Potential of Behavioural Economics Findings for Improving Design of Public Policy: a Few Examples and Some More Questions |

Potential of Behavioural Economics Findings for Improving Design of Public Policy: a Few Examples and Some More Questions

What had seemed conventional to the economics field had given way in the last decade to a new wave of behavioural economics that dispensed — but not entirely — with assumptions of ideal human rationality, Prof. Jack Knetsch, Emeritus Professor of Economics at Simon Fraser University in Canada noted. In a talk at the School, he elaborated the role behavioural economics plays in public policy. Starting with an illustration of examples demonstrating common assumptions in economics, Prof. Knetsch expounded on the role of human biases in economic decision-making. 

Prof. Knetsch proceeded to identify at least six types of biases observed in behavioural economics. First is anchoring, which occurs when human beings judge the value of a good based on a number most familiar to them. Valuing goods and services based on the last two digits of one’s social security number was an instance he gave in the lecture.

Second is on mental accounting, where assuming all money is fungible, or exchangeable for goods and services, has not been shown to be true because different people treat money differently. The perception towards every dollar lost as opposed to every dollar gained was not the same for all situations, whether in stock trading, government spending or consumer purchases — even though it’s the same dollar heading in or out.

Relatedly was his argument that people value losses more than gains. This was the gist behind the bias known as the ‘reference effect’ or the ‘endowment effect’. He cited an experiment in which students had been given — beforehand — mugs, chocolate bars, or nothing. This was to illustrate the higher prices students quoted, holding onto the mug or chocolate, when asked to give up their possession for the other, as opposed to the lower values students offered as their price to obtain a mug or chocolate bar.

Fourth, Prof. Knetsch pointed out that people tend to stay with default options. Using real life cases such as in organ donation, people tend less to switch away from the default plan, whether the default is an opt-in or out. Reinforcing the previous point on our sense of risk or loss aversion, he cited that price increases of products (for example, eggs) and mistakes in a game (such as putting sub-par in golf) are more keenly felt that price increases and positive achievements. This tendency, he noted, has its applications such as influencing the take-up rate on pension schemes.

Prof. Knetsch went on to touch on the bias of fairness. How people treat an issue is treated is influenced by their perceptions towards the reasons tied to it. A price increase in house rents can seem unfair, and thus met with greater opposition, to house renters when it is in tandem with an increase in housing scarcity as opposed to that due to increase in landlord costs.

Prof. Knetsch rounded off his lecture with the sixth bias on risks, where people are — ironically, according to him — more insensitive to catastrophic losses than smaller losses. He was also intrigued by the different weight people give to the probability of an event occurring and the size of the losses resulting from that event; he speculated that people put more weight on the probability for engaging in crime than the size of the loss if caught, as opposed to greater weight placed on the size of the loss resulting from environmental disasters (for example, global warming) and medical infirmity while less weight on the probability of them happening.

In the second half of Professor Knetsch’s lecture, members of the audience sought to clarify his point on fairness, eventually with him pointing out that framing an issue as fair is not the same as squaring it based on legitimate concerns. Some participants also raised the applicability of behavioural economics to influencing recipients of developmental projects to adopt desired behaviours, such as acquiring health immunisation. A question was also raised on the applicability of behavioural economics to children’s decision-making behaviour, with Prof. Knetsch exclaiming that experiments were even conducted on animals, such as pigeons, to stretch the field’s applicability. Prof. Knetsch concluded by reiterating the importance of how the issues economics as a field tackles need to be handled carefully.

On 13 March 2013, Prof. Jack Knetsch, Emeritus Professor of Economics, Simon Fraser University Canada gave a talk entitled “Potential of Behavioural Economics Findings for Improving Design of Public Policy: a Few Examples and Some More Questions” at the Lee Kuan Yew School of Public Policy. 

 

By Kelvin Lee, a Research Assistant to Visiting Prof. Dodo Thampapillai studying the 2008 Euro crisis.

 
Synopsis:

Click here for more info.

Speaker(s):

Prof. Jack Knetsch, Emeritus Professor of Economics, Simon Fraser University Canada

Date:
Wednesday, 13 March 2013
Time:
12:15 p.m. - 1:30 p.m.
Venue:

Seminar Room 3-5
Level 3, Manasseh Meyer
LKY School of Public Policy
469C Bukit Timah Rd
Singapore 259772

WordPress Video Lightbox Plugin