Caroline Fiennes: Charities can learn a great deal from behavioural economics

Such insights become rocket fuel when applied to social and development problems, and to public policy, says our columnist

Caroline Fiennes
Caroline Fiennes

Few people can claim that their work has been used routinely to inform or improve fundraising, reproductive health, the governance of African countries or road safety, or to help people to get jobs or quit smoking; but the US economist Richard Thaler can. He has the rare distinction of having revolutionised a major discipline, and in his new book, Misbehaving: the Making of Behavioral Economics, he recounts how he did it.

Thaler (disclosure: he's a friend of mine) realised that much of what economics predicted about how people behaved conflicted with reality. He thought that economists would make better predictions if they absorbed insights from experimental psychology. This resulted in a new discipline called behavioural economics, which has since become part of the mainstream.

Behavioural insights become rocket fuel when they are applied to social and development problems, and to public policy. They are useful to charities in at least three ways.

First, in programmes: for example, Kenyan farmers could grow more if they put fertiliser on their fields. So why didn't they? Researchers concluded that it was because the fertiliser was needed several months after the previous year's harvest had been sold, by which time the income from the harvest had mostly been spent. NGOs have responded by selling fertiliser to the farmers at a discount at planting time.

Obviously, this is expensive for the NGOs and might be unsustainable. By contrast, behavioural insights suggested fertiliser should be sold at full price just after the harvest, when farmers felt flush. This was very effective. Rationally, there should be no effect from simply switching the month when fertiliser was sold; but people are bad at foreseeing what their future selves will want.

Second, in fundraising: for example, having observed that people often shy away from making decisions, Thaler invented a scheme to encourage retirement savings called Save More Tomorrow. Unlike a conventional scheme in which someone committed to saving, say, $100 each month, in Save More Tomorrow they committed to save $100 a month this year, $120 a month the next year, $140 a month in the third year, and so on. Researchers tested similar Give More Tomorrow schemes, which did indeed get people to give more than if they were asked each year to change the amount.

Third, in influencing policy: the behaviouralists discovered how bad people were at absorbing complex information and applying it when making decisions.

Thaler's view was that if you wanted to encourage activity, make it easy. That included asking policy-makers to use the evidence: it is our job as campaigners to make it easy for them. The toolkits from the Education Endowment Foundation summarising the evidence on education interventions were illustrations of that.

Perhaps the strangest twist is that Thaler wasn't trying to help anybody; he was, he says, just trying to get tenure. But as the economist Adam Smith wrote in The Wealth of Nations in 1776: "Every individual, by pursuing his own interest, frequently promotes that of the society more effectually than when he really intends to promote it".

Caroline Fiennes is director of Giving Evidence and author of It Ain't What You Give

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