Nobel for Behavioral Science Holds Lessons for Local Governments
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Why behavioral science is “changing the way cities around the country design their policies, services, and the moments of choice within them.”
NEW YORK — It's the kind of phone call you want to get at 4 a.m., at least if you're a tenured professor: word from Sweden that you've won a Nobel Prize. This year’s bleary-eyed and well-deserved recipient in the Economics category was Richard Thaler, a man who has spent a valiant 40 years dragging behavioral economics out of the theoretical murk and into the world at large.
Prof. Thaler’s work measures and explains the gap between how we ought to behave, given our best interests, and what we actually do. As someone who makes a living in the wake of Thaler’s trailblazing, I am delighted to see this important body of work being recognized and to share three ways in which Thaler’s ideas matter in local government:
1. Mental Accounting: All dollars are equally valuable but we have a hard time seeing it that way.
Let's say I'm saving for a house deposit and discover I can't pay my credit card bill in full. Rather than set myself back I decide to make a partial payment and deal with the interest charges next month. This is clearly not the rational choice—the interest will cost more than I earn in the savings account—and yet it's an oddly satisfying solution as it preserves my hard-earned nest egg. Hypothetical me is not an anomaly; people mentally tag their tax refund as an unexpected bonus to be spent as though it were somehow different from ‘regular money’, others might struggle to factor in a new expense type—food bills if they cease to qualify for SNAP, for example. By understanding this tendency we can design government services, from assistance disbursement to financial counseling initiatives, to help residents “tag” their money in a way that helps them achieve better financial health.
2. The Endowment Effect: We overvalue the things that we own.
In markets this is an obvious problem; I want to buy something but can't get a deal because I think it's worth less than its current owner does. Government, too can find itself at the mercy of this Endowment Effect. Think, for example, of gun buybacks or incentives to get commuters to give up their cars. While very different, both types of program have something in common: a party that likely overvalues what they have, gun or car. For this reason, framing the deal in terms of money may be ineffective and appealing to a different type of motivation— risk or reputation, perhaps—may be more successful.
3. Choice Architecture: The way we present choices to people influences which option they go on to pick.
We are bombarded with choices every day and have developed sophisticated ways to tune out the ones that don't matter. Our main tactic is to simply go with the flow, taking the default wherever possible. This means the difference between having to opt in to a program—an act that requires effort—and having to opt out of one can be a much bigger factor in enrollment rates than whether its prospective users value it. This rule holds for the big things with long term consequences as well as the small, and government staff are no exception. Indeed, a review of the “choice architecture” of employee benefits can often reveal complexities in the way the options are presented that explain seemingly baffling phenomena like low staff enrollment in retirement plans or a suboptimal choice of medical cover.
Thaler has opened a rich seam of knowledge that changed the way the economics profession thinks about human behavior but it doesn’t stop there.
These ideas are changing the way cities around the country design their policies, services, and the moments of choice within them. Thanks to applied behavioral science, delivered through Bloomberg Philanthropies’ What Works Cities program, police forces across the country are attracting more job applications from under-represented communities, code violations are being corrected faster to make neighborhoods safer, and cash-strapped municipalities are collecting on their debts faster.
The question for public officials throughout the country is how will you advance Thaler’s legacy and improve how local government serves constituents. The answer, to properly honor Thaler, should be go beyond guesswork.
Here are eight ideas from BIT of how to get started.
Elspeth Kirkman is the head of Behavioral Insights Team, North America and is based in New York City.
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