Lesson preview · Working with evidence
Behavioural market failure and the evidence on nudges
~8 min · Free to read
Sam gets two offers. The first: 10 dollars in a year, or 11 dollars in a year and a day. Sam waits the extra day. The second: 10 dollars today, or 11 dollars tomorrow. This time Sam takes the 10 dollars.
Both offers pay one more dollar for one more day. Only the start of the wait has changed.
Key Term
Present bias
Present bias is an extra pull towards now, on top of ordinary impatience. It shows up as a preference reversal: a choice that flips only because one option moved to now, as Sam’s did.
Plain impatience is not a bias: someone who always needs a big reward to wait would take the 10 dollars both times.
Evidence: mixed for money, stronger for effort. A study published in 2012 that paid real money found almost no present bias. One published in 2015, using dull real tasks, found much more: on the day, people put off more work than planned.
Key Term
Behavioural market failure
A market failure means the market makes the wrong amount from society’s point of view: too much or too little. One familiar cause is an externality: a cost or benefit that falls on people outside the deal.
But people also misjudge costs and benefits that fall on themselves later. Present bias makes the future feel small. Complexity, such as pension fees that are hard to compare, hides the best choice, so people put off deciding or choose badly.
A cost to your own future self that you give too little weight when you choose is an internality. A market failure caused by how people think is behavioural market failure.
So, with no externality, people can:
- under-consume merit goods, which benefit them more than they realise, such as pension saving or exercise;
- over-consume demerit goods, which harm them more than they realise, such as cigarettes or vaping.
Check yourself · no marks
A smoker damages their own lungs. Friends who breathe the smoke are harmed too. Which harm is an internality, and which is an externality?
Commit to one first. Guessing and being wrong beats reading the answer cold.
But who decides what someone really wants? Perhaps a vaper just values the pleasure now more than the health risk later. That’s a value judgement: a view about what ought to be, which facts can’t settle.
A gentler fix than a tax or a ban is a nudge. It changes how a choice is laid out, but keeps every option at the same price. The best-known nudge is a default: what you get if you do nothing. Defaults stick because opting out takes effort, the default looks like advice, and leaving it can feel like a loss.
In data published in 2003, Austria counted everyone as an organ donor unless they opted out, and 99.98% counted as consenting. In neighbouring Germany, people had to opt in, and 12% did. In an online survey with a made-up choice, 82% said they would be donors when that was the default, against 42% under opt-in.
Only the pension default held up at scale. Even there, many workers at the US firm kept the default amount to save and where to invest it. Nudge units, teams that test nudges for governments, found about a sixth of the published effect. Opt-out registers raised consent far more than donors, and the jam effect vanished on average. Treat a striking first result as a claim to check, not a forecast.
Trap · Warning
Why first results run large
Journals mostly publish studies that found an effect, so the published average is too big: publication bias. The 2022 nudge-unit study found it explained about 70% of the gap between 8.7 and 1.4 points. Differences between the nudges explained most of the rest.
A 2022 re-analysis of more than 200 nudge studies corrected for publication bias and found no clear evidence of an average effect. But effects varied widely, so some kinds of nudge may still work.
Evidence on nudges overall: mixed.
Trap · Common Misconception
Consent isn't donation
An opt-out register changes who counts as consenting. A donation also needs a death in hospital where the organs can be used, a family that doesn’t object, and staff to make it happen.
The evidence on donors is mixed. In the 2003 study, European countries with opt-out had about 16% more donors, far less than the gap in consent. Across 48 countries in 2000–2012, opt-out countries had more deceased donors but fewer living donors. And a 2019 study of 35 countries found no clear lead in deceased donors in 2016.
Nor is an opt-out register a mandate, a rule that forces people to donate: anyone can opt out.
Trap · Warning
A cautionary tale: the marshmallow test
In the marshmallow test, a child of about 4 can eat a treat now or wait for more. Early follow-ups found that children who waited longer did better at school as teenagers. But they used just 35 to 89 children from one university preschool. A 2018 study of a larger, more varied group, focusing on children whose mothers had no university degree, found a link half as strong. Allowing for family background, early ability and home life cut it by a further two-thirds.
Evidence: mixed. The link shrank sharply once it was checked.
Practice · 1 / 6
On Sunday, four students each plan how to split 4 hours of revision between Monday and Tuesday. On Monday morning, with nothing else changed, each decides again. Whose choices show present bias?
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