Ezy Economics CPD Workshop June 2017 Behavioural Economics

Ezy. Economics CPD Workshop June 2017 Behavioural Economics 1 1 3 ezyeducation. co. uk

Outline Big Picture of B. E. 1 1 3 Framework for implementing B. E. Case Studies ezyeducation. co. uk

Big Picture AQA • • 4. 1. 2. 1 – Consumer Behaviour Rational economic decision making and economic incentives Utility theory: total and marginal utility, and the hypothesis of diminishing marginal utility Utility maximisation Importance of the margin when making choices • • 4. 1. 2. 2 – Imperfect Information Importance of information for decision making Significance of asymmetric information • • 1 Homo Economicus Information 1 3 • • • 4. 1. 2. 3 – Behavioural Economic Theory Bounded rationality and bounded self-control Biases in decision making: rules of thumb, anchoring, availability and social norms Importance of altruism and perceptions of fairness Irrationality 4. 1. 2. 4 – Behavioural Economics and Policy Choice architecture and framing Nudges Default choices, restricted choice and mandated choice Policy ezyeducation. co. uk

Big Picture EDEXCEL • • • 1 1. 2. 1 – Rational Decision Making Underlying assumptions of rational economic decision making Utility max. and profit max. Homo Economicus 1. 2. 10 – Alternate Views of Consumer Behaviour The reasons why consumers may not behave rationally: Consideration of the influence of other people’s behaviour Importance of habitual behaviour Consumer weakness at computation Irrationality 1 3 • • 1. 3. 4 – Information Gaps Symmetric and asymmetric information How imperfect information may lead to a misallocation of resources Information Policy ezyeducation. co. uk

Big Picture Homo Economicus i i 1 i i 4 i i 1 3 i 2 5 ezyeducation. co. uk

Big Picture Homo Economicus i i i 1 1 i i 1 3 3 4 2 5 ezyeducation. co. uk

Big Picture Homo Economicus i i i 1 1 i i 1 3 3 4 2 5 ezyeducation. co. uk

Big Picture Homo Economicus i i 1 i i 4 i i 1 3 i 2 5 ezyeducation. co. uk

Big Picture Homo Economicus i i 1 i i 4 i i 1 3 i 2 5 ezyeducation. co. uk

Big Picture Homo Economicus i i 3 i i 5 i i 1 1 1 3 i 2 4 ezyeducation. co. uk

Big Picture Homo Economicus 1 3 Improve Information 5 • Quantity • Quality/Clarity • Accessibility 1 1 3 2 4 ezyeducation. co. uk

Big Picture Homo Economicus Improve Information • Quantity • Quality/Clarity • Accessibility 1 1 3 Understand human decision making • Counter-bias • De-bias ezyeducation. co. uk

4 Ps Framework Yale School of Management: Zoe Chance, Margarita Gorlin, Ravi Dhar Process • Order • Defaults • Accessibility • Vividness • Comparisons Persuasion • Moments of Truth 1 1 3 • Assortment • Bundling Possibilities • Quantity Person • Goals • Pre-commitment • Habits ezyeducation. co. uk

4 Ps Framework Yale School of Management: Zoe Chance, Margarita Gorlin, Ravi Dhar Process • Order • Defaults • Accessibility • Vividness • Comparisons Persuasion • Moments of Truth 1 1 3 ezyeducation. co. uk

4 Ps Framework Yale School of Management: Zoe Chance, Margarita Gorlin, Ravi Dhar Process • Order • Defaults • Accessibility Opt-in Opt-out • Vividness • Comparisons Persuasion • Moments of Truth 1 1 3 ezyeducation. co. uk

4 Ps Framework Yale School of Management: Zoe Chance, Margarita Gorlin, Ravi Dhar Process • Order • Defaults • Accessibility • Vividness • Comparisons Persuasion • Moments of Truth 1 1 3 Vs ezyeducation. co. uk

4 Ps Framework Yale School of Management: Zoe Chance, Margarita Gorlin, Ravi Dhar Process • Order • Defaults • Accessibility • Vividness • Comparisons Persuasion • Moments of Truth 1 1 3 • Assortment • Bundling Possibilities • Quantity Person • Goals • Precommitment • Habits ezyeducation. co. uk

4 Ps Framework Yale School of Management: Zoe Chance, Margarita Gorlin, Ravi Dhar Process • Order • Defaults • Accessibility • Vividness • Comparisons Persuasion • Moments of Truth 1 1 3 • Assortment • Bundling Possibilities • Quantity Person • Goals • Pre-commitment • Habits ezyeducation. co. uk

4 Ps Framework Yale School of Management: Zoe Chance, Margarita Gorlin, Ravi Dhar Process • Order • Defaults • Accessibility • Vividness • Comparisons Persuasion • Moments of Truth 1 1 3 • Assortment • Bundling Possibilities • Quantity Person • Goals • Pre-commitment • Habits ezyeducation. co. uk

4 Ps Framework Process • Order • Defaults • Accessibility • Assortment • Bundling Possibilities • Quantity • Vividness • Comparisons Persuasion • Moments of Truth Person Google Staff Health 1 1 3 • Goals • Precommitment • Habits UK Pensions Saving ezyeducation. co. uk

Google Staff Health 1 1 3 ezyeducation. co. uk

Google Staff Health Process • Order • Defaults • Accessibility Stocking water bottles at eye level and moving fizzy drinks to the bottom of the fridge, behind frosted glass, increased water consumption by 47 %. 1 1 3 ezyeducation. co. uk

Google Staff Health Process • Order • Defaults • Accessibility A study of a breakroom found that users of the beverage station near the snacks were 50 % more likely to eat a snack with their drink. 1 1 3 ezyeducation. co. uk

Google Staff Health • Vividness • Comparisons Persuasion • Moments of Truth Vividness/Comparisons Traffic-light system for food choices helps to grab attention and simplify information provision. 1 1 3 ezyeducation. co. uk

Google Staff Health • Vividness • Comparisons Persuasion • Moments of Truth Vegetable of the Day initiative with colourful photos and trivia facts at the moment of truth – meal selection 1 1 3 ezyeducation. co. uk

Google Staff Health • Assortment • Bundling Possibilities • Quantity Loose M&Ms were originally self-served from large containers. Replaced with small individual packages. Smaller drinks cups and take-out boxes. 1 1 3 ezyeducation. co. uk

Google Staff Health Person • Goals • Pre-commitment • Habits Study with google employees. Control group; group given info on link between blood glucose and weight gain; group given info and tools to measure blood glucose and weight and data sheets to record. 27% more progress on their diet goals. Reported healthy choices became automatics 1 1 3 ezyeducation. co. uk

Google Staff Health Other possible initiatives? 1 1 3 How you would measure effectiveness? Benefits to the UK economy? ezyeducation. co. uk

4 Ps Framework Process • Order • Defaults • Accessibility • Assortment • Bundling Possibilities • Quantity • Vividness • Comparisons Persuasion • Moments of Truth Person Google Staff Health 1 1 3 • Goals • Pre-commitment • Habits UK Pensions Saving ezyeducation. co. uk

UK Pensions Savings Rate Life Expectancy Source: OECD 1 1 3 ezyeducation. co. uk

UK Pensions Saving 1991 Average of 11 years of life beyond 65. 2011 Average of 16 years of life beyond 65. 2011 Source: OECD 1 1 3 45 % increase in retirement time ezyeducation. co. uk

UK Pensions Saving Three Pillars of Pension Provision 1 Public Pillar Occupational Pillar Voluntary Pillar Pay As You Go Ripe for Influence Minor Sector 1 3 ezyeducation. co. uk

UK Pensions Saving Process • Order • Defaults • Accessibility Defaults Auto-enrolment for workplace pensions one of the most significant impacts of B. E. within a market. 1 1 3 ezyeducation. co. uk

UK Pensions Saving Auto-enrollment roll-out - 2012 1 1 3 Source: ONS ezyeducation. co. uk

UK Pensions Saving Level of Auto-Enrollment Savings Too Low Too High UK Process Initial: 1 % / 1 % 2019: 4 % / 3 % / 1 % “Government has thought about this for me” 1 1 3 Loss aversion stimulates opt-outs Significant Increases ezyeducation. co. uk

UK Pensions Saving Save More Tomorrow – Auto-Escalation Increase contributions when receive pay rise 1 1 3 Time Discount of Cost Combats Loss Aversion 3. 5 % to 16. 3% in 3. 5 years. ezyeducation. co. uk

UK Pensions Saving • Assortment • Bundling Possibilities • Quantity Assortment Complexity of savings instruments puts off potential savers. Simplify options available, focusing on long-term beta trackers. 1 1 3 ezyeducation. co. uk

UK Pensions Saving • Assortment • Bundling Possibilities • Quantity 6 Possible Funds 1 1 3 Low management fees Low active management ezyeducation. co. uk

UK Pensions Saving • Vividness • Comparisons Persuasion • Moments of Truth Vividness Making it clear what the implications of savings or a lack of means for quality of life by exemplifying focuses the mind. 1 1 3 ezyeducation. co. uk

UK Pensions Saving • Vividness • Comparisons Persuasion • Moments of Truth Comparisons “People like me” – explains how much others in a similar situation are saving. 1 1 3 ezyeducation. co. uk

UK Pensions Saving • Vividness • Comparisons Persuasion • Moments of Truth Provision of information when receiving pay slip? 1 1 3 ezyeducation. co. uk

UK Pensions Saving Person • Goals • Pre-commitment • Habits Goals Process of determining goal retirement income which calculates required contribution. 1 1 3 ezyeducation. co. uk

UK Pensions Saving Precommitment initiative? 1 1 3 Impact on the UK economy? ezyeducation. co. uk