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Behavioural Economics and the rise of “Nudge”

May 21, 2017

Using behavioural economics to inform policies has been on the rise in recent times. With the setting-up of “nudge units” across the United Kingdom and France, as well as the appointment of nudge pioneers Sunstein and Thaler to the White House, leaders are increasingly recognising the potential of nudging individuals in the workplace and society to improve health, financial well-being and performance. But what is “nudge” really?

 

 

 

The basic premise of nudge is that people do not always make decisions in their own interest. This is because even though we are intendedly rational, individuals are hard-wired with decision-making biases. These biases are several, including but not limited to: confirmation biases (seeking information that confirms our existing opinions), hyperbolic discounting (preferring immediate gains to future gains, even if future gains are larger) and status quo bias (preferring statis to change). Take the example of savings for the future. We all know savings are good for our future selves but often prefer to spend our salary once the pay check comes in, choosing smaller immediate gains over larger gains in the future. 

 

Behavioural economists Daniel Kahneman and Amos Tversky were the first to meticulously study and test the effects of cognitive biases on decision choices. Having met at the Hebrew University of Jerusalem in 1969, they formed an enriching and enduring academic partnership spanning over decades, even winning a Nobel Prize for their ground-breaking work. However, it was Sunstein and Thaler who brought behavioural economics into the political limelight with their book “Nudge” [1], asking the question: how can we design policies using insights from behavioural economics to help people make better decisions? This was the veritable birth of “nudge”.

 

Nudging tries to improve choices through simple tweaks in the way choices themselves are presented, correcting for inherent biases. Take for instance, the way food options are presented in a supermarket to nudge people into eating healthier. When crisps are put out of reach on a higher shelf and healthy foods are placed directly in front, people reach out for the more available item they see. Google too recently tried out a similar intervention. A sign was placed at the Google cafeteria, stating that people who picked up small instead of large plates were more likely to eat less. The number of people picking up small plates went up by 50 percent. This does not necessarily mean that Google employees actually eat less - after, all whether they go for seconds, is another matter! It does point however, to the exciting potential of a simple behaviourally-informed intervention.

 

Another example is the use of the default opt-in option to increase enrolments in retirement savings plans. The success of automatically enrolments of employees into retirement savings plans as opposed to asking them to actively enrol for it has been so positive that it has been widely accepted as common practice by many [2].

 

Nudging sounds simple, but there are some important issues that need to be considered both before and after planning an intervention. First, designing the intervention itself requires a sound theoretical backing separating cognitive biases from pop science. Some policy interventions can be disruptive and costly, further emphasising the importance of robust theoretical underpinnings. In addition, a lot of experts claiming to use behavioural insights are actually basing their work on social psychology and so are using different theories to design interventions. This is not a problem in itself, but by under-specifying theory risks making nudging a catch-all term with little impact, as discussed in our blog post here.

 

Furthermore, it is important to rigorously test whether an intervention actually worked or not so that results can be confirmed and measured. In case of failure, it is equally important to think about why some nudges do not work. For example, a recent study found that the default opt-in option may not work in all instances. When an airline company made it confusing for customers to opt out of travel insurance on its online booking website, it resulted in public irritation against what was perceived as manipulative marketing [3].

 

Third, we need to continuously improve the methodologies we use to measure impact. Currently, RCTs or Randomised Controlled Trials are the main method and have come under the scanner for various reasons. But with a rich dialogue ongoing between scientists and policy practitioners, there is growing confidence in the ability of RCTs to accurately measure the effectiveness of nudge

 

Finally, we need to think carefully about the ethics of using nudges. Choice architecture runs the risk of governments appearing paternalistic, by claiming to know what is good for people - more than people themselves. However, when used responsibly, there is no reason why nudging cannot be a valuable tool for improving social welfare, discussed in our article here.

 

Any planned intervention thus requires careful thought over which nudges will be most effective as well as whether they are ethical or not. But by being a low-cost and powerful tool to optimise our daily lives, the rise of nudge is certainly promising for leaders and policy practitioners alike, and can be an important method to help overcome short-termism in our society.

 

References

 

  1. R. H. Thaler and C. R. Sunstein, Nudge : improving decisions about health, wealth, and happiness. Penguin Books, 2009.

  2. E. J. Johnson, A. Herrmann, and M. Heitmann, “Nudge your customers towards better choices,” Harvard Business Review, no. 12, 2008.

  3. L. Bachelor, “Ryanair (finally) plays fair on insurance,” Guardian, 2009.

 

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