Beta Podcast: Interview with Elisabeth Costa

Elaine Ung:

Hello, and welcome to another episode in BETA's podcast series. BETA is the Behavioural Economics Team of the Australian Government. BETA's mission is to advance the wellbeing of Australians by applying behavioural insights to public policy and administration.

Hi, my name is Elaine, and I'm part of the team. In this podcast series, we interview a whole range of behavioural economics and behavioural insights academics, practitioners, and policymakers.

Hello, I have Lis Costa here with me from the Behavioural Insights Team from the UK, and we're at the Behavioural Exchange Conference, BX2018. Thank you so much Lis for your time.

Elisabeth Costa:

Thanks Elaine, it's great to be here.

Elaine Ung:

Great. Could you please share with us a bit of your background? So, who you are and where you've come from?

Elisabeth Costa:

Sure. I'm Lis Costa. I'm a director at the Behavioural Insights Team in London. I look after our work on consumer policy, economic growth, and energy, so quite a broad range of policy areas. I'm Australian actually, so it's nice to be home this week and seeing the great behavioural community that's emerged in Australia. I started my career actually at the Australian Treasury, the Federal Treasury where I worked on budget policy and on climate change policy for many years. I moved to London around three and a half years ago to join the Behavioural Insights Team.

I actually became interested in behavioural science when I was doing my Master's at Harvard Law School. It was at Harvard that I met Cass Sunstein and worked with Cass quite closely. And Cass helped me make those connections between the climate change policy that I'd been doing at Treasury and some of the more behavioural aspects of environmental policy in particular; and also really opened my eyes to the enormous opportunities that behavioural insights and public policy presented; and also the opportunities to do that within governments. From there I joined the team in London, and it's been fantastic.

Elaine Ung:

Wow, great! Could you share with us some of the work you're doing right now?

Elisabeth Costa:

Absolutely. As I said, I lead a broad range of policy areas in the team in London. But just to give you a sense of what we cover and some of the highlights, for the past 18 months I've been running the Financial Capability Lab, which is a collaboration with the Money Advice Service in the UK. We've been looking at ways to encourage UK citizens to build up rainy day savings buffers to manage their choice use and repayment of credit cards, and also, to seek financial guidance at timely moments in their lives. We've been doing all of that in an experimental setting, and we're about to take those—the best ideas—from the lab into the field, which is very exciting.

We've also been doing a lot of work with UK regulators in energy markets, and also, telecoms markets, care homes, and other regulated sectors. Working with regulators to take both a more behavioural approach to regulation and also working with them to experiment with the different remedies and interventions that they're putting into the field.

More broadly, we do a lot of work on consumer policy in the UK and have been thinking about emerging online markets and the challenges that they present for government and for regulators. I will come back to that in a minute.

On the energy and sustainability side, we've been doing a lot of work on air quality, particularly, how to shift driver behaviour in the UK to reduce emissions on the strategic road networks. We've also been thinking about sustainable consumption. So how to encourage people to, for example, eat less red meat, reduce their plastic use, and things like that.

Then, on the economic growth side, we've been doing a lot of exciting things. We've just finished our first experiment with the Bank of England where we've been applying behavioural science to macroeconomics, which is really a new frontier in behavioural science. We've also been looking at firm-level decision-making. So how, particularly, small- and medium-sized businesses make decisions about how and when to invest in research and development, where they get advice on how to grow their business, how they benchmark themselves against other businesses, and really discern how good their management practices are, how they might grow their business.

Elaine Ung:

Wow.

Elisabeth Costa:

It's a wide terrain, but that's a flavour of what we're doing.

Elaine Ung:

Well, so really, the big issues!

Elisabeth Costa:

The big issues.

Elaine Ung:

Fantastic. Could you please give us an example of some of the work that you've done that demonstrates the potential impact of behavioural economics?

Elisabeth Costa:

Yeah, absolutely. One of the recent experiments we've done within the Financial Capability Lab, I think is a great example of shifting a choice environment and shifting defaults in a way that is very beneficial to consumers. As you might know, in the UK and I think in Australia as well, credit card providers are required to have a minimum repayment amount on credit card statements, and that's generally a very small percentage of the overall balance, and it stops people from accruing large fees and going into problem debt in some ways.

The problem is that that minimum repayment also acts as a very strong anchor. And so what we see is that most people in the UK either repay the full statement balance or the minimum repayment and almost nothing in between. Whereas for many people, if they were able to make even a small additional payment over and above the minimum, that would mean that they would pay less interest over time and that they would clear their debts much more quickly.

We experimented with some ways to give people interactive salient information about the fees and charges that they would incur and used that to help them to make higher repayments. Essentially, we built a set of sliders that people could interact with on their online credit statement, where as they move the repayment amount the figures in terms of how much interest they were repaying, how long they'd hold the debt, updated as they moved it.

We saw that just introducing that slider increased repayments by about 20%, which was very encouraging. It also dramatically reduced the proportion of people who were sticking with the default. We're now speaking with credit providers in the UK to see whether we could test this in the field and roll that out, and I think if that were implemented at scale, it would have a huge impact on people's debt levels and personal finances.

Elaine Ung:

Wow. All the best with that!

Elisabeth Costa:

Thank you.

Elaine Ung:

It sounds really interesting. Do you have a favourite behavioural economics concept?

Elisabeth Costa:

A lot of our work in consumer policy focuses on comparison friction in particular. We've just ran a really neat experiment on foreign exchange fees, which I think highlights the importance of comparison friction and the way that it can influence people's choices across a range of different areas. What we did in that experiment was very—the level of transparency around what the component parts of a foreign exchange fee were, and what we found was that giving people a much more transparent breakdown of the total fee, including the commission and the exchange rate, greatly increased people's ability to pick the cheapest foreign exchange. And that's really important because the estimates are that consumers and small businesses overpay in foreign exchange fees in order of several billion pounds a year.

That's a really important point, so what we saw is that increasing transparency led from around 40% of people being able to pick the best deal, that is, the cheapest deal, to around 70%. And that was highly significant. But then, we also tested an arm where we had varying levels of transparency, so like the current market where it's very difficult to compare across providers because they all provide different types of information, and we found that the impact of transparency completely fell away. Even though the best deal was also the most transparent deal, people were not able to identify it as the best deal, so really huge implications there for regulators both in terms of the types of disclosures that could help people make decisions in markets, but also, the importance of consistency across the market.

Elaine Ung:

It's like comparing apples and oranges really.

Elisabeth Costa:

Exactly.

Elaine Ung:

And one final question. What's next for you? What's your next big research piece?

Elisabeth Costa:

Yeah. Something around fake news and misinformation. Can we design interventions that not just help people recognise that news is fake or that misinformation is false but that makes them think it's not okay to spread it.

Elaine Ung:

How do you apply behavioural economics on yourself? How do you BE yourself on a day-to-day basis?

Elisabeth Costa:

It's a good question. I would say at the outset that knowing a lot about behavioural science certainly doesn't mean that you apply it to yourself in every facet of your life. I would say though that we have some healthy discussions in the UK office about these types of issues, and obviously, Rory and Owain recently wrote their book, ‘Think Small’, which is about applying behavioural science in goal setting in your own life.

So, picking up on some of those themes, early in the year I did a long swim, so I swum two and a half Ks, which for me was quite a stretch goal and used some behavioural science in terms of training for that swim, and getting to the point where I was able to do it. I made a public commitment about it, everyone in the office new that I was doing it, so there was no possibility of backing out. And many people were asking me how it was going on a regular basis.

A colleague and I trained together and we booked the time in our diaries to go for training swims, and we'd also give ourselves small rewards along the way. So we'd often on the weekend, go for a swim and then

Elaine Ung:

That's really excellent, and congratulations.

Elisabeth Costa:

Thank you. Thanks.

Elaine Ung:

That's a great system.

Elisabeth Costa:

It was quite chilly. It was May in London, which at the time when I signed up, I thought would be relatively warm, but it was not.

Elaine Ung:

Could you please share with us some reflections on the evolution you've seen of behavioural economics and behavioural insights in public policy, but also just applied more generally?

Elisabeth Costa:

Sure. I mean, overall I've been with the behavioural insights team for three and a half years. Over that time, there's been an enormous shift in terms of how mainstream it is within government departments, and within regulators. I think we are definitely getting to a point now where people think about the behavioural aspects of a policy problem without being prompted, which is great to see.

I think in terms of evolution, it's been very interesting in the UK to see the evolution of regulatory approaches in particular. So, regulators have started with what I would class as consumer engagement remedies, so looking at things like information provision, how to encourage people to shop around and to switch, whether that's energy provider or mobile phone provider.

Those types of interventions, we've tested a lot of them. They are very effective and they're very low cost to implement. But you're starting from a very low baseline of engagement, so I think as Cass said at the session this morning, you're getting a good effect size, but actually in terms of the overall market dynamic, you're not shifting it enough to make a real difference.

What we've seen in the UK is an evolution towards thinking not that that is the only answer, but that that can be combined with other behavioural interventions, other types of remedies, and other what I would call market design remedies where you're looking more at the structure of the market, the incentives, and behaviour of suppliers, to really shift the market as a whole.

Elaine Ung:

Great. I think there's a lot in that work that you've led the way for other government behavioural insights units to also apply and take on.

Elisabeth Costa:

I hope so, yes.

Elaine Ung:

Great. One last question. What's next for you? You've talked about a lot of the different areas that you work in and the different fields. What's your next big project?

Elisabeth Costa:

Absolutely. So, there's two that I'm really excited about. The first one is that we are working with the Department for International Trade in the UK on how to use behavioural science to encourage businesses to export. I think that is really a new frontier. It's very exciting work and if we can implement some effective interventions there, we'll also have a huge impact on the UK businesses and the UK economy.

The other thing, as I mentioned at the beginning, we've been running the financial capability lab for 18 months. That work has all been done in online experiments and small scale, qualitative research. We are about to partner with some of the biggest financial institutions, FinTechs, building societies, and credit providers in the UK, to test the most effective ideas in the field and I'm just really excited about that.

I think that if we can scale up some of these ideas, again, it will have a huge social impact in terms of getting people to save more, have that emergency savings buffer, and also manage their credit use as well.

Elaine Ung:

Wow, so a lot of great work, but also valuable work coming out soon.

Elisabeth Costa:

Yes, I hope so.

Elaine Ung:

Thank you so much for your time today.

Elisabeth Costa:

You're welcome.

Elaine Ung:

If you want to learn more about Lis' work, you can read about the projects the behavioural insights team is working on on their website. There, you can also read the report Lis co-authored, Applying Behavioural Insights to Regulated Markets.

Thanks for tuning in. If you haven't heard our previous episodes, listen to them at www.PMC.gov.au/beta. Until next time.