Sometimes, a Nudge is all it Takes

Studying economic theory often feels like looking at a completely different world than the one in which we live every day. By using concepts likes rational choice theory or utility maximising functions, traditional economic models certainly gain in tractability and sometimes in insightfulness. Nevertheless, try explaining to a friend how he should behave to maximise his utility when buying beers, or how rationality requires him to quit smoking. You will quickly understand the unbridgeable gap between economic theory and the real world economic models. Not that it is useless, of course, but it lacks in realism. The models’ assumptions and their results have digressed from the concrete actions and decisions taken by consumers and firms. Even for us, studying economics every day, it is uncertain whether our courses really help us to make better decisions.

“Does what we learn in macroeconomics, or econometrics courses help us take better decisions in the “wider world”? Unfortunately, not so much.”

Now, we must ask how Behavioural Economics fits into this picture. Well, the theoretical approach of Behavioural Economics is quite clear: study the frequent deviations from standard rationality and from this build a theory explaining the agents’ actual behaviour. But how does Behavioural Economics relate to the wider world? How does it create practical tools for organisations or individuals to take better decisions? Or, in the words of Richard Thaler (Misbehaving, p. 307), one of the founding fathers of Behavioural Economics:

“By the mid-1990s, behavioural economists had two primary goals. The first was empirical: finding and documenting anomalies, both in individual and firm behaviour and in market prices. The second was developing theory. (…) But there was a third goal lurking in the background: could we use behavioural economics to make the world a better place?”

Thaler is well placed to talk about Behavioural Economics developments outside academia; he played a major role in the creation of practical tools to implement behavioural economics insights. Along with Cass Sunstein – Professor of Law at Harvard – he invented the concept of nudges in their 2008 book ‘Nudge: Improving Decisions about Health, Wealth, and Happiness’. Nudging people involves small tweaks in their choice architecture – the environment in which they make decisions. After all, humans, being not-so-rational, often need encouragement or intervention — thus, a nudge — to get going and do what’s best for the society at large.

“Nudges intend to guide individuals towards a desirable outcome such as saving more or throwing their rubbish in the bin.”

In the words of David Halpern, “A nudge is essentially a means of encouraging or guiding behaviour, but without mandating or instructing, and ideally without the need for heavy financial incentives or sanctions.” So, while there is encouragement, there is no compulsion for people to comply and they have the freedom to choose alternative options. As Thaler and Sunstein put it, “Putting fruit at eye level counts as nudge. Banning junk food does not.”

An oft-quoted example of a nudge is the image of a housefly etched into the men’s urinals at Amsterdam’s Schipol Airport, encouraging men to “improve the aim”. Another famous example is the Behavioural Insights Team which, by modifying the wording of tax letters, increased the in-time tax payments by 5% (approximately an additional £9 million for the British government). More recently, the SNCF – France national railway company – introduced nudges for different types of trains. For instance, it managed to almost completely suppress littering issues in its low-cost TGVs, thus saving on cleaning expenses and enabling a better consumer experience.

The above picture depicts a nudge aiming at making us switch off the lights

Even governments have pioneered in designing public policies according to Behavioural Economics principles, influencing citizen behaviour, healthcare, personal finance and investment planning. For instance, the tax breaks under Section 80C are a nudge to encourage citizens to invest in financial instruments such as the Public Provident Fund and equity-linked savings schemes, rather than gold or property.

But what happens when these nudges become ‘noodges’?

When the nudge theory was first identified, nudges were “gentle little incentives here and there to get you to do the things you should do,” said Joe Coughlin, director of the Massachusetts Institute of Technology AgeLab.

But since then, merchants have embraced nudging as a way to get people to buy things, and the big data and “Internet of Things” now help them find new arenas where we never even imagined we could be nudged. “Suddenly all those gentle nudges, empowered by new technology and relatively overzealous marketers, have now turned into noodges,” Coughlin said, using a Yiddish term for nag.

In fact, today, “many companies are nudging purely for their own profit and not in customers’ best interests,” Thaler wrote in the New York Times in 2015.

Thaler believes that proper nudging should be guided by three principles: they should be transparent and never misleading, easy to opt out of, and should improve the person’s welfare.

He’s called out marketers who violate those principles, including an airline that prompted passengers to buy expensive trip insurance if they wanted to book their tickets online, and a British newspaper that automatically enrolled trial subscribers into long-term plans and made it cumbersome for them to opt out.

All this has got economists across the globe worried that consumers will start to tune out nudges, including the beneficial ones. “Then we will lose the value of nudging to do good in the society,” Coughlin said.

However, as customers, all we can do is help one another by resisting these come-ons. The more we scrutinize “one month” trials and turn down questionable offers like trip insurance, the less incentive companies will have to use such ‘evil’ schemes. Conversely, if we reward firms that act in our best interests, more such organizations will survive and flourish, and the options available to us will improve.

- Shreeya Jain