Saturday, April 06, 2024

Pension Autoenroment Irish Edition

After at least two decades of being actively considered in Ireland, pension autoenrolment is now being established as part of the Irish policy system, I spoke at the Citizens assembly on pensions in 2018 and outlined the various factors that might need to be considered where a pension auto-enrolment system to be implemented in Ireland. (here is a post on this blog from 2011 discussing a previous version of autoenrolment for Ireland that eventually got stalled). 

Key features of the scheme include: -

1)Phased Implementation

All employees not already in an occupational pension scheme or equivalent, aged between 23 and 60 and earning over €20,000 across all of their employments, will be automatically enrolled.
With the first enrolments set to happen at the start of 2025, the introduction of Automatic Enrolment will be very gradually phased in over a decade, with both employer and employee contributions starting at 1.5%, and increasing every three years by 1.5 percentage points until they eventually reach 6% by Year 10 (2034). This steady phasing allows time for both employers and employees to adjust to the new system.
2)Saving Supports

Matching contributions will be made by employers to those contributions made by employees up to a maximum of €80,000 of earnings. This recognises the value employers gain through their employees having additional security in retirement and assists employees with the cost of accumulating pension savings.

The State will also top up contributions by €1 for every €3 saved by the employee, up to a maximum of €80,000 of earnings. This is in addition to the €3 that will also be contributed by the employer.
This means that for every €3 saved by an employee, a further €4 will be contributed to their retirement savings pot by their employer and the State – that is every €3 contribution by an employee automatically grows to €7 before it is invested.
These employer and State contributions will incentivise people to stay in the Automatic Enrolment system and will reduce the cost to individuals of saving for retirement.

The system will be voluntary but will operate on an ‘opt-out’ rather than an ‘opt-in’ basis.
Eligible employees will be automatically enrolled/‘opted-in’ but will have the choice after six months’ mandatory participation to opt-out or suspend participation.
Employees will have a range of three retirement savings options to choose from at a higher, medium and low risk investment strategy.
Employees who do not make an active choice will be placed in a default investment strategy on a ‘lifecycle’ basis, moving them from the higher to the medium to the lower risk fund in accordance with their age as they approach retirement.

Administrative costs and burdens are to be kept to an absolute minimum for both employers and employees through the establishment of the National Automatic Enrolment Retirement Savings Authority, which will administer the system. Employers will not have to invest in the establishment or procurement of an occupational scheme for their own businesses. They will simply be required to facilitate payroll deductions. Importantly, people moving between jobs will not have to change pension scheme or join a new scheme. They will remain members of the Automatic Enrolment scheme on a ‘pot-follows-the-member’ basis. Services will be provided and supported through an easy-to-use online channel where participants will see their savings pots grow quickly and substantively.

Friday, April 05, 2024

Beveridge 2.0

I contributed a piece to an LSE initiative a couple of years back called Beveridge 2.0. The initiative is led by Tim Besley and Irene Bucelli. Details are available on the link below. The initiative has held several workshops and published special issues around the theme of redefining the Social Contract for the 21st century. My piece with Michael Daly looked at integrating broader well-being measures into systemic response mechanisms. 

Beveridge 2.0 Redefining the Social Contract is an initiative that brings the LSE community together with the intent of exploring avenues for collaborative cross-disciplinary research. Over three-quarters of a century after the original Beveridge Report, which laid the foundations for the welfare state in the UK, new challenges have emerged putting strain on social sustainability and forcing us to reconsider the conditions underpinning the social contract.These challenges bring to the fore cross-cutting questions which require a global perspective and a focus on their interconnectedness. This can only be achieved through fostering dialogue across disciplines and Beveridge 2.0. Redefining the Social Contract aims to provide the space for this dialogue, recognizing the unique position of the LSE in contributing to the research and public debate around the solutions suited to the demands of the twenty-first century.

One thing thinking about the initiative has stimulated me to do is to go back and read the 1942 "Social Insurance and Allied Services" aka Beveridge report. It is a document of epic scale that sets the foundations for the British social security system to this day. The guiding principle is an assault on the social ill of "want" and among other things it sought to amalgate a number of functions of government under a single department that would ensure that people had income under a range of potentially adverse conditions. Many of the themes persist to now in particular the intricacies of designing systems of social insurance that preserve human dignity in adverse settings and are sustainable. As discussed in many seminars and papers in the Beveridge 2.0 sessions, the modern setting sees increased longevity, adverse housing, divided electorates, and several other challenges that qualitatively alter the landscape of the design of social security systems. It is well worth going through the sessions and papers on the Beveridge 2.0 website to at least get a sense of the types of discussions happening here around these issues. 

Tuesday, April 02, 2024

Climate Change Advisory Council

I was recently appointed to the Climate Change Advisory Council in Ireland. The Council is an independent advisory body providing evidence-based advice and recommendations on policy to support Ireland's just transition to a biodiversity rich, environmentally sustainable, climate neutral and resilient society. I hope to contribute to the work of the council in particular through connecting with social and behavioural science evidence relevant to the mandate. The last annual report published by the council is available here.

See link here for an Irish Behavioural Science and Policy Network event on reducing reducing sludge in environmental policy applications with Lucia Reisch (University of Cambridge), Shane Timmons (ESRI) , Emma Howard (TU Dublin) and Des O’Mahony (Environmental Protection Agency), and the discussion was moderated by Deidre Robertson (ESRI).

Some interesting readings below relevant to climate behaviour in Irish context:

Publications page of ESRI behavioural research unit.
Sustainable Energy Authority of Ireland Behavioural Economics page 
Lades et al "Sludge in Irish policy-making".

Saturday, March 30, 2024

Daniel Kahneman RIP

The news arrived this week of the death of Daniel Kahneman at age 90. Kahneman was a noted psychologist obviously and his work with Amos Tversky had a foundational influence on the development of behavioural economics and a range of related fields. His work on prospect theory and judgement and biases were already heavily embedded in several areas when he was jointly awarded the Nobel prize in 2002. Several popular talks and his book Thinking Fast and Slow made him known to a much wider public audience in the later phase of his life. 

I met him on a couple of occasions. I was a fellow at the Centre for Health and Well-being at Princeton in 2011. He was technically there but was absorbed in the activity around a book at the time which was launched as Thinking Fast and Slow. About that stage of my life, I was moving from a phase of seeing some scholars as being abstract characters in a great intellectual historical drama to meeting some of them. With Kahneman, I couldn't ever shake the feeling in the few times I was in the same room that I was in the presence of something larger than life. This is definitely not due to him as his reputation coming from the many who knew him fondly as "Danny" is of a charming, intellectually open and humble individual. My one substantive interaction with him was as part of a workshop on day reconstruction where I treated him to a rant that wasn't fully formed about how survey methods to validate Day Reconstruction Methods could become a lab to study all sorts of fundamental questions. Cringe! 

Students and colleagues in our Department at LSE will be aware of several interactions between our programme and Kahneman both as a scholar and a person. Paul Dolan has written here of the impact Kahneman had on his life and work. A lot of our Foundations in Behavioural Science course is based around his work, including core lectures on prospect theory and on judgement, biases and heuristics. His talk at the LSE in 2012 is available here and takes place at the time where our current graduate programme in behavioural science was being planned out by Paul and others. It would be hard to have studied on any of our behavioural science programmes here without having spent meaningful time with Kahneman's work and along with Cass Sunstein he is most frequently mentioned in cover letters as an inspiration for coming here. 

Like many people, I owe a lot of the trajectory of my life and work to reading the work of Kahneman and Tversky. Reading their 1974 paper "Judgement Under Uncertainty: Heuristics and Biases" completely changed my life. The paper is obviously a citation classic. There are many literatures that can be traced to the paper. And also a genuine question as to how to characterise the real contribution of the paper and their related work. They certainly were not the first to examine heuristics and biases as Kahneman had no problem noting. Others have questioned whether it paints too bleak a picture of human reasoning or whether the pen-and-paper format and student samples lead to very localised descriptions of human behaviour. I am not going to review all the replication exercises and philosophical debates here. From my side, I studied psychology and economics in Trinity College and encountered his work when I was 19. I had always seen economics and psychology as fundamentally intertwined but two years of studying it at college had created a huge pressure in my mind as to how the fields had become disconnected. Studying psychology, I had been exposed to everything from Freud to modern neuroscience experimental techniques and sitting in my economics lectures, I followed along with optimisation problems and axiomatic treatments of human choice. 25 years later I am contaminated by decades of listening to opinions but I still have at least some memory of how mind-blowing it was to read the 1974 paper. It genuinely felt like finding a forgotten treasure and everything I was studying in both fields suddenly came together for the first time. Having studied and lectured on the history of behavioural science for a long time now, I am convinced something similar happened in the discipline as a whole.

There are similar discussions that could be had about the evolution of prospect theory which accumulated several modifications to expected utility theory (including loss aversion - graph below from Nobel website) into a key behavioural decision framework. Kahneman and Tversky's work is definitely redolent of the peasant in the field problem. There are most likely people of all sorts of modest repute who had similar instincts to them regarding human behaviour. And there are certainly works that predate them that contain the building blocks of prospect theory. But there is nothing that combines the mathematical treatment, the psychological intuition, and the awareness of the implications of what they were doing.

Inherent in Kahneman and Tversky and later Richard Thaler is always a keen awareness of the massive edifice they are setting themselves against. Prospect Theory is published in Econometrica the journal that set to define economics as a science, it is given a name that places it in a long-run historical perspective, it is even written in a style that is both compelling and contains enough vagueries (WTF is a prospect??) to keep people discussing it forever. I blogged earlier about recent work examining the state of the art of modern prospect theory. Loss aversion may or may not be a thing. It may or may not be related to the endowment effect. But they have set the terms of discussion of decision-making in core areas of human thought for decades and probably centuries to come. I was fortunate to get a chance to establish behavioural economics courses in Trinity College and University College Dublin in the late 2000s (details here). I have given something in the region of 30 iterations of a course that has prospect theory and heuristics and biases as core lectures and still have not even remote feelings of fatigue with the material.

Kahneman is also a key descendant of utilitarian thinking on well-being (not necessarily an ethical utilitarian which is an argument for another day). A key question in Benthamite thought is how to measure well-being and Kahneman was one of a handful of people to advance that agenda in the last few decades. His 2004 paper "A survey method for characterising human experience" was another thunderbolt. The paper was co-written with Alan Krueger, Norbert Schwartz, David Schkade, and Arthur Stone, a veritable dream team assembled across psychology, economics, and survey measurement. I wrote in another post how this paper shaped a lot of the rest of my own career. It is another classic Kahneman paper, written in a beautifully clear fashion with boundless implications following from unassuming sentences. One major task for the rest of my life will be to craft a more eloquent version of the rant I exposed him to that sees this method as a key arena for studying human subjectivity in consequential settings. 

The main impression I am left with from Kahneman is that he wrote for the ages and that he will be discussed for centuries to come. We are fortunate to have had him in the world. Condolences to readers who knew him personally and will mourn his passing. I hope students who are encountering his papers for the first time will experience the same intellectual stimulation as thousands before. 

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?