Economics Essay 98: Use of Behavioural Economics

Using examples to illustrate your answer, assess the usefulness of behavioural economic theory compared to traditional economic policies in helping governments to correct market failures.

Behavioural economic theory offers valuable insights into understanding and addressing market failures that may not be adequately captured by traditional economic policies. Here's an assessment of the usefulness of behavioural economic theory compared to traditional economic policies, using examples to illustrate:

1. Nudging for Positive Externalities: Behavioural economics suggests that people's choices can be influenced by the way choices are presented or "nudged." This approach can be used to encourage behaviours that generate positive externalities. For example, to promote environmental conservation, governments can use default options for energy-efficient appliances or opt-out systems for organ donation.

2. Addressing Information Asymmetry: Traditional economic policies often assume perfect information, but in reality, information asymmetry can lead to market failures. Behavioural economics recognizes the importance of providing clear and transparent information to consumers. For instance, nutritional labels on food products help consumers make informed choices and reduce information asymmetry.

3. Overcoming Present Bias: Behavioural economics highlights that individuals often exhibit present bias, prioritizing immediate gratification over long-term benefits. This can lead to undersaving or underinvestment. To address this, governments can implement policies such as automatic enrollment in retirement savings programs or matching contributions to encourage long-term financial planning.

4. Correcting Market Power: Traditional economic policies often focus on regulation and antitrust laws to address market power. Behavioural economics suggests that people may have limited ability to make rational choices in concentrated markets. For example, governments can introduce measures to increase price transparency or mandate clearer terms and conditions to help consumers make informed decisions.

5. Reducing Behavioural Biases: Behavioural economics acknowledges cognitive biases that can influence decision-making, such as loss aversion or status quo bias. Governments can design policies to mitigate these biases. For example, automatic enrollment in healthcare plans can help overcome inertia and increase coverage rates.

However, it is important to note that behavioural economic policies have their limitations. They may be more effective for specific market failures or in certain contexts but might not provide comprehensive solutions for all economic challenges. Traditional economic policies, rooted in rational decision-making assumptions, can still be valuable for overall market efficiency.

In practice, a combination of traditional economic policies and behavioural insights is often used. Governments can integrate behavioural interventions into existing policy frameworks to address specific market failures and promote desired outcomes. The effectiveness of these approaches can be assessed through rigorous evaluation and continuous refinement of policies based on real-world outcomes.

The bosses who silently nudge out workers

 By Alex Christian in BBC.com

Employers are often reluctant to fire employees for myriad reasons. But quietly side-lining them in the hope that they’ll quit often leads to even greater harm.

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When marketing manager Eliza returned from holiday, she received an email from her boss asking her to arrive at work early the next day. “I instantly feared the worst,” she explains. “I knew the job wasn’t the best fit. I’d had my probation previously extended; there was an expectation of weekend working and post-work drinking that didn’t suit me. I thought he’d used my time off as an opportunity to fire me.”

However, when Eliza arrived at her boss’s office, she wasn’t immediately let go. Instead, she was informed of a company restructure – her job description was being completely rewritten. Someone else would take over her tasks, and she would be expected to work remotely in a new admin role. 

In the weeks that followed, Eliza’s professional life became much quieter. Instead of formulating the London-based events agency’s marketing strategy from the office or attending live shows as part of her remit, her main duties now consisted of simply being available between 0900 and 1800, sending the occasional email and completing the odd routine task from home. 

Eliza had effectively been frozen out by her employer. Barely a month later, she quit. “It was humiliating – I was made to feel worthless,” she says. “It was the worst experience of my career: I’d rather have been just fired on the spot and paid off than have to go through that.”

There may not always be a good fit between jobs and the workers hired to do them. In these cases, companies and bosses may decide they want the worker to depart. Some may go through formal channels to show employees the door, but others may do what Eliza’s boss did – behave in such a way that the employee chooses to walk away. Methods may vary; bosses may marginalise workers, make their lives difficult or even set them up to fail. This can take place over weeks, but also months and years. Either way, the objective is the same: to show the worker they don’t have a future with the company and encourage them to leave. 

In overt cases, this is known as ‘constructive dismissal’: when an employee is forced to leave because the employer created a hostile work environment. The more subtle phenomenon of nudging employees slowly but surely out of the door has recently been dubbed ‘quiet firing’ (the apparent flipside to ‘quiet quitting’, where employees do their job, but no more). Rather than lay off workers, employers choose to be indirect and avoid conflict. But in doing so, they often unintentionally create even greater harm.

The path of least resistance

For myriad reasons, bosses have long tried to nudge workers they perceive as underperforming or being a bad cultural fit out the door. “This has been happening in workplaces for decades,” says Christopher Kayes, professor of management at the George Washington University School of Business, based in Washington, DC.

The tactic means firms and managers can end up saddled with workers they don’t want, leading to managers engaging in behaviours often seen as passive-aggressive

The reasons for this are complex. If workers behave in ways that violate their contracts, for example, companies can terminate their employment. But if bosses simply dislike workers, or see them as middling or mediocre performers, taking action to remove them is more complicated, often requiring lengthy processes involving performance management programmes and multiple warnings.

“Companies are usually reluctant to let a worker go,” says Kayes. Firing leads to an “immediate sense of sides being created” which, at worst, can land the company in court if the worker contests it, potentially generating negative headlines about the working environment. “It’s often easier to simply let the underperforming employee stay in the job than to go through the process of firing and potential litigation.”

Employers often don’t want to expose themselves to risk or conflict, adds Suzanne Horne, partner in employment law at legal firm Paul Hastings, based in London. “Subtly encouraging someone to leave is seen as the easier option. If the employee eventually resigns, it’s the ‘no-fault approach’: severance doesn’t need to be paid, conflict is avoided and both parties are ultimately happy.”

Managing perceived poor performance, working with the employee to improve their output and turning them into a useful resource for the company would be an alternative way to deal with the problem. However, Kayes says bosses are often ill-equipped to do this, whether through a lack of time or training. “Organisations tend to be bad at preparing leaders to take on the responsibilities they’ll need in the job. So, they often find themselves without the resources they need to be effective and deal with employee underperformance.” 

In this situation, with firing seen as a last resort and managers unable – or unwilling – to turn the employee into what they want them to be, they often follow the path of least resistance: quiet firing. “Much of it is ultimately an avoidance behaviour and comes down to procrastination: managers in most cases are wanting to avoid having difficult conversations,” points out Kayes. “Ironically, they worry that firing a worker will reflect poorly on them, so they quietly fire them instead.”

To push out workers, managers may sometimes set up workers to fail with impossible tasks, or take away their jobs altogether (Credit: Getty Images)

Why it often backfires 

By engaging in quiet-firing behaviours, managers are likely to be playing the long game. In theory, it’s low risk and minimal effort; the hope is that by withdrawing support, the worker soon realises they don’t have a future at the company and moves elsewhere.

However, this approach can have collateral damage. The tactic means firms and managers can end up saddled with workers they don’t want, leading to managers engaging in behaviours often seen as passive-aggressive, says Kayes. “You stop offering the employee opportunities to advance; you stop inviting them to certain meetings; you stop providing them important work and feedback.” 

There is also the risk of creating an ‘us and them’ mentality, potentially harming workers not targeted for quiet firing. “You have the engaged employees, and then those just quietly left there, sometimes without their knowledge,” says Horne. “It doesn’t create an inclusive or high-performance workplace culture.” 

Quiet firing can affect a firm’s reputation, too, even if a worker departs without apparent conflict; employees may well share their experience in an online review. “There’s a greater awareness of employment rights today,” says Horne. “People are now more willing to call out workplace issues, especially following the pandemic.” 

An employee subtly nudged out the door isn't without legal recourse, either. “If you were to look at each individual aspect of quiet firing, there’s likely nothing serious enough to prove an employer breach of contract,” says Horne. “However, there’s the last-straw doctrine: one final act by the employer which, when added together with past behaviours, can be asserted as constructive dismissal by the employee.”

More immediate though, is the mental-health cost to the worker deemed to be expendable by the employer – but who is never directly informed. “The psychological toll of quiet firing creates a sense of rejection and of being an outcast from their work group. That can have a huge negative impact on a person’s wellbeing,” says Kayes. 

Eliza agrees. “I was made to feel worthless and useless being quietly fired,” she says. Now happily employed elsewhere, she’s realised that her experience “was a reflection of having a terrible boss, rather than me”. But other people who experience quiet firing over the longer term, in more insidious ways, may not see things so clearly.

I was made to feel worthless and useless being quietly fired – Eliza

“Over time, an employee may figure out something isn’t right if their one-to-one meetings are always cancelled, their manager never makes time to talk about development and performance or they’re always overlooked for promotion,” says Horne. “They face a daily drip feed of their employer trying to make them resign – it’s absolutely gruelling.” 

'A self-fulfilling prophecy'

Quiet firing may be the easiest option on the table for bosses – especially in a remote-work world, where excluding employees is even easier – but it’s not a good solution for firms or workers.

“Employers can end up damaging their business’s morale, productivity and culture while risking litigation proceedings anyway,” says Horne. “For employees, there’s a mental-health impact of feeling excluded, frustrated or angry. They can lose their confidence and it becomes a self-fulfilling prophecy: their performance declines even further.” 

Fixing it requires better-resourced managers, greater HR support and the acceptance that workplace confrontation is sometimes best. However, the time and cost needed to educate managers on how to better motivate employees and deal with difficult situations means that, realistically, quiet firing may be here to stay. “Training is expensive,” says Kayes. “It takes huge investment and requires leaders to be open to it; an acceptance that they need to ask themselves hard questions.

Human psychology plays its part, too. Ultimately, quiet firing is the avoidance of difficult emotions. “There can be the implication that the manager is being nasty or manipulative when they quietly fire an employee, but there is a person on either side of the table,” says Horne. “And people generally like to avoid hard conversations.” 

Eliza is using one name for career-security reasons

Nudge theory is a poor substitute for hard science in matters of life or death

Behavioural economics is being abused by politicians as a justification for flawed policies over the coronavirus outbreak writes Sonia Sodha in The Guardian 

Illustration: Dom McKenzie/The Observer


I first came across “nudge” – the concept many consider to be the pinnacle of behavioural economics – at a thinktank seminar a little over 10 years ago. We were all handed a mock wine menu and asked what we’d order.

This was supposed to illustrate that most price-aware diners order the second-cheapest bottle to avoid looking tight and that restaurateurs use this to nudge us towards the bottle with the highest markup. I remember thinking it an interesting insight, but that these sorts of nudges were nowhere near as likely to transform the world as their enthusiastic proponent claimed.

Lots of far more eminent people disagreed with me. Behavioural economics looks at how people make decisions in the real world – warts, irrational biases and all – and applies this to public policy. Its signature policy is set out in the 2008 book Nudge , by Cass Sunstein and Richard Thaler. The central insight is that changing the way choices are presented to people can have a huge impact. Make saving for retirement or donating your organs an opt-out rather than opt-in and watch as people suddenly adopt more socially responsible behaviour. Coming just as the financial crisis hit, Nudge was perfectly timed to achieve maximum traction by offering politicians the chance to reap savings through low-cost policy. Sunstein was quickly appointed to a senior job in the Obama administration, while David Cameron set up the behavioural insights team, dubbed the “nudge unit”, led by psychologist turned policy wonk David Halpern.

The nudge unit has since had a mixed track record: there have been some real successes on pensions and tax payments but in other areas it’s been a bit of a damp squib. So I was surprised when Halpern popped up to talk about the government’s pandemic strategy in the press in early March. It was he who first publicly mentioned the idea of “herd immunity” as part of an effective response to Covid-19 (the government has since denied this was ever the strategy). And it’s clear from the briefing he gave journalists that he favoured delaying a lockdown because of the risk of “behavioural fatigue”, the idea that people will stick with restrictions for only so long, making it better to save social distancing for when more people are infected. “If you go too early and tell people to take a week off work when they are very unlikely to have coronavirus, and then a couple of weeks later they have another cough, it’s likely they’ll say ‘come on already’,” he told one reporter.

Halpern is reportedly on Sage, the government’s scientific advisory committee for emergencies, and he is also the government’s What Works national adviser, responsible for helping it apply evidence to public policy. So one might expect there to be something substantial behind the idea of behavioural fatigue. 

But evidence presented to government by the Sage behavioural subcommittee on 4 March, representing the views of a wider group of experts, was non-committal on the behavioural impact of a lockdown, noting that the empirical evidence on behavioural interventions in a pandemic is limited. Shortly after Halpern’s interviews, more than 600 behavioural economists wrote a letter questioning the evidence base for behavioural fatigue.

Rightly so: a rapid evidence review of behavioural science as it relates to pandemics only fleetingly refers to evidence that extending a lockdown might increase non-compliance, but this turns out to be a study about extending deployment in the armed forces. “Behavioural fatigue is a nebulous concept,” the review’s authors later concluded in the Irish Times.

This is a common critique of behavioural economics: some (not all) members of the discipline have a tendency to overclaim and overgeneralise, based on small studies carried out in a very different context, often on university students in academic settings. It’s extraordinary that Halpern was briefing on what essentially looks like his opinion as if it were science. We won’t know how influential it was in the government’s decision to delay lockdown until a post-hoc inquiry, but there’s no reason to suppose Boris Johnson wasn’t listening to his “what works” adviser. “The behavioural psychologists say that if you don’t shake somebody’s hand, that sends an important message… [about] washing your hands,” he said on 9 March.

It’s less extraordinary, though, when you understand that the Behavioural Insights Team is a multimillion-pound profitable company, which pays Halpern, who owns 7.5% of its shares, a bigger salary than the prime minister. Here lies the potential conflict of interest: someone who contributes to Sage also has a significant financial incentive to sell his wares. It perhaps explains BIT’s bombastic claims – “it’s no longer a matter of supposition… we can now say with a high degree of confidence these models give you best policy,” Halpern claimed in 2018. And: “We make much of the simplicity of our interventions… but if properly implemented, they can have a powerful impact on even our biggest societal challenges.” (It is worth noting that Sir Patrick Vallance, the government’s chief scientific adviser, says that one reason the composition of Sage has been kept private is to protect scientists from “lobbying and other forms of unwanted influence which may hinder their ability to give impartial advice”.)

This hubris has led some behavioural scientists to push their approach way beyond those realms such as consumer policy, where it has the potential to be most effective. My jaw dropped on reading a recent 70-page BIT report on applying behavioural insights to domestic abuse that included not one survivor’s voice and in which the word “trauma” appeared only once. It describes domestic abuse as a “phenomenon made up of multiple behaviours undertaken by different actors at different points in time”. Its recommendations are that strange mix of common sense dressed up as behavioural revelation and jarring suggestions that tend to characterise behavioural science when it overreaches itself.

Little wonder that a House of Lords committee was highly critical of government tendencies to emphasise nudges at the expense of other effective policy solutions in 2011. Nudges undoubtedly have their place, but they’re not going to eradicate domestic violence or end catastrophic climate change.

The problem with all forms of expertise in public policy is that it is often the most formidable salespeople who claim greater certainty than the evidence allows who are invited to jet around the world advising governments. But the irony for behavioural scientists is that this is a product of them trading off, and falling prey to, the very biases they have made their names calling out.

I can only imagine how easy it might have been for Johnson to succumb to confirmation bias in looking for reasons to delay a lockdown: what prime minister wants to shut down the economy? And it is the optimism bias of the behavioural tsars that has led them to place too much stock in their own judgement in a world of limited evidence. But this isn’t some experiment in a university psychology department - it is a pandemic and lives are at stake.

Nudging can also be used for dark purposes

Tim Harford in The FT

“If you want people to do the right thing, make it easy.” That is the simplest possible summary of Nudge by Cass Sunstein and Richard Thaler. We are all fallible creatures, and so benevolent policymakers need to make sure that the path of least resistance goes to a happy destination. It is a simple but important idea, and deservedly influential: Mr Sunstein became a senior adviser to President Obama, while Mr Thaler is this year’s winner of the Nobel memorial prize in economics. 

Policy wonks have nudged people to sign up for organ donation, to increase their pension contributions — and even insulate their homes by coupling home insulation with an attic-decluttering service. All we have to do is make it easy for people to do the right thing. 

But what if you want people to do the wrong thing? The answer: make that easy; or make the right thing difficult. Messrs Thaler and Sunstein are well aware of the risk of malign nudges, and have been searching for the right word to describe them. Mr Thaler likes “sludge” — obfuscatory language or procedures that accidentally or deliberately encourage inertia. Voter ID laws, he says, are a good example of sludge, calculated to softly disenfranchise. Meanwhile Mr Sunstein has written an entire book about the “ethics of influence”. 

And as we are starting to realise, Vladimir Putin is well aware of the opportunity that behavioural science presents, too. Rumours circulate that the Russian authorities are keen recruiters of young psychologists and behavioural economists; I have no proof of that, but it seems like a reasonable thing for the Russian government to do. I am willing to bet that not all of them are working on attic-decluttering. 

According to Richard Burr, chair of the US Senate intelligence committee, Russian troll accounts on Facebook managed to organise both a protest and a counter-protest in Houston, in May 2016. Americans are perfectly willing to face off against each other on the streets, but if you want it to happen more often, make it easy. 

A number of other memes, political advertisements and provocateur accounts — both left and rightwing — have since been identified as of Russian origin. Social media networks have unwittingly sold them air time; news sites have cited them; people have shared them, or spent effort refuting them. Nudge isn’t the word for this, but neither is sludge. What about “grudge”? 

The Russians are not alone in using grudge theory to manipulate public opinion. Three social scientists — Gary King, Jennifer Pan and Margaret Roberts — recently managed to infiltrate networks of shills in China, who are paid to post helpful messages on Chinese social media. (Their nickname is the “50 cent army”.) Unlike the Russian trolls, their aim has been to avoid engaging “in debate or argument of any kind . . . they seem to avoid controversial issues entirely”. The tactic is, rather, to keep changing the subject, especially at politically sensitive moments, by talking about the weather, sports — anything. If you want potential protesters to make cheery small talk instead, make it easy. 

Just as noble tools can be turned to wicked ends, so shady techniques can be used to do the work of the angels. For example, why not disrupt online markets for illegal drugs by leaving bad reviews for vendors? Research by social scientists Scott Duxbury and Dana Haynie suggests that because people rely on user reviews on illicit markets, law enforcement officers could attack those markets by faking negative reviews, thus undermining trust. 

The parallel with Mr Putin is alarmingly clear: it is possible to attack democracy and rational discourse by creating an information ecosystem where everyone yells at everyone else and nobody believes anything. 

But we should not give too much credit to Mr Putin. He did not create the information ecosystem of the western world; we did. The Russians just gave us a push, and probably not a very big push at that. Perhaps I should say they gave us a nudge. 

Social media do seem vulnerable to dark nudges from foreign powers. But more worrying is our vulnerability to smears, skews and superficiality without any outside intervention at all. Messrs Sunstein and Thaler ask policymakers to make it easy to do the right thing; what have we made it easy to do? 

It is easy to find a like-minded tribe. It is easy to share, retweet or “like” something we have not even read. It is easy to repeat false claims. It is easy to get angry or personal. 

It’s less easy to distinguish truth from lies, to clear time and attention to read something deep, and to reward an important article with something more than a digital thumbs up. But then, none of this is fundamental to the business model of many media companies — or of the social media networks that spread the news. 

Nudge, sludge or grudge, we can change this. And we should start by asking ourselves whether when it comes to news, information and debate, we have made it difficult to do the right thing — and all too easy to stray.