Behavior, Economics and Finance
Governments can benefit from behavioral insights. People can be motivated to pay their taxes if governments acknowledge and reward good behavior - and demonstrate good public use of tax money. A 2017 working paper published by the Inter-American Development Bank cited a study in which 400 individuals from a municipality in Argentina were randomly selected from a pool of 72,000 people who had paid their property taxes.
Behaviorally-informed interventions can help people overcome biases.
The selected taxpayers were publicly recognized in a highly visible way, when the government built new sidewalks in front of their houses. Those who received the new sidewalks were 7% more likely to pay their property taxes over the following three years, according to the study. In addition, the neighbors of those who received the new sidewalks were also more likely to pay their taxes in the future.Behavioral insights are starting to have an impact on how people save money, on corporate balance sheets, and on national budgets.
They key on the fact that when people make consequential financial decisions, they do not always act rationally - and are prone to biases. A typical example is the so-called “anchoring effect” during negotiations - which have a tendency to be strongly influenced by the first number tossed out. If a buyer gets to make his or her offer first, and it is relatively small, this can draw the ultimate price towards the lower end of the spectrum.
One prominent intervention, “Save More TomorrowTM,” developed by behavioral economists, leverages “hyperbolic discounting” to help people increase retirement savings. Hyperbolic discounting has two components: people want to avoid costs they have to incur sooner than costs they can delay (though this becomes less pronounced over time). Consequently, employees are more willing to sacrifice a fraction of their current salaries to increase their retirement savings, if the sacrifice is delayed. As part of “Save More TomorrowTM,” an employee is approached by a financial consultant as early as possible, before a future pay raise, and asked if he or she wants to increase their contribution to a pension fund with the first pay check after the raise. Contributions are then increased with each raise up to a predefined maximum, unless the employee wishes to opt out - which they can at any time. The program has helped millions of people increase their retirement savings.
As acknowledged by the Organization for Economic Co-operation and Development, a true measure of well-being should include quality-of-life aspects, like one’s sense of personal security, social connections, happiness, skills and education.
The behavioral sciences can help us study how to best pursue these outcomes. Small inputs and changes in narrative can be effective in determining how people react to adversity, and whether they see it as a challenge they can overcome.
Behavioral insights can potentially improve the quality of life for everyone.
Gross domestic product per capita may be a good way of indicating a nation’s well-being, but material conditions are not everything.
For example, behavioral scientists have shed light on the conditions under which students at schools and universities can better flourish. The Behavioral Insights Team, a publicly owned, UK-based company, found that fewer students with disadvantaged socio-economic backgrounds apply to university than students from higher income families, even when these students have the same grades and abilities; however, if such students from lower income families received letters of encouragement from enrolled students with the same socioeconomic background, their application rates increased by 3%. A study by Stanford University researchers published in Science in 2011 demonstrated that simply teaching students that all newcomers to college worry about fitting in, but that over time, everyone feels more at home, both halved the racial-achievement gap and improved the health of African American students.
Research has examined the boundaries that prevent children from regularly attending school in remote or conflict-affected areas of the world. One factor shown to have a strong impact on attendance is a student’s travel time to school. For example, the installment of village-based schools in remote areas of Afghanistan has been shown to increase school enrollment rates from 27% to 68%. The effect was also stronger for girls, reducing the gender gap in school enrollment. Human development faces myriad other challenges. For example, how can ageing societies in Europe, the US and Japan maintain inclusiveness for the elderly?
Identifying and removing barriers that keep older adults from staying actively engaged is crucial, in this regard. For example, residential areas need to be built to enable older adults to stay social and mobile, despite their limited movement - by adding more easily accessible public spaces with ample seating, or providing hand rails.
Behaviorally-informed interventions have also effectively improved outcomes for children in the developing world. One example: early childhood development interventions that increase psychosocial stimulation in children from very poor families. One report about an early childhood intervention that took place in 1986 and 1987 in low-income neighborhoods in Kingston, Jamaica, showed that twenty years later, stunted children who had received psychosocial stimulation earned, on average, 25% more than stunted children who did not receive stimulation, and had eventually caught up with other children who had not been classified as stunted before the intervention.
Whether by helping people improve their eating habits or boost their retirement savings, helping a company engender better team spirit, or helping governments encourage the payment of taxes, the behavioral sciences have a significant role to play in smoothing society’s path amid the dramatic changes accompanying the Fourth Industrial Revolution.
The behavioral sciences are a powerful tool that can be wielded to engender responsible decision-making and improve the quality of life.
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Changing Behavior for Sustainability
The behavioral sciences can help people and companies behave in more environmentally-sustainable ways.
People may aspire to consume less, save more energy and water, and purchase more sustainable products, but they nonetheless often fall back on bad habits and preferences. Traditional approaches to tackling this “intention-behavior gap” often fail. Simply informing people about the importance of sustainability is often not enough to affect their behavior, as decision-making is often guided by more ephemeral influences like mood, short-term desire, or habit. More often than not, people are also lazy - in the sense that they do not consider all available information when making decisions, or prefer convenient and accessible options over rational ones. To circumvent this, behavioral scientists investigate not only how persuasion can be more effective, but also how subtle changes to one’s environment, or so-called “nudges,” can make it easier for people to act in line with their aspirations.
The climate crisis has created a need for more sustainable use of natural resources and a longer-term, more global perspective. Humanity often struggles to act in its own future best interests.
Such nudges should always allow for the retention of consumers’ freedom of choice. For example, the Flemish government in Belgium was able to increase sales of local regional and seasonal foods by up to 30% simply by placing them at eye level for shoppers. Defaults can also work as powerful nudges; a 2008 study by researchers from the Max Planck Institute for Human Development and the Massachusetts Institute of Technology published in the Journal of Environmental Psychology showed that the proportion of people choosing a green, sustainable energy source over a less expensive, less sustainable source like coal can be substantially increased by simply making the green option the default on a registration form.
Information about established norms is also effective in nudging people to behave more sustainably. People do not like deviating from what is displayed as the default - possibly because they think it indicates a recommendation, or prevailing norm. A 2008 study published in the Journal of Consumer Research described guests at a US hotel re-using their towels more frequently if a sign informed them that the majority of guests in the same room had re-used their towels. And a 2011 study published in the Journal of Public Economics showed that providing US citizens with monthly reports about their energy consumption, alongside comparisons to that of their neighbors, reduced their energy consumption by about 2% relative to a baseline.
Even small, behaviorally-informed changes to the environments in which we make our decisions, or to the narratives we use to make sense of the world around us, can help us better act in accordance with the planet’s best interests.
Technology, Digitalization and Behavior
Technology and digitalization have transformed our lives, often by making them more efficient and comfortable. Technology is also an important force for enabling changes in behavior - particularly in terms of boosting productivity and supporting active lifestyles.
Human interaction can be enriched with technology-enabled behavioral insights.
The behavioral sciences can inform the design of technologies - like mobile apps, avatars, and driverless cars - based on knowledge about how users think and make decisions. Which designs appeal? Which can be intuitively understood? By providing answers to these questions, the interplay of humans and machines can result in maximum benefit.
Fitness trackers can help motivate people to exercise, for example, especially when paired with social media platforms. Meanwhile brightly-colored graphics and tactile interfaces enable the gamification of challenges that otherwise might be more difficult to overcome. One example: the sudden popularity of “Pokémon go” several years ago, which managed to get millions of people off of the couch and outside even if just for a little while. In order to reap the maximum benefit of these technologies, their design must encourage seamless interaction; the so-called “uncanny valley” effect of human representations that are less than 100% convincing, for example, can cause feelings of revulsion.
A 2017 paper by faculty at the University of Nottingham suggested that artificial intelligence could do a better job than established algorithms of predicting, based on medical records, the likelihood that a patient will suffer a heart attack - potentially making it easier to educate at-risk populations about precautionary measures.
In addition, behavioral scientists can help provide answers to pressing questions about the risks of increasing digitalization - such as what is the cost of monitoring and quantifying every aspect of our personal lives, how will this affect our well-being, will we feel like autonomous beings any longer if technology takes over so many of our daily tasks, and what are the consequences of the digital footprints we leave behind. And, of course: will we feel more disconnected as human interaction increasingly moves from physical to virtual. According to a 2013 academic paper, "Private Traits and Attributes are Predictable From Digital Records of Human Behavior," artificial intelligence can predict, with a high degree of accuracy, private traits like sexual orientation or political and religious views from just a few Facebook likes. This is potentially alarming, not least because in some parts of the world people can be legally prosecuted for their homosexuality or political views.
Artificial intelligence’s potential to be a curse or a cure depends in large part on whether policy-makers manage to adequately define the boundaries of its use.
Behavior and Governance
Behavioral insights are informing policy-making and encouraging civic participation
The design of health, safety, financial, and education-related public systems and services can benefit from taking into account the psychological traits of the people meant to benefit from them. Past approaches to policy-making often relied too much on simple financial rewards and punishments.
Now, the behavioral-science toolkit has expanded significantly; it includes social incentives like “nudges,” or subtle changes in the environment that gently push people to make better decisions while retaining their freedom of choice. These behavioral tools take into account the fact that decisions do not always result from a purely rational weighing of cost versus benefit, but instead are often influenced by simplistic reasoning, intuition, and social motives.
Behavioral designs are often more effective, and less costly, than traditional approaches that rely on financial incentives or persuasion. For example, millions of people in the United Kingdom and the US have increased their retirement savings in response to a simple change in the way certain pension plans are being presented to them. These new “Save More TomorrowTM” plans have people commit to allocating a portion of future salary increases towards their retirement savings. The sting of these paycheck reductions is dulled by the fact that they only kick in after raises, making people much more willing to agree to them.
Behavioral science can also help increase civic participation, by motivating people to volunteer, donate, sign petitions, participate in rallies, interact with their government representatives, and vote.
Leveraging people’s sense of identity can increase voter turnout, for example; in a study published in Proceedings of the National Academy of Sciences in 2011, researchers demonstrated that when items in a pre-election survey were phrased to invoke the respondent’s identity (by asking, “How important is it to you to be a voter in the upcoming election?” as opposed to, “How important is it to you to vote in the upcoming election?”), respondents were in fact more likely to vote, according to records associated with two state-wide elections in the US.
Further collaboration between behavioral science researchers, governments, and civil society institutions could ultimately foster a more successful journey through the Fourth Industrial Revolution. Another study on increasing voter turnout, published in 2010 in Psychological Science, was based on the 2008 US presidential election; it showed that if calls made to potential voters not only encouraged them to vote but also prompted them to make a specific plan for casting their ballot, turnout increased among single-eligible-voter households by 9%.
Other ways that the behavioral sciences can inform the design of better-functioning societies include motivating people to pay their taxes, preventing people from dropping out of college, increasing vaccination rates, and promoting recycling and the consumption of healthier food.
Business and Behavior
Behavioral insights can play a role in promoting productivity and fairness. In order to help them avoid discrimination in hiring, some organizations have adopted blind evaluation procedures. Orchestras, for example, have managed to substantially reduce the discriminatory hiring that has affected female musicians by having job applicants audition behind a curtain, as reported in the American Economic Review.
The output of any organization is ultimately the sum of individuals working together - and behavioral insights can help clarify how best to improve cooperation, boost motivation and productivity, and engender team spirit. For businesses in particular, culture, work climate, financial incentive structures, styles of leadership, management, and communication should always be in focus. Behavioral science can augment fair hiring practices, for example, and help facilitate unbiased promotions and job assignments for employees.
Another study published in Management Science in 2014 demonstrated that an “evaluation nudge” could help overcome gender bias in recruitment - researchers compared hiring committee evaluations done separately and jointly and, as expected, joint evaluation helped facilitate hiring recommendations based on individual performance rather than gender.
They have implications for marketing and sales strategies - to discern how effectively advertising influences attitudes towards a brand, for example, or to determine the factors accounting for the popularity of a product.
While classic economic models suggest that consumers should benefit from having many choices, it has been shown that under certain conditions having too many options can decrease consumer motivation to buy a product - and subsequent satisfaction with it. In addition to private businesses, policy-makers, too, should consider behavioral insights like these - for example when presenting people with options for pension plans or health insurance.