Behavioral economics has emerged as one of the most influential modern economic schools in both economics and public policy-making today. It combines psychology and economics to understand individual behaviors when making economic and other decisions through conducting behavioral and scientific experiments, known as Randomized Control Trials, and understanding their results before implementing and rolling out any public policy by the government. In this way, behavioral economics differs from traditional economics, which assumes that individuals are rational and their decisions can be predicted. Behavioral studies, however, demonstrate that individuals are inherently impulsive and fall prey to numerous cognitive and emotional biases when making decisions, leading them to make several errors that may harm them economically. International experiments in behavioral economics across health, finance, and other fields have shown that individuals tend to choose the default option without delving into understanding the details of other alternatives.
These concepts have helped in leveraging this tendency positively to nudge people toward decisions that benefit them in the long term. Additionally, several small changes can be employed to increase individual engagement with public policies and programs in the short term.
The Origins of Behavioral Economics
In 1979, psychologists Daniel Kahneman and Amos Tversky wrote a paper explaining the nature of individual decision-making that takes into account the human factors influencing it. This came after researchers discovered that individuals do not always follow the “Expected Utility Theory” in economics, which explains how these decisions should be made rationally.
However, this field evolved rapidly after the publication of the book “Nudge” by economist Richard Thaler and Harvard Law School professor Cass Sunstein. The concept of nudging can be explained as simple, inexpensive changes in how choices are presented that motivate individuals to change their behaviors and choose what is most appropriate. For example, prominently displaying healthy foods in schools while keeping other options available but less visible.
Numerous governmental and private units have been established to design and influence public policies using behavioral economics principles. Several international reports, such as those from the Organisation for Economic Co-operation and Development (OECD) and the European Commission, have documented significant developments in various fields through the use of behavioral policies to improve citizens’ lives.
Success Stories: The UK’s Behavioral Insights Unit
Interest in this approach intensified following the impressive results achieved after the British government adopted this methodology. Through establishing a specialized Behavioral Insights Unit (also known as the Nudge Unit) that works with government agencies to modify public policies and programs while considering psychological and social dimensions, the British government successfully enhanced citizens’ choices and increased their welfare. In 2015, U.S. President Barack Obama established a team of behavioral and social experts for this purpose and issued directives for all government agencies to adopt this approach. Following the British and American experiences, many countries have followed suit, with more than 55 units now established worldwide to leverage this science in designing public policies and programs.
As the OECD report (2017) indicates, it is no longer possible to view the behavioral perspective as a short-term trend, as it has now become deeply rooted in many countries worldwide in civil policy-making. The report presented over 100 experiments using behavioral policies in various fields such as consumer protection, finance, labor markets, public service delivery, taxation, and other areas.
Conclusion
The success achieved through behavioral economics across numerous fields is supported by experimental evidence that cannot be ignored, demonstrating the importance of using this approach to achieve the goals of decision-makers in governments around the world.
