Behavioural Economics and Policy
Meeting 1 Introduction
Katalin Kariko: Nobel prize, important for medicine/vaccine development. She was motivated by
incentives outside of economics (unable to put into a contract), such as curiosity and selflessness.
Biccheiri et al. (2021): Do people see other people comply with the rules, and do they believe that it
is the right thing to do? -> We are social beings, what we see other people do motivates our
behaviour and our belief in what is right.
A case of perverse incentives: electric cars and “statiegeld”
Requiring helmets when driving a fatbike reduces monitoring costs. Police can stop somebody when
they are not wearing helmets. Without this law they can only stop people when they are driving too
fast, but this doesn’t work as it is easy to slow down as soon as you see police. The goal of this law is
to have less young people driving dangerous fatbikes, while not directly prohibiting them to.
Even if these rules could be enforced, would you want rules such as respect to be forced?
Behaviourally-informed policy making
Public Economic Policy
- response to social, economic and political problems faced by governments,
- managed via regulations, subsidies, quotas, laws, and
- implemented on behalf of the government by policy-makers assigned by the governments,
and put in practice by public officials, but also non-profit organisations, sometimes in co-
production with communities, citizens, experts, scientists and stakeholders,
- with policy-targets being citizens, public organisations, firms
Types of government interventions/policy instruments (AICO typology)
- Authority: authoritarian instrument: command and control
- Incentive: incentivizing instruments (cost/benefit)
- Capacity: informational instruments / capacity (teaching/preaching)
- Organisation: (state-led or regulated) infrastructure
Each of them interacts with recipients’ behaviour/expectations/norms
- Authority – bodily integrity importance, acceptance
- Incentive – fairness, cost; reaction to incentives, crowding in/out
- Capacity – openness, ability to absorb information; interaction of information with behaviour
(expects, defaults)
- Organisation – voluntary participation; structure, design
1
,Issues with different types of these instruments
- Paternalism: the major in New York banned drinks with very high sugar content, but people
and companies went to court and the decision was overruled.
- Incentives: can backfire
- Information absorption: ability/willingness to use, complexity, but also how is information
presented? The design of incentive?
- Institutional design: vacation money once a year/monthly affects financial health
- Path-dependency: what is fair/acceptable is affected by the past; expected impact of current
policies might prevent their use
> Understanding how decisions are made (brain, cognition) allows to adjust policies to make them
more effective (colour, font size, losses/gains, …)
Behavioural science informed policy
Research informed: understand, translate, implement
Evidence-based: design, evaluate, adjust
Stakeholder-management: understand, explain, relate
Stakeholder management how you communicate with people who need your knowledge to
achieve their goals.
Standard economic model of decision-making
Individual i at time t = 0 maximizes expected utility subject to a probability distribution p(s) of the
states of the world s ∈ S:
The utility function U(x|s) is defined over the payoff xit of individual i and future utility is discounted
with a (time-consistent) discount factor δ
- Rational: (1), (3)
- Expected utility maximization: (1), (3) and (4)
- Selfishness: (4)
- Bayesianism: (3)
- Consistent time preferences: (2)
- Complete input fungibility: (4)
2
, Neoclassical vs Behavioural perspective on economic decision-making
Neoclassical economics Behavioural economics
Well-defined, stable preferences Possible pro-social motivations, preferences beyond
(traditionally self-centred, but not self-centred concerns, possibly not fully known,
necessarily!) subject to change (e.g. due to framing), reference-
point dependent, loss/gain asymmetry
Optimizing individual Not always optimizing, e.g. satisficing, or heuristics
driven choice; social context and identity matter
(where I belong, what others think, what I think others
think, what others know...)
Unlimited cognitive capabilities to Cognitively limited, filtering the available information
evaluate all available information through emotional states
Bayesian updating under uncertainty, Biases and heuristics, ambiguity aversion
maximizing expected utility
Traditional vs Behaviour – informed policymaking
Traditional approach assumptions: Rational decision-makers, markets without frictions can be
designed. Or replaced by a benevolent regulator implementing the social welfare maximization.
Decide & implement
New approach: behavioural economics, experimental economics, RCT’s use insights on human
decision-making (from economics, psychology) to inform policy-making, and new data sources.
Inductive/adaptive way of policymaking
Toolboxes of behavioural insights: MINDSPACE, EAST, BASIC, DO IT
Making economics easier to understand for policy-makers.
Examples are environment (product placement) and simplicity, for example in energy labels (instead
of A+, A++, A+++, use A, B, C, etc.)
Nudges, budges and boosts
Nudge any aspect of the choice architecture that alters people’s behaviour in a predictable
way without forbidding any options or significantly changing their economic
incentives.
Budge governments recognizing that companies use nudges in their marketing. A budge
protects a customer from nudges from companies. Governments reacting to nudges
for companies (counter-nudge).
Boost anything that has to do with increasing the capacity of decision-makers to act upon
their own intentions. So no change of environment.
Choice architecture the way choice is presented to the decision-maker. Any choice has choice
architecture, there is no neutral position.
3
Meeting 1 Introduction
Katalin Kariko: Nobel prize, important for medicine/vaccine development. She was motivated by
incentives outside of economics (unable to put into a contract), such as curiosity and selflessness.
Biccheiri et al. (2021): Do people see other people comply with the rules, and do they believe that it
is the right thing to do? -> We are social beings, what we see other people do motivates our
behaviour and our belief in what is right.
A case of perverse incentives: electric cars and “statiegeld”
Requiring helmets when driving a fatbike reduces monitoring costs. Police can stop somebody when
they are not wearing helmets. Without this law they can only stop people when they are driving too
fast, but this doesn’t work as it is easy to slow down as soon as you see police. The goal of this law is
to have less young people driving dangerous fatbikes, while not directly prohibiting them to.
Even if these rules could be enforced, would you want rules such as respect to be forced?
Behaviourally-informed policy making
Public Economic Policy
- response to social, economic and political problems faced by governments,
- managed via regulations, subsidies, quotas, laws, and
- implemented on behalf of the government by policy-makers assigned by the governments,
and put in practice by public officials, but also non-profit organisations, sometimes in co-
production with communities, citizens, experts, scientists and stakeholders,
- with policy-targets being citizens, public organisations, firms
Types of government interventions/policy instruments (AICO typology)
- Authority: authoritarian instrument: command and control
- Incentive: incentivizing instruments (cost/benefit)
- Capacity: informational instruments / capacity (teaching/preaching)
- Organisation: (state-led or regulated) infrastructure
Each of them interacts with recipients’ behaviour/expectations/norms
- Authority – bodily integrity importance, acceptance
- Incentive – fairness, cost; reaction to incentives, crowding in/out
- Capacity – openness, ability to absorb information; interaction of information with behaviour
(expects, defaults)
- Organisation – voluntary participation; structure, design
1
,Issues with different types of these instruments
- Paternalism: the major in New York banned drinks with very high sugar content, but people
and companies went to court and the decision was overruled.
- Incentives: can backfire
- Information absorption: ability/willingness to use, complexity, but also how is information
presented? The design of incentive?
- Institutional design: vacation money once a year/monthly affects financial health
- Path-dependency: what is fair/acceptable is affected by the past; expected impact of current
policies might prevent their use
> Understanding how decisions are made (brain, cognition) allows to adjust policies to make them
more effective (colour, font size, losses/gains, …)
Behavioural science informed policy
Research informed: understand, translate, implement
Evidence-based: design, evaluate, adjust
Stakeholder-management: understand, explain, relate
Stakeholder management how you communicate with people who need your knowledge to
achieve their goals.
Standard economic model of decision-making
Individual i at time t = 0 maximizes expected utility subject to a probability distribution p(s) of the
states of the world s ∈ S:
The utility function U(x|s) is defined over the payoff xit of individual i and future utility is discounted
with a (time-consistent) discount factor δ
- Rational: (1), (3)
- Expected utility maximization: (1), (3) and (4)
- Selfishness: (4)
- Bayesianism: (3)
- Consistent time preferences: (2)
- Complete input fungibility: (4)
2
, Neoclassical vs Behavioural perspective on economic decision-making
Neoclassical economics Behavioural economics
Well-defined, stable preferences Possible pro-social motivations, preferences beyond
(traditionally self-centred, but not self-centred concerns, possibly not fully known,
necessarily!) subject to change (e.g. due to framing), reference-
point dependent, loss/gain asymmetry
Optimizing individual Not always optimizing, e.g. satisficing, or heuristics
driven choice; social context and identity matter
(where I belong, what others think, what I think others
think, what others know...)
Unlimited cognitive capabilities to Cognitively limited, filtering the available information
evaluate all available information through emotional states
Bayesian updating under uncertainty, Biases and heuristics, ambiguity aversion
maximizing expected utility
Traditional vs Behaviour – informed policymaking
Traditional approach assumptions: Rational decision-makers, markets without frictions can be
designed. Or replaced by a benevolent regulator implementing the social welfare maximization.
Decide & implement
New approach: behavioural economics, experimental economics, RCT’s use insights on human
decision-making (from economics, psychology) to inform policy-making, and new data sources.
Inductive/adaptive way of policymaking
Toolboxes of behavioural insights: MINDSPACE, EAST, BASIC, DO IT
Making economics easier to understand for policy-makers.
Examples are environment (product placement) and simplicity, for example in energy labels (instead
of A+, A++, A+++, use A, B, C, etc.)
Nudges, budges and boosts
Nudge any aspect of the choice architecture that alters people’s behaviour in a predictable
way without forbidding any options or significantly changing their economic
incentives.
Budge governments recognizing that companies use nudges in their marketing. A budge
protects a customer from nudges from companies. Governments reacting to nudges
for companies (counter-nudge).
Boost anything that has to do with increasing the capacity of decision-makers to act upon
their own intentions. So no change of environment.
Choice architecture the way choice is presented to the decision-maker. Any choice has choice
architecture, there is no neutral position.
3
