ETHOS Issue 11, Aug 2012
The key message of Behavioural Economics and Policy Design is both clear and important. Collectively, the authors emphasise that policymaking can be substantially improved by taking into account aspects of individual behaviour which deviate systematically from standard economic assumptions of rational choice and utility maximisation. These deviations range from universal human limitations, such as bounded rationality and hyperbolic discounting, to behaviour more explicitly shaped by social forces, such as norms of justice and values of morality.
The book — distinctive in that it is written by policymakers drawing explicitly on economic theory — demonstrates how an unthinking application of the “right” tools according to conventional economic theory might lead instead to suboptimal outcomes. The cases tackled in the various chapters cover a broad range of issues, from healthcare and traffic control to global problems such as climate change.
In some of the chapters, the authors discuss “status quo bias” — the tendency for people to prefer sticking to the status quo even if they are rationally aware that a change might suit their preferences or serve them better. This bias leads to large gaps between human preferences, seemingly optimal solutions, and actual behaviour. In the case of organ donation, for example, the authors note that while polling in Canada found that 85% of society favoured being an organ donor, the actual sign-up rate was 17%. In Singapore and some other countries, the policy is to presume that consent to be a donor has been given, unless people explicitly opt out. In such cases, the share of donors is usually above 80%.
An unthinking application of the “right” tools according to conventional economic theory might lead instead to suboptimal outcomes.
A chapter on fiscal policy details how policymakers were able to improve the design of discretionary transfer policies by taking into account a range of behavioural predispositions and cognitive biases. These include: encouraging spending by framing a transfer as a “bonus” rather than a “rebate”, limiting the time period in which transfers can be consumed, and changing the structure and substance of transfers to avoid building up a sense of entitlement.
While policymakers are often thought of as having to make time-constrained decisions in environments of uncertainty, and having to compromise across competing interests, the book manages to bridge the practicalities of their profession and the theoretical models of behavioural economics. The authors have done a fine job of explaining complex economic concepts in clear and plain prose; in the process, they offer the reader rich insights into how Singapore’s policy thinking and practice have evolved over the years. The volume joins a growing body of literature and discourse about how decision-making can be improved by taking behavioural considerations into account.1
Behavioural Economics and Policy Design has two broad aims. The first is to draw out past examples of how policymaking can be enhanced by balancing efficiency and behavioural concerns. The second is to foster greater discussion and investigation into how insights from behavioural economics can strengthen policy design in Singapore. Such discussions might well be meaningfully applied to a number of issues pertinent to Singapore today.
The Introduction devotes some space to discussing the ethical questions that might arise from the adoption of behavioural economics tools to public policy decisions. One concern is paternalism. Is the government being too intrusive in “nudging” citizens towards one set of actions over another? Another criticism is that the intentions of the state when employing such behavioural tools may not be consistent. Where is the dividing line behind a benevolent nudge and the use of psychological devices to promote particular interests at the expense of society? A third concern is how one deals with cognitive biases that also affect the Government, given that these behavioural limitations are common human traits no one is immune to. One reasoned response offered in the chapter is that the Government, in designing policies from electricity pricing to tobacco sales, has to offer choices one way or another, and that these regulatory designs are part and parcel of the responsibilities of the state. The Government should therefore find ways to actively counter these biases. How then should we systematically go about thinking through the possible pitfalls and available remedies?
Taking the case of organ donation as an example: if an opt-out policy were to be adopted in a country, how should the policy be communicated and implemented? At what age is each citizen informed of the policy and given the choice to remain a donor or opt out? If or when the option is provided, is it accompanied by a balanced discussion of the pertinent considerations — moral, ethical, spiritual and practical? The implications for paternalism vary widely, depending on the answers to these questions. The principles of behavioural economics suggest that information could also be used to empower citizens. Chapter 5 on electricity, for example, demonstrates how the Government can use smart meters, and tailor the presentation of information in electricity bills, to improve the information given to households, empowering them to make better choices at their discretion.
One way to address the question of the Government’s own cognitive biases and bounded rationality is to bring greater transparency to the thinking behind various policy issues, opening the policy process to a wider set of stakeholders: through participation, and rigorous, informed deliberation. Clearly, not all issues can be subject to the same level of participation and debate. Some require expert input, others are taken under urgent time pressures, and still others might involve national security concerns. Nevertheless, these considerations ought to prompt greater effort to systematically identify which issues would benefit from a more open and participatory approach to policy design, so that the policymakers do not become captive to their own biases.
A common theme discussed in the book is the value of combining the insights of behavioural economics with the policy practices of transparency and participation. Moreover, a unilateral approach to policymaking is increasingly out of sync with a Singaporean society and economy that is highly networked and integrated with global processes of production, innovation, and cultural and ideational exchange. Deliberative and participatory approaches to governance allow the Government to draw on the diverse viewpoints and skillsets of society as a strength, and enable a more flexible, responsive, and ultimately more robust approach to governance.
One way to address the question of the Government’s own cognitive biases is to bring greater transparency to the thinking behind various policy issues, opening the policy process to a wider set of stakeholders
The first step towards a more participatory approach to governance is to open up the policymaking process to the public. In this regard, this book makes a substantial contribution by bringing the voices and thoughts of different practitioners directly to the public. In doing so, it also represents an evolving attitude of greater openness, with policy practitioners prepared to be reflective about the learning that has taken place within Government, upfront about missteps that have occurred, and frank about the difficult challenges of grappling with norms, values, and psychological biases alongside technical economic issues.
Finally, the book represents an admirable contribution to strengthening exchanges between policymakers and academia. Apart from behavioural economics, the field of cultural economics is also uncovering new insights into how norms and values — from expectations of social mobility, to social capital and trust — relate to economic issues such as inequality, democracy and the functioning of institutions.2 This growing body of work offers another exciting source of new ideas for policymakers in Singapore to draw from, to respond to ever-more complex governance challenges.
- One widely cited book about “nudging” people towards more optimal decisions, for example, is Thaler, R. and Sunstein, C., Nudge: Improving Decisions about Health, Wealth and Happiness (Yale University Press, 2008).
- See, for example, Alesina, A., and Glaeser, E., Fighting Poverty in the US and Europe: A World of Difference (Oxford, UK: Oxford University Press, 2004); Alesina, A. and la Ferrara, E., “Preferences for Redistribution in the Land of Opportunities”, Journal of Public Economics 89 (2005): 897–931.