Tips and tricks, or the tips of the iceberg: Going meta on behavioural economics

[O]n the behavioral side, clearly people aren’t perfectly rational — but there are lots of ways to be slightly stupid, and it’s very hard to come up with a general theory about which of these ways they will choose in any given situation. Behavioral economics is a fine thing, but it’s more a collection of interesting and sometimes useful observations than a general, well, paradigm that can offer guidance across a wide range of cases.

Paul Krugman

Standard economics’ traditional penchant for focusing on problems that are chosen for their formal tractability rather than their resemblance to real world problems squeezed non-monetary incentives and ‘irrational’ motives from economists’ purview. At the same time bureaucracies are very good at doing the same thing – of ignoring the specific nature of the life world of those they serve. (Of course ‘cultural incentives’ and if you like ‘irrational’ motives are at the heart of what makes bureaucracies work at all, but that’s internally. Those very conditions create fertile ground in which the organisation will make presumptions on the rationality of those whom they serve. But I digress.)

There are two potential ‘narratives’ (as we say these days) about behavioural economics as an antidote to this state of affairs. The first – exemplified, for instance in this blog post from behavioural economics consultancy 42 ideas – is that behavioural economics and the policies that emerge from it provide an example of economics’ taking upon itself the injunction “Physician health thyself”. Thus in the place of homo economicus – a simplified but unrealistic view of human nature – behavioural economics investigates the way this model is wrong and policy inspired by it takes those things into account in proposing new policy. To use another buzz-word, behavioural economics introduces nuance.

Thus the nudge unit in the UK (we have a small clone of it in NSW) does AB testing on government correspondence – discovering and exploiting the fact that taxpayers show stronger compliance to an arrears letter from the tax authorities if it contains a sentence like “over 90% of taxpayers pay their taxes on time” and the response is a bit higher still if the sentence makes the comparison more personal still “Over 90.5% of your neighbours in Notting Hill pay their tax on time”. These are ‘nudges’ in the vernacular of this field and so too is attention to trying to set the most benign possible defaults to take into account the power of inertia. The classic example – used around the world in both government and business these days is setting people’s savings plans to save higher proportions of their income (often by diverting any pay rise they have received into savings) unless they make a conscious decision not to go along, in which case it’s as easy as ticking a box on a form and they can (consciously) choose some alternative. This is behavioural economics as a box of tips and tricks to be added on to neoclassical economics. The physician, if he hasn’t healed himself, has introduced some routines that are better suited to the world.

But there’s another way to look at these tips and tricks – to look at them as ‘tips and tricks of the iceberg’. Ultimately people must be encountered as such. The tips and tricks of behavioural economics are no more or less than a summary of rules that have been gleaned that have the generality necessary to find their way relatively straightforwardly into the learned journal literature. But there’s a whole life world out there. That’s what needs to be encountered and that’s what is always in danger of being given insufficient weight. As Hayek put it

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is . . . a body of very important but unorganized knowledge: . . . the knowledge of the particular circumstances of time and place. [In this] respect . . . practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation.

Hayek only ever paid any attention to one particularisation of this general proposition – he’s thinking of the value the trader adds in a market to the knowhow of the scientist, the accountant, the engineer, the boss. But the observation is a much wider one. Yet the very tyranny of central planning against which he set himself is alive and well inside organisations, not least government organisations and those that deliver their services.

Their penchant for ignoring the life world it is their job to serve is often quite striking – indeed chilling. These are the words of a girl I’ve quoted before on this blog who was in care from aged three. She’s now 21.

It happened so quickly. Once I turned 18, they sort of kicked me on my arse. They said ‘here’s $750, see you later, thank you’. And I’m just like ‘what the hell?’. A book and $750. That’s for being in care all your life.   Actually it makes you feel like an outsider. It makes you feel non existent on this earth. Like you are an alien. It does. It affects when you go to school too. You’re so used to being called ‘client’ and stuff that you start looking at yourself different to everyone else.

They didn’t just do that to her. They forbade her from contacting any of the people she’d got to know in the system after she was 18 – she was now a ‘risk’ to be managed.   So it turns out, for complicated reasons that have to do with the sociology of work, and the need to routinise and generate lines of accountability and so on, that organisations tend to be very bad at encountering those outside them and understanding them in order to better interact with them.

These pathologies are also alive and well in commercial organisations. Why do management books and gurus go on and on about the importance of listening to customers? Because it’s a much harder slog to get an organisation to attend to the needs of those outside it than you (or it!) might think. Just saying it doesn’t seem to do much. You have to work at it. Yet market pressures and incentives have led business into the kind of thinking that is now enshrined in behavioural economics. Marketing seeks to understand those to whom it is marketing and to engage them on whatever terms work to shift stock – not something that government bureaucracies have been very good at. It’s kind of strange to have the Cass Sunsteins of the world explaining to us that it matters where a cafeteria puts the food – that the positioning of the food in the caf can have an important impact on what gets bought. This isn’t a criticism of Sunstein, but it does draw our attention to the fact that business has been practicing this extraordinary new departure in economics – behavioural economics – since at least the early twentieth century!

So I see behavioural economics as one end of a larger continuum which is about organisations and systems learning to engage ‘the other’ – as if that’s an absolutely fundamental part of their operations which if it fails can be as destructive of their purposes as inadequate funding or huge managerial or policy errors. Behavioural economics uses psych and its own research to do that, and it’s usually interested in relatively easily scalable engagement with ‘the other’ – like AB testing communications strategies, which, once they’ve been optimised can be scaled easily and immediately. Given the longstanding nature of these practices within business, it’s a testimony to the imperviousness of our institutions that it’s such a Cool New Thing within government.

Nudge Unit and TACSI

By contrast with the Nudge Unit, the Australian Centre for Social Innovation (TACSI) is about the ‘deep engagement’ end of the same continuum of encountering ‘the other – as illustrated in this slide from a recent presentation of mine. If you’re going to help a family or a community, there’s a lot more work to be done engaging the other than some AB testing. Family by Family completely rearranges the usual structure of social policy interventions to attempt to put the families – and particularly the family seeking help – at the centre of the program. (Yes, I know everyone claims that their ‘customers/clients’ and the community are at the centre of everything they do – it’s on all the visions and missions and corporate catechisms – but some knowledge of what is necessary to even get close to such an aspiration shows you how hollow such claims are.)

So for me the Nudge Unit and TACSI are each fundamentally about the same thing – the surprisingly difficult business of engaging ‘the other’. If disciplines, or new departures in disciplines offer a bunch of tips and tricks with which to improve existing operations, well and good. But for me both behavioural economics and TACSI’s approach to co-design are at their best as subversions of entrenched complacency. And the Nudge Unit, from what I know of it both in the UK and in NSW is broadly sympathetic to this view as demonstrated by its embrace of co-design – which I’ve argued is used in these contexts as a kind of ‘counter-narrative’. It’s a counter-narrative to the usual top down sensibilities of hierarchies – so that instead of everyone looking up the hierarchy for approval, all nerves are strained to try to bring in users’ perspectives – as well as other stakeholders and the knowledge and sensibilities of professions – both within such organisations and also in the academy.

The Nudge Unit and TACSI are strongly ‘evidence based’, but when it comes to evidence, the academic literature is often like a moon buggy or a Formula One racer when one needs a golf buggy or just a golf bag on a trolley or lots of them to address specific issues as and when they arise – in precisely the way that good businesses, are ‘evidence based’ but don’t spend much of their time reading the academic literature – even if they’re relatively technical, and often even within their R&D activities. Of course there are plenty of superficial applications of design. But there’s a growing zeitgeist, that it can be used more ambitiously – to really make some deeper progress. If some of those ambitions can be realised, I hope behavioural economics will come to be seen as the tip of the iceberg.

 

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3 Responses to Tips and tricks, or the tips of the iceberg: Going meta on behavioural economics

  1. Nicholas Gruen says:

    Here’s another post that exemplifies the idea that behavioural economics is a new ‘theory’ with ‘applications’ here and there.

    Very handy – puts the academy in the box seat. Wanna know how the world works, or how to fix it? Fund an academic research grant.

    • Nicholas Gruen says:

      And another – which illustrates the ‘heaviness’ of the genre.

      Instead of seeing measurement of things as de rigeur in running any kind of program, and especially one with new elements, the innovation, the knowledge is purchased at great cost in an RCT or similar academic study and it sits on the books as a largely context free ‘truth’ to be used as a tip and trick in delivering outcomes.

      We find that students who were more motivated to read at baseline were more responsive to incentives, suggesting that incentives may not effectively target the students whose behavior they are intended to change.

  2. Nicholas Gruen says:

    Another ‘tips and trixer’ Noah Smith here.

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