Policy examples (impact of behavioural insights on policy and market efficiency) Flashcards
1
Q
Insurance, Why important
A
- Vital for protecting consumers and businesses
- Complex, and consumers don’t always get it right in protecting their assets by selecting optimal coverage and renewing their policy
- When we don’t get these behaviours right, we can see the market failing to achieve an efficient outcome
2
Q
Insurance contrasting EUT assumptions
A
- EUT suggests humans employ optimisation, maximising utility in decision making - failing to choose the appropriate insurance is not maximising utility
- EUT suggests our preferences are complete and we able to compare all possible options and with all the available info , but we have cognitive limitations
- Complex products have high search costs and hassle factors, impeding action
- Assumptions of EUT aren’t representative of decision making
3
Q
Savings - Why market failure
A
- Having sufficient savings, extremely important when dealing with financial shocks and staying financially healthy
- Savings accounts could be described as a merit could (under-consumed by the free market, actual utility greater than perceived utility) due to insufficient information provision
4
Q
Savings - Behavioural solutions
A
- TEMPORAL REFRAMING - help soothe the psychological pain of reduced spending power, presenting a large cost as a series of smaller, ongoing expenses
- Often used to sell big-ticket items such as cars, breaking the cost down into instalments (Klarna e.g.)
5
Q
Insurance - More efficient outcomes from behavioural insights
A
Defaults : Influence the take-up of insurance for various policies
Number roundness: People prefer to round numbers for cognitive ease + want to ‘feel right’ about their decision making
- When consumers have a high cognitive load they prefer to deal with rounded numbers, lead to increased take -up
However - these strategies regarding insurance take up are still heavily reliant on financial incentive, rules and regulations and information provision on education
6
Q
Savings - Behavioural solutions
A
- Study using ING customers indicate that reframing saving as small recurring steps has a positive influence on the amount transferred into savings accounts
- Governments could regulate financial institutions, based off ING findings to improve financial health and help those with low savings to build a buffer
7
Q
Savings - Contrast EUT assumptions
A
- Preferences stable - maintain our ranking of options unless the nature of the options change - would be irrational to change our decision bare in mind we want to maximise utility
- Here we see, overall saving to consumption trade off is still the same, however the decisions have been framed in a different way and behaviour has changed
8
Q
Tax Payments
A
- EUT, expects us to be ISOLATED decisions makers
- Evidence of HERD BEHAVIOUR weakens this assumption
- 2011, BIT - Nudge involved sending a letter advising individuals to pay tax, or be penalised
- Another letter with additional messages e.g. ‘9/10 people pay their tax on time’ ‘you are in the small minority who have yet to pay’
9
Q
Tax payments BIT policy results
A
- Significant increase in compliance
- 2013, letters brought forward £210 million of revenue - money otherwise would have been chased in costly court procedures
- This is IRRATIONAL behaviour from rational choice perspective, HOWEVER A MORE EFFICIENT OUTCOME WAS ACHIEVED - less tax revenue lost due to behavioural insights
10
Q
Loft Insulation and Market failure
A
- Market failure - negative externalities associated with energy usage
- For years - financial help to insulate people’s loft - reduce energy consumption, governments giving money away - Take - up on financial incentive was very low even though its basically a zero-risk policy
- If we were all utility optimisers, we would all take up this loft insulation
11
Q
Loft insulation Behavioural policies
A
- 2011, nudge unit realised money wasn’t the problem - people being help back by all the clutter stored up there etc.
- In a trial, people were offered a loft clearance instead, on the condition they got the insulation afterwards
- Uptake rates tripled
- A move to a socially optimal consumption usage through using real world-evidence of how people behave
12
Q
Sustainable food choices market failure
A
- Negative externalities associated with food consumption, people’s individual motivations can be at odds with the negative environmental outcomes of their food choices (e.g. deforestation, water pollution)
- the only way to move to a more socially optimal level of consumption (if our preferences are complete, we optimise utility, and our preferences are stable), is to increase the cost of food, reducing consumption based on income and substitution effects).
13
Q
Sustainable food choices and behavioural insights
A
- More conscious and deliberate decision-making could come from using carbon labels on food, causing people’s environmental values and beliefs to come to the fore, influencing food choices
- Rational choice theory suggests our decision making is reflective, rational and slow
- Carbon labels using red, yellow, green traffic light system to indicate climate impact for dishes in a University student cafeteria in Gothenburg, Sweden, caused a change to consumption habits, despite the options being the same as before
14
Q
Environmentally friendly vehicles market failure
A
- Negative externalities through pollution
15
Q
Environmentally friendly vehicles behavioural insights
A
- Make electric and hydrogen cars more visible on our roads (Norway, China, Canada)
- Green numberplates - increase awareness and take up of clean vehicles - unusual sight on our roads, make zero emission vehicles more noticeable
- Increase their visibility on the roads - readjust our perception of the NORM - if we think others drive clean cars so will we - HERD BEHAVIOUR , rejects EUT of isolated decision making
