Nudge Theory: Promoting Rational Choices and Improving Outcomes

“Behavioral economics holds important insights for practitioners of public policy.”

By Minaal Adnani

Coined by one of the founding fathers of behavioral economics, Richard Thaler is the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. More notably, Thaler is known for his book Nudge, which was co-authored by Cass Sunstein. The book takes a critical perspective on Homo economicus or the self-interested and rational economic agent that much of traditional economics is based on. Thaler and Sunstein ask us to ponder the heuristics, or mental ‘rules of thumb’, that human beings use when making decisions. This has led to many biases and irrational choices that are contrary to Homo economicus. Using insights from psychology, Thaler and Sunstein believe that people can be nudged towards making better decisions for their health, wealth and happiness.

 

Choice architecture – how choices are presented to consumers –  plays a major role in how private and public institutions can work together to help individuals make better economic decisions about everything from retirement savings to energy efficiency. Therefore, these findings in social science have important applications in public policy. For instance, the British Behavioral Insights Team, also known as The Nudge Unit, was formed because of Nudge theory.

 

In order to better understand this theory, we must first understand what a ‘nudge’ is. Thaler and Sunstein defined the concept as “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” They add that “the intervention must be easy and cheap to avoid.” Therefore, banning junk food is not a nudge, but a law. On the other hand, putting fruit at eye level is a nudge. It brings more attention to the choice at hand and allows the individual to use their conscious mind, rather than automatic reflexes.

 

One of the most famous examples of a nudge relates to re-designing a default option, or the status quo. When trying to encourage organ donations, an opt-out program works more effectively than an opt-in program. When organ donation is framed as the status quo through an opt-out program, people are much more likely to donate their organs than if they must check the box to opt-in to organ donation. By making it the default that the individual donates their organs, countries could nudge citizens to make a better choice for the health and well-being of that country. Ultimately, this nudge improved organ donation rates across countries when implemented.

 

Similarly, in order to make better financial decisions for the future, the ‘Save More Tomorrow’ program leveraged defaults and automatically increased the percentage of workers’ wage devoted to savings. This increased the savings rates of employees and counter-acted the inertia associated with saving for a far-off future. Human beings are often myopic and short-sighted and therefore do not make sound decisions for retirement. Such nudges are inexpensive and play with the way in which choices are presented to people.

 

Nudges can be used to improve energy efficiency, obesity rates, voting behavior and much more. From social science to public policy, research in behavioral economics that began with nudges is shaping the policies created by governments.

 

References

Image Source: https://pixabay.com/en/fruit-vegetables-supermarket-market-1100190/

Thaler, R. H., & Sunstein, C. R. (2008). Nudge: improving decisions about health, wealth, and happiness. New Haven, CT: Yale University Press.

 

Johnson & Goldstein (2003), Do Defaults Save Lives?, Science, Vol. 302
Thaler, R., & Benartzi, S. (2004). Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy, 112(S1). doi:10.1086/380085