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1、Influencing Consumer Behaviour: Improving Regulatory Design TWITTER: OBPRGOVInfluencing Consumer Behaviour: Improving Regulatory DesignContentsGlossary3Summary4Introduction6The Basic Rational Choice Model9Risk and Consumer Behaviour13SummaryBehavioural Economics15Comparing Rational Choice Theory and
2、 Behavioural Economics27Using Behavioural Economics to Influence Choice35Nudge in Practice38Nudge as an Asymmetric Intervention47Challenges in Regulatory Design49Limitations in Understanding how People Behave50Conclusion54Appendix one: Rational Behaviour57Appendix two: Utility Function59Appendix thr
3、ee: Optimal Decision Making60Appendix four: Risk Attitude and Utility63Appendix five: Behavioural Economics in Practice64References67Glossary Consumption: Purchasing of goods or services. This can include cars, food, a visit to the doctor, etc. Note: this does not refer to physically consuming a goo
4、d.Rational: Rationality in economics is defined as preferences which are complete and transitive.Utility: Mapping of preferences over some set of goods and services. Utility provides a measure of satisfaction or happiness and can be expressed numerically.Expected Utility: Weighted average of a possi
5、ble utility value which could be realised, depending on which outcome is realised.Expected Value: Weighted average of possible values which could be realised, depending on which outcome is realised.Preference: Relative desire for a good or service against other goods, services and time periods.Tange
6、nt: A line drawn such that it touches a curve without crossing it.Nudge: A change to choice architecture which influences the decision of an individual without restricting, or raising the price of, the set of choices available.Choice Architecture: The context within which a choice is made.Summary Th
7、e effectiveness of a regulatory intervention may depend on how successful that intervention is in changing consumer behaviour. This paper explores two broad frameworks for considering consumer behaviour: Rational Choice Theory and Behavioural Economics. Traditionally, approaches to consumer behaviou
8、r have been influenced by standard economic theory and models. These are based on the assumption of human rationality.o Rational choice theory assumes that consumers make choices such that their utility is maximised, subject to budget constraints. o Under rational choice theory, regulation which rel
9、axes budget constraints, increases income, alters relative prices or changes consumer preferences will be effective in changing behaviour.o One implication of human rationality is that some economic models explain choices which fail to maximise utility by attributing such choices to either a lack of
10、 information or a misinterpretation of the available information. Consequently, there are many regulations which involve provision of either additional or “better” information to the marketplace. Behavioural economics draws on psychology and the behavioural sciences in assessing consumer behaviour.
11、This field of research has found a number of cognitive, social and emotional variables can impact on choice. These variables include: reference points; framing; social factors; and time-inconsistent preferences. The extent to which these factors are indicative of sub-optimal behaviour, however, is n
12、ot well understood. Specifically, to make this assessment comparison between the decisions which actually occurred and those which would have prevailed under rational choice theory is necessary. To achieve this, full understanding of all prices, costs (including opportunity costs), preferences and c
13、onstraints that a consumer faces is required. The application of behavioural economics to policy design has not been widespread. However, recently a mechanism for translating the findings of behavioural economics to policy has been developed through nudge. Nudge uses insights of behavioural economic
14、s to change choice architecture with a view to influencing behaviour. Research has found that, in some circumstances, small alterations to choice architecture can give effect to disproportionately large behavioural changes. For example, including simple messages which reinforce social norms was foun
15、d to influence electricity consumption. By focussing on choice architecture, nudge is generally end point or consumer, focussed. This approach does not preclude more direct, traditional regulation of business in order to facilitate change. To clarify, a distinction is made between three categories o
16、f interventions; a “pure” nudge; an “assisted” nudge; and a “shove”. Under certain conditions, some evidence suggests that nudge interventions can be:o cost-effective relative to more direct or traditional forms of government intervention;o used alongside existing regulatory approaches;o targeted in
17、 influence; ando easy to implement. While behavioural economics and rational choice theory provide a useful foundation for policy makers, both theories face challenges in their application to regulatory design. Policy-makers ought to be cognisant of these challenges and give consideration to the spe
18、cifics of markets and market participants when applying any form of consumer theory for the purposes of designing, and predicting the effects of, regulatory policy. Insofar as behavioural economics and its application through nudge can be harnessed to improve regulatory design, its advancement is en
19、couraged to be explored. This paper focuses on how findings of behavioural economics can be used in the design of regulation. The paper does not focus on the initial motivation for government intervention which generally should be based on evidence that demonstrates a market failure.IntroductionRegu
20、lation may be necessary for the proper functioning of society and the economy. The aim is to deliver effective and efficient regulation: effective in addressing problems; efficient in maximising net benefits. The Australian Government Best Practice Regulation Handbook June 2010; pg. 4 However, how e
21、ffective and efficient regulatory interventions are may depend on how successful interventions are in changing peoples behaviour.This paper analyses two broad approaches to considering consumer behaviour: rational choice theory and behavioural economics.Rational choice theory (also referred to in th
22、is paper as traditional or standard consumer theory) postulates that consumers rank preferences over all goods, make consumption choices based on these rankings, and do so such that their utility is maximised. It is further assumed that individuals rationally pursue their self-interest subject to al
23、l economics constraints (such as time, income and capital). Rational choice theory is both normative and positive. That is, it seeks to describe how people do behave, and also how they ought to behave.Following this theory, and under certain conditions, regulation will impact on consumer behaviour w
24、hen it: relaxes the consumers budget constraint; alters relative prices of goods and/or services; and/or influences a consumers preferences (such as through information disclosure or altering risk appetite). Examples of this type of regulation include: financial (dis)incentives; banning or limiting
25、choices; and/or requiring the disclosure of certain information.Building on the basic rational choice model, behavioural economics views economic choice as the product of cognitive variables. This approach postulates that consumers are subject to a range of psychological biases and use various heuri
26、stics (rules-of-thumb, educated guesses, and so on) when making choices. Behavioural economics is essentially a series of observations about how people do behave in certain situations. It is therefore purely positive. Following research in the field, key factors which affect decision making include:
27、 loss aversion, reference points (including defaults), social norms and time inconsistency of preferences, or hyperbolic discounting. The extent to which these factors are indicative of sub-optimal behaviour, however, is not well understood. Specifically, to make this assessment, comparison between
28、the decisions which actually occurred and that which would have prevailed under rational choice theory is necessary. This statement follows from the normative aspect to rational choice theory. To achieve this, full understanding of all prices, costs (including opportunity costs), preferences and con
29、straints that a consumer faces is required. In practical terms, obtaining information which provides these details is difficult.Consequently, this paper focusses on how behavioural economics can be used in policy design. The paper does not focus on how behavioural economics could provide the basis o
30、f justification for government intervention, although, where particularly relevant, some analysis is provided.Recently an approach for translating the findings of behavioural economics to policy design has been developed through nudge. Nudge harnesses insights of behavioural economics to change choi
31、ce architecture the context in which choices are made to influence behaviour. Research has found that, in some circumstances, even small alterations to choice architecture can give effect to disproportionately large behavioural change. For example, including simple salient messages which reinforce e
32、xisting social norms was found to influence consumers electricity consumption. Nudge is end-point, or consumer, centric. That is, a nudge is viewed as an intervention which alters the behaviour of consumers without precluding, or altering the relative prices of, different choices. This approach does
33、 not preclude more direct, traditional regulation of business. For example, government policy may nudge consumers by requiring firms to change the messaging in a product disclosure statement, or alter how junk food is positioned in a cafeteria. To clarify this point, we distinguish between a “pure”
34、nudge; an “assisted” nudge and a “shove”. A pure nudge refers to an intervention which alters choice architecture without placing any additional requirement on firms, while an assisted nudge requires business to alter their existing practice in some way. Alternatively, a shove refers to an intervent
35、ion which regulates both consumers and firms. This is expanded on in box one below.Box one: Categories of InterventionsThe set of government intervention options can be considered as follows:Pure Nudge Changes choice architecture without placing additional regulation on business. For example, pre-fi
36、lling of Australian Tax Office (ATO) tax forms.Assisted Nudge Regulates firms to change choice architecture without directly regulating, and limiting the choices available to, consumers. For example, requiring business to disclose certain information in a certain way.Shove Directly regulates consume
37、rs and business, limiting the choices of both groups. For example, not allowing smoking in public places or on commercial premises.Nudge interventions have been implemented across a number of countries, most prominently in the US and UK. This paper provides examples of these interventions and some s
38、pecific applications in the Australian context. From the available research, nudge can be used as an additional tool which governments can use to address public policy problems. Additionally, some of this research suggests that, under certain conditions, nudge can be costeffective; easy to implement
39、; asymmetric and targeted in influence; and can be incorporated within existing regulatory approaches, or as an alternative to these approaches.However, it is important that some assessment is made about all of the costs, prices, preferences and constraints that consumers face in making a decision.
40、In the absence of this information, governments may nudge consumers to make sub-optimal decisions which reduce societal welfare. Given the inherent difficulties governments face in obtaining this information (such as the decentralised nature of the information), fully understanding if a nudge was we
41、lfare enhancing can be difficult to assess.This paper first assesses the basic rational choice model; introduces behavioural economics; discusses how findings of behavioural economics can be incorporated into regulatory design; and finally concludes.The Basic Rational Choice ModelA bundle of goods c
42、an represent anything of interest to a consumerConsumer choice in standard economic theory is the process of optimal decision making, formalised by utility functions which are founded by preferences. This approach assumes that consistent choices are made by people that aim to maximise their utility
43、subject to economic constraints, prices and income. Institute for Fiscal Studies; Tax and Benefit Policy: Insights from Behavioural Economics; July 2012, pg. 13.Rational choice theory offers both a normative and positive approach to consumer behaviour; that is, it seeks to describe both how consumer
44、s do and should behave.Consumer PreferencesConsumers face a range of possible consumption bundles, of which ultimately one is chosen in any given interaction. A consumption bundle can include any number of goods or services. For example, bundle X could be beefburger, cheesecake and coffee and, bundl
45、e Y could be chocolate. Preferences are a way of characterising consumers relative desire for these bundles if they desire bundle A more, less or the same as bundle B and provide the background for analysing why a given bundle was ultimately chosen. A central assumption is that consumer preferences
46、are exogenous to the rational choice model. They are taken as a given and little is said about the nature, structure or origin of consumer preferences. Jackson, Tim; Motivating Sustainable Consumption University of Surrey; January 2005 As will be discussed later, this implies that preferences are re
47、ference independent i.e., they are not affected by the individuals transient position. Camerer, Colin and Loewenstein, George; Behavioural Economics: Past, Present, Future; California University of Technology; October 2002 For example, consumer choice ought not to be affected by a food label that st
48、ates the product is 98% fat-free or it contains 2% fat.Extending from this, it is generally assumed consumers can rank various consumption bundles. A consumer may prefer bundle X (beefburger, cheesecake and coffee) over bundle Y (cheeseburger, coke and ice-cream). These rankings can be graphically shown through “indif