Behavioural Economics meets Electronic Communications: Working with telecoms regulatory specialists Cullen International as part of a training programme for BEREC 

I’m delighted to be working with Cullen International on creating and delivering a workshop on behavioural economics and telecoms regulation as part of a major training programme for BEREC, the Body of European Regulators for Electronic Communications.

BEREC’s mission is ‘to foster the independent, consistent and high-quality regulation of digital markets for the benefit of Europe and its citizens,’ and the Cullen International training programme is in support of that mission. 

It’s a particular pleasure for me to be linking up my current practice and research area of behavioural economics with my former life in Telecoms, Media and Technology, as shown in the graphic below.

More information on the content that I will be delivering in May and June 2021 is in the following section.

Key concepts from behavioural economics, and some implications for telecoms regulation

Economic policy in regulated markets has historically focused on removing barriers to entry and facilitating effective competition. Standard economic theory holds that consumers will then exercise their sovereignty to bring about optimum outcomes, both for themselves and for society as a whole.

Behavioural economics seeks to explain why this might not work in practice, by bringing insights from psychology and other behavioural sciences into an economic framework to explain why consumers behave the way they do.

This can help us to understand how consumers may make choices which may not conform to economic rationality and are not always in their own best interests., due to factors such as:

• Cognitive and behavioural biases
• Limited time and decision-making capacity
• The influence of others
• The role of emotions and stories
• The impact of heuristics, or ‘rules of thumb,’ as drivers of decision making.

These factors are compounded in ICT markets where choosing the right product or services can be more difficult because of complexity and fast-changing technology.

As behavioural economics becomes main-streamed, informing policy-making and regulation around the world, this training session will draw on work by key figures including Daniel Kahneman and Richard Thaler to outline some key findings. The session will:

• Compare and contrast standard economics and behavioural economics
• Set out the main premises of behavioural economics, by reviewing factors not included in standard economics, such as heuristics, biases and mental shortcuts, loss aversion, defaults and framing
• Consider what behavioural economics means for consumer behaviour and effective markets
• Suggest how behavioural economics could help TMT regulators make policy and regulation more effective.

The Biggest Behavioural Intervention of our Lifetimes

Sometimes, something happens that seems too big to comprehend. And although we have been able to predict it was highly likely to happen (after all, it has happened before), a global pandemic definitely qualifies. 

When I worked full time as a consultant (ICT, not medical, not management), we would sometimes advise clients that a problem was just "too big to get your arms around."  COVID-19 is the ne plus ultra of that category. So many different facets, so many different ideas, such complexity, such contention. Everyone has an opinion, regardless of how well qualified (or more usually, not) they might be. 

In this context, the paradox has been that, despite being the biggest behavioural intervention we have ever seen, the response to the pandemic has created a challenge for those of us concerned with behaviour - how to bring genuinely useful insights to the mix? Particularly if one doesn't have a background in immunology, virology, epidemiology, or even medicine. The answer is that the behavioural sciences have a definite role to play. Because before vaccination came along, defeating COVID-19 was all about behaviour: there was nothing else in the armoury other than trying to avoid passing on the virus to others, whether that was by hand washing, disinfecting surfaces, social distancing or shielding the vulnerable.

Now, thanks to the extraordinary efforts of the people who developed the vaccines, the emphasis has shifted to rolling out a mass programme on an unparalleled scale. But, despite the efficacy of the medication, behaviour is still crucial - what's the use of a vaccine if people won't take it? So defeating COVID-19 continues to be about the behaviour of each and every one of us. 

It can be useful to try and learn from history, but reading about the last global pandemic, the Spanish 'flu outbreak of 1918 in Laura Spinney's book Pale Rider, it's striking that, although there were many parallels, there were also many differences between then and now (and not just that COVID-19 isn't a 'flu). 

Differences fortunately include the turbo-charged development of the vaccines, from which we are now benefiting. Similarities include the harrowing deaths and incapacitation of so many. Differences also include the scale of the mortality - it's still unclear how many died in the Spanish 'flu, possibly 50 million people. And the biggest unknown of all - whether COVID-19 could just peter out. Or are we waiting for herd immunity to develop (see vaccines, above).  

And given the links between health, demographics and economics, particularly inequality, we need to ensure that we have learned some lessons along the way, and will use the opportunity to build back better. 

Thinking about all this, the complexity and the huge number of issues raised by the pandemic, the image that comes to mind is a word cloud. Which seems appropriate because, even for those of us who have managed to remain physically untouched by COVID-19, it has clearly invaded our psyches and annexed our conscious and unconscious minds.

 

Poor Economics and the Nobel Prize

It’s great news that the husband and wife team of Abhijit Bannerjee and Esther Duflo (along with Michael Kremer) have just been awarded the Economics Nobel Prize. Not just because it’s only the second time that a woman has won, or because Esther Duflo is young compared with the 60+ norm for Nobel Prize winners. But because the work of all three focuses on poverty, and uses an experimental rather than a theoretical approach – what works, rather than what presents as a neat and elegant solution. 

And following Daniel Kahneman in 2002 and Richard Thaler in 2017, this is the third time that a behavioural approach has featured in the economics Nobel prize.

The work of Bannerjee and Duflo featured in their book ‘Poor Economics,’ where they set out their focus: the lives and choices of poor people. As the authors state, the debates on poverty are usually framed by looking at the big questions – what is the ultimate cause of poverty? How much faith should we place in free markets? Is democracy good for the poor? Does foreign aid have a role to play?  Whereas as Bannerjee and Duflo note in the book, "the studies we use have in common a high level of scientific rigour, openness to accepting the verdict of the data, and a focus on specific, concrete questions of relevance to the lives of the poor."

They invite us to turn away from the feeling that the fight against poverty is too overwhelming and to start thinking of the challenge as a set of concrete problems that, once properly identified and understood, can be solved, one at a time. There’s a lot of behavioural economics in their approach, not because the psychology of poor people is different, but because it’s the same: poor people can be trapped by the same kinds of problems that afflict the rest of us, like lack of information, weak beliefs, and procrastination.

What We Take For Granted

Our real advantage comes from the many things that we take as given: we live in houses where clean water gets piped to us - we do not need to remember to add chlorine to the water supply every morning. The sewage goes away on its own - we do not actually know how. We can mostly trust our doctors to do the best they can - and can trust the public health system to figure out what we should and should not do. We get our children immunized (mostly!). Our health insurers reward us for joining the gym - because they are concerned that we will not do it otherwise. And perhaps most important, most of us do not have to worry where and our next meal will come from. In other words, we rarely need to draw upon our limited endowment of self-control and decisiveness, while the poor are constantly being required to do so.

Make It Easy

The authors invoke the spirit of Nudge to ensure that policies and practices are designed to make it as easy as possible for poor people to make the choices that are best for them. But a lot of the cheap gains are in prevention, and prevention has traditionally been the area where the government is the main player. The trouble is that governments have a way of making easy things much less easy than they should be – eg, government health centres are often closed when they are supposed to be open.

If people in the west, with all the insights of the best scientists in the world at their disposal, find it hard to make basic choices on hard evidence, how hard it must be for the poor, who have much less access to information?  And even the most well intended and well thought out policies may not have an impact if they are not implemented properly. Unfortunately, the gap between intention and implementation can be quite wide

B&D remind us that we need to resist the kind of lazy, formulaic thinking that reduces every problem to the same set of general principles. We should listen to poor people themselves and understand the logic of their choices. We must accept the possibility of error and subject every idea, including the most apparently common-sensical ones, to rigorous empirical testing. Doing all of this means we will be able not only to construct a toolbox of effective policies but also to better understand why the poor live the way they do.

In summary: attend to the details, understand how people decide, and be willing to experiment. All economists should take note!

Nudging in the City of London - Taking behavioural economics to the Square Mile

Stephen Young gave a talk this month at an event hosted by Investec Wealth and Investment for Independent Financial Advisors (IFAs). For many commentators, and those present in the splendid surroundings of The Ned, formerly the Midland Bank HQ, autumn 2018 is significant as the 10th anniversary of the Global Financial Crisis. But 2018 is also the tenth anniversary of the publication of Nudge, the breakthrough book that propelled behavioural economics to global recognition by policy makers and regulators. All the more ironic, considering that Richard Thaler has recently commented that it was a struggle to find a trade publisher for Nudge, which he co-authored with Cass Sunstein. 

Despite its relatively recent prominence, the talk on ‘The Rise and Rise of Behavioural Economics’ (edited version of slides here) started with the surprisingly long evolution of behavioural economics - beginning in the 18th century and came bang up to date with Daniel Kahneman and Richard Thaler - although both have won the Nobel Prize for economics, only one, Thaler, who won in 2017, is actually an economist.

The talk covered the big ideas of the main thinkers before looking at how these ideas are now being used to understand consumers’ financial decision making, showing that complexity, biases and cognitive errors can lead to flawed decisions. The result of financial decision-making being biased and error-prone is that governments and regulators are more likely to intervene in choice behaviour, to increase the likelihood that consumers will make better decisions.

The conclusions showed how regulators, including the UK’s Financial Conduct Authority, are increasingly using insights from behavioural economics to understand what leads people into flawed decisions, and how to avoid them. The result is financial regulation that more accurately reflects how people actually behave rather than the sometimes unrealistic assumptions of standard economics.

Behavioural economics has become mainstreamed, and is informing policy-making and regulation in the UK and around the world. It’s already affecting the UK financial services sector – expect to see more of it.

As an aside, Stephen enjoyed meeting, and being introduced by the BBC’s Nick Robinson, who went on to share his perspective on the politics of Brexit. No surprises....it’s complicated! So pleasing to find out that Nick is a fan of behavioural economics.

New Module in Brighton and Sussex Medical School: The Economics of Healthcare and Health-Related Behaviour

Stephen Young (that's me!) is looking forward to teaching on the new one week module at Brighton and Sussex Medical School aimed at health care professionals, managers, commissioners and leaders actively involved in, or with an interest in financial and economic aspects of health care in the public, private or voluntary sectors. The module, which starts on Monday 5th February 2018, is delivered on five consecutive days, each of which presents a theme in health economics and health behaviour.

As well as putting health economics in a theoretical framework to help healthcare professionals, healthcare decision-makers, or policy makers make choices on how to decide the best use of limited health resources, the module will also consider the scope for market and demand management by showing how behavioural economics and social marketing can help modify the behaviours which contribute to many health problems. 

This module will consider the challenges facing the healthcare sector using economic concepts such as supply, demand and the market to understand resource allocation. These concepts are then applied to the provision of healthcare services and the promotion of good health. The module considers the advantages and disadvantages of different approaches to financing and organizing health services. 

Students are introduced to the main methods of economic evaluation (cost-effectiveness and cost-benefit analysis) and shown how they apply to decision-making in healthcare. We will then spend a day each on social marketing and behavioural economics, before moving on to the final day, an interactive session when students will select a key issue or problem and apply the concepts, theory and tools presented in the module to analyse the problem and critically evaluate possible solutions.

More details of the module (code MDM173) are available from the Module Administrator, Charlotte Hill (C.hill@bsms.ac.uk) Telephone:  01273 644128

Behavioural economics goes mainstream with Richard Thaler’s Nobel Prize

The Nobel prize for Economics (technically, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) has previously been awarded to academics working in the field of decision-making, psychology and economics (Herbert Simon in 1978 and Daniel Kahneman in 2002). But the announcement last week that the 2017 prize would go to Richard Thaler, was the first which explicitly mentioned the award being for “contributions to behavioural economics."

The citation defines behavioural economics as “a research field in which insights from psychological research are applied to economic decision-making. A behavioural perspective incorporates more realistic analysis of how people think and behave when making economic decisions, providing new opportunities for designing measures and institutions that increase societal benefit.”

Thaler’s research was praised for incorporating psychological assumptions into analyses of economic decision-making, his work showing how the limitations of an individual’s knowledge in the decision-making process, as well as the consequences of social preferences and a lack of self-control, can affect people’s decisions as well as market outcomes.  The Royal Swedish Academy of Sciences described Thaler as a pioneer of behavioural economics, saying that it had progressed in recent years from a fringe and somewhat controversial field of research into “a mainstream component of the economics profession.”

Behavioural economics and me

Ten years ago media images showed queues of anxious depositors in British high streets as the crisis at Northern Rock, the first run on a British bank for around a century, became the clearest sign that all was not well in the financial system. A year later, the collapse of Lehman Brothers signalled the full blown emergence of the Global Financial Crisis. These momentous financial events coincided with my new job as an economics lecturer at Brighton Business School, University of Brighton. Economics 101, which I was teaching to first year undergraduates, was hard-pressed to explain the most momentous economic events in living memory. Which was why I turned to other schools of thought, including behavioural economics, launching what turned out to be a series of popular modules on the subject.

Rethinking economics and behavioural economics

Fast forward a few years, and I was invited by the folks at Rethinking Economics to contribute a chapter on Behavioural Economics to a forthcoming reader, aimed at providing an accessible introduction to different approaches to economics and highlight the diversity of economic thought.  The book, which has just been published, introduces new and diverse ideas into undergraduate economics and places the mainstream of economic thought side by side with more heterodox schools. 

According to the publishers, Rethinking Economics: An Introduction to Pluralist Economics is “a great entry-level economics textbook for lecturers looking to introduce students to a broader range of economic ideas, and is  accessible for people outside academia who are interested in economics and economic theory. Can’t say fairer than that.

The Table of Contents from the Reader is a roll-call of alternative economics:

·       Post-Keynesian Economics

·       Marxist Economics

·       Austrian Economics

·       Institutional Economics,

·       Feminist Economics

·       Complexity Economics

·       Co-operative Economics

·       Ecological Economics

·       And my chapter on Behavioural Economics

According to Richard Thaler’s Nobel Prize citation, behavioural economics has become “a mainstream component of the economics profession.” It’s going to be interesting to see if the rest of the “economics profession” agrees!

Can Behavioural Economics Make Us Happy?

Economics was memorably described as ‘the dismal science’ by the Scottish writer and philosopher Thomas Carlyle in the early 19^th Century. So it’s fitting that, in the early 21^st Century there could be lessons on how to be happy from behavioural economics and the behavioural sciences.

Happiness by Design was written by Professor of Behavioural Science at the London School of Economics Paul Dolan. The book is interesting for two main reasons: first, like other books on happiness, it covers a lot of useful research, including Dolan’s own contribution to the work on happiness – he was heavily involved with specifying the measures on happiness which are now included in the work of the Office for National Statistics. 

But Dolan focuses on the personal, showing how to implement findings from the research. The second half of the book includes practical tips to help us be happy. Not by thinking about it, and not by devoting ourselves to 24x7 hedonism (which would be pretty exhausting). Rather, by using insights and techniques from the behavioural sciences. And concentrating on finding the right balance between pleasure and purpose. At the risk of stating the obvious, the book recommends that we spend more time on the things that make us happy, and less time on the things that make us unhappy – happiness comes from what you do, and what you don’t do. Which might even mean chucking in your job if it’s causing unhappiness - although it might be easier to quit the old job than find a new one which will make you happier. Which  probably brings us back to traditional economics. As Thomas Carlyle might agree.