Rethinking Public Policy with Nudges from Psychology

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Go in, young man. File photo. Credit:

Economics, which usually provides a useful framework through which public policy issues can be analysed, often assumes that people are rational actors; meaning that people are selfish, wilful, have perfect foresight and remarkably precise beliefs. However, evidence suggests that our behaviour in day-to-day life depends on a richer set of factors than classical economists would have us believe.

Sample this. Sixty-seven years since independence and our republic is still taking baby steps to induce people to avoid open defecation and use covered toilets instead. A well-intentioned policy helped construct toilets in rural areas. It turns out that that these toilets have attracted few users. What went wrong? Classical economics will find it difficult explain this.

The answer to such vexing questions might lie in the deeper recesses of the psychology behind such decision-making. For example, one possible way to attract more users to public toilets may simply be to rid the toilets off their roofs.

Advertisers have long exploited consumer psychology to sell their products, politicians have leveraged voter psychology to garner votes but not policy makers. In fact the global recognition that insights from psychology can play a crucial role in shaping equitable, efficient and well-targeted policy is one of very recent vintage.

Take the case of obesity for example. More than one third of the US adult population is obese. Given that obesity has an adverse spillover effect on health, financial and other aspects of life, what should society propose be done about this? It turns out that there are some simple yet cheap solutions to induce people to make healthier food choices. In one study, researchers placed attractive but low calorie and nutritious food such as fruits in strategic locations of school lunchrooms. In another one, they created a “healthier choice only” convenience counter. They found that consumption of healthier food increased considerably in these “smarter lunchrooms” and thereby helped achieve better health and educational outcomes. Classical economics, with its emphasis on prices and incentives, has little to say about what induced a change in behaviour in this case.

The explanation may instead be found at the fault line between classical economics and the psychological aspects of our decision making process – namely, Behavioural Economics. Behavioural Economics, in many respects an antithesis to the classical rational actor framework, introduces a psychologically nuanced conceptual framework where many of the unreasonable assumptions are replaced by empirically founded axioms of behaviour. Needless to say that the BE revolution led to a richer set of predictions in a wider variety of settings.

Richard Thaler and Cass Sunstein – authors of the bestselling book, Nudge,  provided the intellectual foundation of such strategies where people’s choices are altered by making subtle changes in the choice architecture. They named it “Libertarian Paternalism” and argued that people often make poor choices for themselves – it is possible to help them make better choices while at the same time preserving their freedom to choose. Such nudges, concurred Nobel Laureate and the father of modern day behavioral economics Daniel Kahneman, “yield[ed] medium sized gains with nano-sized investments.”

A Cambridge academic turned bureaucrat, David Halpern noticed the power of such psychological nudges in the early 2000s. During a stint at the Prime Minister’s Strategy Unit in UK, Halpern convinced Prime Minister David Cameron that a comprehensive Behavioural Insights Team be formed with an aim to help people make better choices for themselves and the society.

The “Nudge Unit”, as it is better known, was born and has since made some spectacular advances: their simple interventions have helped augment tax revenue, increase electoral participation and encourage organ donation. The success of the unit has inspired similar units in the US and in other international organisations. The World Bank, for instance, has published the 2015 World Development Report on the theme of “Mind, Society and Behaviour”. The volume makes a significant pitch to reorient developmental policies, by articulating the need to interpret the beneficiaries of such policies as homo behavioralis rather than homo economicus.

The root of the many failings of public policy in India is perhaps misaligned incentives. However, given a set of incentives, considerable gains can be achieved by making sure that the design of policies conforms to the psychological insights about how people think, operate and choose. Some of these insights may be intuitive, but most are not. Even for those that are, arriving at these require a deep understanding of how our mind works and choices made. Most of all, they require rigorous and independent scientific evaluations, in order to arrive, as far as possible, at objective and de-ideologised understanding of what works and what doesn’t.

Unfortunately, the current monitoring and evaluation departments in India are hardly capable of providing an intellectual direction in this regard. Effective social and public policy interventions will require a near universal overhaul of the existing evaluation department into an independent and comprehensive Behavioural Insights and Evaluation Unit – one that will be strategically positioned to collaborate and coordinate between academia on the one hand and policy makers on the other, and thereby help harness medium-sized gains with nano-sized investments.

Ritwik Banerjee is an economist at Aarhus University, Denmark.

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