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Applying behavioural economics
on 31 July 2008
Whilst I don't know if this book is quite as significant as is being made out, it's a nice and straightforward primer on behavioural economics and some of its applications.
The first section sets the scene for why nudges - policy interventions that encourage rather than mandate certain types of behaviour - may be necessary. So it builds up the argument for why we aren't the rational self-maximizers that economics has tended to assume we are. This section includes a useful run-through of some of the key heuristics and biases that have been identified and what kind of outcomes they result in. This does provide a pretty good overview of some of the major factors like anchoring, availability, representativeness, loss aversion and so on. It also stresses the importance of the design of choice, or choice architecture, and that in many cases there is no option to be 'neutral' - some kind of structure of choices has to be offered.
The second section is about financial issues, so much of this is familiar ground if you know much about recent pension reform. Still the points are worth reiterating. If you auto-enrol people into a pension most tend not to opt-out. Whereas if you don't auto-enrol many don't join. This, combined with what non-savers say themselves, suggests that non-savers aren't making a rational choice not to save. People also adopt naive diversificaton strategies - the equity content of their asset allocation (if they have made an active choice) will be heavily influenced by the allocations of the funds on offer (and what stocks are popular at the time) and what's more people don't tend to shift their initial allocation. Also it seems pretty clear less in more in fund choices - too many options puts us off choosing.
The section on health has a bit of a US focus, but there is interesting stuff in there. The example of the Part D prescription drugs system is useful if only to demonstrate why a random choice for non-choosers is a bad idea. Also the section on organ donations is worth a read - I think I still favour the assumed consent approach, but the idea of mandatory choice (ie having to state your position on your driving liscence) is at least worth thinking about. Also in this section are some fairly interesting suggestions for nudging people to reduce energy consumption. These are definitely worth a look since they involve, for example, being able to make peer group comparisons. I think this would work on two levels - firstly simple self-interest, wouldn't you be annoyed to know you are spending more on energy than comparable households? Secondly I think it would give people smug points for being more energy efficient.
The fourth section I probably found the least interesting, as it deals with ideas I'm not that impressed by, such as school vouchers. Having said that the idea of privatising marriage is intriguing, if unlikely to happen. Basically they argue that the state should restrict itself to civil partnerships and the legal rights that flow from them, but that 'marriages' could be arranged by other groups. That way churches could choose whether or not they want to carry out same-sex marriages. Equally other organisations could carry them out anyway. That way, the authors argue, no-one's values get compromised but neither are anyone's rights denied.
The final section sketches out some further ideas for nudges, as well as combatting some of the counter arguments that have been put forward. This latter chapter is well worth a read as the authors do a pretty good job at arguing back at some of the half-decent arguments there are out there that challenge them. Some good pro-nudge points here include the one I've already mentioned that often there isn't a neutral option - so the absence of a nudge is a kind of nudge itself. Also it is important that nudges are made explicit, so there is no sense that Government (or whoever else is doing the nudging) is being underhand.
Thaler and Sunstein argue that their approach offers a real 'third way' since it seeks an alternative to both state mandated paths on the one hand and complete laissez-faire on the other. This they call Libertarian Paternalism. That's obviously an Americanism, since in the UK libertarianism of any stripe is not a strong theme in our political culture. As such I don't expect the label to catch on here. However overall the book does provide quite a few ideas for how we could achieve some beneficial behavioural changes without being too heavy-handed. And if you want to get into behavioural economics this probably isn't a bad place to start.