Nudge Theory

Small things can make a big difference

On Monday, BBC Radio 4 broadcast a special edition of analysis on “Nudge Theory in practice” with Prof. Cass R. Sunstein co-author of “Nudge: Improving Decisions about Health, Wealth, and Happiness”.  As regular readers will know, we approve of freedom and letting people make their own decisions – Freedom of choice.  A general and correct criticism is that we presume that people are more rational than they actually are. As Daniel Kahneman in his brilliant, must read book “Thinking, Fast and Slow” highlights, people don’t always think correctly. People have many biases which are attributed to decision making “tricks”. Through these biases people make apparent irrational decisions. Nudge theory tries to correct or use these biases to incentives / educate people to make a particular choice.

Nudge theory is probably best defined as Libertarian Paternalism. People are still given all the freedom to make their own decisions but they are “nudged” to make a particular decision. A good example is opt -in and opt-out on savings for retirement. By automatically opting people in more people will save for retirement. Another example is adding a note on your tax bill giving the true statistic that “9 out of 10 people pay their tax on time”, makes more people pay their tax on time.

The question remains of where does a nudge turn into a shove? In my mind it is where there is no longer a free choice – at the moment where the choice is influenced by an economic or physical penalty. You should not be punished with a fine for opting out of saving for retirement.

Nudging is a great tool in government as well as in business. In the end you want to trust people and let people make their own decisions. Legislating and mandating everything leads to rigid box ticking and a lack of flexibility. Legislating and mandating is still the first instinct for many. However, does the centre really know what is best for the fringes? Is there really a one size fits all policy? By giving people and the lowest decision making level the right incentives by taking non-rational choice into account, through nudging, small things can really make a big difference.