Behavioral Game Theory

In the UK budget a week or so ago the Chancellor surprised most by announcing a radical shake up of the UK pension system. According to the old system retirees, with a private pension plan, were essentially forced to buy an annuity that would smooth income over their remaining life. Under the new system retirees can withdraw the money and spend it as they wish. So, if they want to splash out on a Lamborghini sports car then fine (according to the pensions minister).             What has interested me most about the pension changes is the public reaction. Immediately, people began questioning whether it made sense to let retirees have freedom of choice. Are pensioners capable of make informed rational decisions about how to spend their savings? Will they not blow it all and be left to live out their lives on state support? To most people it seemed obvious that some might make dumb, inappropriate choices. And, for me, this illustrates how divorced from reality economic theory has be

Saturday morning I heard a somewhat intense debate on the radio about whether a mother should breast-feed in public. The debate was sparked by an incident in a restaurant where a breast-feeding mother was asked to ' use a blanket '. Views were completely polarized. Some, like me, thought it outrageous to criticize someone for breast-feeding in public. Others, thought it outrageous to breast-feed in public! This polarization of views is a perfect illustration of the reciprocal nature of externalities, first pointed out by Ronald Coase.         The 'textbook' picture of an externality is typically one of good and evil, like a factory polluting the water that local people drink. The clear suggestion is that the evil doer, the factory in this case, should take account of the effect they have on others. Often, however, externalities do not lend themselves to a simple good and evil. That's the case in the breast-feeding example: Some would place the breast-feeding mot

One of the most basic and intuitive ideas that has come out of the behavioural change literature is the opt-in versus opt-out distinction. Essentially, because of psychological bias, people are likely to end up 'choosing' the default option. So if, for example, the default option is to not be opted into a pension savings plan a person is likely to end up not saving enough for retirement. This simple observation partly motivated the save more tomorrow plan that stands to revolutionise retirement saving.         A context where default options are often used strategically is check boxes on online (or hard copy) forms. Suppose, for example, you want to travel from London to Birmingham and go to book your ticket online. If you are going by train then once you've sorted out the times of the trains etc. you will be offered the chance to buy basic travel insurance. In this case the box is not ticked and so the default option is no travel insurance - you have to click a mouse bu