August 7, 2017    5 minute read

The Future of Behavioural Economics: Nudge Theory

Light Touch    August 7, 2017    5 minute read

The Future of Behavioural Economics: Nudge Theory

Amidst the complexity and chaotic nature of life, people sometimes need a gentle nudge in the right direction. Indeed – often subconsciously – humans are ‘nudged’ to perform a certain action. Part of the expanding field that is behavioural economics, nudge theory has recently been deployed by governments in order to lead people towards particular desirable outcomes. As is defined by Richard Thaler and Cass Sunstein, who are largely credited with developing the concept, a nudge is:

“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.”

In the United Kingdom, former Prime Minister David Cameron established a ‘Behavioural Insights Team’, or ‘nudge unit’, during his premiership in order to better influence society’s behaviour. Seen as a low-cost and simple tool that has the potential to alter the behaviours and decisions of millions, the ‘nudge’ may prove to be an effective tool for governments in the future – although it requires detailed examination.

Minimising Legislation

The initial assessment of the nudge approach evidences several benefits over traditional command-and-control regulation. One considerable advantage of nudge for governments is its ability to propose a set of seemingly simple, low-cost solutions that do not require legislation and can be applied to a wide array of problems arising from our behaviour.  Similarly, the utilization of nudge allows the bureaucratic, obstructive and often time-consuming nature of traditional regulation to be

Similarly, the utilization of nudge allows the bureaucratic, obstructive and often time-consuming nature of traditional regulation to be sidestepped through a policy that is more flexible and laissez-faire. This offers dual benefits: not only does it provide a more cost-effective option for the state, but also provides the potential for businesses to be less constrained through bureaucratic regulation, thus allowing for a greater rate of productivity.

The strengths of the nudge approach is also evidential in a number of case studies within the United Kingdom and globally. As an example, the Behavioural Insights Team (BIT) in the U.K. demonstrated the efficacy of nudging via sending text messages to remind civilians of paying fines by increasing the response rate from 5% to 33%. The application of ‘nudging’ the public into signing up to the organ donor register through displaying randomized messages on a website was also successful through recruiting over 350,000 people to register . Through applying these nudges into the public sphere, the annual financial savings generated by the BIT of a reported £30m evidence the economic benefits that the nudge theory can yield.

Opt-out vs Opt-in

Further empirical evidence from overseas illustrates the potential advantages of nudge. An ‘opt-out’ technique used in a United States study displays its efficacy: the decision of a company to automatically enrol new employees in its retirement savings plan (making the ‘default’ to be opted-in) caused enrollment in the plan to increase from 60% to 95%.

Similarly, a Californian case study found residents who had been informed of how their consumption compared with that of their neighbours consequently reduced their energy usage by 10%. The potential efficacy of the nudge can also be seen in Denmark: a trial in Copenhagen wherein green footprints were printed onto a pavement had reduced littering by 46%. The low cost, and simultaneously effective results, of the concept reveals why many governments see it as a viable option for the future.

Nudge theory, however, is not without its flaws. Perhaps its most prominent flaw is the impossibility of the concept to accurately predict human behaviour. The continuously changing nature of individual preferences, as well as the heterogeneity of people’s behaviour, means that nudge-based strategies will require constant modification to ensure they are still consistent and applicable, and will mean that they will often fail in their aims of ‘nudging’; members of the public will become ‘immune’ to nudges after a period of time. Furthermore, individuals’ responses to nudges are diverse across different institutional, social, economic and cultural contexts; a critical failure of the nudge theory is its inability to have the same effect on everybody.

Nudge Limitations

The limited impact of nudge can also be viewed through its relationships with business and private industry. The prevalence of the ‘counter-nudge’, whereby private industry actively resists nudges implemented by the government, negates the function of the nudge. As an example, a government-sponsored nudge to decrease alcohol consumption may well be countered through a company deciding to display high-strength alcohol by the till, or through advertising it more frequently.

Furthermore, the unequal footing between a simple nudge and large and wealthy corporations means that the nudge is often ‘overpowered’: as one writer pertinently summarizes, a nudged reminder about the health risks of McDonald’s is “easily overwhelmed by the saturation of McDonald’s toy promotions, jingles, and movie tie-ins.”

Crucially, the theory of nudge can also be ineffective in the larger context of a society’s problems. A considerable flaw of nudge is grounded in its ‘simplistic’ nature; that it cannot always solve a wider, societal problem solely by focusing on the decision making of an individual.

Limited Application

As noted by scholars, nudge fails to take into account the ‘complex combination of biological, social and cultural causes’ which underpin wide-scale problems throughout society – such as obesity. As an example, the use of nudges would have no real impact on a wide-scale and large issue such as climate change, whereas the use of traditional command-and-control regulation – such as the implementation of environmental laws – would bring about more concrete changes.

Where traditional regulation can often prove ensnared in ‘red tape‘ and be highly time-consuming and costly, nudging appears a promising and cost-effective tool for governments to use in implementing changes on a ‘small-scale’.

Conclusion

It is imperative to note that the concept is too flawed to replace traditional regulation outright-it is unable to fully regulate wide-scale, extensive issues in society such as climate change or obesity, in which substantial institutional change and command regulation is required rather than the optimistic reliance on nudge techniques.

However, the emergent successes of the behavioural economic theory mean that, with further development and trialling, the popularity and usage of nudges can grow for governments globally in the future.

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