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President Obama is a Fan of Behavioral Economics, And Here's Why

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This past Wednesday, Mr. President issued an executive order encouraging federal agencies to use insights from social and behavioral sciences to improve their programs and outcomes and to better serve the American people. The order also formally establishes the Social and Behavioral Sciences Team, a group of experts that has spent the past year and a half conducting experiments and implementing improvements in a variety of government programs. By making simple changes such as sending out letters to potential participants or changing a program's default option, these researchers have been able to bring about significant and cost-effective changes. Among other things, these changes have resulted in increased retirement security, better educational access, and improved compliance among government contractors.

What's so great about behavioral science, anyway?

Behavioral science seeks to understand actual human behavior, especially the ways in which real-life behavior differs from predicted or theoretical behavior. Basically, the idea is that policymakers should remember that they are making policies for human beings, and human beings do not always behave predictably. By taking human behavior into account, we can create policies that do what they're supposed to do instead of designing policies for a fictional world of hyper-rational, incredibly intelligent, endlessly patient super-humans. Behavioral science takes into account that although people might want to choose the best retirement plan, they also get glazed-over and discouraged after reading the details of dozens of retirement plans. So even though we think it's better to have unlimited options, most people actually make better choices when their options are limited. (This particular phenomenon is explored in detail in Barry Schwartz's The Paradox of Choice.)

Is the government trying to change my choices? Is this like that time Facebook tried to manipulate our emotions by controlling which posts we saw?

Well, yes and no. Government agencies can't force anyone to take advantage of their programs or to opt into certain choices, but what they can do is make it easier for people to make the best choices for themselves. For example, simplifying the form for college financial aid is likely to increase the amount of aid and decrease the amount of time spent filling out this form. By making the change to a simpler form, the government is encouraging more students to use it, but it isn't forcing them to do so.

Behavior Economics Executive Order

Likewise, studies across several countries have shown that sending letters to taxpayers reminding them of the moral value of paying taxes and the important uses of tax dollars can have a positive effect on voluntary tax compliance. A large majority of Americans agree that any type of tax cheating is unacceptable, so I think it is safe to say that these letters are serving a social purpose. And once again, the letters aren't forcing anyone to comply with tax laws, they are simply helping people make a better choice for themselves and for society. Simple changes like these can add up to millions of dollars that would otherwise be lost revenue or would be spent on follow-up reminders, audits, and tax law enforcement.

In terms of the Facebook research debacle, it is unlikely that any of these processes will feel so invasive. Although it is true that many government programs have a large amount of data about American citizens, any randomized testing is likely to involve treatments like sending slightly different letters to two separate groups of people or showing them different versions of a website rather than manipulating the emotional content of their Facebook pages.

What does this have to do with FMG?

FMG conducts research on all kinds of similar problems! Our team of social and behavioral scientists works on just these types of issues for both government and private-sector clients. We study the ways in which behavior and attitudes are linked to things like form layout, the wording of social norms messages, or the availability of web resources. By testing outcomes in a systematic way, we help make programs more effective and efficient.

This seems so interesting! How can I learn more? For further dispatches from the exciting world of behavioral economics, try picking up Nudge by Cass Sunstein, Predictably Irrational by Dan Ariely, or Misbehaving: The Making of Behavioral Economics by Richard Thaler. Or you can always call up your friendly neighborhood behavioral economist (e.g. yours truly) for a chat.


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