At the Behavioural Economics Symposium in Singapore in 2013 David Laibson, who is Robert I. Goldman Professor of Economics at Harvard University, gave a lecture on how behavioural economics is changing public policy making in the 21st century. Under the heading Towards Better Policy Design and Evaluation: Behavioural Economics and Randomised Controlled Trials Laibson (2013a, 2013b) looked at the growing importance of behavioural economic concepts as well as randomised control trials.
Laibson introduces the lecture by contrasting mainstream economic assumptions with the assumptions in behavioural economics. Standard economics assumes rationality and optimising behaviour while behavioural economics recognises that people are often confused or do not follow through on their plans. Laibson then continues with the example of savings behaviour to contrast effective policy making based on classical economic assumptions with effective policies based on behavioural economic assumptions. In particular, he shows that under the assumption of rationality and optimisation (‘homo economicus’), incentives and education should prove powerful to induce people to make use of their 401(k) savings plans. Yet the randomised control trials which Laibson conducted together with Choi and Madrian in 2010 suggest the opposite: incentives and education about the benefits of enrolling in a 401(k) savings account to maximise income (targeted at workers of age 59.5 and over) did not lead to the desired effect. It raised participation by only 5 to 10 percentage points (Laibson, 2013a, 2013b).
Hence Laibson suggests that we have the ‘classical economics view’ on the one hand and the ‘behavioural economics view’ on the other hand. While the former relies on incentives and education as the most important tools for public policy making, the latter recognises that incentives and education have a rather small effect on their own. Laibson argues that the solution to such failure of incentives and education is to find “interventions that channel good intentions into action” (2013a, p.13). One example of an intervention which channels good intentions into action is a change of opt-in enrolment to opt-out enrolment. Alternatively, one could also implement ‘active choice’, meaning that an individual is required to make a choice. In terms of the 401(k) savings account, this would mean that individuals would be required to make a choice upon the start of her job with a new firm.
Finally, Laibson turns to the domain of health where he sees significant similarities to saving behaviour and where the challenge is also to channel good intentions into action. For example, he argues that individuals often want to change their behaviour in the future by improving their diet, working out more, quitting smoking or other activities beneficial for health. Yet informing people (for example about their caloric intake) does not have the desired effect either. Information and education on its own are shown to have little effect in a range of randomised control trials. What works, according to Laibson, is to align intentions and actions. One example is a flu shot communication which at basically zero costs to society can be enhanced by adding a date and time plan. His second example is a colonoscopy communication which again at basically zero costs to society can be enhanced by adding a sticky note and an action prompt (Laibson, 2013a, 2013b).
So Laibson (2013a, 2013b) summarises his short lecture on Behavioural Economics and Public Policy Design as follows: The emerging field of behavioural economics sheds light on the failure of standard economic assumptions (rationality, optimising behaviour). Simultaneously, its insights prove valuable for public policy making because they can help to design more effective interventions which nudge people into the right direction at virtually no extra costs to society. Poster children for good public policy design based on behavioural economics are saving behaviour and health decisions.
I recommend you to watch the complete lecture by Laibson, which can be found here. The slides are available from here. In my opinion it is a highly inspirational lecture and gives a good overview on the wide range of applications of behavioural economics and how it transforms public policy making in the 21st century. What is more, Laibson is a highly engaging speaker and great to listen to!
Many thanks for reading,
Laibson, D. (2013a). Behavioural Economics and Public Policy Design. Slides presented at the Behavioural Economics Symposium 2013, Civil Service College, Singapore. Available at: https://www.cscollege.gov.sg/Knowledge/Documents/Events/BE%20Symp%202013/David%20Laibson.pdf [Accessed 15 October 2016]
Laibson, D. (2013b). Behavioural Economics and Public Policy Design [Video]. Available at: https://www.cscollege.gov.sg/Knowledge/Pages/David_Laibson-Behavioural_Economics_and_Public_Policy_Design-Part1of2.aspx [Accessed 15 October 2016]