SHOULD BEHAVIOURAL ECONOMIC POLICY BE ANTI‐REGULATORY?

Abstract

Over the past few years, an approach known as ‘nudge’ has been prominent in the health (and much broader) policy discourse in several countries, reaching its zenith in the UK, with the formation, in 2010, of the Behavioural Insights Team (aka the ‘nudge unit’) at the heart of David Cameron's government. The intellectual foundation for nudge was laid out by Sunstein and Thaler (2003), who labelled this philosophy ‘libertarian paternalism’. They used the word, libertarian, to modify the word, paternalism, so as to indicate that the approach is liberty-preserving. That is, the approach is not intended to restrict freedom and is said to preclude regulation and bans. Moreover, to limit any charge of being coercive, the approach is not meant to involve overt methods of persuasion, nor significantly change the economic incentives of those targeted. It is paternalistic in the sense of wanting to make choosers alter their behaviours such that, on deliberation, they would be better off, as judged by themselves. The heart of the approach is that insights from behavioural economics be used to modify the environment—the ‘choice architecture’—that people face, so that they are more likely to make decisions that better serve their underlying preferences. The nudge approach has therefore, for the first time in any significant sense, brought behavioural economics to the forefront of the policy discourse, but what is behavioural economics (see Camerer and Loewenstein (2003) for a brief history of the approach)? There is actually no broadly accepted definition of behavioural economics (Heukelom, 2012), but possibly, the most common understanding of this sub-discipline is that it is a set of findings that demonstrate that people, when making decisions, often systematically violate the set of assumptions that underlie the dominant utility-maximisation model of economic man. Thus, these systematic behavioural patterns offer what may be thought of as a library of tools that enrich our understanding of human decision making and thus potentially allow us to improve the design of policy interventions on a case by case basis. There are a great many behavioural economic findings; just a few of the most important ones will be summarised here. Loss aversion, for instance, is the common finding that people's negative reaction to losses is far greater—often about twice as much (Tversky and Kahneman, 1991)—than their positive response to gains of the same amount, a difference in magnitude that cannot generally be explained by a declining marginal utility curve. Related to loss aversion is the observation that reference points matter. In standard economic theory, it is assumed that the carriers of value are final assets, but empirical investigation has shown that people often care more about what they gain or lose around what they already have (their reference point) rather than what they finally hold. Non-linear probability weighting is the finding that people often overweight small probabilities and underweight large probabilities, which may help to explain why a particular individual might concurrently demonstrate risk loving (e.g. buying lottery tickets) and risk averse (e.g. purchasing insurance) behaviours, a tendency that has long perplexed many economists. But possibly, the most important observation in relation to the mistakes, vis-à-vis their long-term welfare, that people—including policy makers—make is that of present bias, that is, the finding that people place an enormous weight on the immediate moment and tend to overlook the future consequences of their actions (think smoking, eating, drinking, spending, the environment etc.). Present bias has huge negative implications for mankind. Nudge advocates have proposed using the findings of behavioural economics to inform a great number of interventions. Indicative examples can be viewed in Thaler and Sunsteins's (2008) popular book, Nudge, and, specifically in relation to health-related policy, in Applying Behavioural Insights to Health, the first applied report produced by the Behavioural Insights Team (2010). Space restrictions prevent a review of these interventions here (they include proposals to change the default position on organ donation, the public reporting of restaurant hygiene standards and embedding sensors in stairs to encourage the avoidance of escalators), but it is perhaps noteworthy that nudge proponents tend to pay much attention to incentives, which, to qualify as a nudge rather than a straightforward tool of standard economic theory, have to remain small. For example, the Behavioural Insights Team (2010) proposed piloting the offering of redeemable Nintendo ‘points’ for diabetic children who agree to regular blood sugar tests. In terms of their behavioural economic foundation, these initiatives appear to be attempts to exploit people's tendency towards present bias. That is, offering a small incentive to do something now, and, if possible, making that incentive enjoyable to pursue, may offset to some degree the unpleasantness of undertaking the targeted task. At face value, the nudge approach appears quite innocuous: it offers a means to help people make decisions that their reflective selves would want to make and yet protects their freedom to choose as to whether or not they wish to be helped in this way. However, when we scratch beneath the service, a number of potential problems are revealed. For example, as Sugden (2009) has argued, how are we to determine the directions in which it is legitimate to nudge people? A nudge advocate would look to the deliberative preferences of the people themselves, but we perhaps ought to exercise much caution with respect to what people reflectively say they want because there is no guarantee that the limitations on attention, information, cognitive ability and self-control that people are prone to in their day to day ‘automatic’ decision making are absent from their deliberative responses. Indeed, it may be that answers taken as deliberative preferences are really just responses to pressure, embarrassment or to what individuals think their questioner wants to hear. Although a nudge advocate might argue that default positions are unavoidable and thus it is inevitable that individual decisions will be biased in some way, Sugden would counter by arguing that we can have little confidence that government intervention to reframe a choice context will genuinely improve things for those concerned. A further concern with the nudge approach, although arguably the principal reason for its current popularity among governments eager to protect private sector interests, is its anti-regulatory stance. Moreover, a concern here is that behavioural economics has been to some extent captured by the nudge agenda, that the policy and much of the academic communities are equating behavioural economics with something that it does not necessarily have to be and that behavioural economics could be used for more profound purposes. That is, the findings of behavioural economics can provide a firm theoretical justification for regulating across a huge range of areas. For example, let us once again take present bias: we know that people heavily weight the immediate moment and overlook the longer term detrimental consequences of their actions to themselves, and we also know that the food, tobacco, alcohol (etc.) industries are aware of this tendency in human beings and devise ways to seek to profit from it (for example, attractive packaging, two for one deals and loss leaders, and the placing of chocolate near tills). This, from the industry perspective, is economically rational because their objective is sales and/or profit maximisation, but such strategies, due to cognitive biases, invariably cause long-term harm to a great number of people. That such actions are deliberately causing harm is, following Mill (1869) reason enough for government regulation, the design of which can be informed by behavioural economics. For example, there is evidence to suggest that one of the best ways to make people purchase healthier foods is to use a ‘traffic light’ system on food labelling (House of Lords, 2011), whereby red, amber and green marks are displayed on food products to indicate how rich they are in energy. Behavioural economics is instructive here, both in terms of identifying the problem (present bias) and in designing a regulatory solution—that is, mandating the food industry to give the consumer a very clear reference point, such that a red mark is perceived as a ‘loss’ in terms of health and a green mark as a ‘gain’. Unfortunately, politics, in the form of successful lobbying by the food industry and politicians enamoured with the anti-regulatory approach, has thus far prevented the introduction of such regulatory measures at the EU and UK governmental levels. In short, therefore, behavioural economics should not be used as a reason for not regulating against the often socially harmful activities of private sector interests. In fact, in some circumstances, behavioural economics can offer the intellectual foundation to help inform politicians of where it is appropriate to regulate and how to design regulation such that there is a reasonable expectation that it might work.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 6 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.