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A Nobel Prize for Richard Thaler bolsters the position of many who believe that knowledge of human behaviour should be at the epicentre of all economic decisions. Photo: Reuters
A Nobel Prize for Richard Thaler bolsters the position of many who believe that knowledge of human behaviour should be at the epicentre of all economic decisions. Photo: Reuters

Scaling up Richard Thaler’s ideas

Richard Thaler winning the Nobel Prize in Economics this year has clearly established that behavioural economics is here to stay

Richard Thaler winning the Nobel Prize in economics bolsters the position of many who believe that knowledge of human behaviour should be at the epicentre of all economic decisions as it originally was intended to be. Adam Smith’s The Theory Of Moral Sentiments, published in 1759, contained many thoughts that behavioural economists are now focusing on.

Thaler is hopeful that behavioural economics will have an impact even on macroeconomics, an area over which behavioural approaches have had little sway, thereby influencing big picture issues like monetary and fiscal policies. Already Thaler’s work has shown excellent potential to solve many real-life problems like saving for retirement and inducing organ donation. But even he would admit that developing an enriched version of economics with human behaviour at its centre is far from complete.

What needs to be done to further democratize the application of behavioural economics? The big move that needs to happen is to develop templates and frameworks that help in applying a science that was perfected in the lab to the real world. These come with a few challenges.

The first hurdle behavioural economics will face is status quo bias. Human beings do not like change; they are extremely comfortable with status quo. Policymakers will be reluctant to admit that their pet classical economics theories, which they were using for such a long time, are inefficient.

Status quo should be tackled at two levels. As a top-down strategy, behavioural economists should be asked to take on economic problems that have begged solutions for long. Any success on this front will clearly establish the applicability of behavioural economics to tough challenges. Also, as a ground-up strategy, behavioural economics should be taught in many more educational institutions. As more individuals get to know the fundamental principles of this new science, and at the same time start seeing its ability to solve obstinate social problems, opinions will change.

The second hurdle is that behavioural economics needs a robust, real-world tested framework to reliably decipher and influence decision-making. Behavioural economics describes the various heuristics/biases—short cuts that the human brain takes while making decisions. And unlike in the lab where all other variables are controlled for, in the real world there are multiple biases/heuristics that interact and influence decision- making.

Lack of saving habit could be because of faulty mental accounting or because of a tendency to discount the future or any of the other biases. How does one arbitrate between and truly understand the various heuristics and biases that are influencing the decision-making process?

Most market research techniques available today, like interviews and focus group discussions, focus on the conscious and the rational aspects of decision-making and miss out on the non-conscious biases that moderate the decisions. A true behavioural economics-informed consumer research methodology requires research to move from seeking opinion to one that studies people in decision-making situations. Intervention-led research in real-life contexts as well as simulations of decision-making contexts can help engineer this shift.

The third hurdle, where behavioural economics needs help from various other sciences, is in managing the effect of biases on one’s decisions. The traditional behaviour-change communication strategies involve raising awareness about a particular bias. It has been shown that awareness of a bias does not preclude an individual being affected by that bias.

One of the strategies used to contain the impact of these biases is to use a debiasing strategy. Debiasing strategies are deployed mostly by corporates where more and more rational processes are introduced so that biases are systematically weeded out from the decision-making process. For example, some organizations have created a system of devil’s advocate—an employee whose job is to provide the counter-narrative to decisions made by others. This, they believe, help correct mistakes in the decision process that might have cropped up due to various cognitive biases.

Debiasing strategies might succeed partially in a corporate setting, but it is difficult to make it work in the case of individuals. This approach involves ignoring the fact that heuristics are the brain’s way of coping with too much rationality and the consequent cognitive load. Loading the brain with even more rational processes will not be an effective solution for long.

If the cognitive biases originate and exist at the non-conscious level, the strategy to counter these biases should target the non-conscious level too. The processing capacity of the non-conscious brain is far more than that of the conscious brain. As described in this column previously, it is best that cognitive biases are managed at the non-conscious level.

Daniel Kahneman winning the Nobel prize in economics in 2002 made everyone sit up and notice that a new direction was emerging in the world of economics. Thaler’s win this year has clearly established that behavioural economics is here to stay as part of mainstream economic discourses and policymaking. But the pace of its adoption into mainstream policymaking will depend a lot on how the knowledge-base of behavioural economics can be converted into robust processes—on research and intervention. Otherwise many more books on the topic will get sold, but very little of that will translate into actions that make our world a better place to live in.

Biju Dominic is the chief executive officer of Final Mile Consulting, a behaviour architecture firm.

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