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Social Innovation

Novel Prize winner x Hitachi Special Talk vol.1
Redefining Society
through Behavioral Economics
Nobel Prize winner speaks
about the power of words
to motivate others

Combining behavioral economics and cutting-edge technology is one way we can solve issues in society. Prior to visiting Japan and giving a speech at the Hitachi Social Innovation Forum 2018 TOKYO in October, Nobel Economics Prize winner and a professor at the University of Chicago Dr. Richard H. Thaler was interviewed by Hitoshi Shirai, President of the Hitachi Research Institute. The interview focused on how behavioral economics approach can be applied to tackle various issues including the declining birthrate and ageing population, energy challenges, and towards the achievement of Sustainable Development Goals (SDGs). (Part 1 of 2)

Analyze human habits, and policymaking will change

Shirai In your book “Misbehaving,” I read about the possibilities of behavioral sciences, and I got a feeling that the future role of government might change greatly.

In the UK, there is already an initiative by the Behavioral Insights Team (BIT) to analyze human behavior and redesign policies accordingly. In other words, measuring and analyzing human behavior and applying it to policymaking are possible, right?

Thaler That’s right.

Shirai Prior to adopting policies, in the future, would it be possible for governments to present citizens with several policy options deriving from conduct of social experiments? If so, would the role and function of governments change?

Magic words that encourage tax payment

Thaler For a long time, economists have had a monopoly on giving advice to governments. In the US, the government is run by lawyers advised by economists. However, it would be foolish to limit ourselves to economics and not incorporate advices from experts from other social science fields.

In the UK, we conducted a very practical study to get people to pay their taxes on time. Simply adding “You are one of the very few people whose tax payment is overdue,” to the reminder letter works like magic.

Richard Thaler, recipient of the Nobel Memorial Prize in Economic Sciences and professor at the University of Chicago Booth School of Business
Thaler received the Nobel Memorial Prize in Economic Sciences in 2017 for his contributions to behavioral economics. He studies behavioral economics, which is the interdisciplinary science between economics and psychology, as well as studying finance and decision making science. Thaler is the co-author of the global best seller “Nudge.” His other major publications include “Misbehaving.” Thaler taught at Cornell University, MIT Sloan School of Management, and Center for Advanced Study in the Behavioral Sciences at Stanford University among others, before joining the University of Chicago faculty in 1995. He is a member of the American Academy of Arts and Sciences, a Fellow of the American Finance Association and the Econometric Society, and in 2015 served as the President of the American Economic Association. 

Shirai It’s interesting how just one sentence can make such a difference. This isn’t something that traditional economics would be able to come up with.

Thaler In principle, psychological approaches in behavioral science can be used in almost any important policy domain.

For example, when the talks between President Trump and North Korean leader Kim Jong-un took place, it might have been good to have the view of a psychologist, not just of economists, in terms of how to approach someone that is at complete opposite side from you.

One important aspect in this case was how the world perceived and assessed their talks. An economic advisor might be less useful than a therapist or a marriage counsellor.

Pricing alone cannot solve climate change

Thaler Another example is climate change. Here in Chicago, it can suddenly get very cold, and then very hot. Everyone seems to accept that climate is changing. The only thing that can be done to solve this problem is to change the people’s behavior.

Somehow, we need to get people to consume less fossil fuel. Well, how can this be done? Economists have only one answer, which is raise the price. Put a tax on carbon or raise the price of gasoline.

However, there are so many other things that can be done. There are research results showing that just by telling people how much electricity they are consuming compared to their neighbors, they reduce consumption by around two percent. Now, that seems like a very small number, but building up little things is vital when it comes to dealing with climate change.

Shirai Hitachi is also engaged in various initiatives that take climate change into consideration, including the development of power generation systems that achieve effective use of resources while reducing environmental burdens at a high level. Stabilization of power generation systems that use renewable energy is another example. This is certainly the area where combination of behavioral science approach and technology works effectively.

Hitoshi Shirai, President of Hitachi Research Institute
Shirai joined Hitachi, Ltd. in 1979. In 1994, he became a senior researcher at the Hitachi Research Institute, then the principal researcher in 1998. In 2000, Shirai was also involved in the Cyber Government Project Promotion Center at the Government & Public Corporation Information Systems Group in Hitachi. In July the same year, he published “Digital Government,” a book proposing the ideal cyber government for Japan, while introducing examples of advanced initiatives in other countries. Shirai was appointed President of Hitachi Research Institute(HRI) in 2013. In the journal “Hitachi Souken” published by HRI, he has interviewed many experts in various fields in Japan and from overseas.

Thaler These are just some of the examples. I cannot think of a domain of public policy or social issues where behavioral scientists would not be helpful.

Can businesses also change their behavior?

Shirai You mentioned about environmental issues. To achieve the Sustainable Development Goals (SDGs) adopted by the United Nations, initiatives to solve various global issues are vital.

So, there seem to be several investing funds that are requesting private companies to disclose more information, such as the greenhouse gas emissions, to prompt their proactive contributions to the achievement of SDGs. Do you think this kind of approach is effective?

Thaler I think so. There is some evidence that simply requiring firms to publicize their emissions has an effect.

One is because firms want to avoid being publicly shamed, and the other is because consumers may choose to buy from a firm that is more socially responsible. I am a big believer in transparency and I would favor rules that say that the emissions should be made public and easily accessible, so I like the idea.

Difference between giving tax cut of 100,000 yen once and 2,000 yen over 50 times

Shirai The next question is about economic policies and their possibilities. In “Misbehaving,” you wrote about the role of tax cut to stimulate economy in the US, as an example of a “macro-economic policy that definitely needs analysis by behavioral economics.”

Japan has faced a different sort of challenge. Japan raised its consumption tax rate in 1995 and again in 2014. Each created a last-minute demand surge and resulted in the economy slowdown after the hikes.

Before the next tax hike, which is scheduled for 2019, aiming to control economic fluctuations and reduce risks, the Japanese government is considering policies that take into account consumer and corporate behavior observed during past tax hikes. Do you have any advice or ideas from a behavioral economics perspective?

Thaler Obviously, I do not know enough about the Japanese situation to give any real advice. The example I introduced in the book may be of some help.

The Obama administration was going to give a one-time tax cut in 2009, early in the financial crisis. Let’s say it was 100,000 yen per family. The question was, should you give 100,000 yen in cash all at once or 2,000 yen a week? Traditional economists said it does not make a difference.

An ironic outcome for the Obama administration

However, a behavioral economist would look at it from many different angles. Evidence suggests that when people get a lump sum, they are more likely to save it. However, if their paycheck just goes up by 2,000 yen a week, especially in the US, many would end up spending the increased amount without even noticing it. My advice was that spreading out the payment is more likely to stimulate the economy.

It is very hard to tell which would have been better as a policy. Ultimately, they spread it out, which I think was probably better for stimulating the economy. However, it may not have been a good policy for President Obama.

The reason is because no one was aware of the tax cut. If you get 100,000 yen and it is from the president, the president gets very popular. There could be tradeoffs between what is the best policy and what is the best policy politically.

Shirai So it was an ironic outcome.

Thaler This is connected to yet another social science, political science. In the US, we have the Council of Economic Advisers (CEA), and I am sure you have something equivalent in Japan. However, there is no such thing as a council of sociology advisers or psychological advisers.

I am not saying that we need all of those institutions. If you take the Behavioural Insights Team (BIT) in the UK, for example, it is now over 100 people, and experts from all different domains give advice on various issues.

Brexit may not have happened

Thaler Let’s take the example of Brexit. When David Cameron, the prime minister at the time, was planning for the referendum that he promised, he could have chosen how the two options be called.

The option to stay in the EU was called “Remain.” That is a weak word. You can think of lots of different words; “Let’s stay,” “let’s improve,” or “let’s reform.”

The result was decided by two percent. Had the terminology been different, outcome could have been flipped.

We are used to voting yes or no, but the question is what do we call yes, and what do we call no? At the time, many people were angry with the government. To voters, “Leave” seemed strong and active, while “Remain” dull and sleepy.

If the “Remain” option had been more active, and if they had given us two weeks to run experiments, we might have gotten the two percent to switch.

The UK government asked us for advice on many topics, but they never asked us about this. When BIT was just getting started, I used to spend a lot of time in 10 Downing Street, and I would run into David Cameron or George Osborne, who was the finance minister at the time, and we would engage in discussions. The group got too big and I was not there very often, and this never came up. I wish it did. (Continued in Part 2

Release Date:September 2018
Production:NewsPicks Brand Design