Tuesday, 2 December 2008

Selling the incentives

I’ve been thinking more about fiscal salesmanship – the concept that people will not just spend their fiscal stimulus – it has to be structured or presented in a certain way. I asked myself, as an entrepreneur, what would I do if I wanted to change the behaviour of a large group of people? I would do some marketing.

People don’t just respond to pure incentives. Of course incentives do make some difference; when a consumer decides what to spend in the shops today, one of the factors will be that most products are 2% cheaper. But it’s only one of many influences, and people simply don’t have enough processing power to automatically incorporate all available incentives in their decision-making process.

Indeed, financial incentives can usually be overridden or even inverted by the right kind of sales or marketing effort. BMW salespeople don’t cut their prices because of the signal it might send about their quality. Ryanair makes people think it is the cheapest airline by the clever ploy of treating them really badly; but often they are not at all cheap. If consumers made these decisions on a rational, financial basis they would not behave as they do.

New mechanisms are especially challenging, because of inertia. People already have a large set of behaviour options in their minds, and to add another one has a mental cost. Therefore new options are less effective than they rationally “should” be.
Policymakers therefore need to consider salesmanship in everything they do. What is the psychology of the situation; how can we get people to do something different; and especially, how can we get best leverage? No private company would be willing to spend the amount of money that a government does, in order to achieve the small amount of behavioural change that they seem to be happy with. Clever application of money and brand messages are much more effective, per pound spent, than brute force.

Government certainly knows this in some scenarios; instead of financially incentivising people not to drink and drive, they spend far less money on some very effective advertising. They take advantage of cultural trends to make the behaviour less socially acceptable. And yes, there are concrete incentives too (fines and imprisonment) but they are only part of a mix.

This is not to deny that macroeconomic changes make a difference. Of course if there is more liquidity in the banking system, or more money in the economy, people will spend more. But the advantage you get from changing the mental attitudes of the consumer will multiply the effect of any stimulus.

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