By Ravi Menon
SOME 15 years ago, Switzerland held a referendum about where to put nuclear waste dumps. Researchers went from door to door in two Swiss cantons and asked people if they would accept a dump in their communities. People thought that such dumps might pose a risk to their health or depress the value of their properties. But a surprisingly high 50 per cent of those who were asked said they would accept a nuclear waste dump in their communities. People felt responsibility as Swiss citizens.
But when people were asked if they would accept a nuclear waste dump if they were paid a substantial sum each year - equal to about six weeks of the median wage - a remarkable thing happened. Only about 25 per cent of the respondents agreed to have the dumps. The offer of cash undermined the motive to be a good citizen.
Similar observations have been made in other settings. When students are paid to go to class, attendance falls. When a fine is imposed on parents who pick up their children late from childcare, more parents turn up late and just pay the fine. It is as if when people are paid to do the right thing, they do less of it.
These findings run smack in the face of conventional economics. Traditional neo-classical economics tells us that individuals are rational. This means they prefer more to less. They respond to incentives. They act in their self-interest. They maximise their utility by making well-informed choices within a budget constraint. These assumptions are intuitive and resonate with the observed ways in which most people make decisions.
Of course, few economists would say that all of us make rational decisions all the time. But as long as most people behave rationally most of the time the foibles and errors of those who do not cancel out in aggregate. These assumptions have been repeatedly validated and form the basis of many public policies.
But the exceptions to rational utility maximising behaviour are too numerous to ignore:
- People do not save as much as they themselves think they should.
- People believe in a lucky streak even though the probability of winning in each toss of the dice remains constant.
- People do not opt out of default options, but do not opt in when these same options are presented without default.
Economic rationality is limited by imperfect information, time constraints and cognitive biases. Individuals cannot assimilate and analyse all the information necessary to fully maximise their benefits from various courses of action. Instead of optimising, we use various mental models, 'rules of thumb', and other cognitive shortcuts to make decisions. For example, when we choose a home mortgage or health insurance plan, we settle for one that is 'good enough' rather than exhaustively search for the optimal plan. Some would say the same approach applies to choosing a spouse, though whether such a thing as an optimal life partner exists is another matter.
But some cognitive shortcuts can be misleading, and sometimes even dangerous. For instance:
Third, we display bounded self-interest. We do not simply seek to maximise our individual utility, but instead care about fairness and relative outcomes. We engage in altruistic activities; respond to community identities, norms and values; and are often prepared to incur personal cost to help achieve collective outcomes we perceive as good.
Most people intuitively understand the importance of health insurance but never get round to buying a policy. If MediShield, the insurance programme for catastrophic illness offered through the Central Provident Fund, had been an opt-in scheme, people's inertia and status quo bias might have resulted in a low take-up. Understanding this, the government introduced MediShield as an opt- out scheme. This helped ensure a high participation rate without taking away people's choice.
THIRD, policies have sought to preserve and enhance, rather than erode, people's intrinsic motivations for good behaviour. For instance, through the use of public campaigns and education, policy has reinforced social norms and strengthened Singaporeans' intrinsic reasons for behaving in socially responsible and civic conscious ways.
Financial incentives and social norms go hand in hand. Take the policy on smoking, for instance. Singapore has one of the highest duties on cigarettes in the world - a powerful financial disincentive. More importantly, this is complemented by measures aimed at changing social norms and making smoking as inconvenient as possible. Public campaigns focus not just on the personal health risks of smoking but also its social undesirability - that it is not cool to light up.