Studying economic theory often feels like looking at a very different world than the one in which we live every day. By using concepts likes rational choice theory or utility maximising agents, traditional economic models certainly gain in tractability and sometimes in insightfulness. Nevertheless, try explaining to a friend how he should behave to maximise his utility when choosing beers at the supermarket, or how rationality requires him to quit smoking. You will quickly understand the gap between economic theory and real world economic agents. Not that it is useless, of course, but it lacks in realism. The models assumptions and their results have digressed from the concrete actions and decisions taken by consumers and firms. Even for us, studying economics everyday, it is uncertain whether our courses help us to make better decisions.
“Does what we learn in macroeconomics, IO, or econometrics courses help us take better decisions in the “wider world”? Unfortunately, not so much.”
Now, we must ask how Behavioural Economics (BE) fits into this picture. Well, the theoretical approach of BE is quite clear: study the frequent departures from standard rationality and from this build a theory explaining agents’ actual behaviour. But how does BE relate to the wider world? How does it create practical tools for organisations or individuals to take better decisions? Or in the words of Richard Thaler, one of the founding father of BE:
“By the mid-1990s, behavioural economists had two primary goals. The first was empirical: finding and documenting anomalies, both in individual and firm behaviour and in market prices. The second was developing theory. (…) But there was a third goal lurking in the background: could we use behavioural economics to make the world a better place?”
Richard Thaler, Misbehaving (p.307)
Thaler is well placed to talk about BE developments outside academia, he played a major role in the creation of practical tools to implement behavioural economics insights. Along with Cass Sunstein – professor of law at Harvard – he invented the concept of nudges in their 2008 book Nudge: Improving Decisions about Health, Wealth, and Happiness. Nudging people consists in shaping their choice architecture – the environment in which they make decisions.
“Nudges intend to guide individuals towards a desirable outcome such as saving more or throwing their rubbish in the bin.”
In the words of David Halpern, from the Behavioural Insights Team (BIT). « A nudge is essentially a means of encouraging or guiding behaviour, but without mandating or instructing, and ideally without the need for heavy financial incentives or sanctions. ». Famous examples are the BIT which, by modifying the wording of tax letters, increased in-time tax payments by five percentage points (approximately an additional £9 million for the British government). More recently, the SNCF – France national railway company – introduced nudges for different types of trains. For instance, it managed to almost completely suppress littering issues in its low-cost TGVs, thus saving on cleaning expenses and enabling a better consumer experience. Equipped with such tools to implement behavioural insights, behavioural scientists and economists could stop “lurking in the background” and start making the world a better place.
Whilst looking for internships opportunities in BE, we (the TSE Behavioural Team) discovered that BE has gained in visibility and credibility outside academia. It has grown so much that it cannot be reduced to a single economic sector or to a particular type of organisation. We prefer thinking of BE as a precious set of tools, useful in many fields – including finance, development, education, health, environmental issues and consumer behaviour.
BE’s impact on several sectors is highly visible in academia. Many economists and research labs have focused on producing behavioural insights in very diverse strands of literature. Not only two Nobel Prizes: Robert Schiller in finance and psychologist Daniel Kahneman, but also Sendil Mullainathan in development economics, Dan Ariely in (among other fields) consumer behaviour, are the most famous examples. Education and environmental economics are other fields of applications which have been largely reached by BE.
“Indeed, more strikingly than the many fields it has affected, we discovered that BE has impacted every possible type of organisation.”
First, governments have pioneered in designing policy according to BE principles and more specifically by implementing nudges. The Behavioural Insights Team’ successes in the UK have been replicated worldwide and nudge units have been set up in many countries (e.g. New Zealand, Singapore, Europe, USA, Australia among others). Other public initiatives such as the World Bank’s program (Mind, Behaviour, and Development Unit) or NGOs like ideas42 and the Busara Center have been launched to help developing countries with BE tools.
But BE’s impact is not limited to public bodies or NGOs. It has also affected the way many firms tackle important issues. The SNCF example above is quite illustrative of how behavioural science can be interesting for companies. To help them integrate BE insights, a myriad of consulting and marketing firms have either adopted or been built on BE principles. In France, examples are BVA Nudge Unit, Ogilvy Change or System1Group. Internationally, we have found numerous examples of such firms, which can be specialised in specific topics such as Organisation sciences (Kintla, Behavioural Consulting Group), marketing (The Behavioural Architects, System1Group and many more) or financial planning (Syntoniq).
Finally, start-ups have followed the same way, proving that behavioural insights can be applied at every level of organizations. Finance have experienced a rush of “behavioural startups” with fintechs like Lemonade (advised by Dan Ariely) helping people get insured at lower costs, or Sparkup which sells fundraising instruments to companies. Another interesting example in human resources management is Plum which sells intelligent hiring software and services to recruiting companies.
Analysing the environment around “applied” BE, we were astonished by its numerous applications and use in diverse domains. That is why we prefer to think of BE as a set of tools and methods built on observation and experiments. Behavioural experts thus defend a culture consisting of empirically testing ideas in order to gain a better understanding of our behaviour and its biases.
“This definition of BE makes it a part of the movement towards “evidence-based economics” (Richard Thaler), which has been growing with the use of RCTs and field experiments. BE, however, does not limit itself to financial incentives, and integrates cognitive biases into its mechanisms.
Different courses at TSE (in L3 and M1) will introduce you to experimental and behavioural economics (theoretical and empirical). Discovering this engaging part of economics and acquiring skills to set up nudges or experiments is at the core of the TSE Behavioural Team. As BE grows internationally, it opens new opportunities to find internships internationally and is definitely a valuable skill to have on the CV. It also complements other subjects well, such as data science. But most importantly, understanding human behaviour is a skill that can help you make the world a better place.
Nudge aiming at making us switch off the lights
Another example of nudge
by Victor de Salins