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  • Writer's pictureDivanshu

How behavioural economics is changing policymaking

The system of policymaking is rooted in an understanding of human behaviour with their environment. Rarely, and surprisingly, the individual is thought like a human with biases and mostly as a rational human - Homoeconomicus.

For example, a policy on the distribution of subsidies to the poor, certain systems are thought through the idea of "leakages". However, the policy does not consider aspects of how there might be default biases in individuals which can resist them to change into the new system.

So policy for many years has been seen through the lense of neo-classical economics which has resulted in a lack of optimum policies and sometimes counterproductive. There is a lack of consideration of human decision-making behaviour in the policy circle.

However, with the rise of behavioural economics, there has been a gradual shift in the policy-making sphere. The first one was a nudge unit established in 2010 by the UK coalition government. They focused on increasing tax payment, energy reduction etc. through various behaviour insights like social norming, priming etc.

Throughout the years, many governments have established their nudge units to advance the ability of policymaking. In India also, there has been an interest in establishing such initiatives to advance social policies.

The integration of behavioural economics in public policy can increase its effectiveness.

One of the aspiring pubic economist - Raj Chetty from Harvard University remarked that his aim is 'to illustrate how insights from behavioural economics can yield better answers to these long-standing policy questions’ (Chetty, 2015, p. 2).

Behavioural economics has the ability to contribute better answers to our pressing policy questions. An immediate benefit can be seen as behavioural insights can give a better understanding of the range of policy tools. For example, when there is a question of a behavioural factor of individual decision making, understanding of concepts of framing and mental accounting can immediately allow the policymaker other variables to intervene on.

Another benefit is that it can yield better predictions of the effects of various policy decisions on people's behaviour. For example, considering the effect of defaults and inertia, policymakers can more accurately predict the reaction of a policy decision.

It can further predict better the welfare effect of policy changes which can lead to the optimal policy, generating more welfare gains.

The usefulness of behavioural economics will become evident with the rise of its practice in policymaking. Most economists are realising this idea of behavioural synthesis in their work. This has made people like the behavioural economist and philosopher Erik Angner say that ‘We're all behavioural economists now’.

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