Policy and Choice: Public Finance through the Lens of Behavioral Economics

Sendhil Mullainathan

William J. Congdon

Jeffrey R. Kling

April 11, 2011

and Eldar ShafirPolicy and Choice: Public Finance through the Lens of Behavioral Economics examines the effects of public policy on individuals’ financial choices. In this book, authors Sendhil Mullainathan and Eldar Shafir apply insights from behavioral economics to public finance, touching upon the impact of policy initiatives on financial decisions.The authors explore the effects of various policies on individuals’ decisions, and the impact those decisions have on their day-to-day financial health. They discuss the underlying cognitive mechanisms which influence these decisions and strategies to encourage better financial decision-making. In particular, they highlight the role of long-term economic security and short-term economic instability, psychological fatigue, and fair bargaining, and the implications these have for public financial policy.The authors also examine how people respond differently to financial decisions depending on whether their choices are framed as gains or losses, and the implications this has for properly targeting policy initiatives. They discuss how educational interventions, nudges, and other methods of behavior change can be used to improve individuals’ financial decisions. Policy and Choice is an essential read for those in the field of public finance, providing valuable insight and guidance into how public policy can be better structured to encourage more effective financial decision-making. It is packed with helpful ways for policy makers, economists, and other practitioners to improve the effectiveness of their respective financial initiatives.