Fighting Poverty With Evidence and the Effectiveness of ‘Small Nudges’

The latest episode of Freakonomics is about “fighting poverty with actual evidence” and features a discussion with economists Richard Thaler from the University of Chicago, and Dean Karlan from Yale, who examine studies (like the one by Give Directly), showing what kinds of methods are good at fighting poverty.

They also talk about psychology and “social norming.” Here, Thaler talks about one success story in the U.K. about getting people to pay their taxes:

THALER: Well, probably the best example of that, one of the very first initiatives in Britain was meeting with some guy who’s in charge of collecting money from people who owe money on their taxes. Most people in the U.K. pay their taxes automatically.

DUBNER: Payroll withholding.

THALER: Pay As You Earn it’s called, and… but if you have a private business, you drive a cab, or you have whatever…

DUBNER: Doctors.

THALER: Yeah, what we would call Schedule C income here, then you have to file a tax return and come up with a lot of money, and some people were late and they were writing letters. And they would send one letter, and then they’d send another letter, and then turn it over to a collection agency, which is very expensive, and the team just started experimenting writing different letters. So there’s a simple trick from Bob Cialdini, the great social psychologist, author of the book “Influence” that you tell people truthfully, most people pay their taxes on time. That helps a little bit. If you say most people in Westchester County where you live…I’m making this up…pay their taxes on time, that helps more. If you say most people in Westchester County are paying their taxes on time and it’s going for that new park that we’re building…So you can get the take up rate up by as much as 5 percent.

Thaler says small nudges like mailing people the right kinds of letters help move people in the right direction. Maybe a receiving a nice letter would help remind us self-employed folks to pay our estimated taxes every quarter.

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