Tuesday, April 30, 2013

Choice Architecture

One of the most obviously useful applications of behavioral economics falls under the name choice architecture. In short, choice architecture is the study of crafting options in such a way as to guide deciders to a preferable outcome.  This new sub-discipline has been used to great effect already in a number of nations.

For example, most people would agree that higher organ donation rates are preferable for society as a whole. Yet despite large investment in many European nations organ donation rates remained quite low.  Meanwhile other nations seemed to have near 100% donation rates without much effort. Many studies we conducted on how to best increase public subscription to donation programs but without much result. Cultural, economic and even religious factors were studied but seemingly had little effect. Even nations that were geographically, economically, and culturally quite similar often had wildly different rates (as in the case of Denmark, The Netherlands and Belgium).

Ultimately the answer is likely so simple it was overlooked.  In nations where organ donation was the default option organ donation rates were very high. Nations where organ donation was not the default meanwhile had very low rates.

Not every application of choice architecture is so overt however. A study conducted by Eran Doyan and published in Judgement and Decision Making found that even the most common choices can be easily manipulated.  Doyan discovered that by rearranging items on a menu he could regulate how often certain items were selected. Items placed at the start or end of the menu were selected far more commonly than items placed more towards the middle. It may seem like a trivial choice to try and influence, but to a restaurant owner trying to maximize profits (or a society trying to minimize obesity) it may make a large difference.

The end goal of most choice architecture is to help the public make the right decisions without eliminating their options.  For example, for most people contributing to a 401k plan is a wise decision. However, forcing employee contribution isn't an idea many people would support.  The question then becomes how can we influence people towards contributing to their 401k without removing their choice completely?

Let's examine two scenarios.  Imagine you were told you needed to make your decisions for your retirement savings soon. The human resources specialist visits you and emphasizes the importance and urgency of the decision. You're given a packet of information containing descriptions of a dozen options and how each will influence your eventual retirement or lack thereof. Then, their obligation discharged the human resources employee leaves never to return.  Do you think you're very likely to inform HR about your decision, or even make a decision at all? If you're like a large portion of people the packet of information will be pushed aside for a tomorrow that never arrives.

Contrast with this scenario. The HR specialist comes by your office with a clip board and says, "Hey, do you want to contribute to your 401k?" It's an easy question so you of course respond that you would. The specialist makes a note on their clipboard next to your name and says, "Great, here's a packet of information for your options. You should probably read it and let us know what you'd like to do. If you don't have any particular opinion we'll automatically enroll you in our default contribution program at the end of next week. That program is outlined on the top piece of paper in the packet."

The approach accomplishes a number of things. First, the employee is enrolled in a program that is likely much better than nothing.  Second, there is very little pressure put on the decision. If the employee wants to do something other than the default that's great, but otherwise they know they're more or less taken care of. Finally, by forcing a choice (either take the default or choose your own) the employee is less likely to delay their selection. The employee receives the same information and the same options but by having them agree to a default before they're presented with a complex choice their likelihood of contributing skyrockets.

Choice architecture is a powerful tool for influencing how people make decisions as well as what they choose. When used correctly it can increase efficiency, guide the public to self beneficial decisions, and improve society as a whole. Not only that, it's cheap, easy, and effective when implemented.

More economics next week. Until then stay safe and rationale.

1 comment:

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