In Singapore, rush hour at the Mass Rapid Transit trains can involve more body contact than a full on TSA pat down, the train so packed you will know whether the guy next to you had garlic toast for breakfast. Because of this crowding, someone in the Transit office decided to give people a 10% discount if they rode the trains during off-peak hours. But very few Singaporeans took the Transit folks up on this offer. Why?
Because the Transit system gave them another more exciting choice: As The New York Times reported recently (here), if commuters chose to ride during off-peak times, the Transit Authority gave them the opportunity to enter a daily lottery. While their odds of winning were small, especially compared to the certainty of a 10% discount, the sheer fun of entering a lottery—just for riding a train!—was hard to pass up.
As a result, rush hour commuting congestion in Singapore is down 10%.
Economics is the science of incentives. Behavioral economics tries to broaden our understanding of how humans respond to incentives, by accounting for the psychological forces that make one incentive more, um, incenty than another.
Suppose you ride the train 200 days out of the year. You could receive a 10% discount each day and save, say, $200 over the year. Or you could enter a lottery each day, one with an average pay-out of less than $1 per day. Over the course of the year, you’ll probably save more money by taking the sure 10% discount every day. But because the lottery is so much more fun, it acts as a much stronger incentive.
In trying to promote socially beneficial behavior, governments need to be creative and employ incentives that not only work according to standard economic theory, but also work in practice. Sometimes accounting for people’s irrationality makes for better policies. That way, we all end up as winners.