Behavioural economics for the 1 in 4
How behavioural economics has informed policy making so far
Behavioural economics is the study of human behaviour and psychology to better understand the economic decisions we make every day. Why do so many of us never switch bank account even though we know we could get a cheaper deal elsewhere? Why do we not make use of the many different types of energy tariffs and pick one that suits our needs?
It’s probably not surprising to anyone that most of us are not the perfect ‘rational’ consumers. We use rules of thumb to make decisions, we are inert and stick with the status quo, we place more emphasis on the present than the future and we get overloaded by too many choices – to name but a few of the drivers of our behaviour. Just because there is a cheaper deal or lots of choice on offer, doesn’t mean we will make use of it.
Increasingly, smart policy interventions are designed to work with our behaviour, aiming to deliver good outcomes based on how people actually behave, not on how policy makers wish we would. A brilliant example is auto-enrolment, which makes it compulsory for employers to enrol their employees into a pension scheme. In the first first six months alone the number of employees saving into a private pension rose from 61% to 83%. Accepting that people will stick with the status quo and use a default option has massively increased the number of people with retirement savings.
What does this mean if you have a mental health problem?
But at the moment, this study of human behaviour largely assumes we are all biased in the same way. Yet our research has shown that the psychological and cognitive impacts of having a mental health problem can affect the decisions we make. These are not barriers that can be overcome by willpower. A different regulatory response is needed.
Nudges have shown to be very effective in helping consumers avoid overdraft charges. But people with bipolar disorder who are experiencing a manic phase may not respond to these messages and may incur fees and charges as a result, as well as borrowing when they cannot afford to do so. The nature of bipolar disorder means that people experience a lack of restraint and higher levels of impulsivity resulting in ambitious and unaffordable spending sprees. But a different behavioural intervention, like the ability to opt out of an unauthorised overdraft altogether, would allow them to protect themselves from financial harm.
Research on behavioural economics is yet to look in depth at how different groups of consumers, or consumers in different circumstances – such as those living with mental health problems – make decisions. We don’t yet know whether there are there some biases that might be emphasised with certain conditions, or if there are certain behavioural nudges that don’t work so well during a period of poor mental health.
Why it matters
Understanding this would have a big impact on policy making. At the moment, when certain people fail to respond to nudges, they are often viewed as ‘naive’ ‘unaware’ or ‘lazy.’ But people with mental health problems face real barriers to engaging with services, no matter how many times you nudge them to do it. This is not due to laziness, and we need to understand that certain groups will need different interventions or support to help them get a fair deal.
Behavioural economics has been invaluable in understanding how humans navigate markets and make purchasing decisions, and has massively helped to produce better outcomes for consumers. But appreciating that consumers are not a homogenous group and looking in depth at the differences between them is the missing link. This will help create policies and markets that are much more inclusive and accessible.
We think more needs to be done to look at how different groups of people make decisions. This an area that Money and Mental Health will continue to research and experiment in. If you work in this field, perhaps as a behavioural economist or a regulator, we would love to hear from you.
If you want to find out more, we recommend that Financial Conduct Authority looks at this issue in our submission on their future mission.