Nudge Theory and the Pitfalls of Behavioural Economics

Richard Thaler, the creator of Nudge Theory won the Nobel Prize for Economics in 2017 as the solution to the simple problem: how can one oblige people to act in a certain way without force. While Traditional economic theory states that people act rationally, making rational decisions in every area of their lives when faced with choices; Thaler disagreed here as he believed that people cannot and do not always make rational decisions as sometimes the choices people make are too complex to allow them to make a ‘rational decision’.

In the book co-authored with legal scholar Cass Sunstein, Richard Thaler explains a “Nudge” to be “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”. Hence Nudge Theory is simple at its core. It is built on the tenet that by following the principles of behaviourism and through small environmental changes, individuals and groups can be nudged to behave in certain desirable ways. Nudge Theory has now become di rigueur in many spheres across the world. Sounds familiar to playing God with people’s choices, doesn’t it?

Before we go further, let us take a moment to understand our current environment that has facilitated such a theory. We are living in a digital era of unprecedented connectivity. Technology has made communication possible with people across the globe. The internet and smart phones rule our life. Smart cities and a smart planet are buzz words. Never before has the herd mindset or collectivism been so pronounced making it relatively easier to influence individuals or a group of individuals. The abundance of social media tools have made groupism easy and as human interaction are slowly moving away from the individual and intimate to the impersonal virtual world; digital engagements and communities have made influencing large groups easy to achieve commercial goals. Adding to this is the pressure of the daily grind and the paucity of time to examine all the available choices and voila; you have the perfect environment to implement Nudge Theory.

Nudge Theory states that policies must be created that ‘nudge’ people to make the choices that they would make if they were acting in their own self-interest. For example, one ‘nudge’ that has been used in supermarkets is placing arrows on the floor pointing towards healthy food. This has been successful in increasing the consumption of healthy food and it can be stated here that a nudge was effective in encouraging decisions that serve an individual’s greater interest. While this is great news for companies to reach their target audience effectively and reduce ad spends, the lines get blurred when Nudge Theory extends its applications to social and political choices.

Citing “libertarian paternalism”, the idea of using behavioural economics to alter human behaviour in conformity with ideas or the policies of state without use of any force or coercion opens up a huge opportunity for governments and corporations to employ a regulatory paradigm in their self-interests or the welfare of society as perceived by them.

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The UK was one of the first countries to adopt Nudge Theory. PM David Cameron in 2010 setup a Nudge called Behavioral Insight Team (BIT) to influence the societal decisions of millions for the “better”. For Example BIT in UK sent out message reminders to civilians to pay fines and subsequently compliances increased from 5% to 33%. Similar nudges were made for organ donor registrations. The BIT’s nudging efforts are estimated to have saved 30 million pounds for the exchequer.

The United States launched Social & Behavioral Sciences Team (SBST) in January 2014 by President Obama and it has been successful in nudging people through service reminders and health care subscriptions. On September 15, 2015, President Obama issued Executive Order 13707, “Using Behavioral Science Insights to Better Serve the American People”. This directed Federal Government agencies to apply behavioural science insights/ research insights about how people make decisions and act upon them to design policies and programs The Order also charged the Social and Behavioral Sciences Team (SBST- a multiple agency group of applied behavioural scientists, program officials, and policymakers) with providing policy guidance and advice to Federal agencies in pursuit of this directive. Behavioural sciences have now become an integral part of US Government policies as the 2016 annual report by SBST states wherein an Opt Out technique was used by organizations automatically enrolling all employers in retirement savings plans unless the enrolee opted out leading to an enrolment increase from 65% to 95%. Come to think of it, in our daily life we are inundated with emails that automatically subscribe us to various initiatives with the option to de-register. How many times do we make a conscious effort to do so?

The US Office of Regulatory Affairs also has policies influenced by Nudge Theory. For example the Smart Disclosure Initiative informs people of their past expenditures to lead them to make better choices in the future. USAID also actively works with SBST in forwarding of agendas like the handwashing campaigns in West Bengal in India and Zimbabwe. The United States has incorporated Nudge Theory in a versatile manner from sending reminders by text messages about appointments to using social norms when communicating with those who have yet to pay their taxes, e.g. “most people have paid their taxes by Jan 31st”. Australia created Behavioural Economics team of Australia (BETA) in 2015; another nudge unit to influence public opinion and social behavior towards the desired choices. In Denmark, an NGO named iNudgeYou, designs policies such as placing footprints that pointed towards rubbish bins that reduced littering by almost half.

In 2016 India’s Niti Ayog, the policy planning group of Government of India collaborated with Bill & Melinda Gates Foundation to set up a Nudge Unit to push people in an affirmative to the policies of the state. Many government policies like “Give It Up” LPG subsidy campaign, “Beti Padhao Beti Bachao”, “Swachh Bharat” Campaigns are modelled on polite nudges from state to the people to act in certain way especially in social and economic causes. Nudge Theory has been used from facilitating timely tax payment to awarding benefits/rewards to public for digital transactions to alter people’s behavior towards the state aimed goal of Digital India.

As per a 2017 report titled, “Use of Behavioural Insights in Consumer Policy” published by organisation For Economic Co-Operation and Development (OECD) more than 150 governments across the globe have tried Nudging as a better choice.

Singapore often referred to as a model country has been using Nudge Theory before it became fashionable. Late Prime Minister Lee Kuan Yew knew that in order to avoid repeating the mistakes of the neighbouring nations, Singaporeans would need to be nudged to make the correct decisions to create a strong social identity in which people of multiple cultures could assimilate homogenously providing a viable platform for economic growth and nation building. In fact in 1986, he had stated, “I am often accused of interfering in the private lives of citizens. Yes, if I did not, had I not done that, we wouldn’t be here today we would not have made economic progress, if we had not intervened on very personal matters that your neighbour is, how you live, the noise you make, how you spit, or what language you use. We decide what is right”. From rubbish bins that are placed away from bus stops to separate smokers from other bus users, utility bills that display how your energy consumption compares to your neighbours, outdoor gyms near entrances to remind people to exercise, the Healthier Dining Program that makes eating healthy a cheaper option, The National Steps Challenge, which encourages participants to get exercising using free step counters in exchange for cash and prizes to the Baby Bonus Scheme that encourages parents to have more children by offering cash incentives and money into a Child Development Account (CDA) to pay for childcare and healthcare, the Nudge Theory is omnipresent in Singapore! Use of Nudge theory is not only limited to the above countries, currently as per a 2017 report titled, “Use of Behavioural Insights in Consumer Policy” published by organisation For Economic Co-Operation and Development (OECD) more than 150 governments across the globe have tried Nudging as a better choice.

While the above examples demonstrate the positive aspect of Nudge Theory, it can also be argued that libertarian paternalism or soft paternalism undermines democracy subtly putting more power in the hands of the state and its agencies which seek to limit choices for the public and seek conformity to their agendas instead of promoting a healthy debate and containing view points on a policy decision. It could also be argued that Nudge Theory empowers the belief that the policy makers know their citizens true desires and needs better than they do and since the concept of “shove” is anathematic to a democratic society that prides itself on freedom of choice, a collective “nudge” instead is an effective way of achieving the desired goal.

Use of Nudge by the state presents an ethical question of manipulating the cognitive faculties of the human mind.

For example, if the government mandates that fruit be placed at eye level in shops, so that customers are more likely to buy it than sweets and chocolate will that acceptable in a democratic society? One answer could be yes, absolutely as we will be much healthier while another could be perhaps, but have we been tricked into picking up a choice, altering our behaviour. Most of us may agree with the first answer and find the second one cynical but the question that really emerges from this debate is what is next? What will sweets and chocolates replace next as we slowly move away from the tenets of democracy slowly but surely towards greater authoritarianism without even realising it? The use of Nudge by the state thus presents an ethical question of manipulating the cognitive faculties of the human mind which Cass R Sunstein, the co-author of Nudge Theory with Richard Thaler has stated in the book “Ethics of Influence”.

The application of Nudge Theory with Big Data and Artificial Intelligence expands the scope of the nudge to a much larger platform vide “Nudge Analytics”. Nudging in Telecom Sector is already prevalent where data driven technologies such as predictive analysis, behavioural clustering, and image and pattern recognition are used by telecom operators along with AI for determining policies. By clustering people’s data a telecom operator can ascertain the amount and pattern of data usage by a customer and accordingly nudge them with an incentive for adopting usage specific plans.

In the tech industry through smartphones and smart watches, a person can be nudged towards a fitness regime change based on health data collected by these devices. In the banking Industry banks like HSBC have already launched AI enabled apps that collect the financial data of consumers and based on analytics; nudge the customer towards financial plans and portfolio management that suits his profile. As we all desire to make good, rational and optimal decisions or what we call the right choice, the probability of conversion of these nudges into reality is high as humans are prone to adopt the herd mindset due to the confidence we gain from a collective set of numbers. After all, if something is good for a greater number of people per the analytics, it must be good for us individually as well right?

Nudge Theory has merits when it can influence the behaviour of people for the betterment of the individual and society but in a digital world, it can take on a different connotation. Behavioural economics when mixed with AI can be lethal as smart devices and robots in the future would know what we do, where we go or what we prefer and nudge us accordingly while promoting certain products and services while censoring others. Moreover, with a modulation of the environment, it could make us rethink about buying our favourite product in favour of another. Such an action is against the principles of a free competitive market, free will and informed consent.

Digital World works on there’s only one winner concept which necessitates the creation of soft monopolies in the medium to long term which could end up further limiting our choices by nudging us towards desired policies or plans none of which are in our interests. The application of Nudge Theory by the policy makers from state or the corporations is like a double edged sword. One on side it provides a unique solution to the problems at hand and on the other brings new challenges in an ever changing world where the consumer is ultimately the end product and his data the gold mine.

Notes:

  • https://www.foreignaffairs.com/reviews/nudge-too-far?cid=soc-tw-rdr
  • http://www.behaviouralinsights.co.uk/
  • https://local.gov.uk/sites/default/files/documents/changing-behaviours-publi-e0a.pdf
  • https://obamawhitehouse.archives.gov/the-press-office/2015/09/15/executive-order-using-behavioral-science-insights-better-serve-american
  • https://sbst.gov/download/2016%20SBST%20Annual%20Report.pdf
  • https://www.usaid.gov/sites/default/files/documents/15396/DIV_APS_OAA-16-000006.pdf
  • https://globalhandwashing.org/norms-nudges-or-addiction-understanding-drivers-for-handwashing-behavior-change/
  • http://theconversation.com/government-behavioural-economics-nudge-unit-needs-a-shove-in-a-new-direction-80390?utm_source=twitter&utm_medium=twitterbutton
  • https://economictimes.indiatimes.com/news/economy/policy/niti-aayog-plans-nudge-unit-to-help-push-governments-flagship-schemes/articleshow/54041144.cms
  • https://www.indiatimes.com/news/india/pm-modi-s-give-it-up-swachh-bharat-are-examples-of-thaler-s-nudge-theory-that-won-nobel-prize-331691.html
  • http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DSTI/CP(2016)3/FINAL&docLanguage=En
  • https://www.newscientist.com/article/mg23231002-200-playing-politics-exposing-the-flaws-of-nudge-thinking/#.Wp5nkk_AYq4
  • https://analyticsindiamag.com/richard-thalers-nudge-theory-can-used-analytics/

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