Insights brought nudge theory to prominence. Thaler and Sunstein

Insights
into social psychology and behavioural science have revealed that human
behaviour diverges from rationality as previously outlined by classical
economic theories (Alberto & Salazar, 2012; Goodwin, 2012). Humans have
been conceptualised as being inefficient information-processors (i.e. cognitive
misers) who have limited mental resources (Mols, Haslam, Jetten, &
Steffens, 2015). When faced with certain decisions or situations, errors in
human judgement and decision-making tend to occur as a result of several
factors such as: optimism and overconfidence, loss aversion, status quo bias,
framing effects, akrasia, ignorance, inertia, inattention and heuristics
amongst others (Hausman & Welch, 2010; Thaler & Sunstein, 2008).

Therefore, to overcome such cognitive biases and to influence individuals into
making choices that that are both beneficial to themselves and the rest of
society, Thaler and Sunstein (2008) brought nudge theory to prominence.

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Thaler and Sunstein (2008) defined their
concept as “any aspect of the choice architecture that alters people’s
behaviour in a predictable way without forbidding any options or significantly
changing their economic incentives”.  The central idea is that choice
architects (e.g. policy makers) design the context in which choices are
presented in a way which sways individuals towards more beneficial behaviours
and optimal outcomes (John, Smith, & Stocker, 2009; Thaler & Sunstein,
2008). Underpinning their concept is the philosophy of ‘libertarian
paternalism’. Although this concept might
seem to be in contradiction as the components are usually seen as being
mutually exclusive, Thaler and Sunstein (2008) argue that it shows common sense
if it is understood. They have argued that the
libertarian aspect stems from the idea that people should be free to elect the
choices they want (Goodwin, 2012; Thaler & Sunstein, 2008). The
paternalistic aspect stems from the idea that it is appropriate for the choice
architect to try to influence behaviours to make people’s lives better, longer
and healthier (Goodwin, 2012; Thaler & Sunstein, 2008). Therefore, their
philosophy of libertarian paternalism argues that nudges actively drive
individuals into choosing options which are in their best interest but, without
compromising their freedom to choose otherwise (Goodwin, 2012; Thaler &
Sunstein, 2008).

 

In
addition, Thaler and Sunstein’s (2008) broad definition has allowed scholars to
treat a wide range of subtle interventions as nudges. As a result, nudging has
become increasingly appealing to US and UK politicians in the private sector
and public health as they are easy, low cost solutions which do not require
legislation and can be used to deal with a variety of important social problems
(Marteau, Ogilvie, Roland, Suhrcke, & Kelly, 2011). As a result, many
policy makers, employers, insurance companies, researchers and healthcare
providers favour the use of nudges over other approaches because evidence shows
that if individuals are presented with a good choice architecture, they can be
successfully influenced into making better choices (Blumenthal-Barby, &
Burroughs, 2012). People will mostly need a good nudge for choices that have
delayed effects, are difficult, infrequent and those which propose weak
feedback. The same is true for those in which the relationship between choice
and experience is ambiguous (Thaler & Sunstein, 2008).

 

Nudging
has been used in the private sector to encourage employees to invest and save
more into their pension plans so that they are able to enjoy a comfortable
retirement. To decide how much to save, employees must first enrol in a
defined-contribution plan to participate (Thaler & Sunstein, 2008). The
problem is that the enrolment rate remains far from perfect, for example, in the US around 30% of employees who
are eligible fail to join a pension (Thaler & Sunstein,
2008). It has been implied that this is
because many individuals make careless mistakes and either fail to join or take
months or years to join (Thaler & Sunstein, 2008). Consequently, employers
have successfully nudged participants to join more quickly by changing the
default rule. Currently, the default rule is non-enrolment, so a minimum effort
(i.e. filling out a form) is required to join a pension plan (Thaler &
Sunstein, 2008). However, individual’s inertia and status quo bias imply that
most employees will tend to rely on the default option, regardless of whether
it is good or bad for them, leading to non-enrolment in pension plans (Thaler
& Sunstein, 2008). Changing the default to automatic enrolment means that
employees, when eligible, will automatically be enrolled in the pension plan except
if they explicitly state otherwise. Evidence from a study showed that when the
default was changed to automatic enrolment, enrolment of new employment
immediately reached 90% and further increased to 98% after 36 months (Thaler
& Sunstein, 2008). On the other hand, participation rates under the opt-in
approach were hardly 20% after 3 months of employment and they slowly increased
to 65% after 36 months (Thaler & Sunstein, 2008). Therefore, nudges prove
to be extremely effective in influencing employees to join sooner and a larger
number of employees to join eventually.

 

Although
automatic enrolment is effective in making employees join sooner and more to
join eventually, participants tend to take part at a low contribution rate,
saving too little compared to the life-cycle savings rate (Thaler &
Benartzi, 2004; Thaler & Sunstein, 2008). Behavioural explanations for this
demeanour emphasize the limited rationality because although people may try to
save more, several barriers may prevent them from doing so. First, people tend
to weigh losses more significantly than gains, a phenomenon also known as loss
aversion. When people cut their spending to increase their savings towards
pension funds, they perceive this as a loss, as it generally means a reduction in
take-home money (Thaler & Benartzi, 2004; Thaler & Sunstein, 2008).

Self-control can also be a problem because people may be unable to reduce
current consumption in favour of future consumption (Thaler & Benartzi,
2004; Thaler & Sunstein, 2008). Thus, this implies that many employees
might be making errors and would gladly appreciate help to make better
decisions regarding their savings (Thaler & Benartzi, 2004). To mitigate
this problem the ‘Save More Tomorrow’ (SMarT) programme was developed, making
employees commit in advance to contributing part of their future salary
increases toward retirement savings (Thaler & Benartzi, 2004; Thaler &
Sunstein, 2008). By making pay raises coincide with increases in savings,
employees do not feel like they are receiving lower pays nor view the increase
in retirement contribution as a loss (Thaler & Benartzi, 2004; Thaler &
Sunstein, 2008). The choice architecture design was a success, resulting in
employees who joined to almost quadruple their savings rate in four annual
raises (from 3.5% to 13.6%).

 

Furthermore,
choice architecture is important in the domain of organ donation. The amount of
organs available and the consequent number of lives that are saved depends on
what default option is set (Johnson & Goldstein, 2003). Changing the
default from explicit consent to presumed consent, means people will be organ
donors unless they opt-out. Austria, France, Poland, and Portugal have 90 to
100% rate of organ donation as a result of setting their default as presumed
consent. Whereas countries who remain with explicit consent as a default option
have a donor rate of 5 to 30% (Johnson & Goldstein, 2003).

In
addition, individuals are socially influenced by others. When individuals see
that many others are doing or thinking something, they presume that this may be
what is best for them (Thaler & Sunstein, 2008). Furthermore, those
individuals who care what others think about them are likely to conform with
the rest of the group in order to avoid being judged (Thaler & Sunstein,
2008). Therefore, if choice architects want to influence behaviour with a
social nudge, they can do so by informing people about what others are doing.

For example, part of the plan for the state of Illinois to increase organ donor
enrolment was allowing individuals to register online (Thaler & Sunstein,
2008). Through the web page, the state made use of social norms in a way that
built the power of social influence (Thaler & Sunstein, 2008). They
asserted that 60% of adults in Illinois had already registered and that 87% of
adults in Illinois believed that signing for organ donation was the right thing
to do (Thaler & Sunstein, 2008). Thus, the web page successfully used
social nudges to attract many donors. Additionally, providing social norm feedback
has also been successful in changing people’s behaviour in other domains. For
instance, in a study conducted in Minnesota, the only intervention that had a
significant effect on tax compliance was informing taxpayers that more than 90%
of Minnesotans had already complied with their responsibilities under the tax
law (Thaler & Sunstein, 2008). Some taxpayers are more inclined to break
the law due to a misconception that there is a low level of compliance.

Therefore, providing taxpayers with social norm feedback (i.e. that compliance
is high) results in taxpayers being less likely to violate the law.

 

However, nudges
are not always successful in influencing individuals towards behaviours that
are in their and society’s best interest. For example, in a study researchers
investigated the effectiveness of providing feedback to households about their
own energy consumption and of giving accurate information about the average
energy consumption of the households in their neighbourhood (Schultz,
Nolan, Cialdini, Goldstein, & Griskevicius, 2017; Thaler & Sunstein, 2008). Using this social nudge
to influence individuals into lower energy consumption triggered an adverse
response by below-average users who significantly increase their energy use
(Schultz et al., 2017; Thaler & Sunstein, 2008). This finding is called a
‘boomerang effect’ and it shows that nudges can frequently have limited impacts
or no effect at all in producing socially desirable behaviour when the
individual knows that he or she is being nudged (Mols et al., 2015; Schultz et
al., 2017; Thaler & Sunstein, 2008). Therefore, this problem reveals the
central limitation of nudging: that although it might achieve some short-term
effects influencing unintentional or automatic behaviours, nudges are not capable
of sustaining long-term behavioural changes (Mols et al., 2015). The reason is
that nudges do not change individual’s knowledge, attitudes, values or patterns
of decision-making and judgment in the reflective system (Mols et al., 2015).

Additional strategies are necessary to influence individuals into long-term
behavioural changes (Mols et al., 2015).

 

Nudges
have attracted a lot of attention from policy makers and academics as an
approach which is successful in influencing behaviour. Nevertheless, there are
many researchers who disagree and do not favour the view that nudging is the
approach that should be used to influence individuals into socially desirable
behaviours and optimal choices. Additionally, many researchers have raised some
ethical and moral issues concerned with nudging. Thaler and Sunstein (2008)
have argued that nudge tactics are ethically justifiable and their
justification comes down to the argument that, under libertarian paternalism,
individuals remain free to choose amongst alternatives (Mols et al., 2015).

While this may be true to a certain extent, nudges such as defaults do appear
to be paternalistic because they might encourage individuals to make one choice
instead of another (Hausman & Welch, 2010). Their freedom in terms of the
range of alternatives that can be chosen remains the same. However, when the
encouragement does not take place as a result of rational persuasion, the
degree to which they are in control of their own deliberation and evaluations
(i.e. their autonomy) is reduced (Hausman & Welch, 2010). Therefore,
individual’s actions reveal the strategy used by the choice architect to
influence choice rather than the individual’s own evaluation of alternative
choices (Hausman & Welch, 2010).

 

Nudges take
advantage of individual’s flaws in human judgement and decision-making, with
the goal of substituting what the choice architect considers to be beneficial
or an optimal option, for the nudgee’s own judgment (Goodwin, 2012; Hausman
& Welch, 2010). Consequently, it can be deduced that the shaping of
individual’s choices seems to be much more intrusive than what Thaler and
Sunstein (2008) outlined. This is because it is possible that through shaping,
individuals end up making choices that are not consistent with their overall
preferences and with preferences they would convey if their decision-making
process was not flawed (Hausman & Welch, 2010). To respect an individual’s
autonomy and avoid shaping their choices in a way that are inconsistent with
their preferences, the government should inform of its effort to exploit flawed
decision-making, even though informing will reduce the effectiveness of nudging
(Goodwin, 2012; Hausman & Welch, 2010).

 

In conclusion,
nudging has become increasingly supported by policy makers in the private
sector and public health as it is a cheap and flexible approach. Nudging
demonstrates how small and insignificant details in the environment shape and
retrain human behaviour more than what we think. It explains, using insight
from behavioural economics and social psychology, why people do not behave as
rationally as outlined by classical economics. Nudging is rooted in the concept
of libertarian paternalism, which is used to design policies that influence
individuals into making better choices, without limiting their freedom to
choose otherwise. However, many researchers and academics have raised several
criticisms. Firstly, they have questioned the effectiveness of nudging in
achieving long-lasting behavioural changes as the technique limits the chances
for individuals to rationally deliberate in the decision-making process of
choosing. This  prevents changes in
individual’s knowledge, attitudes, and values. Secondly, some researchers have
argued that some nudges are considered paternalistic and shape individual’s
choices, making libertarian credentials become questionable. Shaping people’s
control over their own choices involves risks as it undermines the degree of
deliberation an individual engages in, as well as, his ability to assess
alternatives for himself. This can be considered morally objectionable.

Therefore, to ensure that policies are not considered morally objectionable and
are able to have a substantial behavioural impact, nudging will not be
sufficient. Individuals will have to move away from daily experiences and
deliberate on a broad range of policy choices. This will allow them to get to
the origin of problems, which is probably necessary if long-term healthy or
sustainable behaviours are to be implemented. Although this requires more
cognitive effort and a higher degree of reflection, it may produce changes that
are more innovative. In the view of the above deliberations and taking into
account the divergent expert opinions, this essay has reached the conclusion
that nudging shouldn’t be used.