Most of us don’t save enough. When governments try to encourage saving, they usually enact big policies to increase the incentives. But, in Kenya, people were given a lockable metal box – a simple place to put their money. After one year, the people with metal boxes increased savings by so much that they had 66 percent more money available to pay for health emergencies. It would have taken a giant tax reform to produce a shift in behavior that large.
Too many people die in auto accidents. When governments try to reduce highway deaths, they generally increase safety regulations. But, also in Kenya, stickers were placed inside buses and vans urging passengers to scream at automobile drivers they saw driving dangerously.
The heckling discouraged dangerous driving by an awesome amount. Insurance claims involving injury or death fell to half of their previous levels.
These are examples of a new kind of policymaking that is sweeping the world. The old style was based on the notion that human beings are rational actors who respond in straightforward ways to incentives. The new style, which supplements but does not replace the old style, is based on the obvious point that human beings are not always rational actors. Sometimes we’re mentally lazy, or stressed, or we’re influenced by social pressure and unconscious biases. It’s possible to take advantage of these features to enact change.
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For example, people hate losing things more than they like getting things, a phenomenon known as loss aversion. In some schools, teachers were offered a bonus at the end of their year if they could improve student performance. This kind of merit pay didn’t improve test scores. But, in other schools, teachers were given a bonus at the beginning of the year, which would effectively be taken away if their students didn’t improve. This loss-framed bonus had a big effect.
People are also guided by decision-making formats. The people who administer the ACT college admissions test used to allow students to send free score reports to three colleges. Many people thus applied to three colleges. But then the ACT folks changed the form so there were four lines where you could write down prospective colleges. That tiny change meant that many people applied to four colleges instead of three. Some got into more prestigious schools they wouldn’t have otherwise. This improved the expected earnings of low-income students by about $10,000.
The World Bank has just issued an amazingly good report called “Mind, Society and Behavior” on how the insights of behavioral economics can be applied to global development and global health. The report, written by a team led by Karla Hoff and Varun Gauri, lists many policies that have already been tried and points the way to many more.
Sugar cane farmers in India receive most of their income once a year, at harvest time. In the weeks before harvest, when they are poor and stressed, they score 10 points lower on IQ tests than in the weeks after. If you schedule fertilizer purchase decisions and their children’s school enrollment decisions during the weeks after harvest, they will make more farsighted choices than at other times of the year. This simple policy change is based on an understanding of how poverty depletes mental resources.
In Zambia, hairdressers were asked to sell female condoms to their clients. Some were offered financial incentives to do so, but these produced no results. In other salons, top condom sellers had a gold star placed next to their names on a poster that all could see. More than twice as many condoms were sold. This simple change was based on an understanding of the human desire for status and admiration.
The policies informed by behavioral economics are delicious because they show how cheap changes can produce big effects. Policymakers in this mode focus on discrete opportunities to exploit, not vast problems to solve.
This corrects for a bias in the way governments often work. They tend to gravitate toward the grand and the abstract. For example, the United Nations is now replacing the Millennium Development Goals, which expire in 2015, with the Sustainable Development Goals.
“The Millennium Development Goals are concrete, measurable and have an end-date, so they could serve as a rallying point,” says Suprotik Basu, the chief executive of the MDG Health Alliance. “One good thing about the Sustainable Development Goals is that they’re being written through a bottom-up consensus process. But sometimes the search for consensus leads you higher and higher into the clouds. The jury is out on whether we will wind up with goals concrete enough to help ministers make decisions and decide priorities.”
Behavioral economics policies are beautiful because they are small and concrete but powerful. They remind us that when policies are rooted in actual human behavior and specific day-to-day circumstances, even governments can produce small miracles.