Editora Roncarati – Article: Principles of behavioral economics applied to EFPCs – by Lucian Fagundes and Sergio Rangel*

Editora Roncarati – Article: Principles of behavioral economics applied to EFPCs – by Lucian Fagundes and Sergio Rangel*



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Behavioral economics gained global attention with the launch of the book “Nudges” by authors Richard Thaler and Cass Sostin in 2008, which brought the idea that incentive “nudges” could help people make good decisions.

The meaning of nudge is an intervention made in the environment that leads people in a specific direction, while maintaining their freedom of choice. The warning is a push. For example, when you receive information about how many calories are in a hamburger, you are warned about the amount of harmful fat, but nothing prevents you from eating it. Nudges help people deal with the fact that the human brain operates with limited attention, and nudges can make us change a behavior. But they also help encourage new behaviors, such as saving for retirement through automatic enrollment in retirement plans.

But it’s not just pushes in the behavioral sciences. When it comes to contributing to voluntary and positive behavior change, people also need clarity of information. If we often make wrong decisions, it is because we do not have information available or easy to understand, and here comes the concept of “reinforcement”, an intervention in the context that enables a person to make an informed decision on their own. For example, providing simulators to forecast account balances and benefit levels can generate a sense of urgency to recalibrate subscriptions. Or offer the “financial loss” resulting from failure to adhere to a benefit plan. This can sensitize the potential participant to loss aversion bias and break the inertia created by lack of commitment.

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Nudges are quick interventions with a short-term effect, while boosters are “dosed” and work in the medium and long term. Changing behavior is difficult and there is no “one size fits all” help. Nudges and reinforcements can (and should) be complementary strategies.

By combining the best of these two worlds (nudge + reinforcement), behavioral design, based on neuroscience, psychology and behavioral economics, takes behavioral insights into the real world of business and public policy, designing products, services and solutions designed for humans. The UK government pioneered the creation of a behavioral insights team in 2010, and since then many other governments have created their own teams and companies as well, such as Facebook, Amazon, HSBC, Google, Allianz, AirBnB, Apple and Uber.

Faced with an intangible product, which leads to deferring consumption (giving up something now) for a future benefit, supplemental annuities inherently involve the behavioral challenge of realizing value. “The biggest lesson is that once a behavioral problem is observed, it is possible to find a behavioral solution” (Richard Thaler, Nobel Prize in Economics 2017).

Below, we suggest 4 behavioral principles to apply in EFPC:

1. Make it easy: Harness the power of patterns. Our brain follows the law of labor economics, looking for shortcuts (behavioral biases) and simpler ways to do anything. We tend to use the default option because it’s the easiest to do. Just as when a participant does not change their investment profile and/or level of contribution to capacity development plans, making it easier also reduces the “hassle factor” that arises from actions that require effort and can discourage people. Reducing effort can increase the chances of the action being carried out. Here it is worth simplifying messages or breaking down a complex goal into simpler, easier-to-achieve steps. We, behavioral analysts, call this reduction “friction” points.

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2. Make it attractive: We are more likely to do something that attracts our attention. Using personal messages, rather than generic messages, significantly increases the proportion of people who adopt a certain behavior. Use prizes, sweepstakes and incentives as well. Tangible rewards are very attractive.

3. Make it social: We are social animals and therefore are greatly influenced by what people around us do and say. We can incorporate social factors, for example, to show that most people engage in the desired behavior: a series of tests show that comparing local energy consumption with that of more “efficient” neighbors leads to lower overall consumption. We live in networks of relationships and can use this power to enhance collective actions, creating a network of mutual encouragement and support. We call these commitment devices.

4. Make it timely: Immediate costs and benefits motivate us more than future costs and benefits. This asymmetry occurs because the present is concrete, and the abstract future is hypothetical. Since the present greatly influences our choices, think about the immediate costs and benefits. What resources can be used to put in place some sort of initial incentive (in the present), no matter how small, to reduce the feeling of loss (we call it a behavioral barrier) regarding saving behavior for the future?

Applying behavioral insights requires a rigorous, evidence-based methodology and a rich understanding of behavior change tools. Designing an intervention, in isolation, without considering the context of decision-making, can be like “shooting ourselves in the foot” and lead to irreversible side effects. It is necessary to precisely define the target behavior to be encouraged; Understand the context of the decision from the participant’s perspective, taking care not to jump to hasty conclusions; intervention design; Only then move into the field to test, learn and adapt before scaling up the solution. This process is not linear as there are many interactions and feedback loops.

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Everything in life evolves (or should evolve). Even the book “Batch”, since its first edition in 2008, has been reworked (according to the authors themselves) and reached its “best version” in 2022. Innovation and science must go hand in hand, to expand knowledge on the path to lasting change. We have a challenging path in evolving our ideas and solutions, as people are at the heart of our business.

* Lucien Fagundes, Psychologist, teacher and consultant at MIRADOR. Specialized in Economic Psychology (FIPECAFI-USP) and Behavioral Design (IMEC-México).

* Sergio Rangel, Actuarial expert, professor at the Federal University of Rio Grande do Sul – UFRGS and consultant at MIRADOR.

source: Abrab in focusOn 11/16/2023.

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