Nudge theory (or nudge) is a concept in behavioural science, political theory and economics which proposes positive reinforcement and indirect suggestions to try to achieve non-forced compliance to influence the motives, incentives and decision making of groups and individuals. The claim is that nudges are at least as effective, if not more effective, than direct instruction, legislation, or enforcement. The concept has influenced British and American politicians. Several nudge units exist around the world at the federal level (UK, Germany, Japan and others) as well as at the international level (OECD, World Bank, UN).
The first formulation of the term and associated principles was developed in cybernetics by James Wilk before 1995 and described by Brunel University academic D. J. Stewart as “the art of the nudge” (sometimes referred to as micronudges). It also drew on methodological influences from clinical psychotherapy tracing back to Gregory Bateson, including contributions from Milton Erickson, Watzlawick, Weakland and Fisch, and Bill O’Hanlon In this variant, the nudge is a microtargetted design geared towards a specific group of people, irrespective of the scale of intended intervention.
In 2008, Richard Thaler and Cass Sunstein’s book Nudge: Improving Decisions About Health, Wealth, and Happiness brought nudge theory to prominence. It also gained a following among US and UK politicians, in the private sector and in public health The authors refer to influencing behaviour without coercion as libertarian paternalism and the influencers as choice architects. Thaler and Sunstein defined their concept as:
A nudge, as we will use the term, is 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. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not.
Why is it important?
The ‘Nudge Theory’ has potential applications in varied fields such as public policy, influencing citizen behaviour, healthcare, personal finance and investment planning. For example, tax breaks under Section 80C are a nudge to encourage people to invest in financial instruments such as the Public Provident Fund and equity-linked savings schemes, in place of gold or property. Insurers use the ‘nudge’ of lower premiums on life covers to encourage customers to keep away from smoking. Stretching this a bit, mutual fund SIPs, by making regular investing the default option, are also a nudge to investors to avoid panicking during market falls.
By offering insights into how humans think and act, the Nudge Theory can be used to drive favourable behaviour and avoid unfavourable ones, without resorting to drastic interventions such as penal action or outright bans. For instance, the not-so-effective SC ban on sale of firecrackers this Diwali season in Delhi could have been avoided had people been ‘nudged’ well in advance into realising the adverse effect on air quality and public health due to widespread firecracker usage.
A good recent example can be found in UK pension policy.
In order to increase worryingly low pension saving rates among private sector workers the Government mandated employers to establish an ‘automatic enrolment’ scheme in 2012.
This meant that workers would be automatically placed into a firm’s scheme, and contributions would be deducted from their pay packet, unless they formally requested to be exempted.
The theory was that many people actually wanted to put more money aside for retirement but they were put off from doing so by the need to make what they feared would be complicated decisions.
The idea was that auto enrolment would make saving the default for employees, and thus make it easier for them to do what they really wanted to do and push up savings rates.
Has it worked?
Since auto enrolment was introduced by the Government in 2012, active membership of private sector pension schemes has jumped from 2.7 million to 7.7 million in 2016.
Organ donation is another example of an area where nudge policy has worked.
Spain operates an opt-out system, whereby all citizens are automatically registered for organ donation unless they choose to state otherwise.
The concept has certainly been criticised as paternalistic.
Yet it’s hard for libertarians to make a persuasive cases against such policy nudges in relation to pensions and organ donation because the opt-out option always remains available for people.