Sunday, February 04, 2024

Nudging away from minimum payments in credit cards

Disclaimer: I sometimes discuss live policy issues on this blog. All opinions expressed are my own and do not represent the views of LSE or any other entity.

A recent NBER paper by Benedict Gutmann-Kenney, Paul Adams, Stefan Hunt, David Laibson, Neil Stewart, and Jesse Leary examines what happens when you remove the minimum payment anchor from credit cards. Abstract below. 

We run a field experiment and a survey experiment to study an active choice nudge. Our nudge is designed to reduce the anchoring of credit card payments to the minimum payment. In our field experiment, the nudge reduces enrollment in Autopaying the minimum from 36.9% to 9.6%. However, the nudge does not reduce credit card debt after seven payment cycles. Nudged cardholders tend to choose Autopay amounts that are only slightly higher than the minimum payment. The nudge lowers Autopay enrollment resulting in increasing missed payments. Finally, the nudge reduces manual payments by cardholders enrolled in Autopay.

Firstly, NBER working papers are put out for discussion and could potentially change between when they are published and after peer review. Secondly, it is worth a meta-point about the direction behavioural science is taking in these areas. The paper combines survey experiments with field experiments conducted in collaboration with two major financial providers. The experiments are pre-registered and longitudinal and with very large samples. While such set-ups can end up self-selecting as they require senior industry figures to facilitate, it is also clear that regulators have some power to shape this. 

In this case, a well-known mechanism (anchoring) is tested first in a survey setting replication prior work in this area. The replication exercise is broadly in the direction we would expect, with respondents being more likely to use the minimum payment option when it is made salient. Therefore taking it away potentially improves consumer outcomes by encouraging consumers to pay off the debt more quickly.  However, over a relatively short time horizon in both field experiments they conduct the advantages to the consumers erodes to zero through a combination of more missed payments and less voluntary additional payments. Basically the advantage accrued from utilising knowledge about anchoring to change behaviour in this area does not persist.  

Friday, February 02, 2024

Ethical Nudging in Corporate Settings

There are several places on this blog where we have covered ethical issues in applying behavioural science (reading list here, link to our FORGOOD ethics framework here, blogpost on recent ideas and applications in incorporating ethical issues in behavioural science here). 

As part of our wider world initiative at the Department, our students work in groups to examine different aspects of how behavioural science is integrated into institutions. Thanks to Annabel Gillard and Bishin Ho from last year's group for working on a project that examined the extent to which the FORGOOD framework could be applied in corporate settings. A short paper based on their project is available here and we are working together on an LSE innovation project to extend this to be used in various settings. 

Below is an interesting checklist from their paper adapting the framework for corporate settings. We have been working together on new resources to embed this type of thinking, including things like pre-mortem tools, checklists, workshop materials, etc., 

‘FORGOOD’ starter questions adapted for the private sector

Fairness: Does the behavioural intervention treat its target fairly? Does it attempt to fairly manage conflicts of interest between targets, beneficiaries and other relevant stakeholders?

Openness: Is the behavioural intervention disclosed or evident to the target? 

Respect: Does the behavioural intervention respect the target’s autonomy, dignity, freedom of choice and privacy within the context of their relationship with the corporation?

Goals: Does the behavioural intervention seek to improve outcomes for targets, beneficiaries and/or other relevant stakeholders of the company?

Opinions: Does the behavioural intervention pass the ‘front page test’ of public opinion? 

Options: How does the financial and non-financial cost/benefit assessment compare to other options?

Delegation: Does the company have the regulatory right and ability to implement the behavioural intervention?

Desludging the Irish Tax System

Disclaimer: I sometimes discuss live policy issues on this blog. All opinions expressed are my own and do not represent the views of LSE or any other entity. 

The Irish Revenue Service has a solid track record of engaging with behavioural science and related literature e.g. see their 2017 working paper outlining a range of experiments and data work over the previous decade. (See also a paper from the Irish Department of Finance on behavioural economics and tax policy here). Recently, the Irish government have been engaging in a campaign to help citizens avoid overpaying tax. Some details here (thanks to my colleague for pointing this out). The key point is below. As can be seen, as well as pointing out the significant amount of under-claiming of allowances, the campaign also serves as a reminder to include additional income. So in some sense, it is a standard payment prompt but the salience given to under-claiming and the significant amount of resources being put to assist and nudge people towards claiming allowances is interesting in terms of both potential impact and distributional effects. The level of underclaiming suggested in the press release also seems quite striking. 

Today, (23/01/2024), Revenue published a range of statistics on PAYE for 2023. These statistics show that over 472,000 PAYE Income Tax Returns have been processed for 2023, an increase of almost 30% on the same period last year.

Approximately 275,000 of the returns filed to date resulted in an overpayment of tax. Among the key tax credits and reliefs claimed by PAYE taxpayers are the rent tax credit and health expenses. The facility for PAYE taxpayers to claim the 2023 mortgage interest tax credit will be available from next week.

Revenue, in conjunction with the Minister for Finance, Michael McGrath T.D., today launched a public information campaign to raise awareness among PAYE taxpayers about the range of tax credits and reliefs available, and how they can claim those credits and reliefs. The campaign also reminds PAYE taxpayers that they need to tell Revenue about any additional income which has been earned outside the PAYE system.

Sunday, January 28, 2024

New Paper: The Distributive Effects of Administrative Burdens on Decision Making

I posted previously about our recent paper (with Lucie Martin and Orla Doyle) on administrative burdens and inequality. That paper used episode reconstruction methods to examine the distributional aspects of administration. A follow-up paper now published in the excellent Journal of Behavioural Public Administration examines the distributional impacts of administrative burdens on decision-making using choice experiments. The abstract is below and paper is linked here

Administrative burdens may discourage people, especially vulnerable groups, from acting in their own best interest. Most survey experiments focus on attitudes around burdens, while case studies and field interventions analyse specific groups or policy contexts. We test the distributive effects of administrative burdens on decision-making, using a pre-registered survey experiment with a diverse UK sample (n = 2,243). Participants are shown two scenarios, claiming a government benefit and a phone bill refund. They are randomly assigned to low or high-burden versions of each scenario. High-burden versions involve a lengthy process (compliance costs) or an unpleasant interaction with a government worker (psychological costs) for the benefit claim. For the refund claim, they involve added complexity or an uncertain delay. Participants report being significantly less likely to complete the claim when the burden is high. Being in poor health exacerbates this effect. However, there are no additional burdens for those experiencing financial scarcity. Age and gender effects are mixed. This study shows that administrative burdens negatively impact decisions, even in hypothetical scenarios which may under-estimate effects, and that some groups may be especially affected. Survey experiments such as this can be used to pre-test policies by assessing potential burdens and their impact.

The scenarios used in the paper are below and are designed to mimic common administrative tasks in both a public and private settings. While most people indicate a high likelihood of completing the tasks despite the burden, they clearly discourage a significant minority of the sample (see Appendix 1 in the paper). The main question for the paper is whether the degree of discouragement varies by financial, age, gender, and health status. 

The key result from the paper is below with health effects being most clear. The impact of administrative burdens on those with poor health is very important from a range of perspectives and we hope these findings provide clear evidence of how these work and how they can be studied further in a range of settings.  

As I wrote in a previous post, the intersection of behavioural public policy, behavioural economics, and administrative burden literatures is one that is growing and potentially very fruitful. I wrote in a previous post following an excellent review article by Sanjay Pandey in particular the role that study of subjective experience might play in unifying these literatures. 

Thursday, December 21, 2023

Ethics of Nudging Meat Consumption

Since developing courses in Dublin in 2008 and then in Stirling, a key preoccupation among a group of us has been to ensure programmes in the area of behavioural science and policy have adequate space for reflection on ethics aspects. Along with Leonhard Lades we published a paper condensing a vast literature (summarised here in a previous blogpost) down to seven dimensions using the FORGOOD acronym. We have used this framework for teaching and planning in various ways and it has been picked up quite a bit by various organisations developing their own ethical processes (e.g. see some recent examples on a previous post).

In a recent paper Lades and Nova apply the framework to examining the ethics of nudging meat consumption. A summary is below and gives a sense of how reflecting on these dimensions can enhance the discussion of interventions in these areas. The abstract is below.

The paper sets up the fascinating topic of changing meat consumption in general populations setting out the main motivations provided for nudging people toward non-meat alternatives. The paper goes through each of the seven dimensions of the framework and how they might inform discussion of the types of interventions employed in this area. It's clear that the framework doesn't provide definitive answers but instead a framework for deliberation across these dimensions that could inform a range of processes. 

Tuesday, December 19, 2023

Is Loss Aversion a Thing?

One thing I like about working in academia is the variety of styles of corridor talk you encounter that challenge your perspective on things you think are most likely to be true. I have tried to keep a fairly Humean view on things and not get too personally wedded to empirical generalisations. Having said that, I would still be very surprised if I get to the end of my life not believing that default effects matter in several circumstances beyond purely incentive effects, or that people make decisions on financial products based on confusion at least partly engendered deliberately by the provider or clumsy regulation in several cases, or that people will generally be more sensitive to time distance of rewards at near intervals compared to far intervals etc., And for the most part but possibly to a lesser extent (as it frankly is a more abstract idea than the others) I would be surprised if I didn't believe in some version of the idea that losses matter more than gains in terms of valuation and decisions. 

So it was good that my colleague Fred Basso sent me several papers questioning the basis of loss aversion, including this very thoughtful paper by Yechian (2018) arguing that the evidence for loss aversion that existed around the time prospect theory was published was unclear. A 2018 Journal of Consumer Psychology dialogue started with a paper by Gal and Rucker with the provocative title "The loss of loss aversion: will it loom larger than gains?"

A key idea in the Gal and Rucker paper is that many of the effects associated with loss aversion are only weakly associated with the core idea. And that when you think of things like the endowment effect as separate aspects of behaviour that themselves can be impacted by many things such as reference points with respect to market values, strategic behaviour, etc., then the case for loss aversion as a primary influence on human behaviour becomes a lot weaker. 

The core paper in the journal is followed by a number of responses, including the one below and here by Simonson and Kivetz largely arguing that while loss aversion has a number of potential moderators that should be developed further, the case for its demise is overdone. 

There are a number of recent papers that provide a more comprehensive summary of the empirical case for loss aversion than existed at the time of the above critiques. The Ruggeri et al multi-country study from 2020 replicates most of the original propositions of prospect theory though, as acknowledged by the authors, this does not itself demonstrate that loss aversion itself is the driving factor for the decisions seen in prospect theory set-ups. 

Most impressively is the recent meta-analysis of 607 studies of loss aversion by Brown, Imai, Vieider and Camerer. This work conducts a very systematic trawl through empirical estimates of loss aversion and includes controls for things like study quality and potential publication bias. Their work suggests a loss aversion parameter of approx 2/1 of the type that is discussed often in the literature is a solid rule of thumb to describe patterns from the last 40 years of studies. 

I am not volunteering to do it with current other time constraints but it would clearly be interesting to go through the 607 studies identified by Brown et al from the point of view of potential moderators of loss aversion. They do this to an extent in their already very impressive paper but mostly from an international comparison, sampling design, and statistical quality perspective. There are also some interesting discussions to be had about the limits of our claims about human behaviour in a world where global high-quality probability samples allowing for measurement of the type needed to separate out moderators of effects like loss aversion are extremely difficult to achieve in practice.