Defaults, nudges, frames
BEHAVIOURAL INSIGHTS RELEVANT
TO POLICY INITIATIVES
In mainstream economics:
People are rational decision makers who always choose what is in their
best interest.
• Unbounded rationality
• Unbounded will-power
• Unbounded self-interest
• Have complete information
• And have full attention
e.g: Attention
• People’s attention capacities are limited.
Attention is malleable!!!
What factors might affect attention?
Distractions (e.g., social media)
Worries (e.g. about own or others’ well-being)
Sleep
Practice?
Other?
How do we measure the impact of attention?
• Impact of reminders on behavior
• Plenty of evidence, e. g. on saving or medical adherence
• Impact of making some features (e.g. taxes) salient: Chetty et al.
(2009)
✓Taxes not featured in price are likely to be ignored.
✓ Sales tax only added at the register
✓ Compare demand response to sales taxes changes vs. to other prices changes
Field experiment to measure attention
• Individuals have limited
attention
• Make after-tax price salient in
the treatment group.
Estimate the change in demand
from making taxes fully salient
Quantity sold and total revenue in
the treated group of products fell
by about 8 %.
Why do consumers underreact to taxes that are
not included in posted prices?
• 2 alternative explanations:
Hypothesis 1: imperfect information - customers are
uninformed about the sales tax rate or which goods
are subject to sales tax
• Survey among grocery shoppers about their
knowledge of sales taxes suggests this is not the
case.
• Hypothesis 2: salience matters - the customers know
what is taxed, but focus on the posted price when
shopping…Inattention
Other Examples
• Smoking causes lung cancer...cigarette packs
• Labelling food items to make salient the nutritional value.
• physical activity calorie equivalent label (PACE), informs
consumers how much walking or running they would need to do
to equal the calories contained in the food.
• For example, a soda containing 138 calories would take 13
minutes of running or 26 minutes of walking to burn off.
• Compare on outcomes with and without intervention to study
impact of the PACE.
Food labels to show excercise equivalent
• People often make suboptimal choices
• Research shows that errors are made in a highly systematic way and
thus, can be predicted.
• Behavioural economics can intervene to ensure that people make the
right choices.
“Behavioral economics applies models of systematic imperfections in
human rationality, to the study and engineering of organizations,
markets and policy. These imperfections include limits on rationality,
willpower and self-interest, and any other behavior resulting from an
evolved brain with limited attention.”(Camerer,2006)
Reasosn for government policy..neoclassical reasons
▪ Macroeconomic policy (e.g., Federal Reserve, fiscal
stimulus)…stimulate aggregate demand
▪ Competition policy (e.g., anti-trust laws) …monopolist charges above
MC
▪ Redistribution, tax and social insurance (unemployment insurance;
Social Security) ..as market does not bring equity
▪ Externalities (e.g., cigarette taxes) and other market failures (e.g.,
innovation) … as otherwise underinvestment in innovation
▪ Internalities: consumer does not fully or properly internalize all the
costs and/or benefits she imposes on her (future) self
internalities
• Similar to externalities but
• Damage is on the future self rather than others in society.
• If the government lacks confidence that citizens are not working
towards their best future self... Government can interfere.
• Affect people’s behaviour for their own good...as they are making
suboptimal choices
• Attributed to behavioural economics
Behavioral policy
Recently, governments and public institutions have started embracing
the behavioural approach and including behavioural insights in policy
initiatives.
Applications to a wide range of public policy domains, e.g.,
employment, health, taxation, environment, consumer protection
• Several philosophical approaches to policy interventions based on BE
• The public interest in BE applications to policy was boosted by the
concept of libertarian paternalism, aka nudging (Thaler & Sunstein,
2003, 2008)
Libertarian paternalism, aka nudging (Thaler &
Sunstein, 2003, 2008)
• Libertarian: People should be free to choose.
• Paternalism: Attempts to guide people to perform a specific
action, behave a certain way, or choose a product in line with
their own good.
• When these two things come together—freedom and guidance—we
have the foundational philosophy of nudge theory.
• Nudges cater to, and can even correct, our innate and subconscious
biases, paving the way for positive behavioral change.
Hard vs. soft paternalism
1. Hard paternalism
Force choices on people; change prices significantly
Mandate choices or procedures
Outlaw products
Taxes ..make things infinitely expensive
Subsidies products
2. Soft paternalism
• Libertarian paternalism (Thaler and Sunstein, 2003): policies that
constructively influence behavior, while preserving or nearly preserving,
freedom of choice …nudges
• Asymmetric paternalism (Camerer et al., 2003): policies that help people who
make mistakes, while interfering minimally with people who behave
optimally…not make worse others …who are already optimizing….e.g., casual
smokers…policy must target heavy smokers
Nudges
• What is a nudge?
Richard Thaler & Cass Sunstein:
……any aspect of the choice architecture that alters people's behavior in a predictable
way without [1] forbidding any options or [2] significantly changing their economic
incentives
A nudge is a feature of the social environment that affects people’s choices without
imposing coercion or any kind of material incentive.
• Defaults
• Simplification
• Information/disclosure
• Warnings
• Reminders
• Uses of social norms
• Increases in ease and convenience
• Framing of choices (e.g. gains vs. losses)
Nudge Example:Cigarette litter
• Two cigarette disposal bins are erected on a littered street. One bin is marked
Ronaldo, the other, Messi.
• The bins encouraged smokers to vote for the best football player with their
cigarette butts. After twelve weeks, cigarette litter dropped by 46%.
• In the United States, a similar experiment reduced cigarette litter by 74% in six
months.
• The bins implied the desired behavior in an easy and fun way.
• Nudges are powerful influences in our daily lives; they help people
save money, recycle, and even eat healthy, quit addiction—without
requiring massive changes.
• Nudges are tiny changes in the environment that can help people
make better choices. They are micro-modifications in design that align
with “choice architecture.”
• David Laibson: An attempt to influence or control people’s conduct
for their own good – in other words, when the motivation for the
intervention is not about externalities.
Behavioral interventions in the health domain
❖Individuals and society have (often) aligned goals
Individuals want behavioral change.
Improve diet
Increase physical activity
Stop smoking
Get vaccinated
Use less energy etc etc
Societal costs of obesity, smoking, etc.
❖ But individuals often fail to follow through.
Education and information interventions often ineffective
Can nudges help align intentions and actions?
Arguments against paternalism?
1. People have better information than the government. Government may make
mistakes…may not have information…I know best for me. Some people worse off and some
better off…what is the overall effect?
2. Might make things worse if misunderstand preferences …government benevolence opens
room for corruption and mismanagement.
3. People optimize already anyway. Why intervene?.
4. Rational people are worse off since their choices are distorted… ..heterogeneity in choices
5. The government is inefficient and wastes money.
6. The government does not (always) have consumers’ best interest in mind…
7. Fear of regulatory capture…(more in institutional economics)
8. Freedom of choice matters per se…..Freedom is an outcome on its own
9. People dislike (hard) paternalism.
10. Which paternalistic policy should we choose? How do we know one is better than the
others. Evidence?
11. Practical implementation problems
Arguments in favor of paternalism
• People make mistakes.
• People’s behaviors sometimes generate costs that are not paid by the
decisionmaker himself (i.e., negative externalities), and nudges may be
justified on the ground that they reduce (i.e., internalize) such costs
• People don’t like to make choices for themselves…demand commitment
devices
• Rational people can opt out of/are unaffected by soft paternalism regimes.
• Addresses many of the above concerns which relate to hard
paternalism…..governments can focus on soft paternalism
Relatively popular paternalism
1. Social security (hard paternalism)
2. Health program (hard paternalism)
3. Consumer safety regulations, e.g., (hard paternalism)
4. Mandatory education (hard paternalism)
5. Cigarette ‘sin’ taxes (hard paternalism)
6. Banning polygamy (hard paternalism)
7. Banning prostitution (hard paternalism)
8. Mandating face masks (hard paternalism)
9. Ban junk food in school vending machines (‘soft’ paternalism)
10. Calorie disclosure laws. PACE (soft paternalism)
11. Default enrolment in saving and pension plans (soft paternalism)
12. Helmet laws (hard paternalism)
13. Seatbelt laws (hard paternalism)
14. Junk food taxes (hard paternalism)
15. Gambling laws (hard paternalism)
Soft paternalisim: example
• To discourage junk food
• Make info
salient(e.g.,calorie
posting policy)
• Make info vivid
Instead of tax, restriction
or education provision
Basic idea of nudging: to exploit people’s biases to
design mechanisms that
Help individuals make better choices do not restrict people’s choice
sets
✓ are easy and cheap to avoid
✓acting on the choice architecture (decision environment)
Examples of small architectural changes
• Ex. Restaurant/cafeteria
➢improving health by making unhealthy food harder to reach
➢reducing washing by locating the cutlery after the food
➢Hotel menus where veggies appear first and the relatively unhealthy later
➢a sign at the buffet that encourages restaurant guests to help themselves more than
once
➢Default participation
Example . church – natural field experiment by Soetevent (2005, JPubE)
in 30 churches for 29 weeks in the Netherlands
➢change in the offering collection tool in 2 treatments
➢offering the use of either closed collection bags or open collection baskets
➢When using baskets, attendees can see the contribution made by their direct
neighbors as well as the total amount already gathered.
➢Contributions in the baskets initially increase by 10%
Possible behavioural mechanisms
In the basket treatment, 2 additional pieces of
info:
✓ each other’s contributions
✓total amount already gathered
•A possible force
•social incentives like prestige, social approval,
shame, and social comparison
Tools of nudging (Thaler et al., 2012)
❖Defaults
• Outcome a decision-maker gets under the status quo.
• A pre-set default option is the alternative that someone will receive if not actively making
another choice.
• A pre-set default option should not affect the choices made by rational subjects.
• The default choice or default option is the option that a consumer “selects” if he or she does
nothing. Default options are pre-set courses of action that take effect if nothing is specified
by the decision maker (Thaler & Sunstein, 2008)
• Exaggerated preference for the default option, also when there are no or minimal
transaction costs
• The action set as default influences choices
• large default effects in the economic literature…see the organ donation (Johnson and
Goldstein ,2003)
• e.g.: Automatic renewals online
Tools of nudging (Thaler et al., 2012)
❖Defaults
A number of different explanations have been offered for how default setting causes a change in the
choice distribution.
Status Quo Bias: The human preference for the current state of affairs, which results in inertia and
resistance to change.
Cognitive effort may not be exerted by agents: Consumers don’t want to spend time looking around to
see if something might be better
Inertia: The tendency to do nothing and/or avoid change. The uncertainty of changing. If we stick with a
default choice, we know what we get.
Loss aversion: If an agent evaluates options on multiple dimensions, then the default functions as a
reference point from which some dimensions are interpreted as losses and therefore becomes more
important for the choice.
Implications: It limits the equi-marginal principle that states consumers choose goods depending on
marginal utility/price. Default choices suggest that in many cases, consumers are not measuring utility.
Tools of nudging (Thaler et al., 2012)
❖Incentives
solve potential incentive conflicts
salience → make choosers aware of the incentives they face
e.g., Immunization is a highly cost-effective way of improving child survival, yet
immunization rates remain low in many low- and middle-income countries.
Intervention: Immunization camps and 1 kilogram of lentils per immunization
providing incentives alongside reliable immunization camps increased the likelihood of full
childhood immunization by more than six times.
Offering families in resource-poor settings small, non-financial incentives can have large
impacts on welfare.
Esther Duflo Bribes India’s Poor To Health!!
• However monetary incentives may backfire
Increasing Tuberculosis Detection through
Incentivized Peer Referrals(Goldberg et al,2018)
• Tuberculosis will kill 28 million people between 2015 and 2030, and cost the global economy is
almost US$1 trillion.
• Despite the high personal cost of illness and the availability of highly effective treatment that is
free to patients in developing countries, a large share of those infected with TB do not receive
timely diagnoses or appropriate treatment.
• In India, close to 40 % of TB patients do not reach health authorities
• How to detect TB patients in the population?
• Identification through typical screening programs is costly
• Despite treatment availability, many patients suffer because of stigma
• Researchers conducted a randomized evaluation to measure the impact of peer referrals by
current patients.
• In an experiment with 3,176 patients at 122 tuberculosis treatment centers in India.
• They find that small financial incentives raise the probability that existing patients refer
prospective patients for screening and testing, resulting in cost effective identification of new
cases
Experimental variation (Design)
1. In one-third of centers, there was no financial reward, only encouragement
to participate for the good of the community.
2. In another third of centers, existing patients were offered Rs. 150($3) for
each new suspect who got screened at their request.
3. In the remaining third of centers, existing patients were offered Rs. 100 for
each new suspect who got screened and an additional Rs. 150 if the suspect
tested positive for TB.
Peers asked to approach people they knew socially and believed to have TB
symptoms, inform them about TB’s consequences and treatment, give them
cards, and encourage them to get tested. The value of private information may
be especially high in this context
What is the cost incurred by the peer referrals?
Peer referrals carry two types of costs: the time cost of the interaction itself and
the stigma cost of revealing one’s own TB status to a peer (and hinting that the
peer might have TB).
What are the possible mechanisms behind a
positive effect?
Two possible mechanisms:
i. Peers have private information about individuals in their social
networks to target for outreach, and
ii. They are more effective than health workers in inducing these
individuals to get tested
Backfiring effect of incentives
• However monetary incentives may backfire
Gneezy & Rustichini (2000): field experiment in day-care centers
• Problem: late arrival of parents
• Hypothesis: the introduction of a penalty (monetary fine) reduces
• the occurrence of the undesired behaviour
• Sample: 10 private day-care centers in Haifa (Israel) with no important
• differences among them
Overall period of the study: 20 weeks
Intervention: from the beginning of week 5 to the beginning of week 17, introduction of a fine for
late-coming parents in 6 randomly selected centers the announcements (of introduction and
cancellation) was posted on the bulletin board
Results: The incentive backfired
The fine seems to have reduced
parents’ ethical obligation to avoid
inconveniencing the teachers and led
them to think of lateness as simply a
commodity they could purchase.
Similar
backfiring in
blood
donations
experiment
Incentives may backfire
Incentives(fines, rewards) are a cornerstone of economics. But they can
backfire.
Monetary incentives have two kinds of effects: the standard direct price effect, monetary incentives have
two kinds of effects: the standard direct price effect, which makes the incentivized behavior more
attractive, and an indirect psychological which makes the incentivized behavior more attractive, and an
indirect psychological effect. In some cases, the psychological effect works in an opposite direction to the
effect. In some cases, the psychological effect works in an opposite direction to the price effect and can
crowd out the incentivized behavior
Extrinsic incentives crowd out intrinsic incentives.
• Paying for intrinsically enjoyable: temporary payment reduces subsequent engagement tasks.
Incentives may offend or diminish our ethical sensibilities.
Incentives may reduce motivation.
• paying for prosocial tasks…such as blood donation
Rewarding blood donations may backfire because it suggests that the donor is less interested in
being altruistic than in making money.
Prosocial behavior often involves trust. Trust relationships are delicate. Explicit incentives can
signal distrust.
Another example:Promoting rule compliance
• Apesteguia et al. (2013)
Analyzed behavior: late return of items borrowed in public libraries
• violation of a rule
• generation of negative externalities for the population of users
penalty for late returning: the exclusion from the possibility of borrowing more items for a time
period equal to the number of days
• Usual solution proposed by economists?
• monetary incentives however, they may backfire
• Tested intervention: message intervention
• advantages: virtually costless, non-invasive, simple and flexible to implement
• different email contents to library members
Main results
Compared to control, all the 4 contents significantly reduce both the proportion of late returned
items and the number of days between the return and the due date
All the 4 contents affect users’ behaviour in an equal manner
A general reminder of the users' duty to comply with the rule is effective in promoting rule
compliance, while adding other contents do not bring a significant additional increase in rule
compliance
• Two possible interpretations (behavioral mechanisms):
✓ people pay limited attention to the duty to return items on time
✓ users interpret the treatment emails as a signal that the libraries care about
rule compliance (maybe to a greater extent than expected)
• Impact Duration: short term, but it is replicated after getting a second email
• Culture seems to influence how much users react to messages targeted at rule compliance
(users from English speaking countries and Asian users react significantly more than Spaniards)
Tools of nudging (Thaler et al., 2012)
❖Framing
The way options are framed influences preferences (e.g., losses vs gains)
❖Feedback and social norms
Providing feedback own…own energy usage , student performance
Social norms are collectively held beliefs about what kind of behavior is
appropriate in a given situation. social norms-comparison with peers
Normative feedback (e.g. how one’s energy consumption level compares to the
regional average)
Framing (Recall Asian Disease experiment)
Social norms
• Behavioural economists believe that most decisions are taken in a social
context within social networks. Individuals are influenced by social
preferences, identities, and norms.
• A vast body of evidence demonstrates that social norms impact a wide
range of behaviors, including conservation activities, charitable donations,
alcohol consumption, and diet and exercise habits.
• Social information can affect individuals for a variety of reasons: people
may wish to fit in (or on the contrary, stand out), avoid social disapproval
or seek social esteem.
• People may also take the behavior of others as an indication of what is
most effective.
• Social norms tend to operate through fast, intuitive, and emotional mental
heuristics.
Examples in energy use(Costa & Kahn,2010)
• The use of social norms in energy conservation
• “Behavioral economists assert that in the absence of price signals,
policymakers can change people’s behaviors by harnessing their
natural inclination to conform to social norms”
• Feedback about their energy usage relative to that of their neighbors
• Home Energy Report (HER). The report provides household specific
information on own monthly electricity usage over time and relative
to neighbors’ usage over the same time period
• non-price interventions can substantially, and cost effectively change
consumer behavior
• People engage in social comparison and are strongly influenced by
others’ behaviors.
Social norms
• Similar experiment in water conservation
Households that received the report used 8.35% less water in the
subsequent 6 months than did similar households that did not receive
the printed reports.
Are nudges persistent?
Do nudges work in the long run?
• Whether the behavioral change generated by a nudge intervention is
persistent over time?
• There are two channels through which the long-term effect of a
nudge may be sustained.
i. First, a nudge may be implemented in the choice architecture only
for a limited time and the behavioral change may somehow persist
in the nudged subjects. May be because the nudge created a novel
habit.
e.g., People exposed to signs informing them that most of their peers prefer
stairs over the elevator not only adopt the indicated behavior themselves but
also adopt it for some time after the signs are removed.
Do nudges work in the long run?
ii. A nudge may be permanently present in the choice architecture and its
effect may be renewed each time the decision-maker interacts with it.
e.g., Cronqvist et al. (2018) report that a default saving plan implemented
in Sweden in 2000 (termed the “Premium Pension Plan”) was still effective
in raising saving rates after nearly two decades (2000−2016).
Popularity of nudges
Proliferation of centers adopting a non-regulatory approach
• The Behavioural Insights Team (aka the Nudge Unit) in the UK, the
Social and Behavioral Sciences Team (SBST) in the US, Behavioural
Insights Unit of the New South Wales Government, Behavioural
Insights Unit – Ontario, Danish Nudging Network, Behavioural
Insights and Design Unit (BDU) in the Ministry of Manpower (MOM)
– Singapore, the World Bank’s Global Insights Initiative (GINI), Min,
behavior and Development Unit (World Bank)
• Australia, Canada, Denmark, France, Germany, the Netherlands, Peru,
Singapore, the UK and the US are pioneering the use of behavioral
insights.