Application of Behavioural Economics in India

The Economic Survey 2019 has drawn on Nobel Laureate Richard Thaler’s Behavioural Economics Theory to lay out what it describes as an “ambitious agenda” for behaviour change that will bring in social change, which in turn, will help India transit to a $5 trillion economy by 2024-25. Programmes such as Swachh Bharat Mission, Jan Dhan Yojana and Beti Bachao Beti Padhao, provide testimony to the potential for behavioural change in India.

Given India’s rich cultural and spiritual heritage, social norms(that play a very important role in shaping the behaviour), can be utilized to effect behavioural change. Behavioural economics is, however, not a panacea to policymaking.

What is Behavioural Economics?

• Behavioural economics is a method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making
• In reality, decisions made by people often deviate from the various theories of classical economics. Drawing on the psychology of human behaviour, behavioural economics provides insights to ‘nudge’ people towards desirable behaviour.
• The US academic Richard Thaler has won the Nobel prize in economics in 2017 for his pioneering work in this field.

What are nudges?

If policy design is thought as the map and development outcomes as the destination, then nudges can be the road signs that gently guide you towards the best route.

Formulating these road signs requires expertise at two levels:

1. Understanding why consumers pick less optimum routes (cognitive biases)
2. Designing signs that guide users to better routes (nudges/interventions).

Background:

‘Nudge’ theory was proposed originally in US ‘behavioral economics’. But, it was popularized by the 2008 book, ‘Nudge: Improving Decisions About Health, Wealth, and Happiness‘, written by American academics Richard H Thaler and Cass R Sunstein. The book is based strongly on the Nobel prize-winning work of the Israeli-American psychologists Daniel Kahneman and Amos Tversky.

Nudge theory is a flexible and modern concept for:

1. Understanding of how people think, make decisions, and behave.
2. Helping people improve their thinking and decisions.

• Managing change of all sorts.

1. Identifying and modifying existing unhelpful influences on people.

Basis for such interventions:

Behavioural economists have found that all sorts of psychological or neurological biases cause people to make choices that seem contrary to their best interests. The idea of nudging is based on research that shows it is possible to steer people towards better decisions by presenting choices in different ways.

• Nudges and other behavioural change interventions primarily rely on design and messaging that address the effect of behavioural biases on human behaviour.
• These biases are no unique phenomenon in government and public policy, neither do they affect only a small percentage of the population—cognitive biases are everywhere.
• Take for example the IKEA effect (named after the do-it-yourself Swedish furniture retailer). This bias leads to us placing a disproportionately high value on ideas or products that we had a hand in creating. The bias can prevent us from recognising early on that our much-valued product isn’t working well, or make us closed to ideas from elsewhere since we’re attached to the home-grown idea.
• Another common bias that we face on a daily basis comes from the psychological theory of framing—where the construction of a sentence or situation changes your perception or reaction of it (reactions in newspapers to the latest census results on religious groups are an excellent example of framing).

Do such interventions work?

Previous experiences suggest that, if planned carefully, and backed by accurate bias-targeting, then, such interventions do work.

Success stories:

• In Israel, the issuing or renewal of an ID, passport or driving license, became conditional upon answering the question of becoming a registered donor. The default option was an ‘opt-in’ provision, which greatly increased the list of registered donors by targeting the status quo bias.
• Similarly, in Singapore—known for a number of innovations in governance—providing the average electricity usage of the locality on the back of bills has nudged households to think about their own energy consumption, driving them towards reducing it to the average levels, an example of the groupthink effect.
• Copenhagen’s experiment of using green footsteps to lead to trash bins helped reduce littering by 46%.
• In the field of tax collection, nudge has helped boost revenues for cash-strapped governments. For instance, in Singapore, printing tax bills on the pink paper typically used for debt collection led to an improvement in the prompt payment rate of between three to five percentage points.

Applying behavioural science in India

• Analysis of social norms

1. Efforts in Bihar, to improve the quality of health-care service delivery by front-line workers takes into account popular ‘rituals’, like keeping a baby away from the ground in a cot (palna), or marking decorations around her hearth (chulah), for transmitting messages that are culturally acceptable

• Behavioural science can be applied to large-scale programmes

1. The very nature of the science being imbued in a social and cultural context enables it to generate effective and sustained results to public service programmes
2. Research is going on in Tamil Nadu and Bihar to analyse core social motivators for open defecation and related behaviours with culturally appropriate social measures to convert toilet usage into a sustained habit

• Interventions that are designed using this science can reduce the intent-to-action gap

1. There are a plethora of tools like defaults, reminders, prompts, and incentives that can reduce poor adherence and increase compliance for sustained impact throughout the life of an intervention
2. A good example of this is Kilkari, a mobile service by the government that delivers free, weekly and time-appropriate audio messages about pregnancy, childbirth and childcare directly to families’ mobile phones

• Data collected and evaluated from a behavioural insights approach can be used for better management of programme performances

1. Rigorous evaluation of behaviour is often missed while measuring programme performances, and often this missing data can help explain the limited impact of well-intended government programmes
2. The impressive work done by the Ministry of Rural Development, on monitoring the implementation of national flagship schemes through DISHA dashboards, can be leveraged for evaluating behavioural change on the ground

The learnings of the economic survey on Behavioral Economics

• A key principle of behavioural economics is that while people’s behaviour is influenced significantly by social norms, understanding the drivers of these social norms can enable change. In India, where social and religious norms play such a dominant role in influencing behaviour; behavioural economics can, therefore, provide a valuable instrument for change.
• Many Indian schemes that employ insights from behavioural economics have met with success. For example:
  • The Swachh Bharat Mission (SBM) and the Beti Bachao, Beti Padhao (BBBP) scheme, Give it up (LPG subsidy).
• The Survey, therefore, lays out an ambitious agenda for behavioural change by applying the principles of behavioural economics to several issues, including gender equality, a healthy and beautiful India, savings, tax compliance and credit quality.

Behavioural Economics’ application in the Indian context

• Recently, behavioural economists have discovered the efficacy of a new class of policies called “nudge” policies. Nudge policies gently steer people towards desirable behaviour even while preserving their liberty to choose.
• According to Nudge theory: People need reminders and positive reinforcement to sustain socially desirable behaviour.
• According to the Organisation for Economic Cooperation and Development, there are more than 202 government institutions using behavioural insights around the world.
• Examples of nudge policies:
  • For increasing tax compliance in India: Citizens can be sent variations of text messages on how their taxes make a difference to public services.
  • For reducing drop out rate in poor families: Parents can be informed about the average income gains from spending one more year in school for children.
  • To increase savings rate: People can be offered specially designed savings accounts that locked up funds until a self-specified target was met.
• Behavioural economics is, however, not a panacea to policymaking.

Limitations of Behavioural Economics

• ‘Give It Up’ -LPG subsidy was a comparatively easy policy to be induced by behavioural economics as it requires only a one-time action of affluent households, whereas task is very difficult in case of Beti Bachao, Beti Padao and SBM, as it requires continuous effort to dislodge mind-sets that prevailed for decades.
• Community-led sanitation schemes, part of the SBM, did include steps to change behaviour, but advertising campaigns such as the Beti Bachao Beti Padhao scheme did not target specific states where child sex ratios were already skewed (although it was effective in Haryana, which also has a very poor sex ratio)
• The applications of behavioural insights appeared to be a result of confirmation bias (to the extent that past policies were viewed with a behavioural lens).
• Survey held, reducing corruption, discouraging the conspicuous display of wealth and inculcating a sense of pride of being the highest taxpayer in a district (by naming buildings after them) would go a long way in ensuring behavioural change vis-à-vis tax compliance
  • But this could easily lead to a backlash among lower taxpayers, and hurt tax morale disproportionately.

In this scenario, government regulation, taxes and free-market policies should be clubbed with a nudge effect to increase the efficacy of policymaking. If it is implemented diligently than Indian policymaking will be transformed:

• From BBBP to BADLAV (Beti Aapki Dhan Lakshmi Aur Vijay Lakshmi)
• From Swachh Bharat to Sundar Bharat
• From “Give it up” for the LPG subsidy to “Think about the Subsidy”
• From tax evasion to tax compliance

And the dream of New India 2022 can be realised.