Sunday 25 September 2016

Well-designed nudges can make the world (a bit) better

Published 19/07/2015 | 02:30

‘Nudges were not about creating bigger or smaller government, but smarter government. And they have achieved a degree of success...’
‘Nudges were not about creating bigger or smaller government, but smarter government. And they have achieved a degree of success...’

The economics profession has not had a stellar crisis. But if some branches of the discipline are floundering, others are doing a whole lot better. One field of inquiry can even make the bold claim that it is making the world a little better in many small but often important areas.

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Understanding better the choices that people make and the motivation behind them is central to many companies' marketing strategies and tactics. It is just as important in designing public policy.

Behavioural economics has been trying to get beyond the basic assumption underpinning much of modern economics - that people are rational, utility-maximising automatons.

Using insights from psychology (which show that we are far less rational and calculating than was once assumed), scholars are coming up with all sorts of suggestions on how policies can be designed to achieve better collective and individual outcomes - but without trampling on liberties.

American Cass Sunstein (who just happens to be married to Samantha Power, the Irish-born US ambassador to the UN) is a leader in the field of behavioural economics.

A book on how people can be gently "nudged" to make better decisions, co-authored with Richard Thaler in 2008, has been enormously influential in policy-making circles. Across the water, David Cameron even established a "nudge unit" in Downing Street when he became prime minister in 2010.

In a recent paper,* Sunstein adds some important insights gleaned from his research.

Nudges are interventions that steer people in particular directions, while not preventing them from going in any other way, hence the (wordy) term "libertarian paternalism".

And nudges can be big or small.

Re-arranging the display in a cafeteria (to make the healthier options more accessible) is a nudge in the direction of better nutrition and keeping obesity at bay.

Automatically enrolling citizens or employees into pension plans (in order to sidestep any inertia and procrastination) is another much-discussed nudge - but it is only a nudge because it is accompanied by an opt-out, which doesn't remove the citizens' freedom to choose.

Underpinning all of this is the greater understanding that we now have of behaviour - because humans make lots of very predictable errors. If policymakers can anticipate them and devise policy to reduce the error rate, then everyone wins and no one loses.

Nudge theory has already reached Irish shores. An opt-out system for organ donors is being proposed to replace the current opt-in one. Prompted by success in the UK, the Office of the Revenue Commissioners have been experimenting with the wording of letters in order to improve tax-compliance rates.

Despite notable policy successes, there are objections to nudges. Serious questions on the ethics and legitimacy have been asked. While certain policies - such as improving health or getting people to save for retirement - are relatively straightforward, there are limits. It is doubtful whether having nudges in every aspect of life is desirable. And nudges can be bad too.

One effective way to determine the legitimacy of nudging is simply to ask the general public. In his paper, entitled simply Do People Like Nudges?, Sunstein uses his own American survey and draws on the work of others.

In general, the surveys suggest that there is quite a lot of support for the gentle guidance that Sunstein has been to the forefront in advocating. Policies incorporating nudges that have already been introduced tend to be backed more than mooted nudges, as did those offering increased education or information.

More specifically, popular nudges include: mandatory calorie labels (87pc approval), public education on childhood obesity (82pc) and a mandatory choice of whether to become an organ donor when obtaining a driver's licence (70pc).

It seems that as long as people deem the ends to be legitimate and beneficial to most people, they are happy to be nudged around.

While most proposals received majority approval, about a third did not, including: assumption of Christianity for census data (21pc approval), default donation on tax returns to an animal welfare charity (26pc), and a default charge for carbon emissions on airplane tickets (36pc). All these options contained opt-outs, but consent is presumed otherwise.

Automatic donations or payments, even with an opt-out box to tick, look more like a shove than a nudge, possibly explaining their relative unpopularity. And there was disapproval of policymakers using the average Joe's inertia or inattention against them, likely to be explained by a fear that big government might try to hoodwink people.

Sunstein explains this by making a distinction here between the two types of thinking that are synonymous with Daniel Kahneman, one of the fathers of behavioural economics. In system 1 ('thinking fast') we make snap decisions that are intuitive and impulsive. It is here that much of human's biases and errors occur. System 2 ('thinking slow') is more deliberative and calculating.

Sunstein concludes that people prefer System 2 nudges to System 1 nudges because they have the chance to weigh up what they are being nudged towards and are less likely to feel they are being manipulated by unconscious or subconscious processes.

Interestingly, in a country that is riven by culture wars, the nudges that are popular with Americans get bi-partisan support - although predictably Democrats tended to be more enthusiastic than Republicans.

One of the main goals of Sunstein and Thaler's original book was to put forward ideas that would get bipartisan support. Nudges were not about creating bigger or smaller government, but smarter government. Here, it seems, they have achieved a degree of success.

Though like in any area of public policy, it is inevitable that some proposals will become politicised. For instance, in the survey, a small majority supported automatically registering eligible citizens on the electoral roll. Yet there was a sharp partisan divide, with Democrats in favour and Republicans against, reflecting the contentious nature of voter registration in the United States.

To guard against some of this, Sunstein encourages public officials to be humble and attentive to the views of others (not always easy, when Sir Humphrey is sure he knows best). If strong majorities favour or oppose nudges, says Sunstein, then their views ought to be taken into account, regardless of whether they are right of wrong.

There will be much trial and error in this field. Success will surely be accompanied by failures. Nor will nudges ever become a panaceas to all of society's ills. But the prospect of improving our lives in small ways makes it a worthwhile endeavour, and may help rehabilitate economists in the eyes of those who have lost faith in dismalists.

*http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2604084

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