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 http://economicbehavior.wordpress.com/

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 http://economicbehavior.wordpress.com/.

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A small dose of facts could transform Britain's immigration debate

While "myth-busting" doesn't always work, there is an appetite for a better informed conversation than the one we're having now. 

For some time opinion polls have shown that the public sees immigration as one of the most important issues facing Britain. At the same time, public understanding of the economic and social impacts of immigration is poor and strongly influenced by the media: people consistently over-estimate the proportion of the population born outside the UK and know little about policy measures such as the cap on skilled non-EU migration. The public gets it wrong on other issues too - on teenage pregnancy, the Muslim population of the UK and benefit fraud to name just three. However, in the case of immigration, the strength of public opinion has led governments and political parties to reformulate policies and rules. Theresa May said she was cracking down on “health tourists” not because of any evidence they exist but because of public “feeling”. Immigration was of course a key factor in David Cameron’s decision to call a referendum on the UK’s membership with the EU and has been central to his current renegotiations.  

Do immigration facts always make us more stubborn and confused?

The question of how to both improve public understanding and raise the low quality of the immigration debate has been exercising the minds of those with a policy and research interest in the issue. Could the use of facts address misconceptions, improve the abysmally low quality of the debate and bring evidence to policy making? The respected think tank British Future rightly warns of the dangers associated with excessive reliance on statistical and economic evidence. Their own research finds that it leaves people hardened and confused. Where does that leave those of us who believe in informed debate and evidence based policy? Can a more limited use of facts help improve understandings and raise the quality of the debate?

My colleagues Jonathan Portes and Nathan Hudson-Sharp and I set out to look at whether attitudes towards immigration can be influenced by evidence, presented in a simple and straightforward way. We scripted a short video animation in a cartoon format conveying some statistics and simple messages taken from research findings on the economic and social impacts of immigration.

Targeted at a wide audience, we framed the video within a ‘cost-benefit’ narrative, showing the economic benefits through migrants’ skills and taxes and the (limited) impact on services. A pilot was shown to focus groups attended separately by the general public, school pupils studying ‘A’ level economics and employers.

Some statistics are useful

To some extent our findings confirm that the public is not very interested in big statistics, such as the number of migrants in the UK. But our respondents did find some statistics useful. These included rates of benefit claims among migrants, effects on wages, effects on jobs and the economic contribution of migrants through taxes. They also wanted more information from which to answer their own questions about immigration. These related to a number of current narratives around selective migration versus free movement, ‘welfare tourism’ and the idea that our services are under strain.

Our research suggests that statistics can play a useful role in the immigration debate when linked closely to specific issues that are of direct concern to the public. There is a role for careful and accurate explanation of the evidence, and indeed there is considerable demand for this among people who are interested in immigration but do not have strong preconceptions. At the same time, there was a clear message from the focus groups that statistics should be kept simple. Participants also wanted to be sure that the statistics they were given were from credible and unbiased sources.

The public is ready for a more sophisticated public debate on immigration

The appetite for facts and interest in having an informed debate was clear, but can views be changed through fact-based evidence? We found that when situated within a facts-based discussion, our participants questioned some common misconceptions about the impact of immigration on jobs, pay and services. Participants saw the ‘costs and benefits’ narrative of the video as meaningful, responding particularly to the message that immigrants contribute to their costs through paying taxes. They also talked of a range of other economic, social and cultural contributions. But they also felt that those impacts were not the full story. They were also concerned about the perceived impact of immigration on communities, where issues become more complex, subjective and intangible for statistics to be used in a meaningful way.

Opinion poll findings are often taken as proof that the public cannot have a sensible discussion on immigration and the debate is frequently described as ‘toxic’. But our research suggests that behind headline figures showing concern for its scale there may be both a more nuanced set of views and a real appetite for informed discussion. A small dose of statistics might just help to detoxify the debate. With immigration a deciding factor in how people cast their vote in the forthcoming referendum there can be no better time to try.