New Zealand’s Ministry of Economic Development has developed a useful guide on understanding ways people make decisions and reasons for their behaviour. Such understanding is needed to help with designing effective policy so that policy reflects the way people actually behave. As a quick reference guide explains: ‘A policy analyst’s assumptions can colour the way problems are defined, objectives set and interventions designed and implemented.’

Many aspects of public policy analysis and design have their roots in neoclassical economic theory. This means that many policies are based on assumptions about rational decisions, self-interest and complete information. This guide adds to this understanding by leading the policy analyst into a careful scrutiny of the assumptions which underlie public policy choices.

The guide, Behavioural analysis for policy: new lessons from economics, philosophy, psychology, cognitive science, and sociology, can help policy analysts develop a broader understanding of the range of factors that influence people’s behaviour.

The quick reference guide suggests policy analysts should ask two fundamental questions:

‘Does this policy involve an issue driven by people’s behaviour or decision-making – does the intervention adequately tackle the reasons for behaviour or adequately guide people to preferred behaviour?

Would people respond to this policy with behaviour which would be undesirable or defeat the purpose of the intervention – what assumptions does the policy make about the intrinsic motivations of any affected parties? Does this policy assume that affected parties have a particular way of understanding the world?’

An example for this second question is the Baby Bonus. Much of this money was not spent on babies’ welfare and some mothers delayed their births in order to quality.

Drawing from the paper, this is what the content covers:

Part 1 of the paper looks at the policy development process and behavioural responses to policy initiatives. This part also describes the assumptions underpinning the standard neoclassical economic model.

Part 2 of the paper describes some of the current theory of decision-making from cognitive science, adaptive behaviour research, behavioural economics and philosophy. It begins with things a policy analyst needs to understand about decision-making, before it turns to questions about the assumptions underlying a policy which involves decision-making by the public.

Parts 3 and 4 then place this decision-making theory within the context of people’s motivations, aspirations and understanding of the world. These sections will help policy analysts challenge their assumptions so as to develop effective policy interventions. It brings together the main insights from current behavioural economic thinking on how people form preferences and the motivations and aspirations that underlie those preferences.

Following the discussion of what motivates people to act, this section examines economic assumptions about the way people understand the world. A person’s situation has a big influence on behaviour, but situation is not objective – it is constructed around the way in which the person understands the world.

The ways in which people understand the world and take in information have important implications for policy making. A person’s understanding influences how they respond to policies and targeted information and ultimately influences how policy can most effectively target information to the public to achieve behavioural change.

My reading of this guide shows it also has wider application for understanding how people make decisions generally. When dealing with people it’s useful to keep in mind some of the main lessons from the Guide.

• Don’t assume people will have perfect information as most decisions are made under uncertainty.
• Do consider the situation a person is in and the way the person is interpreting the situation.
• Don’t rely too much on beliefs as they are not a reliable predictor of behaviour.
• Don’t assume people will engage in a detailed search to get the optimal outcome.
• People are not only motivated by self-interest. Fairness, status, social norms and personal identify need to be considered.
• Don’t underestimate peer pressure.
• Don’t underestimate the power of emotions.
• Do consider the impact of losses as people are generally loss averse.
• Do take into account unconscious and ingrained habits.

For people in policy roles, this is a useful document.