Behavioural Economics is one of the fastest growing disciplines in economics. Scholars in the industry has directly or indirectly been awarded 5 Nobel Prizes in Economics over the last 16 years, including most famously Daniel Kahneman and Richard Thaler. Two years in a row QUT students have participated in the Nudgeathon, a national competition that aims to generate policy ideas based on insights from behavioural economics.
This piece will look at what behavioural economics is, how it can be applied to business and government, and debrief from the 2018 Nudgeathon competition.
One of the core assumptions of neo-classical economics is that people are rational. Put simply, that is, that people always make the choices that make them happiest. This assumption allows economics to build highly predictive models, but it doesn’t always hold true.
Behavioural economics seeks to challenge this assumption by looking at the way people actually make decisions. Part of the criticism that behavioural economics makes is that people are unable to make their best choices because of the decision making process we use. Rather than actually answer the complicated decisions we face, people use mental shortcuts, known as heuristics, to simplify the problem.
One classic example is the availability bias, where people let an example that comes to mind easily affect decision-making. How easily you can remember something is not the same as how likely it is to occur. For example, most people drastically overestimate the likelihood of a plane crash because it is so easy to remember and visualise – but the reality is that only around 1 in 11,000,000 planes crash.
How can Behavioural Economics be used?
Both private business and governments can and do use behavioural economics. One example of behavioural economics in private business was using simple checklists in hospitals to remind doctors, which led to a halving of the death rate from surgeries. Simply providing feedback to pilots regarding fuel use led to substantial fuel savings.
In public policy, behavioural economic nudges have been used to help people save, stop littering and re-consider organ donation.
Australia, too, has been considering the implications of behavioural economics into its government policy. Hosted in Canberra by QUT, ANU, BETA and the Australian Treasury, the 2018 Nudgeathon looked at the Consumer Data Right. The Consumer Data Right will allow Australians to access the information that various institutions store about them, and transfer this information to other third parties to simplify for them.
Teams were tasked with building strategies to encourage people to consider whether they wanted to opt into this data right, and then design nudges to simplify information so that people might consider switching their bank, telephone or energy provider based on the information they receive from the right.
QUT sent two teams, one from marketing and one from economics, who placed first and second nationally in the competition. As part of the economics team, our nudge focussed on simplifying the consumer data right into things people can understand – where is your data going, who is using it and how? We recommended a universal symbolism that accredited third parties should be required to adopt in order to promote transparency.
The combing perspectives of psychology, marketing and economics into the growing field of behavioural economics will certainly be on the forefront of public policy in the future.