Application of Concepts of Behavioral Economics to Public Policy

Introduction

The core tenant of rational choice that I want to test is; ‘have people well defined and stable preferences’. It is assumed that an individual’s preferences are transitive and well defined however through close examination this is not always the case. I aim on showing this by conducting a field experiment using a nudge to see if my core tenant remains the same when subjected to this nudge or does it have an effect. The choice that will have to be made will be made under certainty and not risk, meaning the individual will have full information and should make the choice that maximises their utility. You would assume that an individual would maintain the preference that they perceive to provide them with the most utility when given a choice. However I would expect the participants behaviour to be altered when subjected to a nudge.

Conducting the Experiment

I will conduct this experiment with a large sample of UCD students which will provide me with the results I need to make educated assumptions on whether the stable preferences principle holds true. In order to see if the students preferences change during the course of the experiment, I will collect their preferences beforehand to have as a reference point to base my results on. They will fill out a form ranking which type of charities, from a set list of 6, that are most important to them in numerical ascending order. The students will then be given €10 each to donate on Grafton street Dublin, to a charity collecting on the street that day during a given weekend. The students will be spilt up into smaller groups and then stagnated at different times and weekends throughout a month period in order to try and prevent herd behaviour, as outlined by Thaler and Sunstein in their book Nudge (2008), when donating to charity. At the bottom of Grafton street there will be two charities collecting for two different causes with specific buckets for people partaking in the experiment. The students will have to walk down the street and donate to one of the two charities at the end of the street. The two charities at the end of the street will be the Dublin Simon Community who collect in order to help the homeless and Bernardos who are a children’s charity.

The following month the students will be asked to repeat this with the same amount of money and the same process. Only this time unbeknown to them there will be a nudge involved pushing them to a certain charity. On the students second visit there will be homeless people strategically placed outside shops and walking around the street. These homeless people will be provided with food and a hostel the night of their participation in order to incentivise their involvement. The students will have to walk past these people in order to spend their money and donate to the charity of their choice. We will take the figures provided to us by the charities to see if there was any difference between the amount collected from students during the first month and the money collected in the second month. The amount given to each charity in the first and second months will be counted as a percentage of the students and we will see if this differed from the first month to the second month and how they compared to the preferences initially written down by students.

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What Results I Would Expect:

Following the experiment I would expect the preferences of some students to have changed from what they wrote down initially compared to how they acted after being targeted by the nudge. This goes against rational choice theory. A nudge is a strategy to alter people’s behaviour ‘in a predictable way without forbidding any options or significantly changing their economic incentives’ according to Richard Thaler. They are commonly used throughout business and public policy to influence consumer behaviour. I assume that some students who ranked a children’s charity higher than a homelessness charity initially would have then changed their preferences and donated to the Dublin Simon Community when they came into contact with more homeless people. This would show that people do not have well defined and stable preferences. I would assume the percentage of money collected by the homeless charity in relation to the preferences outlined initially would be greater the second time. This would prove that the nudge had worked on these people. I would assume that the opposite would be true if I had created the nudge in favour of the children’s charity by making the participants interact with disadvantaged children before donating. The difference in the amounts received by the Simon Community and Bernardos will be rectified after the experiment as to not show any bias towards a certain charity on the part of the experiment. It is also reasonable to expect the charities collecting on those weekends would get more donations than on average due to herd behaviour and seeing numerous students donating might induce others on the street to donate.

Why do I Expect these Results:

Initially when the students are making their decisions when ranking the charities they prefer they are using different heuristics. They use the heuristic principles of Availability and the ‘retrievability of instances’ as outlined by Kahneman and Tversky (1974) by thinking of the charities that they have most contact with or charities that are prominent in the news and current endemics at the time of choosing. However, when they start to wander Grafton street and see the homeless people, put there by the strategic nudge, the homeless problem in Ireland becomes more salient and will push them towards donating to the homeless charity.

Disparities in the findings

As reported by Beshears et al (2008) sometimes self-reported preferences can’t be taken at face value. Self-reports are sometimes motivated by signalling which we cannot distinguish in our survey. Despite our best efforts, herd behaviour may come into play when groups of students might converge on a single charity. They may not consider another charity purely due to the crowd being at the first one and wishing to not stand out from the crowd.

Discuss the application of concepts in behavioural economics a to particular topic in business or in public policy. Please relate this to material we have discussed in the lectures.

The application of behavioural economic concepts can be seen throughout society. It has a part to play in our everyday lives without people ever realising it. In this essay I will discuss the recent endemic of obesity that has gripped the country, why people become overweight without the long-term desire to be and the public policy implications associated with this. Some of Irelands recent public policy has been shaped by this problem due to rising healthcare costs, which can put a strain on the governments resources, and the affect it has on the health of the Irish population. Some of these new public policy regulations apply concepts of behavioural economics in order to be successful.

Obesity in Ireland

Obesity is defined as a BMI of at least 30. In 2011 just over 1 in every 4 (26%) men and 1 in every 5 (21%) women were obese in Ireland. Since then obesity has increased further throughout Irish society and the latest projections state that by 2025 37% of Irish women and 38% of Irish men will be obese according to Cullen (2015) . This is not a problem exclusive to Ireland however, with about one fifth of the adult population worldwide projected to be obese by 2050. But why do people become obese when they obviously have no desire to be? This can be explained in some part by the behavioural economic theory of hyperbolic discounting. Economics studies how people make decisions with respect to the future and intertemporal choice is concerned with how we make trade-offs between rewards at different points in time when making these decisions. Economic theory assumes people maximise expected utility however this is not always the case. People are fundamentally inconsistent and have inconsistent time preferences. Hyperbolic discounting refers to the tendency for people to be more present focused with respect to current trade-offs than later trade-offs according to Delaney (2018) . This is evident when people want to lead a healthy lifestyle and exercise but instead act impulsively at the time of decisions and eat unhealthily and fail to exercise. This type of hyperbolic discounting engaged in by people can lead to them making choices which are not always the best for their wellbeing. Along with countless other reasons such as the easy access to fast foods and food marketing towards kids, which uses behavioural economic concepts also, it can lead to obesity.

In the 2017 budget the health sector received an extra €497 million which saw its total funding amount to €14.6 billion. This made it the biggest health budget in the history of the state. A study conducted by the University College Cork in 2012 found that obesity costs the island of Ireland €1.64 billion annually (safefood, 2012) . This figure not only includes direct costs of healthcare but also indirect costs such as lost productivity and absenteeism from work. It is clear as to why the government would want to reduce this figure as it would free up money to spend elsewhere. Obesity is an unnecessary first world commodity which could be eradicated simply by people making the correct decisions for themselves at the right time. However as explained above people have self-control failures and are dynamically inconsistent. This means in order for them to make decisions which benefit them and subsequently the government, they may have to be persuaded to do so.

Solutions

The Irish government has recently introduced new public policy in order to fight against the tide of obesity. Without the help of integral behavioural economics concepts however, this may have never happened. The introduction of the sugar tax in April 2018 by the Minister for Finance Pascal Donohoe was a big step in the right direction. The launch of ‘A Healthy Weight for Ireland: Obesity Policy and Action Plan 2016 – 2025’ in 2016 by ministers aims to “reverse obesity trends, to prevent health complications and reduce the overall burden for individuals, families, the health system and the wider society and economy” according to the Department of Health (2016) .

In Economics, Nudge theory suggests that a consumer’s behaviour can be influenced by small suggestions and positive reinforcement. These suggestions can be strategically designed so that the consumer may act in a desired way. Nudges are used by the government in order to persuade the citizens of a country to act in a manner that supports their goals. There are obviously arguments for and against government intervention and the impact it can have on the population as a whole. Supporters of government intervention can see the benefit it brings by combating the market failures which occur due to imperfect rationality by consumers. For example, children are not rational when it comes to decisions over their diet as they do not buy their own food. Also support comes due to the existence of externalities related to obesity and the fact that the bill is being picked up by the tax payers in the yearly budget and not the obese individuals themselves. Arguments against paternalism include the fact that it violates the individuals freedom to choose as they wish and doesn’t respect their standing as rational beings.

The sugar tax implemented in 2018 is an example of a strategy to alter a person’s behaviour. The tax was levied on sugary drinks in order to combat excessive consumption and thus obesity. It is a tax of 30 cents per litre on drinks with a sugar content of over 8 grams per 100ml and 20 cents per litre if the drink contains between 8 and 5 grams of sugar. This tax aims to make unhealthy drinks more expensive in relation to healthy drinks. This will nudge the producers in the direction of producing more healthy drinks as they see their market shares fall. The new drinks produced will include less sugar in order to bypass the tax. This means that people will be maximising their expected utility with regard to their goals of staying healthy by buying healthier drinks or else consuming newly modified drinks that contain less sugar. Estimates from Rhode (2015) suggest that a 10% tax on sugar-sweetened sodas would reduce consumption by 8 to 15%.

The Irish government launched ‘a healthy weight for Ireland’ obesity policy and action plan in 2016 in light of the obesity problem. Their aim with this new action plan is to combat obesity, make the Irish people healthier and save the government money. In making a new government policy there has to be a lot of consideration in terms of behavioural economics in order to make individuals comply. A redundant policy without behavioural concepts would be no good. There has been many research papers on how to implement behavioural economics successfully into government policy. According to Matjasko et al. (2016) in order to design a behaviourally informed policy intervention it is essential to understand the decision-making process around the targeted behaviour.

One example of a nudge that aimed to improve diet and obesity is found in the book ‘Nudge’ by Thaler and Sunstein (2008) . They proposed a change in choice architecture, which is essentially the environment where we make choices, in schools to improve children’s diets. They suggested that making slight changes to school cafeterias would increase the convenience and appeal of healthier food options which would increase the consumption of fruit and vegetables by students. It just shows how a small difference like the prominence of vegetables strategically placed in a school cafeteria can make simply by applying behavioural economics. It has also been found that changing the size of the plate the students eat on also had a profound beneficial effect.

The Irish government can learn from other nudge examples like this as well as examples like appealing to loss aversion by highlighting the impact of obesity on an individual and the resultant loss of life to a family member. Also the government could advocate the use of pre-commitment devices such as pre ordered meals in schools a month ahead, or the use of disclosure requirements regarding how calorific a meal is. This would illuminate hyperbolic discounting and students acting irrationally at the time of meal decisions as the decisions have been made in advance or are made easier. Recently in UCD the vending machines containing unhealth snacks have been replaced by healthy vending machines with snacks of a certain calorie amount only being allowed to be dispensed. They have also banned the sale of carbonated sugary drinks on campus which shows the university is employing behavioural techniques in order to facilitate students to be healthier.

Conclusion

It is clear that obesity is a major problem in Ireland. With the costs associated with it rising along with the obesity rates the Irish government has had to act. The implementation of behavioural economic concepts into public policy has been crucial. With some objections to paternalism I feel it is a necessary measure to stop this crisis. The Irish government is only at the start of the journey to combat obesity using public policy. With the implementation of the obesity policy and action plan in 2016 and the sugar tax they have set an important precedent. There are also many examples of nudges which have been proven to be successful which the Irish government may implement in the future. With University College Cork (2017) estimating a €365 million saving from a 1% reduction in childhood BMI it would be non-sensical for the government not to implement behavioural concepts to achieve their healthy Ireland goal by 2025.

Reference

1. Cullen, P (2016). ‘irelands obesity rate among worlds worst’. The Irish Times, April 1st. Available at: https://www.irishtimes.com/news/health/ireland-s-obesity-rate-among-world-s-worst-1.2594266. (Accessed November 3rd)
2. Delaney, L (2018). ‘Intertemporal Choice’ {Lecture} ECON30270, Behavioural Economics. University College Dublin. October 2nd.
3. safefood (2012). ‘cost of overweight and obesity’. Available at: https://www.safefood.eu/News/2012/New-study-reveals-the-annual-cost-of-overweight-an.aspx. (Accessed: October 2nd)
4. Department of Health (2016). ‘A Healthy Weight for Ireland: Obesity Policy and Action Plan 2016 – 2025’. The Stationary Office. Available at: https://health.gov.ie/wp-content/uploads/2016/09/A-Healthy-Weight-for-Ireland-Obesity-Policy-and-Action-Plan-2016-2025.pdf.
5. Rhode, D. L. (2015). Obesity and public policy: roadmap for reform. Virginia Journal of Social Policy and the Law 22(3), pp. 491-524.
6. Matjasko et al. (2016). ‘Appling Behavioural Economics to Public Health Policy: Illustrative Examples and Promising Directions’ American Journal of Preventive Medicine, Volume 50, Issue 5, Supplement 1, pp. S13-S19.
7. Thaler, R and Sunstein, C. (2008) ‘Nudge: Improving Decisions about Health Wealth and Happiness’ Yale University press New Haven and London.
8. safefood (2017). ‘Cost of childhood overweight. Available at: https://www.safefood.eu/News/2017/New-study-reveals-total-lifetime-cost-of-childhood.aspx (Accessed October 2nd)