Thursday, October 22, 2009

When push comes to nudge

I'm currently reading Nudge by Richard Thaler and Cass Sunstein.

It's a highly accessible journey into the growing field of behavioural economics.

The central point of the book is that people can be "nudged" towards desirable behaviour in simple and non-controlling ways that maintain choice.

A nudge is defined as:
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. (p.6)

The case for 'nudging' comes from the seemingly self-evident idea that people are humans not econs.

In other words, people are subject to limited rationality and flawed decision making, rather than being rational, utility-maximising individuals ('econs') as described in mainstream economic theory.

Humans have an inbuilt propensity for seriously flawed decision making and behaviour, which has major implications for public policy. Psychological experiments have shown that rather than doing detailed analysis before making decisions, humans use a variety of shortcuts or 'rules of thumb'*. Humans also tend to be over-optimistic, overconfident, loss-averse and biased towards the status quo.

For example, people tend to hugely underestimate their risk of developing health problems, resulting in many being under-insured.

The good news is that by tapping into these psychological flaws/tendencies, people can actually be nudged towards doing the right thing by themselves and others. (this can also be exploited for 'evil' by advertising companies!).

The book is full of amusing and effective examples of nudging, like the case of the European airport that wanted to reduce its cleaning costs. It stuck fake flies on its urinals and found that men began aiming at them, reducing spillage (and cleaning costs) significantly!

Many charities have long dined out on the fact that people tend to give more when the suggested minimum giving amount is high (e.g. $100 instead of $20).

Thaler and Sunstein believe in nudges so much they have even suggested a new political philosophy - "libertarian paternalism".

I can see a lot of benefit in policy makers taking on board the insights of behavioural economics. It means government having an active role but developing policies that are smarter, less intrusive and less costly.

Having said this, the 'nudge' paradigm is limited - it trivialises harmful behaviour as a psychological rather than moral/ethical problem. And it assumes that people can be sub-consciously led towards good behaviour without having to explicitly turn away from their old way of doing things.

So.... have you been 'nudged' lately??

*Rules of thumb include anchoring (using a familiar starting point and then adjusting), availability (assessing likelihood of risks by how readily examples come to mind) and representativeness (making judgements based on stereotypes).


brad mccoy said...

ahhh... stephen bell would love this one!

i suppose the problem with the government "nudging" people is that it opens it up to accusations of trickery and manipulation. but let's be honest - we elect government's to manipulate us (eg. coercing people to follow the law).

i'd like to hear your thoughts on how nudging could be used to improve living standards (i.e. health, education, criminal overrepresentation, drug & alcohol abuse) in indigenous communities). is this an alternative to the cape york welfare reforms? or perhaps an element of it?

(by the way is an "econ" the same as "homo economicos"?)

Phil Richardson said...

Ah yes I've started thinking about the same thing - i.e. how 'nudges' could apply in Indigenous communities.

Unfortunately I'm only 80 pages into the book so haven't had time to develop my thinking much.

And yes, 'econ' is the author's shorthand term for 'homo economicus'

As a bit of a side-note, I read that mainstream economists have criticised behavioural economists for their choice of methodology (e.g. surveys etc) that tend to indicate 'stated preference' rather than 'revealed preference'.

So its interesting that most of the experimental evidence discussed by Thaler and Sunstein actually deals with the latter - making it harder to refute.

brad mccoy said...

so how's it going phil? up to page 81 yet?