Re-engineer Choice Architecture to Improve Budget Decisions


Each year, district leaders make many decisions about school and district finances. Hidden behind those myriad decisions is a choice architecture, which, explicitly or implicitly, defines and shapes leaders’ decision-making. Learning from behavioral economics, this article offers a new perspective to look at the functions and tasks school business officials (SBOs) perform in relation to the choice architecture and calls for rethinking the role SBOs can and should play in facilitating those decisions.

Specifically, three essential components of choice architecture are highlighted: default, anchor, and framing. For each component, prevalent design features and their impact on budgetary decisions are discussed. Based on the discussion, ideas for re-engineering choice architectures commonly found in many school districts are proposed so that SBOs can better support and influence district leaders to achieve the goal of optimal use of taxpayer money for student success.

DEFAULT

Default is the pre-set choice among available options that will remain in effect until a new decision is made. For example, many of us stick with the same auto and home insurance company year after year. This is despite repeated ads we receive from its competitors, reminding us of the alternative options we have and money that we could save by switching from the default.

Defaults are powerful. As best put by Nobel laureate Richard Thaler and his colleague Cass Sunstein in their bestseller, Nudge: Improving Decisions about Health, Wealth, and Happiness, most people tend to take the option that requires the least effort or path of least resistance. Defaults provide that. When it comes to school and district finances, the default in many school districts is the automatic continuation of most if not all line items, under the budgeting model generally characterized as incremental budgeting. With this default, decision-makers avoid the “trouble” of scrutinizing spending for efficiency and effectiveness or “inconvenience” of potentially offending colleagues or facing angry parents and staff impacted by their decisions. However, such choice architectures have proven to not respond well to changing district needs and priorities. Hence, came the Zero-based budgeting (ZBB) model.

With ZBB, a new year budget starts from scratch, and each line item is examined based on specific district criteria such as needs and costs. In essence, ZBB is intended to reform choice architecture by changing the default of budget items from automatic renewal in incremental budgeting to justification needed before approval. Fully implementing ZBB is a tedious and time-consuming process, which requires a great deal of discipline and commitment. Because of this, it has received limited adoption. Even in school districts that adopted this model, it tends to become zero-based in name only as time goes by.

Building on the strengths of ZBB, cycle-based budgeting (CBB) is a renewed attempt to remake the default in choice architecture for budget decisions. Different from ZBB in which all budget items are treated equally and scrutinized for continuation, CBB makes a distinction between operation expenditures that are necessary for a school district to function and investment expenditures that are intended for improvement. Following this distinction, CBB treats the two sets of expenditures differently. For operation expenditures, the default is an automatic renewal, as in incremental budgeting. For investment expenditures, the default is a more flexible version of ZBB. That is, instead of being examined annually, each investment item is reviewed based on an investment cycle that can be either one year or multiple years. With this design, decision-makers can focus their attention and energy on a limited number of investment items instead of the entire budget each year, which makes CBB relatively easier to implement while maintaining the integrity and effectiveness of the annual review.

ANCHORING

Anchoring takes place when a decision is influenced by information that serves as the reference point or benchmark. For example, many people use Kelly Blue Book to assess price fairness for the vehicle they are thinking about purchasing. Anchoring is ubiquitous, and human beings routinely resort to it to facilitate decision making, especially when dealing with novel things or unfamiliar objects.

Anchoring can occur on multiple dimensions. While price is one of the most important factors, we also consider many other features (e.g., safety rating, fuel economy, performance, etc.) when shopping for a car. On each dimension, how we make sense of information and render judgment is often influenced by the anchor point we use. A shopper might shun away from a pair of $200 shoes because it is too expensive comparing to most shoes he owns, but make the purchase when seeing the original $400 price tag, deeming it a great deal that cannot be missed.

In situations of collective decision making, disagreement can quickly arise when people anchor their thinking on different dimensions and use different anchor points to make assessment and render judgment. For example, when a couple go shopping for a car, one might focus on fuel economy and reliability while the other eying on appearance and performance. For the same price, one might think it is affordable but the other considers it beyond budget. When both are driven by their own dimensions and anchor points, it will be a struggle for the couple to come to agreement, which unavoidably involves change of mind and/or compromises.

Similarly, the difficulty for district leaders to reach consensus on which new program to fund and which existing program to defund is partly due to the fact that leaders often anchor their deliberation on different dimensions and might use different anchor points for decision making. That is, leaders will tend to anchor their thinking on the dimensions that matter most to them, while at the same time ignoring or paying little attention to other dimensions that seem less important to their areas of interest and responsibility. Even on dimensions that all leaders care about, it can still be challenging to forge consensus when leaders use different anchor points as a result of distinct focuses, diverse experiences, and varying circles of influence. This dynamic will likely persist as long as individual departments continue to be the starting point (where improvement ideas are formulated and proposed) and end point (where responsibility is assigned with resources allocated) of budget prioritization.  

Due to departmentalized focuses and responsibilities as well as different backgrounds among leaders, prioritizing budget items, by nature, is a challenging task. That said, SBOs can still facilitate the process by doing two things. First, work with district leaders to build consensus around a set of factors that need be considered when making decisions about investing in new programs and discontinuing existing programs. Serving as anchors, these factors make it easier for leaders to see where they have consensus, where they are close to agreement, and where differences lie. Additionally, these factors help leaders attend to issues that might have been ignored or overlooked but are critical for the success and sustainability of the proposed programs. Some factors for SBOs to consider include alignment with organizational priorities, evidence of impact, cost per pupil, political support, implementation feasibility, and coherence with existing programs (See “To Fund or to Defund: Making the Hard Decisions”, School Business Affairs, September 2018 for detail).

Second, for each of the identified factors, SBOs can further support leaders by providing an anchor point whenever it is possible and appropriate. For example, district leaders can use the average and range of cost per pupil information from typical programs implemented in the district to decide whether a newly proposed program is affordable or too pricy. For implementation feasibility, based on research or local experience, SBOs can suggest a maximum number of programs a department should implement concurrently. This helps leaders know which department might be beyond capacity if its proposal is approved, which runs the risk of hurting successful implementation of both the new and existing programs.

In many ways, building a choice architecture that explicitly spells out factors for budget decisions is akin to building search functions for web sites like match.com or cars.com that help people refine choices and make decisions. A thinking process anchored on the identified factors helps leaders filter out choices that do not meet their criteria and retain choices that can be further examined. While district leaders remain in control of which factors they want to use or focus on, a carefully crafted choice architecture can influence leaders to make good decisions, or at least avoid bad decisions.

Even for districts that already have a such a choice architecture developed and implemented, SBOs need to continually examine the design and impact of that choice architecture by asking the following questions. First, what anchors and anchor points do we intentionally or unintentionally provide or fail to offer? Second, of those anchors and anchor points we provide, which tend to help leaders make sound decisions that lead to improved student outcomes or other successes?  Which tend to bias their assessment and judgment, resulting in investments that are ineffective and costly? And which tend to be ignored by decision-makers? Third, how can we refine the presentation of the anchors and anchor points we currently provide to make them more effective?

FRAMING

The way a decision problem is presented or “framed” through different wordings, settings, and situations can influence our choices. For example, research has shown that people tend to react differently when a decision problem is framed as a gain versus a loss. For instance, you receive $50 at the end of each month if you meet an exercise requirement as opposed to earning $50 at the beginning of each month, but lose it if you don’t meet the exercise requirement. During election season, voters often see negative TV ads run by a candidate trying to frame  an opponent as someone who would hurt voters’ economic interests or a radical who is not aligned with voters’ values on specific issues.

When it comes to school and district finances, leaders’ ability to make the best decisions about resource use and communicate those decisions to stakeholders is often hampered by how those choices are framed. For example, the choice about which new programs to fund from a pool of proposals is often framed as choosing the ones that are most aligned with district priorities. This framing poses two challenges for leaders. First, alignment with district priorities is largely a qualitative question that quantitative data cannot always help answer. For reasons discussed above, this is also a dimension on which leaders tend to use an anchor point reflecting their interest and responsibilities. As a result, reaching a consensus is often difficult. Second, it trumps the importance of other important factors to consider, such as program strengths (e.g., evidence-base, implementation feasibility, teacher and principal buy-in), cost (e.g., total cost, cost per student, and financial sustainability), and coherence with the current improvement strategies (e.g., no overlap or redundancy with existing programs).

In other words, the decision problem should not be a matter of just picking programs that most aligned with district priorities, as often narrowly framed in many budget discussions. Rather, it is about investing limited resources in programs that have the best shots of successfully helping student achieve at a low or reasonable cost, without creating new problems. In addition to alignment, leaders should ask whether it is wise to fund a program that is proposed to meet certain student needs but lacks the ingredients to deliver the promise. Or, do we want to support a department’s proposal for a new literacy program that could potentially cause confusion or lead to competition for time and attention, when there is already another literacy initiative run by a different department?

Another scenario is how the choice about whether to discontinue an existing program is usually framed. When news about a program potentially being cut breaks out, it is a familiar scene that program supporters line up at the board meeting, pleading district leaders not to take the resources away from kids. This framing is often further perpetuated by local media showing a parent on TV talking about how her or his kid has greatly benefited from the program. When framed in this way, the decision problem puts leaders in an indefensible position with the planned cuts. After all, how can you take resources away from kids who need them? As a result, some district leaders scale back or completely abandon the proposed elimination.

However, the decision problem is never about taking resources away from kids as framed by supporters and the media. Instead, it is about making the best use of limited resources to benefit most students. Despite benefiting a handful of students, the program proposed for elimination has failed to help most program participants improve. At the same time, other urgent student needs demand resources for an evidence-based program that has high potential to effect meaningful change. This dynamic is usually what motivates leaders to propose the cuts, and this is how the choice should be framed. This is not to say that this framing will easily help leaders implement the proposed cuts. At the very least, it will help present a full picture of the challenges leaders face and viable choices, though imperfect, leaders have to gain understanding and support for.

SUMMARY

Under the current choice architectures, district leaders face many challenges to make the best decisions about the optimal use of limited financial resources to help students achieve. In this article, three fundamental concepts from behavioral economics are introduced to help SBOs think about how they could re-engineer their own choice architecture to better support leaders in making those decisions. While by no means is it easy to apply these concepts, it is hoped that the discussion provides SBOs with a new perspective to see that we can do more than just presenting budget proposals together with the district’s financial situation and outlook. Further, this new perspective will help SBOs look at the deficiencies in the choice architecture of their own school district and offer ideas on how to improve it so that the deliberation will be more rational and objective instead of driven by emotions, conviction, or convenience. More important, the re-engineered choice architecture will lead to better decisions that help students achieve.

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