This Is Why We Nudge: Reaffirming Nobel Winner Richard Thaler’s ‘Nudge’

In October 2017, Richard Thaler won the University of Chicago its 29^th Nobel Prize in Economic Sciences for his contributions to behavioral economics. Stockholm’s nod to Thaler is less coup than coronation, of both Thaler himself and of the broad applicability and value of behavioral economics as an indispensable discipline, nudging the reluctant field of economics into dialogue with other fast-converging conversations in the behavioral and social sciences.

Thaler describes these applications of behavioral economics principles as ‘nudges’—typically unobtrusive, inexpensive methods of altering consumer preferences. In theory, the ‘nudge’ concept challenges classical economic theories. In practice, ‘nudge’ teams have saved untold sums of time, talent, and treasure for governments and corporations as they incorporate consumers’ ‘misbehavior’ (or humanity) into new models for interaction, ranging from marketing and consumption to delivery and enrollment.

In this context, Thaler co-authored a paper with Benartzi et al. investigating whether governments should invest resources in this sexy, new field of nudging. Their paper, aptly titled “Should Governments Invest More in Nudging?,” confirmed strong suspicions that nudging is a valuable and cost-effective tool to improve a wide range of public services. Indeed, the paper goes on to demonstrate how nudges improve traditional tools of coercion or adoption, such as marketing, education, and even tax incentives. Ultimately, in almost any economic activity characterized by decision-making, a good nudge goes a long way.

A core tenet of ‘good’ nudging is what Thaler describes as “gentle touch.” That is, a nudge policy should defer to user preference and choice, featuring opt-ins, opt-outs, or decision points, rather than attempting to mandate a preferred policy. One example of a policy nudge is automatic enrollment in a benefits program. Because people exhibit inertia, “sticking to defaults,” and because policymakers incidentally recommend preferred options in their selection of those defaults, deviation from those defaults trigger consumers’ instincts for loss aversion. All this to state an obvious observation: Policymakers can ‘nudge’ people toward preferred social programs or outcomes by priming them as default options.

The chief concerns of the paper, though, are with what Benartzi et al. call “relative effectiveness calculations,” or, ‘did the cost of the nudge result in disproportionate cost savings or positive outcomes?’ The authors achieved this by measuring the ratio of the causal effect of a policy to the policy implementation cost. And they did so with a startling number of diverse policy areas, including retirement savings, collegiate enrollment, healthcare, influenza vaccinations, and energy conservation.

It need not surprise us then to find that nudge policies, compared with traditional policies, have resulted in meaningful and cost-effective impact for governments innovative and brave enough to test them. As in the diagram shown, an active nudge toward retirement savings can result in $100 of contributions for each $1 spent on policy implementation. College enrollment can be increased by 1.53 students for every $1,000 spent by government. Vaccination and energy conservation improvements are more modest but proportionally significant when compared with existing options.

The authors found that nudge policies work best when policy objectives alter day-to-day behavior of individuals making rushed and demonstrably imperfect decisions. Meanwhile, monetary incentives do best when policymakers seek to correct misalignments between public and private interests for citizens capable of more careful decision-making.

And yet, there is some question about the larger impact. In terms of public budgeting, these nudges produce modest savings. Further, the authors note that ‘success’ in terms of a nudge (e.g., more kids in college grant programs) could well result in an indirect cost to other government programs. For governments wary of innovation, one wonders whether valuable political capital and reforming zeal might be better spent addressing larger problems, for instance: structural failings of government institutions, corruption, or a comprehensive approach to costly health systems or failing judicial systems.

Are modest, even simple, improvements worth the energy? Is ‘nudge’ worth the effort? The authors say so. In most cases studied, the authors found that the nudge intervention simply encouraged the use of existing, “under-capacity” institutions in a way well-aligned to the institutions’ missions. And in many ways, the nudge improves policy delivery and complements existing policies. We improve FAFSA’s effectiveness; we don’t replace college aid programs.

Benartzi et al. close with three broad recommendations: increase government investment in nudging, encourage nudge units to track and share data, and measure future behavioral interventions in terms of impact per dollars spent. Without such calculations, reformers lack evidence both to design good policy, but perhaps more importantly, to sell it to political stakeholders. This study shows us that nudge policies can deliver enormous and disproportionate savings for minimal investment; the cash saved adds up.

Article source: Benartzi, Schlomo, John Beshears, Katherine L. Milkman, Cass R. Sunstein, Richard H. Thaler, Maya Shankar, Will Tucker-Ray, William J. Congdon, and Steven Galing. “Should Governments Invest More in Nudging?” Association for Psychological Science. 28:8 (2017): 1041-1055.

Featured photo: Jean Lachat/University of Chicago