three-fold: those with high two digit numbers valued the wine substantially higher (Ariely et al., 2006). An example in the area of dietary habits relates to package size. Roberto and Kawachi (2014) report that research subjects “used 30% more pasta when they were given a 2-pound box compared to a 1-pound box, and 23% more oil from a 32-ounce bottle than a 16-ounce bottle when
libertarian paternalism. Under libertarian paternalism, people are given a full array of alternative choices (the libertarian part) but are guided to ones that are in their best interest (the paternalistic part).7 Below, we discuss four policy tools that have the potential to improve decision-making. Each could be viewed as a nudge, but it is not necessary to apply that name to any or all of them.
Defaults
Defaults are perhaps the most popular behavioral economics tool, in part because they are often effective in changing behavior substantially. They take advantage of status quo bias or people’s natural inertia to stick with a previous decision. The classic example relates to organ donation. In many countries, people’s driver’s licenses indicate whether they are willing to donate their organs if they are in a fatal car accident. In some places, a person needs to opt in, that is, explicitly choose to be an organ donor. In others, there is an opt-out system: the person is automatically a potential donor unless she explicitly opts out. Whether the default choice is opt in or opt out has a dramatic effect on the proportion of people who are potential donors. Johnson and Goldstein (2004) show that four countries with opt-in systems have organ donation rates ranging from 4 to 28%, while five of the six using opt out have rates of 98% or higher.
A health-related example of defaults comes from the fast food industry. As discussed in Chapter 4, people often stick with an unhealthy food choice because that is what they have always done—for example, having a fast food meal come with a soda or fries rather than choosing alternatives that may be offered such as water and salad. Fast food restaurants can, if they wish, change the default side drinks to the healthier options. McDonald’s did that by listing only milk and juice on its menu boards for children’s “Happy Meals”; to obtain a soda it is necessary to know if it’s available and to ask for it (opt in). This led to a modest reduction in soda consumption over the first year of the program with hopes that this effect will grow over time (Giammona, 2015).
Choice architecture
Defaults are a single example of a broader behavioral economics strategy, known as choice architecture. The role of the choice architect is to determine on behalf of others what good decision-making looks like, and then to take the multitude of complex information available and present it more simply, and in a way that facilitates good decision-making in light of both bounded rationality and cognitive biases. This usually involves both reducing the sheer amount of information to a manageable amount, and presenting it in a way that emphasizes what is most important in a format that is easy to rapidly interpret. Another possibility is to frame the information in different ways to help foster better understanding. For example researchers have shown that framing information as either gains or losses can promote or inhibit higher vaccination rates. This notion behind choice architecture also stems, in part, from the work of Herbert Simon. Simon believed “a great deal can be learned about rational decision-making … by taking account of the fact that the environment to which it must adapt possess properties that permit further simplification of its choice mechanism” (1956, p. 129).
An example is how information about quality is presented to consumers through health care report cards. Early report cards presented a multitude of complicated metrics but it became quickly apparent that people could not effectively use them. More recently, choice architecture has evolved toward much greater simplicity. The typical way of presenting ratings of health plans and providers is through stars. For example, on Medicare’s Hospital Compare website, if one searches for patient ratings of their hospital experience, the first information presented is a simple icon of one through five stars. This is then followed up by more details (e.g., the percent of people who say their doctor’s communicated well, percent who say their pain was always well controlled, etc.). Further clicking provides yet even more information, for example, percentages of the above answering “always,” “usually,” or
“sometimes or never.”
Sometimes, simply providing less information is better. McCormack et al.
(2001) conducted an experiment where one group of people received a 100+
page publication called Medicare & You; a second group received even more
—the same publication plus a report giving quality scores on all area Medicare managed care plans, and a third group received only a short, abbreviated version of Medicare & You. The control group did not receive any publications. The results were sobering: those receiving more information used it less and were less likely to change health plans. Similarly,
as discussed in Chapter 12, good choice is facilitated by a less complex choice environment. In one experiment we tested various ways of simplifying the choice environment, including using symbols rather than dollars to represent premiums and having a choice of three versus nine drug plans.
Those facing the more complex information were 23% less likely to choose the least expensive drug plan (Barnes et al., 2012).
Commitments
Traditional economics focuses on monetary incentives—often with success.
For example, raising the price of cigarettes and alcohol through heavy sales taxes has, by most accounts, reduced smoking and drinking (Chaloupka et al., 2012; Wagenaar et al., 2010). But some people are not motivated very much by money and even those that are may have large self-control issues. For instance, a person might realize that he has a history of unhealthy behaviors that the best of intentions has not been able to overcome. One way to increase motivation is to put one’s reputation at stake. Behavioral economists have taken advantage of this social phenomenon, examining how making commitments can influence people to act in ways that they would like.
There are two different types of commitment: public and private. Public ones are likely to be the most effective because a person puts her reputation on the line. Those who make a public commitment and fail to meet it tend to believe that they will look bad in front of others. As described in Chapter 9, doctors who made a public commitment against unnecessary prescribing of antibiotics, by putting up a poster with their picture in their waiting rooms attesting to their commitment to the issue, reduced their antibiotic prescriptions by 20%. An example from a radically different setting is described in Chapter 10 on developing countries. A program for Ethiopian girls ages 10–14, where they and their parents made a public commitment to delay marriage, reduced early marriage by 90% and increased three-fold the likelihood of staying in school.8
Private commitments backed up by monetary incentives may also be effective. One prominent example is a website started by academic behavioral economists, stickk.com. To use it, a person enters in a goal (e.g., lose 10 pounds in six months) and identifies a sponsor who will monitor her progress. She also enters her credit card number, which will be charged an
amount specified in advance, automatically, if she does not meet her goal as adjudicated by a designated sponsor. The website chooses a group of worthy charities that receive the donations when or if the sponsor certifies that the goals are not met. But to increase motivation even more, the person can name an “anti-charity,” e.g., the National Rifle Association for those who believe in gun control or the San Francisco Giants if she is a Los Angeles Dodgers fan.
At the time of writing the website claimed that people had put more than $25 million on the line, and that it was responsible for 800,000 additional workouts and 15 million fewer cigarettes smoked.
Lotteries
It might be odd to categorize lotteries as behavioral economics interventions.
Lotteries are (usually) pecuniary in nature, and it would therefore seem that their use would be a strategy more in line with traditional economics. The reason that they have been embraced by behavioral economists is that in certain circumstances people respond to them more strongly than they would to the equivalent expected-value payment. A 5% chance of winning $100 may be more influential than a flat payment of $5—a surprising result to a traditional economist since most people are risk averse and would be expected to prefer the certain payout.
Indeed, the use of lotteries to incentivize behavior is a popular method of exploiting behavioral economics insights. They rely on leveraging common decision errors that individuals make in dealing with probabilities. Moreover, participation in them is fun. As a result, and discussed in Chapter 7 on HIV, they can be a more cost-effective way of inducing desirable behaviors than conditional cash transfers, which give a fixed reward for obtaining a particular health-related goal. A study from Lesotho found that low-cost lotteries, eligibility for which was based on being tested periodically as HIV- negative, reduced infection rates. Such a strategy can be particularly appealing in low- and middle-income countries, as a small budget can go farther in influencing health behaviors. This dynamic is further accentuated in settings where individuals tend to be risk takers, an example being young people otherwise prone to the “gamble” of unprotected sex, for whom interventions structured around lottery payouts for being tested as HIV-free have been particularly effective (see Chapter 7).
Lotteries can be even more effective if they recognize other factors such as social norms. Loewenstein and colleagues (2013) report on one real-world experiment they conducted. An employer found that it could increase the use of a health assessment tool among its employees by raising the bonus from
$25 to $50; doing so increased employee participation from 40 to 44%. The employer was looking for a greater impact, and worked with researchers to design an experiment (which they called a “Dutch Lottery”) at another of its worksites. In this type of lottery, winners receive a greater prize if most of their group engages in the desired behavior. Those who completed a health assessment were entered into a $100 lottery, but if 80% or more of their group of 4–8 employees completed the assessment, the lottery stakes were
$125. The Dutch Lottery cost the same as the health assessment bonuses, but it increased the use of the assessment tool to 64%.
Limitations of behavioral economics
Over the past two decades or so, behavioral economists have made many contributions that, this book argues, have the potential to improve health behaviors and health. Nevertheless, there are limitations, and the true potential, especially with respect to health applications, is still a subject of speculation. We highlight two concerns here: effectiveness and ethics. Others are discussed in the chapters that follow.
The first limitation is whether behavioral economics interventions have large enough impacts to really make a difference. One area in which they clearly do is with defaults, but as noted below, defaults have their own ethical issues. In contrast, less controversial things like commitment contracts and lotteries, while they can be effective, generally have not shown the ability to change behavior substantially. Many behavioral economists recognize this shortcoming, noting that such interventions are not meant to replace traditional economic and regulatory tools. Adam Oliver, for example, concluded that behavioral economics,
can perhaps best be thought of as offering a library of tools, not all of which can be used at any specific time, but each of which may be of use in some particular contexts. Behavioural economics is not a panacea, but by using the insights from human psychology that are embedded in the
approach, academics and policy makers may be able to design interventions that—in some circumstances—are relatively well equipped to motivate people to behave in ways that are better for themselves, and for society at large.
(Oliver, 2012) The ethical issues are of perhaps greater concern. Defaults are an excellent example. We saw earlier that, in countries where being an organ donor is the default, almost everyone becomes a donor. But this does not necessarily reflect their preferences. Rather, it may simply reflect status quo bias or a lack of understanding of how to opt out of donations. By making it the default, government may be ascribing preferences to people that they do not actually have.
There are other aspects of choice architecture that also raise ethical issues.
One of us has suggested elsewhere that an effective way to improve people’s decision-making is to reduce the number of health insurance plans available (Rice and Cummings, 2010). If the “bad” choices in the eyes of the choice architect are weeded out before the open enrollment period, then people should be more likely to choose a plan that, in the view of the choice architect, would raise their utility. This will mean, however, that choices that some people would have picked are not available. Related to this is the fact that the choice architects who make these decisions on behalf of individuals are often regulators and thus not subject to any democratic accountability (Zimmerman, 2015).