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Tag Archives | behavioural economics

Using behavioural economics insights for vector-borne diseases

Aiming for better health outcomes without addressing the behavioural roots of health problems is bound to be unsuccessful.

Choices

 

A recent public health issue that has made global headlines and has caught the imagination of public health practitioners the world over has been the spread of Zika– a virus that spreads through mosquitoes. While it hasn’t yet been conclusively established, there’s increasing evidence of the connection between the virus and microcephaly – a birth defect that causes brain damage in foetuses. This possible link between the virus and microcephaly has sent alarm bells ringing. The virus has infected people in more than 20 countries in Central and South America and the Caribbean and has the potential for further international spread. With the World Health Organisation (WHO) declaring the spread of Zika virus as an international public health emergency, countries around the world are announcing a slew of policy measures to tackle the outbreak and spread of the virus.

The WHO estimates that more than half the world’s population is at risk from vector-borne diseases (spread through mosquitoes) and that more than one million people die every year from such diseases. Low- and middle-income countries with high incidence of poverty, tropical weather – in which mosquitoes thrive and fragile public health systems are normally at a higher risk for spread of vector-borne illnesses. Clearly, vector control is the most important tool in preventing the outbreak and controlling the spread of such diseases. Indeed, as has been in the case of Zika, fumigation, distribution of mosquito repellant and vaccine development are the immediate measures that various countries adopt. Other solutions promulgated range from the benign travel advisories to the more controversial ones advising women to not get pregnant until the crisis has passed.

However, it is important that any policies for vector control do not just rely on traditional methods but also include insights from the recent advances in behavioural economics. This branch of economics, which has made inroads into public policies (at least in the US and the UK), counters neo-classical economics in that it does not assume (and rightly so) human beings to be fully rational agents when it comes to making decisions and choices. Various research studies in this area have shown how humans tend to consistently make sub-optimal choices. One of the insights is that of present bias, wherein the human mind disproportionately weighs present costs over future benefits and hence makes people deviate from their own desired behaviour. For instance, the cost (time and money) of getting a vaccination today outweighs the unseen future benefits and hence many people (especially the poor) delay getting the vaccinations. The researchers have also studied and proposed how policies – often termed as “nudges” can be designed that match people’s actual psychology. Typical health ailments that have been targeted through nudge approaches are obesity and smoking. However, the concept has not yet found currency to fight the diseases of the global South.

As human beings are at the centre of all policies that are aimed at improving public health, achieving improved health outcomes is nearly impossible without addressing the behavioural roots of health problems. It is therefore critical that developing countries’ large-scale public health policies to contain the spread of vector-borne diseases must utilize the insights from behavioural economics.

Nidhi Gupta is a Programme Manager at the Takshashila Institution and tweets at @nidhi1902

 

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Anchoring Bias

Why irrelevant facts and numbers can affect your judgement

By Narayan Sharalaya

The anchoring effect is a cognitive bias that describes the human tendency to rely too heavily on the first piece of information they receive (anchor) while making judgements. This can happen even if the anchor provided has little or no relevance in the decision making process. A classic example of this is a study where people were divided into two groups and asked the following questions:

Group 1 Group 2
  1. Was Gandhi more or less than 144 years old when he died?
  2. How old was Gandhi when he died?
  1. Was Gandhi more or less than 9 years old when he died?
  2. How old was Gandhi when he died?

The results of the study showed that the participants in Group 1 tended to give a mean age of 80 years as compared to 50 years by the participants in group 2. The first question acted as a suggestion towards describing Gandhi’s age. While no one really believed that he had lived for 144 years, or less than 9, the associative memory produced a picture of an ancient man or a young man based on the question they got.

Anchoring effects are not unknown and are used by salesmen and marketeers all the time. Flipkart came under the spotlight last October when it was found that it had jacked up the prices of all its products leading up to its big billion day sale.The increased price acted as an anchor price making the discount look bigger.

The use of anchoring is not limited to retail businesses only. Anchoring and framing also affect how objectively we look at news presented to us.

New Bitmap Image

The above headline comes in the wake of the recent ban on Maggi by regulators. By using an anchor of Rs 445 crore, the article looks to show the lack of quality testing by Nestle on its food products. But, judging the adequacy of spending on quality testing by comparing it to advertisement expenditure is a clear case of a cognitive bias. Testing expenditure is an outcome of factors like shelf life, research costs, equipment costs, etc. while advertisement expenses are dependent on market size, differences, competition and so on. To compare the two is akin to comparing apples and oranges. The article even mentions later on that this spending was consistent with the other noodle brands.

Anchors are also a useful tool during the negotiation process. Sellers are often advised to move first during a negotiation. When the seller opens negotiations, he subtly manages to decide the price by using the anchoring effect. Even if the seller receives a lower amount than his offer, he still receives an amount close to his asking price.

Anchoring Effects on Financial Markets

Recent studies on behavioural finance show a strong tendency of anchoring effect by analysts and experts. The anchors used by investors fall into quantitative and psychological anchors. Quantitative anchors lie in the form of past prices, industry averages and indexes or price earning ratios of other companies. Psychological anchors take the form of stories or antecedents that influence stock prices. It is often found that those who sell stocks to the public often use vivid stories about the history of the company, nature of the product and its demand rather than relevant statistical data about the stock. These serve as moral anchors to the public and decide the share prices.

Resisting the Anchoring Effect

Anchors serve as a useful tool to decision making in many cases where information is not easily available and decisions are hard to arrive at. The problem arises when the anchor used has little or no implication towards the decision being made. Successfully avoiding anchoring bias requires the identification of the anchors or situations where anchoring bias could prevail. People are less likely to be influenced by an anchor when making a decision if they have knowledge of it. However, recognising anchors requires an impressive amount of intelligence and self-awareness; the problem with anchoring is that it is like an invisible phenomenon that operates outside our consciousness. Resisting the anchoring bias is an exceedingly hard task because the anchors we use are often subtle and random cues from the environment.

Narayan Sharalaya is an intern at Takshashila Institution and is currently doing his Bachelors in Economics at NMIMS, Mumbai.

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Nudges – a Real Third Way

An influential book by Richard R. Thaler and Cass R Sunstein, “Nudge” looks into the science behind decision making and how it can be applied to policy formation.

By Narayan Sharalaya

Sometimes, even the best intended policies do not have the required effect. Why don’t people eat healthily, save wisely or become environment friendly even though incentives exist to do so? ‘Nudge’ provides answers to these questions using Behavioural Economics and proposes that the most simple and effective solution is the nudge. The book begins by explaining the rationale behind nudges and the authors’ guiding philosophy in using them. It then examines real life situations where nudges can or have helped.

Before going into further detail about nudges, it is important to look at some of the concepts used in the book.

  1. Libertarian Paternalism
    Coined by the authors, this term may seem somewhat oxymoronic but it is a guiding philosophy in this book. The authors wish to preserve the libertarian demand of the right to free choice but also advocate self-consciously guiding people towards a certain choice. It can be described as a kind of ‘soft’ paternalism. According to this concept, it must be cheap and easy to opt out of the nudges provided. For example, placing healthy food at eye level in supermarket displays would be following libertarian paternalism whereas banning all junk food would not.
  2. Choice architecture
    The way choices are presented to us influence the decisions we make.A choice architect organises the context in which people make decisions. The book shows how choice architecture can play a significant role in multiple scenarios ranging from organ donation to choosing an apartment. The authors also provide guidelines on how to select an effective choice architecture as this would ensure that people select the best choice available to them. For example, the Amsterdam airport managed to reduce spillage in its urinals by 80% by sticking a picture of a fly.

Urinal

  1. RECAP
    A frequent solution proposed by the book, RECAP stands for Record, Evaluate and Compare Alternative Prices. It is a mild form of government regulation where companies are required to post their prices publicly in an easy, readable form. While this imposes very little costs on the companies, it significantly helps in improving consumer decisions.

When do we need a nudge?

A nudge is needed when the decisions to be made are difficult (selecting the right mortgage), rare (buying a house), do not yield immediate benefits (eating healthy food) or are not fully understood (investing in retirement funds). A nudge in any of these situations helps improve decision-making drastically. The book also looks into the functioning of markets and whether they solve people’s problems. On this subject, the authors have a mixed view. Market competition ensures fair prices and welfare of the consumer but on the other hand, companies have a strong incentive to exploit human frailties and profit from them. In this case, the authors favour a nudge towards the favoured options.

Examples of Effective Nudges

  1. Savings
    The “Save More Tomorrow” campaign initiated by Tahler and Bernatzi in three private companies, successfully educated workers about saving for retirement. Participants were given an option of selecting between a default rate at which their salary increments would go towards their retirement fund or make their own savings decision. Workers that chose to enroll in this program showed much higher saving rates as shown in figure 2. The program followed libetarian paternalism by actively guiding workers towards a preferred option while retaining their freedom of choice.Save More Tomorrow
  1. Credit Markets
    The market for mortgages and credit cards are alike. They both involve making hard choices regarding fixed and variable interest rates, teaser rates, etc. They also tend to have dozens of hidden fees and charges most people are unaware of. The book proposes a form of RECAP, where companies will have to disclose the list of charges and fees they levy in an accessible format. This would help consumers make better choices while avoiding excessive regulation.
  2. Organ Donation
    Rather than have an ‘opt in’ option for organ donation, countries that have an ‘opt out’ policy for organ donation tend to have a higher number of donors than c. In other terms, a person’s consent to be an organ donor is presumed unless the person states otherwise. This is a good example of how choice architecture can have a direct bearing on subject behaviour. Another type of choice architecture that the authors suggest is a mandated choice. For example, where the grant of a license is dependent on people choosing between options.Organ Donation

The Real Third Way

Nudges can preserve freedom of choice while still guiding people to act in a certain way. The book emphasises the use of Nudges as a “third way” to influence behaviour which strikes a middle ground between the strict regulations favoured by the Left or the laissez faire approach championed by the Right. Furthermore, the scope of using a nudge is not limited to certain domains. With policy makers recognising the human frailties inherent in decision making, nudges are slowly finding their way into policy formulation.

Narayan Sharalaya is an intern at Takshashila Institution and is currently doing his Bachelors in Economics at NMIMS, Mumbai

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