A Nudge in the Right Direction? Richard Thaler and Libertarian Paternalism 

Sylvia Patterson

We don’t often stop to think about the thousands of influences that contribute to the decisions we make every day, or the hidden forces that may be exploiting our psychology to act a certain way. The nudge is one such force, and although it seems like an innocent reminder, as we will learn, we should never underestimate the effect of the nudge.

Bounded Rationality 

It was an economist named Dr. Richard Thaler who defined the idea of the nudge, beginning with the idea that human beings are not rational creatures. Thaler was the recipient of the Nobel Prize in Economic Sciences in 2017 for his contributions to Behavioral Economics. His awarding was met with a degree of controversy due to the merging of the field of Psychology with Economics.

On October 10, 2020, Dr. Richard Thaler spoke at Trinity University. Despite his prestigious place in the world of academia, Thaler came across as a very knowledgeable, yet down to earth and even humorous speaker, someone who illustrated his points through a series of entertaining stories, real world examples of human nature. 

Dr. Thaler stressed the importance of that which economic theory tends to ignore, most crucially, the fact that human beings are not rational. Humans have bounded rationality and bounded willpower, and will more often than not submit to temptation in the moment, rather than act for the long-term good. This is because, for most of human history, people did not live long enough to worry about saving. This is why long term planning is evolutionarily one of the spheres where rationality falls short. 

Through his research, Thaler found that people have a strong tendency to keep what they have. Although economic theory says that the people who value something the most will end up with it, in reality, status quo bias comes into play, and people have the tendency to stick with what they have, what he refers to as ‘inertia.’ The tendency toward inertia can be utilized through a type of nudge. 

The Default

In real life, Thaler used his work to nudge people into choosing the optimal pension plan that would allow them to save the most in the long run. Instead of having them opt into the program, they were automatically enrolled as the default option and instead would have to opt out. It was successful in getting people that normally wouldn’t have saved to acquire a retirement fund. The idea of the nudge all comes down to choice architecture, or how you create the environment in which people choose. 

Nudges are a part of choice architecture because they are features of the environment that influence humans. According to Thaler, nudging is not taking away choices, it is choice preserving, or  “libertarian paternalism,” which, Thaler explains, is not an oxymoron. Essentially, we are encouraged to act a certain way, but the choice is still ours.

One of the most powerful types of nudges is the default. By changing the default option, we can change people’s choices. Because of people’s tendency toward loss aversion, and their resistance to change options, or inertia as Thaler called it, the desired outcome happens if they simply do nothing. Thus, a new default, or automatic enrollment, can achieve the optimal goal. 

Libertarian Paternalism

This research comes with a series of implications, first, that nudges are very powerful, and second, that the effects are long lasting. The work of Richard Thaler shows us that human nature is key to understanding any human decision, and that we can nudge for good. But the question remains: are all nudges good?

At the end of the day, there are nudges all around us, more than we think, and not often as nobly applied as in the pension-plan case. Some common examples of this marketing tactic include, the default “subscribe and save” option on Amazon, pop-up announcements or reminders from websites, a psychological anchor, like a visible before and after price on a good, or even simply the relative ease or noticeability of a choice, such as the placement of food items in a cafeteria. 

In the right hands, the nudge can be used to influence productive and beneficial behavior in individuals, but at the least, it is a clever marketing tactic.  But this leaves the unanswered question: can the nudge be used for ill?

The Nefarious Nudge

The concept of the nudge gets the most murky when it comes to the government and policy enforcement. Although Thaler published a paper defending libertarian paternalism, our instinct is to see it as something dystopian. Needless to say, the nudge has not been without its fair share of criticism. It’s human nature to bristle at the thought of a powerful entity subtly influencing us into making the desired choice. Where do we draw the line with the nudge? Ultimately, who determines what the “right” decision is? The Nudge can be used for good, but like any phenomenon, it can also be abused

Already, we have witnessed the rise of the Behavioral Insights Team (BIT), also known as the ‘Nudge Unit’, which is a “ global social purpose company” founded in 2010. The BIT has offices around the world, including in the UK where it began, as well as in America, Australia, New Zealand, Singapore, and Latin America. The BIT uses social engineering based on behavioral insights and tactics from psychology and marketing to influence public thought and decision making to be in compliance with government policy. The goal is to minimize costs related to poor compliance of government policy and regulation. 

The BIT has done work in a variety of concepts, from assessing the risk of gambling, to more overtly progressive political goals, like designing ways to get people to drive less to reduce emissions, studying how to establish diversity task forces, and running numerous experiments to find the most effective way to use social norms to get people to wear masks during COVID. 

Nudge theory has also been used to nudge people into getting the COVID vaccine. Researchers used reminders that were “carefully designed to reduce barriers to following through” in addition to “behaviourally informed messaging designed to amplify individuals’ desire to get vaccinated” and “information-provision intervention aimed at correcting the misconceptions that drive vaccine hesitancy”. What else could be achieved by nudge units if they so desired? 

Due to the Nudge Unit’s success, a number of similar organizations have since popped up around the world. According to OECD, there are 202 institutions across the globe that have applied behavioral insights to public policy. Most people don’t know that these organizations exist, or that they are influencing compliance and promoting their goals all around us. 

What is most off-putting is the fact that nudges are not transparent about their objectives. Instead of being forthright about their desired policy, they rely on manipulative methods to achieve their goals. At what point does the nudge become deceit? When does it become subversive? At what point does it become unethical? Governments and corporations see the need to act as a parent-figure and guide us in the “right” direction, as if we are not worthy of hearing a logical argument and making a decision based on evidence and reasoning.

Closing thoughts 

Originally used to help clients save for the future, the concept of the nudge has since been adopted in politics, finance, retail, and beyond. It is important to be aware of this phenomenon, how it can not only help you, but also how it can hurt you. Due to human nature and imperfect information, it is impossible to be perfectly rational. We should, however, learn all that we can and ultimately strive for rationality. Only then will we be free to make the best decision for ourselves, not the decision that other entities nudge us towards. The first step is to identify and accept that we are irrational, and understand how these irrationalities can be manipulated for a desired outcome. Then, we can consciously, rather than subconsciously, choose whether to follow or resist the nudges we encounter. 

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Author: Sylvie Patterson

I’m originally from Madison, WI and I plan on studying international economics at Trinity University.

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