Avoiding a Fudge or a Sludge: Nudge to the forefront

I read with much interest an already acclaimed book in its latest form published in 2021. Richard Thaler and Cass Sunstein take us through a fabulous journey. It is much more than a fudge and you can read it without a budge. Today’s column is all about the Nudge with its relevance to Sri Lanka. 

Overview 

Prof Richard Thaler of the University of Chicago and Prof Cass Sunsten of Harward University, both behavioural economists introduce the concept of “nudge” for the first time, in 2008. The word nudge literally means to touch or push gently, especially, to attract the attention by a push of the elbow. From an economic perspective, the nudge as a concept is a relatively subtle policy shift that encourages people to make decisions that are in their broad self-interest. It is not about penalising people financially if they do not act in a certain way but about making it easier for them to make a certain decision.

“By knowing how people think, we can make it easier for them to choose what is best for them, their families and society,” the authors state. They in fact have presented a critical choice-making framework where nudges as interventions, big and small, aimed at getting people to act in their own best interest. It is worthwhile to note that in 2017, the Nobel Prize in Economics was awarded to Richard Thaler for his contributions to behavioural economics through the “nudge theory”.

“People will need nudges for decisions that are difficult and rare, for which they do not get prompt feedback, and when they have trouble translating aspects of the situation into terms that they can easily understand.”, so say the authors. In essence, nudges are a powerful way of creating behavioural change while keeping choice and encouragement at the heart of driving that change.

Nudge in action 

As Cass Sunstein, one of the co-authors brilliantly illustrates, a nudge is an intervention that maintains freedom of choice but steers people in a particular direction. A tax isn’t a nudge, nor is a subsidy, a mandate or a ban. A warning is a nudge: “If you swim at this beach, the current is high, and it might be dangerous.” You’re being nudged not to swim, but you can. When you’re given information about the number of fat calories in a cheese burger, it is a nudge. If a utility company sends something two days before a bill is due, saying, “You should pay now, or you are going to incur a late fee,” that is a nudge. You can say no, but it’s probably not in your best interest to do so. Nudges help people deal with a fact about the human brain, which is that we have limited attention. The number of things that we can devote attention to in an hour, a day or a year is lower than the number of things we should devote attention to. A nudge can get us to pay attention. Putting fruit at eye level counts as a nudge. Banning junk food does not.

Ben Chu, the Economics Editor of the Independent, cites a good example for nudging in the 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.

In fact, 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. 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.

Another fitting example for nudging is found in Spain, in relation to organ donation. Spain operates an opt-out system, whereby all citizens are automatically registered for organ donation unless they choose to state otherwise. This is different from many other countries where donors have to opt in. Such a system paved the way for Spain becoming a world leader in organ donation.

The cover page of the book consists of a meaningful picture of an elephant giving a simple touch using its trunk to the fellow elephant in front. As Hindustan Times comments, “If correctly utilised and well executed, it has the potential to drastically alter the level of trust among citizens, thereby changing the nature of the ‘government–citizen’ relationship forever. It can upgrade citizenry, improve democratic outcomes, and enhance the public services’ efficiency in the longer run.” What it states with regard to Indian context has some relevance here

Relevance after 15 years

According to McKinsey Consultants, since the inception of nudging, about 400 “nudge units” or behavioral-insights teams have been established in public- and private-sector organisations around the world. Nudges are interventions, big and small, aimed at getting people to act in their own best interest. Health organisations, for example, have used nudges to educate citizens about COVID-19 testing and vaccination. Consumer-goods companies have used them to steer customers toward climate-friendly products and services. 

As The Guardian observes, belief in the existence of free will ebbs further with every page of Nudge. It couldn’t be more timely: in an era in which a vast range of options paralyses decision-makers, this witty unpacking of what the authors call “choice architecture” gives an insight into what influences people when they are faced with a decision. It is fascinating but also a little alarming. The authors nimbly convey difficult principles through plenty of palatable examples. Nudge is never intimidating, always amusing and elucidating; a jolly economic romp but with serious lessons within.

In looking back at the theory of “nudging”, the authors confess they understand it better now than then. They further opine as follows: “I think we’ll understand it better in ten years than we do now. We know that good nudges still make the chooser’s life better, and bad nudges don’t. What we’re seeing more of now, however, is nudging to protect third parties. You might have a climate-change nudge where the basic goal isn’t to protect the chooser; it is to reduce greenhouse-gas emissions. In Switzerland, for instance, people have been nudged to automatically enrol in clean-energy programs. If they don’t want to, they can opt out, although the “dirtier” program may be more expensive. That nudge is designed to protect people from climate change generally, not necessarily to protect individual choice makers.”  Nudging has a connection to how you chose goods and services. According to Cass Sunstein, any situation where you make a choice has architecture to it. The owner of a website may put certain things in a very large font, the things that the private or public institution really wants you to attend to and maybe choose, and keep certain things hidden in small print at the bottom. It turns out that small differences in this kind of architecture can lead to large differences in social outcomes. If you have a choice architecture where people must opt in, for instance, the participation rate is a lot lower than if the architecture prompts them to opt out.

One example of that is a US program designed to help children get access to school meals. The kids are legally entitled to these meals if they’re poor. But a lot of their parents don’t sign them up, probably because it’s scary to figure out how or is confusing or just a matter of time commitment and the parents don’t have a lot of time. The government switched from an opt-in design to an opt-out design, if the school or the locality knows that you’re poor and you’re a child, you automatically get the meal. The idea was that this would not involve a big advertising campaign. It would be very simple. And at the last count, 15 million children in the US are enjoying nutritious and tasty meals in school.

For all the good that nudges can do, there could also be ethical concerns. “I get this question all the time”, says Richard Thaler. “Do we worry about how people are thinking about this concept? It’s been a concern, sure. For the past 13 years, I’ve been signing copies of the book with the note, “Nudge for good,” which was meant as a plea. But I don’t think bad people need our book to do bad things.” 

As Cass Sunstein, one of the co-authors brilliantly illustrates, a nudge is an intervention that maintains freedom of choice but steers people in a particular direction. A tax isn’t a nudge, nor is a subsidy, a mandate or a ban. A warning is a nudge: “If you swim at this beach, the current is high, and it might be dangerous.” You’re being nudged not to swim, but you can. When you’re given information about the number of fat calories in a cheese burger, it is a nudge. If a utility company sends something two days before a bill is due, saying, “You should pay now, or you are going to incur a late fee,” that is a nudge. You can say no, but it’s probably not in your best interest to do so

Applicability to us 

The cover page of the book consists of a meaningful picture of an elephant giving a simple touch using its trunk to the fellow elephant in front. As Hindustan Times comments, “If correctly utilised and well executed, it has the potential to drastically alter the level of trust among citizens, thereby changing the nature of the ‘government–citizen’ relationship forever. It can upgrade citizenry, improve democratic outcomes, and enhance the public services’ efficiency in the longer run.”  What it states with regard to Indian context has some relevance here. 

The advice from Adam Grant, a popular professor from Wharton, makes a lot of sense. “Nudge should be required reading for anyone who aspires to run a country, lead a company, raise a child, or make a choice. It’s the gold standard for using behavioural science to guide decisions and policies”. It is a clear way to avoid forcing but to use subtle influencing. 

As an EY report states, we react differently to the same information depending on how it is framed, and our choices are often affected by whether the outcomes are framed in terms of the gains or losses. For example, food described as 99% fat free is perceived as more favourable than food described as 1% fat. This can be clearly viewed as a perception nudge. 

Way forward 

“People will need nudges for decisions that are difficult and rare, for which they do not get prompt feedback, and when they have trouble translating aspects of the situation into terms that they can easily understand.”, so say the authors. In essence, nudges are a powerful way of creating behavioural change while keeping choice and encouragement at the heart of driving that change. Creating effective nudges is a complex process and to truly make an impact, the behaviour that is trying to be changed needs to be acutely understood.

(Ajantha Dharmasiri, a senior professor in Management, and an Independent Non-executive Director, can be reached at [email protected], [email protected] or   www.ajanthadharmasiri.info.)