behavioral-economicsIn business school, I was a teaching assistant for one of my favorite professors, John Lynch. He mentioned that a former student of his, Dan Ariely, was returning to Duke to teach behavioral economics, and suggested I take the class. I must confess that my first reaction as a second-year MBA student was not very positive: “Economics – I think I have had enough of that type of course!” He then explained that behavioral economics was a new discipline that was turning traditional economics, which assumes humans make rational decisions, upside down. Behavioral economists believe that human decision-making is often imperfect and imprecise. By our very nature, humans are imperfect – we procrastinate, stray off our diets, get overwhelmed and can be shaped by our experience. For example, one study of Asian-American women showed that when primed to think about their gender before taking a math test, they performed below average, but when they were primed to think about their race, they performed above average. What explains this change? Our expectations change the way we experience situations and can lead to different results. In the end, I did take Dan Ariely’s class and loved it so much that I became his research assistant. He has gone on to become a celebrity author of four books on the subject and has been featured in The New York Times and Scientific American.

Now, as I work with clients and speak about social change, I use behavioral economics examples in my work as much as possible. I was recently excited to learn that MDRC (one of my favorite social sector research organizations) used behavioral economics in recent work with the Oklahoma Department of Human Services to increase the number of clients who renew their child care subsidy. This subsidy is crucial for many working parents to afford quality child care. Unfortunately, only a third of an estimated 39,000 child care subsidy cases eligible for renewal each year in Oklahoma are renewed by the deadline. This is important because non-renewal leads to serious consequences and costs – children may lose their place in their child care center and parents then have to apply again. This costs the system time and effort, which in turn delays parents in getting their child back into child care, which ultimately could lead to job loss. You may ask yourself – why don’t they renew? Well, this cuts to the heart of behavioral economics. How often do many of us work against what is in our best interest? How can we engineer a system that makes it easier to make the right decisions? Or, as psychologist Daniel Kahneman suggests – how do you “achieve medium-sized gains by nano-sized investments?” These were the questions that MDRC worked on in their project in Oklahoma.

Their full report, which is an excellent read, is available online. They tried three interventions with a randomized control group:

  • a provider intervention where the child care provider was reminded when the client didn’t take action (cost = $1.10/child)
  • a client intervention where the state sent clearer communications to the client to encourage renewal (cost=$1.00/child)
  • a combination of the provider intervention and the client intervention

The findings showed that the provider intervention alone was most effective at helping clients renew on time. Debi Ream, former Deputy Director for Programs, Adult and Family Services, was encouraged by the results and planned to use them. “Although the costs of the provider intervention are not negligible, the possibility of thousands of more on-time renewals and the potential for increased good … justifies us exploring ways to institutionalize the provider intervention.”

In the the past 10 years, behavioral economics has gone mainstream and is being tested across all sectors – education (teacher pay), social services (peer support) and health (organ donation, medication compliance). We’d love to hear how you are using these techniques in your organizations and whether or not they are working.

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