Yielding to temptation

An introduction to behavioural economics.

One human weakness that we are all familiar with is that we are forever making plans for the future that involve some kind of self-improvement, but later on we renege on these plans and yield to temptation, taking an "easy way out". For example, we plan on going for a run this evening, but then decide to lay back on the couch and watch TV instead; we may go to bed planning to rise at 6am, but when the alarm rings we rapidly hit the snooze button and end up oversleeping. On a more long-term basis, we plan to make regular savings for retirement, but then decide we should spend our money on new furniture for the living room, a new set of golf clubs, and so it goes on. In general we make plans to achieve a larger benefit later, but then change our minds and settle for a smaller benefit sooner.

For a long time, economists have abstracted from such complexities of human decision making. The standard model of economic rationality suggests that we should only change our minds if and when appropriate new information is received. But often the change of mind is not caused by new information. Why humans tend to behave in this way is still a subject of controversy. However, rather than continuing to regard them as an anomaly, economists have begun treating these variations in our behaviour more seriously. Under the label of behavioural economics, new approaches to the study of decision making have been emerging which are catching the imagination of politicians.

Saving for retirement for example is a serious problem for many. Much evidence from the UK and US suggests that a large proportion of people do not save sufficiently for retirement. Various measures that have become known as ‘nudge’ policies are being suggested to address this as an issue of public policy. Unlike traditional regulation by government, nudge policies do not seek to compel us to behave in certain ways, but change what is called the ‘choice architecture’ of the situation, providing incentives for us to act in certain ways. A common nudge policy is to change the default option in a choice situation. Thus, if employers’ pension plans require employees to opt in, there will be a tendency for many to go with the default of remaining outside the scheme. Evidence from the US suggests that the simple measure of reversing this option can substantially increase the number of employees contributing to retirement plans. Furthermore, options can be framed in a way to encourage greater contributions than employees might otherwise make. For example, if people are given 3 options in terms of size of contribution, say £100, £120, and £140 per month, many will choose the middle option. Simply changing the options to £160, £180, and £200 per month automatically increases people’s willingness to contribute, as once again people tend to go for the middle option.

The UK government has taken some of these findings of behavioural economists on board. The 2011 Pensions Act has established default enrollment options which will be implemented in the UK economy over the next six years. A Behavioural Insights Team attached to the Cabinet Office is exploring further applications of nudge policies in other areas such as eating habits or organ donation. However, their effectiveness remains controversial. Many doctors doubt that nudge policies are sufficient to encourage people to change their dietary or smoking habits, and believe that more radical intervention is necessary. Wider debates have focused on the merit and scope of the underlying 'benevolent paternalism' and its implied call for the large scale engineering of choice architectures across the economy. But this does not detract from the fact that the behavioural turn in economics is proving to have a lasting impact on public policy and is rapidly reshaping the economics curriculum taught at universities today.

Nick Wilkinson and Matthias Klaes are the authors of An Introduction to Behavioral Economics, 2nd ed, (Palgrave Macmillan) which will be published in April. A companion blog to the book can be found at

Decisions, decisions, Getty images.

Nick Wilkinson and Matthias Klaes are the authors of An Introduction to Behavioral Economics, 2nd ed, (Palgrave Macmillan) which will be published in April. A companion blog to the book can be found at

Photo: Getty Images
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How can the left make the case for immigration?

All too often, we drift into telling people we want to convince that they just don't get it.

We don’t give the public enough credit. You’ll often hear their views dismissed with sighs in intellectual circles. In fact on most issues the public are broadly sensible, most are these days supportive of cutting the deficit and dubious about political giveaways, but in favor of protecting spending on the NHS and education. Yet there is one issue where most, “knowledgeable” folks will tell you the public are well out of step: immigration. 

With [today’s] net migration figures showing yet another record high, it is an ever more salient issue. On a lot of measures ‘too much immigration’ ranks highest as the number one concern (see Ipossmori). The ongoing rise of right wing political parties across Europe demonstrates that simply enough. But concerns about immigration don’t just sit with those with more extreme views, they’re also shared across the mainstream of public opinion. Yet unlike thinking on cutting the deficit or funding the NHS the public consensus that immigration is bad for Britain, flies flat in the face of the intellectual consensus, and by that I mean the economics. 

Given the intense public debate many a study has tried to spell out the economic impact of immigration, most find that it is positive. Immigration boosts the nation’s GDP. As the theory goes this is because immigrants bring with them entrepreneurialism and new ideas to the economy. This means firstly that they help start new ventures that in turn create more wealth and jobs for natives. They also help the supply chains to keep ticking. A example being British agriculture, where seasonal workers are are needed, for example, to pick the strawberries which help keeps the farms, the truckers and the sellers in business. 

Most studies also find little evidence of British jobs being lost (or displaced) due to immigrants, certainly when the economy is growing. Indeed economists refer to such “ “they’re” taking our jobs” arguments as the “lump of labour fallacy’. On top of all that the average migrant is younger than the native population and less likely to rely on welfare, so their net contribution to the state coffers are more likely to be positive than natives as they don’t draw as much state spending from pensions or the NHS. 

So why haven't the public cottoned on? Many progressive types dismiss such views as racist or xenophobic. But it turns out this is to misunderstand the public just as much as the public ‘misunderstand’ immigration. When you study people’s views on immigration more closely it becomes clear why. Far from being racist most people asked by focus groups cite practical concerns with immigration. Indeed if you go by the British Social Attitudes Survey a much smaller number of people express racist view than say they are concerned about migration.  

The think tank British Future broadly set out that while a quarter of people are opposed to immigration in principle and another quarter are positive about it the majority are concerned for practical reasons - concerns about whether the NHS can cope, whether there are enough social houses, whether our border controls are up to scratch and whether we know how many people are coming here in the first place (we don’t since exit checks were scrapped, they only came back a few months ago). But more than anything else they also have very little confidence that government can or wants to do anything about it. 

This truth, which is to often ignored, begets two things. Firstly, we go about making the argument in the wrong way. Telling someone “you don’t understand immigration is good for our economy etc etc” is going to get a reaction which says “this person just doesn't get my concerns”. Despite the moans of progressives, this is precisely why you won't hear left leaning politicians with any nous ‘preaching’ the the unconditional benefits of immigration.

More importantly, the economic arguments miss the central issue that those concerned with immigration have, that the benefits and effects of it are not shared fairly. Firstly migrants don’t settle homogeneously across the country, some areas have heavy influxes other have very little. So while the net effect of immigration may be positive on the national tax take that doesn't mean that public services in certain areas don’t loose out. Now there isn't clear evidence of this being the case, but that could just as well be because we don’t record the usage of public services by citizenship status. 

The effects are also not equal on the income scale, because while those of us with higher incomes scale tend to benefit from cheep labour in construction, care or agriculture (where many lower skilled migrants go) the lower paid British minority who work in those sectors do see small downward pressure on their wages. 

It’s these senses of unfairness of how migration has been managed (or not) that leads to the sense of concern and resentment. And any arguments about the benefit to the UK economy fail to answer the question of what about my local economy or my bit of the labour market. 

Its worth saying that most of these concerns are over-egged and misused by opponents of immigration. Its only a small factor in stagnating wages, and few local areas are really overrun. But the narrative is all important, if you want to win this argument you have to understand the concerns of the people you are trying to convince. That means the right way to make the argument about immigration is to start by acknowledging your opponents concerns - we do need better border controls and to manage demands on public services. Then persuade them that if we did pull up the drawbridge there is much we’d loose in smart entrepreneurs and in cultural diversity. 

Just whatever you do, don’t call them racist, they’re probably not.

Steve O'Neill was deputy head of policy for the Liberal Democrats until the election.