Behavioural Economics – Page 5

Behavioural science should be used to design effective evidence-based public policy

For the most part, designing policy has meant passing a law, a sanction or penalty that imposes a fine or imprisonment to effect desired behavioural change or action. It assumes that the connection between law and actual behavioural is linear. It assumes that people are aware of the law, realize it applies to them, that people weigh the costs of breaking the law with the risk of being caught, overcome the temptations of the moment, in favour of willpower and self-discipline, and comply.

However, in spite of alcohol being prohibited in Gujarat, Nagaland, and Bihar, it is still readily available in these states, and has helped create a network of bootleggers, liquor mafia, spurious liquor, and a complicit police. There are fines for not adhering to traffic laws like honking unnecessarily or not stopping the car before a zebra crossing, but they are far from being effective in getting people to take the desired action. There is a fine for littering, but our roads are strewn with litter. Even when retailers charge for plastic bags, its consumption continues to grow. Fines and sanctions curb people’s fundamental right to choose and, therefore, are met with resistance and are often counterproductive.

A nudge, on the other hand, is a way of encouraging or guiding behaviour without mandating, instructing, sanctioning or monetarily incentivizing. It leaves people with the freedom of choice and yet guides them to act positively. Instead of shutting down choices, a nudge changes behaviour with a lighter touch, a more empirical and behaviourally-focused approach to policymaking.

A pioneer in designing effective public policy by using behavioural design nudges is the Behavioural Insights Team (BIT) or the “Nudge Unit” of the UK. It was started in 2010, headed by David Halpern and advised by Richard Thaler, with the backing of then Prime Minister David Cameron. Like any new idea, it had its sceptics in government. But over the first two years itself, it demonstrated the value behavioural science could bring in designing policy, based on empirical methods, that led to better outcomes, easier services for the public and most importantly saved government money.

BIT conducts dozens of experiments in the form of randomized controlled trials or rapid low-cost trials in areas such as healthcare, tax, energy conservation, crime reduction, employment and economic growth. Among some of its popular work is how it helped the tax department collect more taxes. BIT worked with the tax department to send out different versions of letters to people who owed tax to test systematically if changing the wording based on behavioural science literature would make a difference. They tested whether adding a single sentence such as “most people pay their tax on time” would boost repayment rates. And it did. By several percentage points, bringing in tens of millions of pounds. It’s because social norms are powerful in getting people to take action. Wording can make a big difference in behaviour change—imagine 3G, 4G and Wi-Fi being reworded as “radiation”.

Another experiment was about motoring fines. It showed that adding an image of the owner’s car to the ticket, captured by the camera, made the owner significantly more likely to pay unpaid car tax. In a third experiment, they encouraged people to insulate their lofts or attics. Insulation reduces heat loss, reduces energy bills and costs much less compared to the overall monetary benefits, yet people weren’t insulating their lofts. They tested two offers—an attic-clearance service and extra discounts. The attic-clearance scheme was more than three times more popular than extra discounts because the biggest issue was attic clearance rather than cost.

In the area of employment, getting the unemployed to think about what they could do in the next two weeks, instead of asking what they had done in the previous two weeks, significantly increased the number of unemployed who got work faster, trimming millions of days off benefits. In behavioural science, such a nudge is termed “implementation intention”.

In the area of pensions, employees now automatically joined the company-sponsored pension scheme by default but still had the option of opting out. So now the default was automatic enrolment rather than actively choosing to do so, making good behaviour easy. That led to more than five million new pensioners. Behavioural science studies by David Laibson, Shlomo Benartzi and other behavioural scientists show that changing the default beats financial education hands down.

Other BIT experiments have showed how simple behavioural design nudges can reduce carbon emissions, increase organ donations, increase quit-rates of smoking, reduce missed medical appointments, help students finish their courses, reduce discrimination and boost recruitment. And like the examples mentioned above, they are low cost, simple and scalable.

India has hundreds of problems to solve that require effective public-behaviour change—waste segregation, energy conservation, reducing road accidents, fuel conservation, cleanliness, adherence to medication, tobacco addiction, open defecation, reducing crime, hand-washing, tax evasion, alcoholism, etc. Instead of relying on law, fines, threats and monetary incentives, why not apply behavioural science and test simple, low-cost behavioural design nudges to see what works? Test, learn and adapt. After all, evidence-based policy is the best policy.

Be careful when offering your brand for free

Published November 15, 2016 by Anand Damani

When you give something free, people don’t value it. Even if your brand is being given free as a gift with the purchase of another brand, whether highly priced or not, it could backfire.

Behavioural scientist Priya Raghubir had participants view a duty-free catalog that featured liquor as the target product and a pearl bracelet as the bonus gift. One group was asked to evaluate the desirability and value of the pearl bracelet in the context of it being the gift, and another group was asked to evaluate the pearl bracelet by itself. She found that people were willing to pay around 35% less for the pearl bracelet when they saw it bundled with the target product as a gift, than when they saw it as a standalone product.

This happens because consumers might infer that the product’s manufacturer wouldn’t give away a valuable product for free. People may wonder what might be wrong with the gift or may assume that the gift is obsolete or out of style or isn’t selling or it may be plain junk.

One way of preventing such damage would be to inform consumers about the true value of the gift. So instead of a ‘Free backpack with the suitcase’, it should read ‘Free backpack worth Rs. 1990 with the suitcase’.

This has application for anyone looking to influence others. Says Robert Cialdini, Professor of Psychology and Marketing at Arizona State University, “by pointing out to a colleague that you were happy to work for two extra hours to help finish this important project, because you know how much it means to his/her prospects, you are valuing your time in your colleague’s eyes. Or you could use it to convince people that, in order to avoid having their opinion devalued, they should stop giving you free advice.”

Source: Free gift with purchase: Promoting free gifts with purchase: Promoting or discounting the brand? – Priya Raghubir – Journal of Consumer Psychology, 14(1&2), 181–185 (2004)

Why Behavioural Design is more effective than Advertising at changing behaviour

Published November 8, 2016 by Anand Damani

Advertising is useful for creating awareness of the the brand and making the brand likable through a story. However its too much to expect that viewers would choose that same brand or product when they are actually in ‘buy’ mode. Because today consumers are subjected to thousands of associations everyday and the human brain cannot be expected to revive the desired brand connection at point of purchase or consumption. Behavioural Design, on the other hand, works at this moment of truth and is far more effective at making people act in the desired way. Let us give you an example.

Suppose we wanted to encourage students to drink alcohol in limits and not go overboard. And say we chose advertising as a way to influence them to reduce their drinking. And say we even use the proven persuasive technique of using social norms – people are motivated to behave in line with perceived social norms. So we advertise that 85% of students drink 2 or lesser than 2 drinks when they party. The thinking is that when students know that their peers don’t drink much, it will reduce the amount that they’ll want to drink when they party. And we advertise via posters in colleges in prominent places so that the students would surely notice them.

Though the technique of social norm is persuasive, by the time the students get to the pubs, clubs, parties, wherever drinking occurs, they forget about that piece of persuasive messaging. The disparity between where the students see the persuasive message and where they are when they drink means that the distant voice of the message is likely to be drowned by the here-and-now sounds of cheers, fast music, laughter and an ambience created to shed inhibitions.

It’s unlikely that the same message would work if placed inside the pubs or clubs, especially if students see other students drinking more than 2 drinks. But what if the pubs put playful ‘light cubes’ in students’ drinks. Light cubes that are LED lights enclosed in plastic, emitting flashes of blue and white light, making the drink look like it were flashing the police car lights (blue, white and red in US). That could subliminally remind the students of the presence of cops around and restrict them from going overboard and getting into trouble. That’s why Behavioural Design is more powerful at changing behaviour.

Moving towards Swachh Bharat (Mint)

Published October 3, 2016 by Anand Damani

This article written by us appeared in the editorial section of Mint on 30th September 2016

A couple of weeks back, a video made by a private organization promoting the Swachh Bharat Abhiyan, featuring Kangana Ranaut and other Bollywood actors, went viral. The video depicted the picture of goddess Lakshmi disappearing from photo frames when people indulged in littering. The narrator on the video was Amitabh Bachchan, who said that the goddess of wealth lives only where there’s cleanliness. It ended with a plea by Bachchan and Ranaut to keep the country clean by not littering. Though the government didn’t issue this particular video, it has issued other, similar ad campaigns in public interest that promote the use of a public toilet instead of open defecation.

It is largely believed that ad campaigns change public behaviour by creating a change in people’s mindsets, which in turn leads people to take the desired action. But changing behaviour is not so easy. There are too many assumptions for this model of awareness leading to action.

The first assumption is that people can recall the message all the time. The second assumption is that the message is successful in motivating people to such an extent that it prompts them to act. The third assumption is that at the moment of actual behaviour, people would have the right amount of motivation, and also the ability to act in the desired way. That is a tough ask.

This is not the first time that the government has used ad campaigns to try and change public behaviour. In the recent past, campaigns like Save Fuel, Save Money have been aimed at changing driver behaviour by asking them to switch off car engines at traffic junctions to save fuel. Do you remember the campaign? If you don’t, crores of rupees in the form of advertising have been wasted. But let’s assume you are one of the few who do recall this message. Has it changed your behaviour? Do you now switch off your car’s engine at traffic signals?

Most people don’t. It’s a lot of effort. You need to turn the ignition off every time you wait at a traffic signal. And when the signal turns green, you have to turn the ignition on, listen to frantic honking because you haven’t moved immediately, change the gear from neutral to first if you are driving a manual-gear car, get frantically honked at again, put the hand-brake down, and finally get moving. Even for people who are highly cost-conscious or environmentally conscious, it’s too much effort.

That’s why campaigns are a money-draining and time-consuming way of attempting to change behaviour. In the UK, for example, in the 1970s and 1980s, the government spent millions on TV, radio and billboard ads educating people to wear seat belts. Researchers F.M. Streff and E.S. Geller estimated that by the end of the 1980s, 80-90% of British people had seen these ads eight-nine times each.

One would assume that showing people being launched head-first through their windscreens would make people respond. But it turned out that most people weren’t wearing seat belts. It was when the law changed in 1983, along with strict policing, that most people started wearing them.

Behavioural science suggests that a lot of the messaging on educating people to change behaviour seems powerful and emotional in the spur of the moment, but eventually doesn’t change behaviour because mere awareness rarely leads to action.

Changing behaviour is tough. People don’t always behave in the desired way. People should be exercising regularly, but many don’t. People shouldn’t be overeating, yet many do. The traditional way to change behaviour is to make people aware of the pros and cons of a particular act. But this method is ineffective, because most behaviour is instinctive i.e. subconscious. We aren’t always aware of the reasons for our actions. It takes a lot of time, effort and money to make someone aware of their behaviour, convince them that change is necessary and motivate them to change.

Behavioural science, on the other hand, uses subtle on-time nudges to enable the desired action. It focuses more on the ability to perform the desired action in the last mile than on motivating people. These nudges are based on a combination of behavioural economics, cognitive neuroscience and psychology. The nudges are designed to automate the desired action and for it to take place right at the moment of action.

For example, to reduce honking, we conducted an experiment in which a red button called Bleep was fitted on to the dashboard of the car. When the driver pressed the horn, the red button would begin to beep and flash. In order to switch it off, the driver needed to press the button.

The button made the driver conscious of the habit of honking by giving him immediate feedback in order to reduce indiscriminate honking. In a six-month experiment, Bleep reduced honking by 61% on average.

Similarly, a nudge was used in Copenhagen, with green footprints painted on the ground, pointing the way to the nearest garbage bin, that reduced littering by 46% by painting.

Meanwhile, to keep India clean, we first need dustbins that are easily accessible and cannot be stolen. They could be designed to include that extra bit of motivation for use—for instance, by having two sections and a question such as: “Who’s your favourite actress: Kangana or Deepika?”.

How reframing choices, changes our decision

Published August 31, 2016August 31, 2016 by Anand Damani

(In the illustration did you first see a rabbit or a duck?)

Consider the following situation. Imagine that India is preparing for the outbreak of a disease, which is expected to kill 600 people. Two alternative treatments to combat the disease have been proposed.

If Treatment A is adopted, 200 people will be saved.

If Treatment B is adopted, there is a 1/3^rd probability that 600 people will be saved and a 2/3^rd probability that no people will be saved.

Which one do you prefer?

Most likely you prefer the certain option – Treatment A over the gamble – Treatment B.

Now lets consider a second version of the situation:

If Treatment A’ is adopted, 400 people will die.

If Treatment B’ is adopted, there is a 1/3^rd probability that nobody will die and a 2/3^rd probability that 600 people will die.

Which one do you prefer?

Most likely you prefer the gamble – Treatment B over the certain option – Treatment A.

Now look closely and compare the two versions: the consequences of Treatment A and A’ are identical and so are the consequences of Treatment B and B’. However, your options most probably differed. Did you choose to save 200 lives for sure in the first version and chose to gamble rather than accept 400 deaths in the other?

Embarrassed? So were we. Even when this test was shared with public health professionals in the US, they were swayed by this framing effect!

Daniel Kahneman, nobel-winning behavioural economist, explains the rationale behind our decisions. In his book ‘Thinking Fast and Slow’, he says “Decision makers tend to prefer the sure thing over the gamble, when the outcomes are good. They tend to reject the sure thing and accept the gamble, when both the outcomes are bad. Risk-averse and risk-seeking preferences are not reality-bound.”

This shows how a small manipulation can have drastic impact on decision-making. And if you still believe that we humans behave rationally, think again.

If you want something to happen, write it down

Published June 22, 2016 by Anand Damani

Hopefully by now you are beginning to appreciate how a seemingly small design intervention can make a huge difference in behaviour change. Here’s one more story that illustrates this point.

British psychologistsPaschal Sheeran and Sheina Orbell conducted an experiment in two of Scotland’s busiest orthopaedic hospitals. The participants were elderly patients from low and middle class households, who had undergone hip or knee replacement surgeries.

Recovering from a hip or knee surgery is incredibly arduous. While recovering the smallest movements can be excruciating. But it is essential that patients begin exercising almost as soon as they wake from surgery, even before the muscles and skin have healed, or the tissues will clog the joint, destroying its flexibility. But exercising is so painful that many patients skip out on rehab sessions, especially the elderly ones.

So the patients were each given a booklet after their surgeries that detailed their rehab schedule, and in the back were thirteen additional pages – one for each week – with instructions: My goals for this week are _________________? Write down exactly what you are going to do. For example, if you are going to walk this week, write down where and when you are going to walk.

Three months passed. The patients who had written exact plans in their booklets had started walking twice as fast as the ones who had not, as well as, getting in and out of their chairs, putting on their shoes, doing laundry, all of it much faster, than the ones who had not written anything in the booklet. Why did that happen?

The psychologists examined the booklets of those who had filled it and found it filled with specific detailed plans about the most mundane aspects of recovery. Like one patient wrote that he would walk to the bus stop on a particular day to meet his wife coming back from work at 3:30pm and the time he would leave, the route he would walk, what he would wear and which pills he would take if the pain became too much. Someone else who would exercise each time she would go to the bathroom, wrote that she would automatically take the first step right away after standing up from the couch, so that she wouldn’t be tempted to sit down again.

All focused on how they would handle a specific moment of anticipated pain. They built plans around inflection points when they knew their pain – and their temptation to quit – would be strongest.

Patients who didn’t write out any plans were at a significant disadvantage, because they never thought ahead about how to deal with pain. They didn’t deliberately design their habits. So their resolve abandoned them when they confronted the first few steps.

So if you want something to happen, write all the steps down.

Source: Paschal Sheeran and Sheina Orbell – Implementation intentions and repeated behaviour: augmenting the predictive validity of the theory of planned behaviour – European Journal of Social Psychology Volume 29, Issue 2-3, pages 349–369, March – May 1999

Why we hate losing more than we love gaining

Published May 16, 2016April 19, 2016 by Anand Damani

The tendency to be more sensitive to possible losses than to possible gains is one of the best-supported findings in behavioural science. Nobel laureate Daniel Kahneman and his colleague Amos Tversky were the first to test and document the notion of ‘loss aversion’ – the idea that we are more motivated to avoid losses than we are to acquire gains.

Loss aversion affects a lot of our decisions, in finance, negotiation, persuasion, etc. One consequence of loss aversion is that it makes inexperienced investors to prematurely sell stocks that have gained in value because they simply don’t want to lose what they’ve already gained. (We had also written about it in ‘Why we sell the wrong stocks’) Similarly, the desire to avoid any potential for a loss also makes investors to hold on to stocks that have lost value since the date of purchase. Because selling the stock would mean taking a loss on the investment, which most investors are reluctant to do, a decision that often precedes further stock price decline.

Another popular example of loss aversion is the debacle of New Coke. From 1981 to 1984, Coca-Cola company tested its new and old formulas in taste tests amongst two hundred thousand people across twenty-five cities. 55% of people preferred New Coke versus 45% who preferred the Old Coke. Though most of the tests were blind, in some of the tests people were told which was the New and Old Coke. Under those conditions, preference for New Coke increased by an additional 6%. Why did New Coke fail inspite of such extensive research?

Says Robert Cialdini, Professor of Psychology and Marketing at Arizona State University and advisor to Obama “During taste tests, it was New Coke that was unavailable to people for purchase, when they knew which sample was which. So they showed an especially strong preference for what they couldn’t purchase otherwise. People at the Coca-Cola company might have said, “Oh this means that when people know that they’re getting something new, their desire for it will shoot up.” But, in fact, what the 6% really meant was that when people know what it is they can’t buy, their desire for it will shoot up. Later when the company replaced Old Coke for New Coke, it was Old Coke that people couldn’t have, and it became the favorite.”

For people losing Old Coke was more valuable than gaining New Coke. What this means is that to make messages more persuasive they should be framed to avoid losses more than acquire gains. So a message like ‘Shop till you drop at 30% discount’ could be more persuasive if framed as, ‘Don’t miss the chance to shop at 30% discount’. The latter implies that the deal is scarce in some way (e.g. limited time) and that people could be losing the opportunity to get a good deal.

Sources: Daniel Kahneman and Nathan Novemsky – The Boundaries of Loss Aversion – Journal of Marketing Research 42:119-128 (2005)

Ziv Carmon and Dan Ariely – Focusing on the Forgone: How value can appear so different to buyers and sellers – Journal of Consumer Research (2000)

G.R. Shell – Bargaining for advantage (1999)

All’s well that begins well

Published April 5, 2016 by Anand Damani

Any event that has a good ending is good even if some things went wrong along the way. That’s why ‘All’s well that ends well’. But ‘All’s well that begins well’ can be true too. Especially in the case of customer loyalty programs. Every retailer looks to increasing customer loyalty by offering incentive programs like frequent flyer programs or a club membership program. But amongst so many kind of programs which ones manage to perform better?

Behavioural researchers Joseph Nunes and Xavier Dreze conducted a research to find out. They handed loyalty cards to 300 customers of a local car wash. Every time the car was washed the loyalty card was stamped. There were two types of cards: one required 8 stamps to receive a free car wash and the other required 10 stamps, but 2 stamps were already affixed to the loyalty card. So both cards required 8 washes to get the free car wash.

After several months of the researched program, the researchers found only 19% of customers in the 8-stamp group made enough visits to claim their free wash compared to 34% of the 10-stamp, All’s-well-that-begins-well group. The latter group also took less time to complete their 8^th wash, taking an average of 2.9 fewer days between car washes.

According to Nunes and Dreze, reframing the program as one that’s been started but not completed, rather than one that’s not yet begun, motivated people to complete it. Additional findings from research suggested that the closer people got to complete a goal, the more effort they exerted to achieve that goal. Data revealed that the amount of time between visits decreased by about half a day on average with every additional car wash that was purchased.

Now we know when to ask people for help on a project. One that’s already underway but incomplete, rather than one that has to start from scratch, is likely to be the project that gets help. So get started, help will be on its way.

Source: Joseph Nunes and Xavier Dreze: The endowed progress effort: How artificial advancement increases effort: Journal of consumer research 32: 504-12.

Organizations have bad habits too (and they can be changed)

Published December 1, 2015 by Anand Damani

“Individuals have habits; groups have routines. Routines are the organizational analogue of habits”, wrote Geoffrey Hodgson, who spent a career examining organizational patterns. And as we know habits can be good or bad. Not just that, they can be dangerous, because while performing routines, employees yield decision-making to a process that occurs without actually thinking, automatically – habit.

Paul O’Neill who is known to have turned around the fortunes of a company called Alcoa – Aluminum Company of America understood this really well. Alcoa was going through troubled times when it hired Paul O’Neill as CEO. Investors, executives and workers were unhappy. Quality was suffering. And competitors were stealing customers and profits.

O’Neill believed that some habits have the power to start a chain reaction, changing other habits as they move through an organization. These are keystone habits. The habits that matter the most. These are the ones that, when they start to shift, dislodge and remake other patterns.

So O’Neill figured he needed a focus that everybody – unions and executives – could agree as being important, so that he could bring people together. He said, “So I thought everyone deserves to leave work as safely as they arrive, right? You shouldn’t be scared that feeding your family is going to kill you. That’s why I decided to focus on: changing everyone’s safety habits.” So he made SAFETY his top priority and set an audacious goal for a manufacturing company of that size: zero injuries.

The approach was brilliant because unions had been fighting for safety rules for years. And managers were happy since injuries meant low productivity and low morale. What most people didn’t realize was that O’Neill’s plan for getting zero injuries entailed the most radical realignment in Alcoa’s history.

According to O’Neill’s safety plan, any time someone was injured, the unit president had to report it to him within 24 hours and present a plan for making sure the injury never happened again. The reward: people who got promoted, were those who embraced and cracked this system.

If unit presidents had to contact O’Neill within 24 hours with a plan, they needed to hear about the accident from their vice presidents as soon as it happened. So vice presidents had to be in constant communication with floor managers, who in turn needed to get workers to raise warnings as soon as they saw the problem. Meanwhile in those 24 hours everyone in the chain had to generate a list of suggestions for their immediate superior, so that there was an idea box full of possibilities for the unit president to choose from. This changed the company’s rigid hierarchy as communication had to make it easy for the lowliest worker to get an idea to the loftiest executive, as fast as possible.

As Alcoa’s safety patterns shifted, productivity skyrocketed, quality improved, costs came down and autonomy improved. If molten metal was injuring workers when it splashed, then the pouring system was redesigned, which led to fewer injuries. It also saved money because Alcoa lost less raw materials in spills. If a machine kept breaking down, it was replaced, which meant there was less risk of broken gear snagging an employees arm. It also meant higher quality products because, as Alcoa discovered, equipment malfunctions were a chief cause of subpar aluminum.

By the time O’Neill retired after 13 years, Alcoa’s annual income was five times larger than before he arrived. Its market capitalization had risen by $27 billion. Alcoa became one of the safest companies in the world – the keystone habit that changed it all.

Source: The Power of Habit by Charles Duhigg

Stop planning. Start testing.

Published October 26, 2015 by Anand Damani

Corporate organizations have a habit of planning, strategizing, forecasting, debating extensively before moving ahead on projects. Entrepreneurs on the other hand care little about market research and more about testing the idea. Corporate executives want to predict the future and control it. Entrepreneurs favor testing. An entrepreneur once said, “Instead of asking all the questions, I’d try and make some sales.”

That’s exactly what Bill Gross did. Bill Gross started Idealab in 1996. Idealab has prototyped and tested hundreds of ideas, and from those, has formed and operated more than 125 companies.

Carsdirect.com was one of ideas that he wanted to roll out in late 90s – early 2000. He was excited about selling cars directly to consumers online in the US. As he envisioned it, customers could search quickly for the exact car they wanted and have it delivered right to their door. He could offer discounted price online, because he wouldn’t have to maintain an expensive car lot filled with inventory, but even a discounted car is still a huge purchase to conduct online. Would people spend so much money online on a car?

He believed the idea could work but it was risky. So he hired Andy Zimmerman and gave him a mission – sell one car online. They put up a website with couple of pages that looked like it would allow you to order a car. But actually the message went to a clerk who looked up the price and sent it back to the user. The next morning Bill discovered we had sold three cars. They had to quickly shut down the site because they were offering a heavy discount.

So rather than debating about the plan and the uncertainty, they simply tested it. Within three years Carsdirect.com became the largest auto dealer in US.

By making decisions through experimentation, the best idea can prove itself. Does your company promote this kind of experimentation?

Behavioural Design

Designing effective public policy (Mint)