despite its pragmatism, it still assumes "objective rationality"
Often lab-tests
Often small cohorts
No comparisons with other interventions
Full transcript