The Theory of Nudge and it’s Impact on Your Decisions

Nudge, Nudge: The Housefly and the Hybrid

When you are as old and irreverent as I am, the first association you might have when you hear “Nudge” is to a Monty Python sketch aired in 1969.  Two strangers meet in a pub and the phrase “Nudge, Nudge, Wink, Wink” is used to draw attention to a sexual innuendo in a question.  It can also be used to help someone understand that there is an ulterior motive, e.g. “Doing this project will get you great exposure with senior management.” (Meaning: “I don’t want to do it, nudge, nudge.”) 

“Nudge” has been in the news recently because the 2017 Nobel Prize for Economics has just been awarded to Richard Thaler from the University of Chicago.  Thaler – along with his co-author Cass Sunstein – authored the book Nudge: Improving Decisions About Health, Wealth, and Happiness (Penguin Books, 2008).

Like Daniel Kahneman (winner of Nobel Prize for Economics in 2002), Thaler works at the intersection of psychology and economics – a field now known as behavioral economics.  Before Kahneman and Thaler, economic models were based on the concept of homo economicus – that our economic decisions are consistently rational and narrowly self-interested.  Behavioral economists undermine this conception by arguing that human decisions are often less than rational, e.g. impulsiveness drives many of our choices as do a host of heuristics, fallacies, and biases.

What is a Nudge?

Before describing a nudge, let me introduce a key concept of Thaler’s: choice architecture.  A choice architecture describes the way in which decisions are influenced by how the choices are presented.  Influence on decision making can be ‘architected’, for example, by methods such as default settings, framing, and decoy options. And so, what is a nudge?

“A nudge . . . is 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.”

Small changes in choice architecture can encourage people to make better decisions.  Thaler and Sunstein said in their book, “By knowing how people think, we can make it easier for them to choose what is best for them, their families and society.”  Let’s look at a few examples:

• Putting healthier foods in a school dining hall at eye level, while making junk food less conspicuous – the consumer has been nudged to make a healthier choice.  Students are not forbidden to eat the junk food, but the choice architecture makes the ‘junk choice’ less likely.
• To increase low rates of pension saving rates among private sector workers in in the UK, the Government mandated employers to establish an automatic enrolment scheme in 2012.  This meant that employees would be automatically placed into the company’s scheme, and contributions would be deducted from their pay packet – unless they formally requested to be exempted.  The theory was that people really wanted to put more money aside for retirement, but were put off by having to make what they perceived as complicated decisions.  The scheme would make it easier for people to do what they really wanted to do – save.  By making saving the default position in the choice architecture, the active membership rates in private sector pension schemes between 2012 and 2016 rose from 2.7 million to 7.7 million.
• Nudge policy has also been used for organ donation.  As in the retirement savings example, organ donations in Spain and France are based on the opt-out rather than opt-in principle.  You are automatically registered for organ donation.  Again, the theory is that most people want to be donors if for example, they were to die in a car crash but could still save someone else’s life.  The opt-out scheme makes it easier for people to do what they really want to do.

Thaler would prefer a system of ‘prompted choice’; instead of automatic enrollment people would be able to opt-in at various points in applying for – or renewing – a driving license.  

A frequently cited example of a nudge is the etching of a housefly onto the men’s urinals at Schiphol Airport; the intention is to improve the aim and create a better environment.  I thought it was a company logo and toyed with the idea of emailing the maker’s marketing department and letting them know I didn’t think the location was a good choice.

In 2010 the UK government set up a Behavioral Insights Team, informally called the ‘nudge unit’.

Many companies are using nudge management to improve productivity and health and safety.  

Much of this can seem like coercion, manipulation, and heavy paternalism, but believers will tell you that you don’t have to comply.  Choices have not actually been taken away from you.  Thaler and Sunstein call the nudge approach ‘libertarian paternalism’.  

I’m not sure about the long-effects.  When I bought a hybrid car, I felt I was being nudged to improve my driving and protect the environment.  The dashboard was a continuous reminder of how many miles I was getting for each gallon of petrol.  By being lighter on the accelerator, I could improve my score.  My wife and I became very competitive about who could get the best mileage.  The nudge lasted for a while, but soon our habitual heavy feet asserted their authority.  

I’ll try to do better in the future and follow the nudge.  

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