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What is Nudge?

Nudging is a very popular concept with behavioural economics. There is a lot of research on it. Famous books have been written about it. It has been implemented in policies worldwide, due to its relative ease and cheapness of implementation. Hell, it even won Richard Thaler a Nobel Prize!

So what is nudging? Within this post I’m going to dive into what nudging actually is, and what it is not. And of course, I will exemplify my case with referencing some word renowned research.

Nudging is the idea that people do not need laws, regulations, prohibitions or other major external forces to make the most desirable decision. Rather, a small change in the choice architecture, will have much more of an effect.

Choice architecture is a term frequently used within the concept of nudging. It means the whole set of options available to choose from, but also how they are presented. For example, in cafeterias, the display of food determines what is bought. If unhealthy snacks are placed in the most visible places, they tempt people to buy them. As a result, more unhealthy food is being purchased. However, rather than putting unhealthy foods on the most visible display, when putting healthy foods there, such as fruit, the purchasing of healthy foods increase. As such, without removing any options (the unhealthy foods are still there, just displayed somewhere else), we have changed behaviour.

When implementing a nudge, the person implementing it does believe people want to make the right decision (the decision genuinely believed to be most beneficial), but fail to do so in line with evidence in behavioural science. Examples of this are default rates. Working with different defaults has proven to have a very big effect as a nudge. With most programs, there is an opt-in, rather than an opt-out mechanism being reinforced. A great example of this is organ donation. It seems that when surveying people, they do wish to donate their organs. However, this willingness is not reflected within organ donation rates at all. What happened there?

Saying that we are willing to do something is one thing. But taking the necessary actions to make sure we actually end up doing what we said we would, is another. It is not that people are lying about wanting to donate their organs. It’s just that they never opt-in to the donation program. This doesn’t make them bad or lazy people. It just makes them people who are busy, have a lot of other things on their mind, and as a result might forget to opt in. As such, some countries have decided to change the default of organ donation programs to opt-out. Now, rather than saying “I wish to donate my organs,” people will have to put in effort to state the opposite. As a result, very few, only those who are strictly against organ donation, take the necessary actions to avoid having to donate their organs. As a result, the countries that have implemented this new default, have seen a massive increase in organ donation rates. Which is great.

In line with inertia, Thaler and Benartzi (2004) introduced SMarT (Save More Tomorrow), which was an automatic pension saving scheme. Instead of having to continuously decide how much to save for pensions, one group of people was enrolled on a scheme that would end up taking their pay rises into account and basing their pension contributions on this. The reason this scheme was pay rise based is as to not affect the actually money taken home. People are averse to losses. When taking money away from their current income to invest into pensions this is felt as a loss, because there is less current income available to be spent. However, when implementing pension saving on pay rises, current income is increased by the pay rise, and only part of this pay rise is invested in pensions. As a result, the actually income to be spent has increased, no losses have occurred. It’s just that the increase wasn’t as extreme as it could have been. SMarT is truly a smart program as it deals with both laziness (inertia) and loss aversion. As such it was no surprise that those enrolled in this specific nudge ended up saving the most out of all participants in the program. They saved close to four times more than the average participant.

So far so good. As I said, there is a lot of research on how nudging, the changing of choice architecture, can change behaviour to a better and larger extent than legal reinforcement can. It should again be mentioned that nudging is never forced. It is just clever design. In the scenarios described above you can still buy unhealthy foods, you can still opt-out of organ donation, and you don’t have to save up for your pension if you don’t want to. All these examples can be found in Thaler’s and Sunstein’s book Nudge, which has become a staple in each behavioural economists reading list. And as much as I am a fan of clever design and simple and cheap interventions, in the next blogpost I will outline that we should be careful in implementing nudges. As I said before, nudging has become incredibly popular. As a result, its application might have become to overextended for its applicability. Rather than nudging, policy makers end up sludging their people. We will dive into how nudges can backfire next.

References Thaler, R. H., & Benartzi, S. (2004). Save more tomorrow™: Using behavioral economics to increase employee saving. Journal of political Economy, 112(S1), S164-S187.


Behavioural Science

Personal Finance



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