Behavioral Economics applied to the design and evaluation of public policies

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Governments all around the world are increasingly taking advantage of the progress and advancements made in Behavioral Economics, improving the efficacy and efficiency of their policies. But before getting into a few examples, we should take a moment to ask ourselves: what are the actual principles behind Behavioral Economics?

This economic theory states that humans do not always make rational or logical decisions. On the contrary, their actions are often influenced by many other variables worth taking into account, such as emotional, psychological, social and cognitive factors. This holistic perspective about decisions goes against the more common rational agent postulate from economic theory, shedding light on several important aspects of individual and collective decision making.

It’s important to note that economics hasn’t been the only science to profit from these developments; psychologists, political scientists and sociologists have also benefitted and contributed to the progress and application of this theory’s main concepts. Among the most significant ideas developed within this theory, we can find:

  • Framing effect: people’s decisions can be affected by the way in which the problem is presented. A classic example is influencing a customer with the design of the menu at a restaurant, diverting attention away from the prices and focusing on the plates the chef wants to sell.
  • Heuristics: individuals often make decisions based not on rational calculations but on habit or approximations. Examples include confirmation bias and the endowment effect.
  • Inefficient markets: market results often contradict the predictions of rational expectations and efficient market theories.

At this point, we could ask ourselves: how is this theory connected to public policy?

 To answer this question, we need to introduce the concept of nudging, or using non-coercive incentives in policy. This concept was first introduced by Richard Thaler (2017 Nobel Memorial Prize in Economics); it consists of influencing an individual’s behavior in a predictable way through specific policies, without affecting her economic incentives or forbidding certain options. This can create specific effects on the population through easily-applicable and inexpensive interventions.

Copyright © Nobel Media AB – Richard Thaler, premio Nobel de Economía 2017 por su contribución a la Economía del Comportamiento y el concepto de nudge.

The key to this concept’s success is that the policies that implement it are not designed as mandates or direct orders. Instead, the policies are designed to affect an individual’s decision based only on the main principles of Behavioral Economics. This combination of free choice and socially-minded policies has earned the theory its (somewhat contradictory) name of “libertarian paternalism.”

Currently, the number of governments who have special units focused exclusively on the design and evaluation of policies based on these concepts continues to increase. Some examples of successful introductions of this theory to public policies include:

How is this theory put into practice and how is it related to results and impact evaluation?

ZIGLA has been advocating for the importance of generating more and better evidence for decision-making in social interventions and public policies. We do this through the implementation of different types of result evaluations and quasi-experimental impact evaluation techniques.

We think there’s an opportunity to integrate the lessons and findings from Behavioral Economics into the current evaluation systems at different levels within the public sector, particularly in Latin America and the Caribbean.

This year, we took part in a workshop on evidence-based public policy organized by Universidad Austral in association with Middlesex University of London (“Evidence-based public policies: using the techniques of Behavioral Economics to optimize the design of public policies” – Middlesex University London and Escuela de Gobierno of Universidad Austral, Argentina – November 13th to 17th 2017). The workshop revolved around three fundamental concepts: Behavioral Economics for policy design, Random Control Trials (RCTs) as a step towards scaling up, and Impact Evaluations to rigorously measure observed effects.

One of the main points raised in the course was the need for governments to multiply theoretic tools and scientific evidence for the improvement of public policies. The lessons from Behavioral Economics can play a key role in this, giving professional staff easy-to-use and low-cost tools for designing better policies that can effectively improve the lives of citizens.

With this in mind, we are constantly challenging ourselves to improve the evaluation capacity of our clients and allies. We hope that evidence-based public policy continues to become less of an exception and more of a healthy habit.

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