Behavioural Economics can be very useful not only in understanding our own behaviour, but also in formulating the right policies and evaluating policy outcomes. In this blog, Muthuprasad T, S Niranjan and Aditya KS urge academia to consider inclusion of Behavioural Economics topics in social science curricula.
Behavioral Economics is not a new branch of Economics. Its seeds were sown by Adam Smith in his book “Theory of Moral Sentiments”, in which he opined that human decisions are driven by several factors, such as cognitive ability, attention and motivation. However, the seed of Behavioural Economics did not germinate until it was rejuvenated by Daniel Kahneman and Amos Tversky in the 1970s with their paper titled ‘Judgment under Uncertainty: Heuristics and Biases’. For his contribution to Behavioral Economics, Daniel Kahneman was awarded the Nobel Prize in 2002. Further developments in the field of Behavioral Economics came up largely due to the seminal works of another Nobel laureate, Richard H Thaler. Publication of the book ‘Nudge’ by Thaler and Cass R Sunstein (2008) revolutionised economic thinking and drew the attention of both academia and policy makers alike. This book talked of how understanding of different biases and use of simple nudges can induce people to make ideal/optimal choices.
‘Nudge’ means a light touch or push. The term ‘nudge’, in this context, is 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 (Thaler and Sunstein 2008). Let us consider, for example, that the objective of a policy is to reduce the weight of obese people, and you are tasked to design the choice architecture for achieving this. In this case, banning junk foods is not a nudge but keeping fruits and other healthy food in places which has higher probability of catching the attention of people is definitely a nudge. All the same, as mentioned in the definition, a nudge should not prohibit any of the options available.
Let us assume that you are consulting a doctor for major heart surgery. You are interested in knowing what the probability is of the being successful, right? Suppose the doctor says, “Of one hundred patients who have undergone this operation, ninety are alive after five years”, what will you do? For most of us, the statement will be pretty comforting, and probably provide enough confidence to go ahead with the surgery. What if the doctor frames the statement in a slightly different way and says “Of one hundred patients who have this operation, ten are dead after five years”? This statement sounds alarming and might make the patient seek a second opinion. Here, even though the contents of both the statements were exactly the same, people tend to react differently based on how it is framed. Similarly, framing nudges are used in marketing, advertisements, promotions, and also in government policy making. For instance, consider the following information campaigns: (a) If you use energy conservation methods, you will save Rs. 5000 per year; or (b) If you don’t use energy conservation methods, you will lose Rs. 5000 per year. It turns out that information campaign (b) framed in terms of loss, is far more effective than information campaign (a).
Figure 1: Shepard’s Table Figure 2: Müller-Lyer line
Source: Shepard’s table: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3485780/
Müller-Lyer line: https://www.illusionsindex.org/ir/mueller-lyer
One of the recent examples of using framing as a nudge in Indian policy making is the renaming of Swachh Bharat to Sundar Bharat (Economic Survey of India 2019).
Anchoring bias is a cognitive bias in which an individual choice depends on the initial piece of information offered while making decisions. Allow us to explain with an example. One of my friends was looking to purchase a new laptop. As usual, we searched on two e-commerce websites and narrowed down on a model, which was priced at Rs. 35,000. Since it was electronics, we thought of purchasing from a shop, rather than from an e-commerce site. We reached a nearby shop, and to our happy surprise, the same model was on sale for Rs. 34,000. We immediately purchased the laptop and came out all satisfied. However, later in the day, we discovered that one of our friends had purchased the same model for Rs. 33,500 in a shop which was just 100 feet from where we had purchased. Well, what made us purchase the laptop in such a hurry, even before enquiring in the neighbouring stores?
The answer lies in anchoring bias. For all our decisions in purchasing the laptop, the initial price (which was the price of laptop on e-commerce site, Rs. 35,000) was the base price. As soon as we discovered that the actual price is one thousand less than the base price, we were convinced that it was a great deal. This concept of anchoring effect is successfully used during many marketing campaigns such as ‘Amazon big billion days’ and ‘Flipkart freedom sales’. Initially, the price is quoted way above the actual price (in our heads that will become the benchmark price) and then offer hefty discounts on the products (like 50% off). When next time you see any advertisement like 60% off on MRP, think twice and don’t be a victim of anchoring bias!
Default settings as Nudge
Default options are pre-set courses of action that take effect if nothing is specified by the decision maker (Thaler and Sunstein 2008). Default settings can be used as nudge if inertia exists. Let us understand it through simple examples.
While booking a flight ticket or any other travel ticket, as default the travel insurance check box will be ticked and many a times, we end up paying the insurance amount, only to realise the mistake later (we don’t mean that buying insurance is a mistake, but buying it when you never wanted it is a mistake).
Even in many of the websites, while registering for membership, as a default, the check box for subscribing to their newsletter will be ticked, and often we go ahead without changing it. Only when the newsletter reaches our mail box, do we realise that we have subscribed for it. In this case, setting subscription as default increases the number of subscribers to their newsletters.
Figure 3: Be aware of defaults
In some of the e-commerce sites, though free delivery is available it will not be set as a default option.
The decoy effect is technically known as an ‘asymmetrically dominated choice’ and occurs when people’s preference for one option over another changes as a result of adding a third (similar but less attractive) option (Bateman et al. 2008). We will now explain theoretical bluffs that you didn’t understand correctly with simple examples.
Figure 4: Decoy effect
In the picture above the $30 bottle will be seen as expensive, but once the $50 bottle is introduced into the picture the $30 one will be seen as relatively cheap. Here the role the $50 bottle plays is as a decoy to increase the sales of $30 bottles. This is the reason why many of the items in several restaurants are highly priced even though nobody buys them. Actually, the role of such items in the menu card is to induce people to buy the other items in the menu. Thus, you will find many decoys in the product lines of many companies.
USE OF NUDGE IN AGRICULTURE: LITERATURE REVIEW
We have listed a few applications of nudges in the agricultural policy space in the following table:
From the discussion above, it is evident that Behavioral Economics has a lot of scope in agricultural policy making. Throughout the world, many countries have realized the importance of Behavioral Economics and have started to establish their nudge units in order to introduce ‘nudge’ in the policy space.
In the Indian context, Behavioral Economics is still at a nascent stage. The Government of India, realizing the value Behavioural Economics holds in policy making, has dedicated an entire chapter to it in the Economic Survey of India 2019, which is quite admirable and a welcome step.
Some of the important areas where nudge can be used in the Indian context are
- In reducing water usage;
- In reducing food wastage;
- In reducing pesticide usage;
- In saving electricity;
- To induce the farmer to adopt new technologies; and
- To induce the farmer to opt for crop insurance etc
WHY NUDGE IS GOOD FOR EFFECTIVE POLICY MAKING?
- Nudges are cheap (involves minimal cost);
- Nudges are more democratic (not forbidding any choices).
We welcome the step taken by the Government of India regarding Behavioral Economics; at the same time we would like to point out that there is a long way to go. Nudges are good, but more research has to be done in the Indian context, not just to clear all the scepticism around it, but also to identify what nudges work and what do not.
Behavioural Economics can be very useful not only in understanding our own behaviour, but also in formulating the right policies and evaluating policy outcomes. Knowledge of Behavioral Economics can help social scientists in understanding farmers’ choices – be it their decision to adopt technologies or their response to policies or choice of source of information. Concepts, such as ‘framing effect’ can be used in devising extension strategies for upscaling of technologies. Also, nudging farmers to make socially desirable choices is a nascent area, waiting to be explored. Hence, we urge academia to consider inclusion of Behavioral Economics in social science curricula.
Buchholz M, Peth D and Mußhoff, O. 2018. Tax or green nudge? An experimental analysis of pesticide policies in Germany (No. 1813). Diskussionsbeitrag.
Peth D, Mußhoff O, Funke K and Hirschauer N. 2018. Nudging farmers to comply with water protection rules – Experimental evidence from Germany. Ecological Economics 152:310-321.
Chabé-Ferret S, Le Coent P, Reynaud A, Subervie J and Lepercq D. 2019. Can we nudge farmers into saving water? Evidence from a randomised experiment. European Review of Agricultural Economics 46(3):393-416.
Duflo E, Kremer M, & Robinson J. (2011). Nudging farmers to use fertilizer: Theory and experimental evidence from Kenya. American economic review, 101(6), 2350-90.
Thaler RH and Sunstein CR. 2009. Nudge: Improving decisions about health, wealth, and happiness. UK: Penguin.
Bateman IJ, Munro A and Poe GL. 2008. Decoy effects in choice experiments and contingent valuation: asymmetric dominance. Land Economics 84(1):115-127.
Economic Survey of India. 2019. Policy for Homo sapiens, not Homo economicus: Leveraging the behavioural economics of “Nudge”.https://www.indiabudget.gov.in/economicsurvey/doc/vol1chapter/echap02_vol1.pdf
Muthuprasad T is a PhD student (Agricultural Economics) at the ICAR-Indian Agricultural Research Institute (IARI), New Delhi.(E-mail id: firstname.lastname@example.org)
S Niranjan is a PhD student (Agricultural Economics) at the ICAR-Indian Agricultural Research Institute (IARI), New Delhi.(E-mail id: email@example.com)
Aditya KS is a Scientist (Agricultural Economics) at the ICAR-Indian Agricultural Research Institute (IARI), New Delhi.(E-mail id: firstname.lastname@example.org)