Recent events in the life of my friend “Bill” provide a natural experiment in behavioral economics.
Bill works at a national advocacy organization we’ll call Our Future (the person and organization are real but the names are made up). Last year the OF was nervous about its budget and in mid-year told everyone that the organization would be closed between Christmas and New Years, and that no one would be paid for that week. OF also took a small amount out of everyone’s paycheck for several months and “paid” the employees with that money for the furloughed week. Depending on your perspective, OF either cut everyone’s pay and closed the office for a paid vacation week or it borrowed money from its employees that it paid back (without interest) during an unpaid furlough.
But that’s not how Bill saw it. Because the amount removed from his pay was relatively small and because he received a paycheck during a week when he was away vacationing in warm places, it felt like he got an extra, paid vacation. Of course Bill could have saved a little amount from each paycheck all year and simply taken the time, or invested a small amount from each paycheck and made money on the deal, but (like most of us) Bill probably wouldn’t have done that.
There is a recent plot twist: OF did just fine last year and is giving Bill and his co-workers checks for the amount removed from their paychecks last year. In other words, OF is paying people this year money it promised to pay them last year, and in addition Bill got an unexpected paid vacation. Since Bill felt as if he’d already received a paid week in the sun, the new money (really last year’s promised money) feels like a bonus. Bill’s 2009 salary was cut by 1 week’s wages and he involuntarily lent his employer money without interest. Because of the way the arrangement was structured (and because Bill knows the people who have been laid off) Bill thought it was terrific. OF is now paying Bill what it promised to pay him to begin with, and he feels as if he’s getting something special.
In addition to being of a “taa-daa” moment (behavioral economics! Taa-daa!) this offers lessons for policy makers. People like big checks because they feel like windfalls, and don’t notice (as much) small hits they never see (this is why automatically deducting retirement and other savings from paychecks before we get them works).
Tax policy, including tax credits and rebates, can be more popular if they offer lump rewards rather than small ones (see here on the Earned Income Tax Credit for example). Similarly, the government could use lots of small bits of money that we would rather receive all at once later and invest it now, making money off of it. Policymakers advocates would do well to learn from OF’s cleverness and Bill’s happiness.
