THE THEORY OF NUDGE: AN INSIGHT INTO HOW PEOPLE PSYCHOLOGICALLY BUDGE
Updated: Mar 11, 2020
-by Gulhaider Zaidi, 1st Economics
The 2017 Nobel laureate in Economics, Richard Thaler along with Cass Sunstein, co-authored a book named ‘Nudge: Improving Decisions about Health, Wealth & Happiness’, which shattered the antediluvian preconception of economics being a science of ‘dollars’ and ‘calculators’. The book has had a great impact on the minds of both, economists and the common man. As we all look forward to every opportunity to (apparently) maximise our satisfaction, we must stop for a while and contemplate whether we are really fitting the ‘Homo economicus’ (the economic man) stereotype. It won’t be a matter of surprise if we find out that we hardly represent the economic man that is often described in our economics textbooks. The book by Thaler and Sunstein brought the nudge theory to the limelight. This article draws inspiration from the field of ‘Behavioral Economics’ and discusses what the nudge theory is and how it matters to us.
The newly developing field of Behavioral Economics combines economics with psychology. It clarifies that economic models that are studied at schools or colleges are not consistent with real life. Conservative economics focuses on rationality and mechanical humans, that are referred to as ‘Econs’. Thaler, in his book, ‘Misbehaving’, describes his days as a professor. He would give very difficult tests to his students, which naturally, would make them infuriated and students would be in an uproar when they would get their results. Their principal complaint was that the average score was 72 points out of 100. The students would hate their exams, despite knowing that the average numerical score had no effect on the distribution of grades. Worried about keeping his job, Thaler came out with an idea. He did not want to compromise upon the level of the exam, so he went ahead and increased the maximum marks from 100 to a weird 137. This exam turned out to be even harder, with students being able to get only 70% of the answers correct. Yet, the average score this time was 96 points. The students were delighted! Thaler chose this magic number 137 because it would give average scores well above 95 points and interestingly, doing calculations with 137 was not as easy as doing the same with 100. So, nobody would bother much, to sit and do the calculations. To an Econ, a change from 100 to 137 would not have made the case any different, but what Thaler was dealing with were real humans and not econs.
The Nudge Theory is no different. Keeping psychology at its foundation, it works its wonders in economics and public policy. By offering insights into how humans think and act, the Nudge Theory can be used to drive favourable behaviour and avoid unfavourable ones. It is just like a stimulus that stimulates us to do a certain task. Let us take an example of a video game. After playing all your chances or winning the game (if you are an expert!), there is a ‘Game Over’ indication along with scores of other players. Why would that be? By revealing the scores of other players for the same game, you are being nudged to take another challenge and beat their scores (many people are nudged in the same way, which increases the popularity of the game further). Often, when you visit a website to make a purchase, you may have noticed that one of your purchase options was labeled as most popular. The website is nudging consumers to choose the most popular option by informing them that other consumers prefer that option and so should you. These examples seem to be innocuous, but they go a long way to help firms achieve what they want to.
(Image source: Twitter)
Another example comes from the Amsterdam airport, back in 2009. The authorities at the airport installed small fly-shaped stickers near the drains of the urinals in men’s washroom. Funnily and peculiarly enough, now, men had something to aim for. This reduced spillage at the washrooms by 80% (no overstatement!)! That fly-shaped sticker served as a nudge for these people, which helped the airport to pay a reduced amount to the cleaning staff and cut down on its expenditure. Similarly, there are instances which depict how shops nudge us to buy certain products. The American grocery store ‘Pay & Save’ placed green arrows on the floors leading to vegetable & fruits section. The result- customers followed the arrows 9 out of 10 times, resulting in increased sales of fresh produce.
Can we use ‘nudge’ to promote organ donations? The answer is a resounding ‘yes’! Countries where people have to opt in to donating organs generally see a maximum of 30% of the population registering to donate. In countries where people are enrolled in organ donation schemes by default and have to actually opt out, see only 10 to 15% of people opting out of the policy, thus increasing the number of organ donors. Creating ‘default options’ is equivalent to creating norms. People, usually do not wish to come out of these norms, while many are too lazy to do so! An experiment in the Philippines provided smokers with a savings account for 6 months. At the end of this period, they had a urine test for nicotine. If they passed, they got all their money, but if they failed, it was all given to charity. We must understand that ‘banning’ something doesn’t prove to be effective at all, at least in the long run. What is more beneficial is ‘nudging’ people and gently coercing them to act in lines with the government policy, as we saw in the smoking example.
Behavioral Insights Teams (BIT’s) (officially called ‘Nudge Units’) have been set up across different countries like the UK, the US, Singapore and Australia. BIT’s are organisations that have been set up to try to improve government policy and services as well as to save the government’s money. In the UK, it is estimated that fraud costs the economy about £38.4 billion per year. In particular, about 10% people do not pay their self-assessed taxes on time. The BIT conducted a series of trials to test the effectiveness of various messages on self-assessed tax repayments. The trials revealed that tax letters stating that majority of individuals pay their taxes on time and the importance of paying taxes, resulted in a 15% increase in tax repayments. If these tax letters were sent out to self-assessed tax debtors, it is estimated that about £30 million of extra revenue could be generated for the government. In fact, what can prove to be more efficacious, is telling individuals that their neighbours have paid the taxes. This move is more likely to bring out a better response on the part of the tax-payer, as compared to telling them that majority of people have paid their taxes. As an example, one recent US study found a saving of 6% in home energy use could be achieved by including information on residents’ energy bills about the average energy consumption for homes in the area, demonstrating how people unconsciously conform to what others like them are doing.
Behavioral Economics has its way with children too! ‘Lazy Town’ is an Icelandic TV show that motivates children to exercise and eat healthier. Leveraging on its popularity, the show has launched several health initiatives, in partnership with the Icelandic government to encourage healthier eating and exercise. In one initiative with a large supermarket chain, fruits and vegetables were labeled ‘Sports Candy’ – the name Lazy Town uses for fruits and vegetables. The simple change in naming led to a 22% increase in sales for the supermarket. Lazy Town became mainstream in 1996 and since then, child obesity rates have decreased among 9-year olds in Iceland.
The Global Insights Initiative Team of the World Bank proposed to help the Indian government work out how to meet its target to eliminate open defecation by 2019, measuring the success of certain interventions, such as asking people to commit to using toilets, and ‘no toilet, no bride’– an initiative that asks parents to ensure their daughters are not married to men whose villages have no toilet. These are some of the very innovative ways nudge theory is being applied world-wide.
There are people however, who claim that the ‘nudge’ theory appeals to people’s weaknesses. Moreover, repeated nudges like our car ‘nudging’ us to wear our seatbelt often fade into the background noise. Nudges may be believed to be ‘not-so-beneficial’ in the long run, because people may not like doing something at variance with their usual interests, for long. However, the very idea of ‘Nudge’ has indeed shown results at the macro levels. Nudge is undoubtedly ‘hacking’ into the minds of people to promote well-being across different sectors. Governments round the globe have come to realise the potential that this concept is laden with. It is the most quintessential item in an economist’s toolbox.
Thaler, Richard, C. Sunstein. The Nudge: Improving Decisions about Health, Wealth & Happiness. Penguin Books, 2017.
Thaler, Richard. Penguin Books, 2016.
The Skipprichard, skipprichard.com/10-examples-of-nudge-theory/