With this blog post, I intend to give a (very) brief taste for newbies to the field of behavioural economics. And by that – lets start by talking about some standard economic theory and a rarity of man called Homo Economicus. Homo economicus is a very rational man who carefully weighs cost and benefits and is well-informed by his existing preferences – that is, he computes the values of all the options he faces, and then follows the best possible path of choice. We can also call him superman – hrmhrm, minus the fact that he only maximizes utility in his choices with regard to his own self-interest. This self-interested Superman (nope, he doesn’t sound very charming at all) is what standard economic theory assumes we are as humans. Subsequently, it is also what standard policy tools (e.g. taxes, subsidies, bans & regulations) that target human behaviour are based on.
However, we all now that we as humans are not always rational in our choices. A substantial body of research proves that we are very much influenced by limited cognitive resources, incomplete information and heuristics that lead to systematic deviations from our “rational” choice. Heuristics are mental shortcuts that humans rely on which though to simplify judgemental operations. These heuristics are in general quite useful (it helps you to not being forced actively reflect on every little single bit action you do), but also quite often they lead to severe cognitive biases. Biases that reasons in a way, which is not in accordance with norms of logic and probability. Let’s give you one of the behaviour economics guru Daniel Kahnemans’s favourite examples of how a cognitive bias can occur (although I Swedishonized the version a bit):
An individual in Sweden has been described by a neighbour as follows: Veronika is a very shy and withdrawn person but always helpful to people. She has a passion for reading books and is a very tidy soul with a detail for order and structure. Is Veronika more likely to be a librarian or a doctor?
Now, most people’s first intuitive thought or image that pops up into their mind is that Veronika is a librarian. Surely, this is because Veronika resembles a librarian more than a doctor. But, what “rational” people first should think of is that there are almost ten times more doctors than librarians in Sweden – hence Veronika is more likely to be a doctor. This example is just one out of MANY that proves that we deviates from Mr. Rational Superman.
In fact, we are far more complex than just being rational and therefore behavioural economists rather call us humans HomER economicus. For example, we tend to postpone things that we rather would like to be done with, have unhealthy living habits where we smoke, eat too much and exercise to little and – we consume beyond the planet’s capacity to recover. Therefore, in the area of public policy-making and tools that are based on biased assumptions – the intended effect may lead to failures. Behaviour economics, and in particular nudging, which recently has become a field within applied behavioural economics, is all about understanding these failures in order to change human behaviour.
Applied behavioural economics acknowledge the importance of having an interdisciplinary evidence-based approach using economic with insights from psychology. It emphasizes the role of analyze and test (often via experiments) in order to reveal if the policy intervention actually reached an intended effect on human behaviour. In conclusion, the purpose with this blog – as Britt mentioned in her previous post is NOT to say that “nudging” is the solution of all problems – but to spur an open debate about use of it as a tool with the aim of increasing “good” behaviour in Sweden. Nevertheless, not all nudges are good nudges – nudging is a powerful tool and can be harmful if being used in the wrong hands. But a debate about the ethics of nudging requires much more space than what I will dedicate this post – we’ll save that discussion for an upcoming one!
For those of you how had no clue what behavioural economics is about – hopefully this post gave you a teaser about it and why we should look at policy through a evidence-based behavioural lens.
Over and out!
On the behalf of the Swedish nudging team,
Ps.. Oh, and to be clear – I only shared a glance from my own head in this post. For a more comprehensive understanding I suggest you to dig deeper in to the literature. We will soon provide a reading – and watching list for those who are interested in knowing more!