Nudging in action has given us more insight into the way people make decisions. The key now is to use that knowledge to design more realistic policies.

Five years ago, Richard Thaler and Cass Sunstein published Nudge: Improving Decisions about Health, Wealth and Happiness, a book that asked us to fundamentally change the way we think about how policy is made. Nudge challenged the prevailing approaches to policy-making and governance that were grounded in the appealing idea that human beings are rational decision-makers, cognitively sophisticated enough to process all relevant information and unswayed by emotion. It presented several years’ worth of research to demonstrate that, by contrast, our decision-making is surprisingly malleable and therefore dramatically influenced by context. And if that is the case, Thaler and Sunstein asked, is it not possible to create the context that steers people toward the right choice (or at least the one we believe brings about the greatest common good)?

The authors believed it was, and they used the term ”choice architecture” to refer to the act of creating environments that would nudge citizens toward preferred choices. The book went on to be a New York Timesbestseller and was cited as the book of the year by the Economist and the Financial Times. But it was also the target of debate and controversy. Naysayers ranged from those who took issue with the structure of the book (”What the book needs is not more examples but more elaboration of the central idea”– the Sunday Times) to those with concerns about the thesis itself (”If the “nudgee” can’t be depended on to recognize his own best interests, why stop at a nudge?”– the New Yorker). So while the nudge theory caught the imagination of policy thinkers, its applicability to the real world was questioned from the start.

Since then, we have seen some governments begin to embrace this behavioural approach to policy. In Britain, the cabinet office has set up the Behavioural Insights Team, which is charged with identifying traits that can be embedded into policy and governance initiatives. Various divisions and agencies of governments in the United States and Singapore have developed behaviourally informed policies and programs (a follow-up book by Sunstein, entitled Simpler: The Future of Government, provides an account of some of the work done in the United States in this regard).

The list of behaviourally driven initiatives is growing. In the US, Save More Tomorrow, a behaviourally designed retirement savings program, has been shown to outperform other savings programs. Enhanced Active Choice prompts people to make choices like renewing medication, which they otherwise would have ignored. And in Canada, Quick Enrollment makes enrolment in retirement plans easy. Furthermore, partnerships between academic centres and industry have resulted in the creation of consulting groups like ideas42, whose tagline ”Using behavioural economics to do good” sums up its work well.

In short, five years after it came to prominence as theory, nudge is gaining a toehold in making real policy changes.

In Nudge, Thaler and Sunstein contrasted their nudging approach to two instruments that have often been used by policy-makers: economic incentives, such as rewards and taxes, and restrictions, such as bans on behaviour. Consider, for example, two school cafeterias that want to help students consume less junk food. One cafeteria places a ”tax” on junk foods or bans the sale of junk foods altogether. The other cafeteria decides to change its food display so that it is inconvenient to reach out and choose the junk food.

Research shows that people make decisions that are emotional, distracted, impulsive and inconsistent.

Both cafeterias are trying to influence behaviour, but they are using two entirely different methods. The first cafeteria is influencing behaviour either by financially incentivizing students to choose healthier options or by restricting their options and thus their freedom of choice. The second cafeteria does neither, but uses a nudging strategy. Elements of this approach are evident in New York City Mayor Michael Bloomberg’s attempt this year (now held up in the courts) to get New Yorkers to consume less sugary soda. Bloomberg sought not to ban the drinks but rather to influence consumption habits by limiting the size of drinks to 16 ounces.

Policy-makers and welfare architects often have to deal with subsets of choices: the ”should” versus ”want” choices. People should work hard, be honest in paying taxes and eat healthy foods– but they often want to do the opposite. But if the right context can be constructed, the proponents of nudging argue, discrepancies between the should and want options can be diminished by using a gentle form of policy intervention.

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One example is organ donation rates. Many people support the idea of organ donations but fail to follow through on their intentions. In many countries, potential donors need to sign up at the department of vehicles and licensing, and the burden of asking for the forms that will indicate that choice rests with the potential donors. In a ”prompted choice” system, however, applicants for licences are actively asked whether they would like to donate organs. In Illinois, this simple nudge has increased organ donation rates from 38 percent to 60 percent.

Examples like this show how changes in the environment or context can influence behaviour without requiring significant changes to financial incentives or restricting freedom of choice. Indeed, recent research by Raj Chetty and colleagues in the domain of retirement savings compares a nudging strategy (automatic contributions) with a more active incentive (tax subsidies) and concludes that the former is significantly more effective than the latter.

Decades of research in the behavioural sciences has shown that people make decisions– even consequential ones– that are emotional, distracted, impulsive and inconsistent. We now know that humans suffer from option overload– an inability to make well-reasoned decisions in the presence of large assortments– and that their attention is a relatively scarce (and getting even more scarce) resource.

In the domain of economic behaviour, there is further bad news for the proponents of rational man. Research in the area of mental accounting shows that the standard principle of fungibility– the assumption that any dollar is perfectly substitutable for any other dollar– is routinely violated, and that people have trouble making choices where the consequences are spread out over time. Furthermore, a host of social, noneconomic factors have a large effect on our economic behaviour. An overwhelming, growing and fairly conclusive body of evidence suggests it is past time to move away from a rational view of the decision-maker.

In response, the fledgling field of ”judgment and decision-making,” or behavioural economics, provides a richer, more descriptive narrative for how decisions are made. Doing away with the focus on rationality produces models of economic behaviour that are more realistic. The models are also relatively inelegant.

Consider this simple question: ”How much should a given person save for retirement?” Traditional economics has an elegant mathematical equation to capture the response. The behavioural approach, by comparison, is intuitively more appealing, yet more complex. It can take several pages of prose to describe, instead of a simple formula. And whereas the behavioural approach to policy can lead to a number of guiding principles, a ”grand unified theory” of decision-making has yet to be uncovered.

One key principle in behavioural economics is the idea that people are not very adept at valuing objects, products, services or ideas. Instead, the context of the decision leads them to infer their own preferences. For instance, Mr. A might have little insight into which fuel– 87, 89 or 91 octane– he should purchase for his car but might end up choosing the 89 because it is not an extreme option. Ms. B is not quite sure what RAM and screen size are best suited to her needs as she is shopping for a laptop online, so she simply chooses the default option when asked to make a choice. And Mr. C is confused poring over the multitude of options on the menu of his local Chinese takeout restaurant and is relieved to find (and choose) the ”featured item” recommendation.

In each of these cases, the context– the manner in which choices have been presented and information has been structured– has influenced the choice that was made.

Given that government budgets are shrinking and public opposition to taxes and bans is growing, nudging offers a good way to accomplish social good without the associated inefficiencies of traditional policy instruments. But while the deluge of recent evidence in favour of nudging has assuaged some of the criticisms, some concerns still make the rounds.

The first of these concerns is that nudging is manipulative: the citizen is being tricked by the technocrat into choosing a certain path. Yet one of the most fundamental goals of human enterprise is to influence and persuade others to follow a path– we are always being nudged. If nudging is manipulative, then so too are many interactions that we routinely accept as fair, from advertising to parenting and teaching, from selling to the cornerstone activity of democracy: asking for a vote.

Some of these practices are perhaps even viciously manipulative. On the other hand, a behavioural approach to policy is conducted with the goal of being beneficial to the decision-maker. Furthermore, the instruments of nudging are harmless. Every choice always has a default option, and there is always a conventional, transparent approach to presenting information. If one can meaningfully use these defaults to increase the public welfare, that can only be beneficial rather than manipulative.

A second criticism is that we should be using education and not nudging to achieve our policy goals, reflected in the idea that education is empowering, nudging is demeaning. This argument would have merit if the proponents of nudging wanted to convert all policy and welfare interventions into nudges. They do not. Nudging is most effective in initiating actions, such as getting someone to open a bank account or visit a doctor, whereas education is paramount in nurturing activities, like managing a portfolio or leading a healthy lifestyle. The educating versus nudging debate is a false choice. The appropriate question is how to use these two approaches in tandem.

What can be done, then, to spread the word of behavioural insights and embed them more often in our policy choices? One of the key differences between the traditional and the behavioural approaches to economics is the nature of the science. The traditional approach is theoretical: it makes certain assumptions about the decision-makers and proceeds to make specific predictions about their choices. The behavioural approach is empirical. It essentially points to the data as the primary source of insights. It is imperative to build a widely shared, open-source database that measures the outcomes of various behavioural interventions and guides policy-makers on the suitability of nudges.

We now have some experience with nudges in action and its implications. We know, for example, that people are paralyzed when faced with too much information. The behavioural approach leads us to advocate for providing people with relevant and meaningful– but not copious– information, in conjunction with decision-making tools that organize information in meaningful ways. These ”choice engines” could take the form of online Web-based tools or mobile smart-phone apps, what Richard Thaler and Will Tucker recently referred to as ”smart disclosure.”

We have also learned that given the gap between people’s intentions and their actions, it is vital to get them to precommit to their choices, and to develop commitment mechanisms to help them follow through on these choices. Examples of commitment mechanisms are contracts that could include penalties on withdrawing from participation in a plan, or rewards for following through on commitments. And we know that social pressure can induce people to behave in ways that lead to a desired outcome. Making it clear that your neighbours have paid their taxes has been shown to be an effective way to encourage laggards to pay their tax bills.

Nudge is not a panacea for all the problems that confront us. But it is showing itself to be an effective way to encourage socially beneficial behaviour. Most importantly, by getting our policy leaders to focus on how people actually behave rather than on unproven assumptions of economic rationality, the nudge approach kindles a fresh way of looking at problems, offering hope where we now see only obstacles.