What makes you act the way you do? Recent research in behavioural economics has shown the important role cognitive biases play in influencing decision making. Certain truths that economists find surfacing from the prosaic behaviour of apparently rational-minded consumers show that we are oriented towards front-loaded benefits and back-ended costs, ignorant of the outcomes of most superior options, and unable to accurately evaluate complex choices. We are more averse to risks and losses than attracted to similar-sized gains, and have an overwhelming motivation to be liked and regarded.
All this means that people can be passive—often mindless—decision makers, influenced by the contexts and available choices, and can therefore be coaxed into making specific choices. Governments can structure the decision making context to “nudge” people to make more “informed choices”. And the Union budget next week would be a nice place to start.
Experience from across the world provides ample proof that important social and civic issues such as obesity, littering and garbage segregation, drinking and smoking, energy and water conservation, school attendance by children and teachers, hospital attendance by nurses and doctors, payment of taxes and savings can neither be regulated nor disincentivized away by using traditional approaches. However, appropriately tailored nudges that take into account some of the aforementioned cognitive biases can, at least partially, address these serious public policy challenges.
Given the fact that your average human is not completely rational and, therefore, would not be overly competent at making complex calculations, automatic enrolment and good default options can be effective in structuring choices.
For instance, the new defined contribution pension scheme of the government of India, which allows employees to choose from among a bouquet of investment choices, takes its cue from Sweden’s semi-privatized social security scheme and has optimal default choices for employees of different ages. This experiment can be taken a step forward by allowing employees to allocate a pre-defined share of their future salary increases towards retirement savings, as a default option in their pension plan. Those who wish to not participate can opt out.
Numerous willingness-to-pay surveys show that people have no reluctance to paying higher than prevailing user charges for effective delivery of civic services. Yet, the blanket political opposition to any new taxes prevents the imposition of such user charges. One way out of this paradox is to impose a voluntary default user charge on, say, solid waste collection, bundled along with the property tax. If the citizen does not want to pay up, he can visit the citizen service centre and get it cancelled by filling out a form. Another variant of this is to fix a flat default charge and leave the option to pay that or any lower amount. Such arrangements can be initially tried out in some high-income neighbourhoods.
A tax packaged as a user charge to be spent in the same area on a specific activity or asset or a small cess on a reasonably large tax outflow directed to a specific cause can minimize political opposition. Further, if the tax collection is non-invasive, such as electronic toll collections, small increases are likely to pass through relatively unobserved. Offering a cluster of services, with varying user charges and a basic no-frills service for free (or at a very low price), can also help assuage the clamour against rises in taxation.
E-governance initiatives could use checklists as well as pre-defined and mandatory fields. In fact, simplifying procedures by using pre-filled tax returns and public service application forms can improve compliance and reliability of disclosed information.
Municipal bodies can leverage the peer group pressure existing among members of residents welfare associations (RWAs) and nudge residents to keep surroundings clean, segregate garbage, pay taxes regularly, follow building rules, and conserve water and electricity. RWAs can periodically evaluate households on any or some of the aforementioned parameters, and then grade them. These grades, when pasted alongside the house door numbers or sent with the respective electricity or property tax bills as a “default option”, can act as powerful “social nudges”.
Similarly, water and electricity utilities can send out personalized report cards that rate households on their consumption by comparing them with neighbours in, say, houses of similar size. A municipal power utility in Sacramento, California, did this successfully and sent out report cards with two smiley faces for those that used energy most efficiently, one face for those that were good, and a “frown” for those below average in efficiency.
Awareness campaigns that highlight achievements instead of failures have always been found to be more effective. Therefore, messages that claim three out of four people pay taxes are more likely to be effective than ones that wail about one in four evading taxes. Messages on conservation of resources and the environment can be more effective if they focus on immediate and personal losses than on impersonal, global and long-term costs.
These are valuable insights for policymakers to tailor policies for the average human being with his “not-so-rational” flaws.
Gulzar Natarajan is a civil servant. These are his personal views. Comments are welcome at firstname.lastname@example.org