Experiments with economics: A narration
By - Aadhityaa Nathamuni
In the fifth semester of college, I chose behavioral economics and finance as an elective course I looked forward to studying. Under the guidance of my professor, I explored the confluence involved, where insights from economics and psychology merged to create a brand-new school of thought. This field of study primarily contradicts conventional economic theory with experiments to highlight the differences between homo-economicus and homo-sapiens1).
These experiments provided many interesting insights, inspiring me to conduct my little experiments with the curiosity to see what results I can gain from them.
To satisfy my curiosity, I registered myself into a budding youth-run non-governmental organization, which was just establishing itself Tamil Nadu from Kerala. Despite being a very small team, the management was kind enough to provide me the flexibility to conduct my little experiments with the subject, all with the hopes that my ideas will help the organization sustain and expand further.
First, I described behavioral economics's fundamental concepts with examples of videos I compiled from YouTube to the management. I told them about the dual systems theory proposed by Nobel laureate Daniel Kahneman. This theory states that every human being makes decisions based on two systems in the brain. They are the automatic system (system one) which operates effortlessly without any voluntary control, making quick decisions usually based on emotion, and the reflective system (system two) which makes decisions after careful thought and deliberation2). I further briefed them about the concepts of choice architecture which is the process of organizing the context in which we make decisions or the “choice environment” 3) and nudge theory. Nobel laureate Richard Thaler states: “A nudge is any aspect of the choice architecture that predictably alters human behavior without forbidding any options or significantly changing economic incentives” 3). After this, I proposed a few ideas that the management can utilize for the recruitment of prospective volunteers into the organization.
Firstly, I talked to them about my twin advertising strategy that involved creating two video advertisements that were to be simultaneously released on social media, designed to target the dual systems. The first advertisement was designed to target system one which primarily relied on an emotional “call for action” appeal to the viewers to trigger the viewer’s altruistic emotion to serve the needy. The second advertisement was primarily designed to target system two which involved explaining to the audience what our N.G.O uniquely offers and why they must join us. This is so that the viewers can engage their reflective system to do a cost and benefit analysis and then join our N.G.O after being convinced that the benefits outweigh the costs.
I then talked to the management about how they can make use of default rules to recruit volunteers. In general, default rules are a nudging technique that makes use of the “status quo bias” or the tendency of an individual to stick to their current situation (or point of reference)3). The default rule I proposed addressed the situation in which a volunteer expressed interest but did not confirm her enrollment in the organization. This lack of confirmation that could have been caused due to uncertainty or forgetfulness in making the decision would have prevented her from enrolling in the organization or would result in her being stuck at her point of reference of not joining the organization. To address this, my default rule changed her point of reference to that of being enrolled in the organization with an option to “not join” the organization within a stipulated time frame. Thus, if the status quo bias took effect, the volunteer would remain at her new point of reference which is to enroll at the organization.
I further introduced the idea of suggested donations and illustrated how it made use of the anchoring bias to influence the amount a person donates to the organization3). The anchoring bias occurs when an individual makes use of an available reference point to adjust her estimates in a certain direction. In this case, the suggested amounts act as the reference points that the donors can view and accordingly adjust the amount they intend to donate to the association.
My ideas were not limited to the management. I briefed the volunteers who worked on posters about its various components, with examples from behavioral economics, and psychological studies. I talked to them about some unconscious responses triggered by different colors and how viewers can retain highlighted information by using different font sizes, styles, and colors. I told them about the impact framing3) or the way a message is framed can significantly change how a message is perceived by a prospective volunteer by giving them real-life examples. Furthermore, I illustrated how pictures can be used to make a person engage in socially desirable behavior by referring to a study conducted in a British university, mentioned in Kahneman's bestseller: Thinking, Fast and Slow2). I also improvised with reminders to tackle the inactiveness in my organization and succeeded so far in making sure that the volunteers complete their tasks on time.
Finally, I successfully argued against the imposition of fines in the organization. Although it may make sense to impose a fine among volunteers that leave shortly after working, I have argued that it was not ethically desirable as fines should only be levied when there are “major effects to a third party as a result of the actions of a particular party/entity”4). I urged them to instead focus on developing incentives to improve the retention of volunteers. I also warned the management about its adverse effects on recruitment by highlighting that the salience of the fine could make our N.G.O relatively less attractive to other charitable organizations. This is an example of narrow versus broad frames, as seen in behavioral studies that influence individuals' decision-making. The narrow frame focuses on only isolated outcomes5), which in my case was the impact of the fine only on the current volunteers as perceived by the management. By persuading them to consider the impact on recruitment of new volunteers, I incorporated a broad frame that considers a more holistic perspective5).
I have seen major success in ideas that show their effects in the short term within the organization and am optimistic about the long-run prospects of these ideas. I write this as I look forward to more opportunities that would further my understanding of the field and refine my application of such ideas in the future.
Aditya Nathamuni is a third-year student at JSGP.
1) Obs, F. K. (2016, April 10). behavioral economics. Retrieved from Exploring economics: https://www.exploring-economics.org/en/orientation/behavioral-economics/
2) Kahneman, D. (2011). Thinking, Fast and Slow. Farrar, Straus, and Giroux.
3) Thaler, R. (2008). Nudge. Yale University Press.
4) Sunstein, C. R. (2016). The ethics of influence: Government in the age of behavioral science. Cambridge University Press.
5) Hershfield, H. E., Shu, S. B., Spiller, S. A., & Zimmerman, D. (2020, September). Broad Framing in Retirement Income Decision Making. Working paper NB20-10, 5-7.