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. 

Why the West is Wealthy

John Love

Have you ever wondered why Mexico is so much poorer than the USA, despite sharing a border? Or why Asia, despite having such a great population, is poorer than the west? You’re not alone. Historians, economists, sociologists, and politicians have been asking the same questions for centuries, and have had many theories about why over the years.

In the past, theories have centered largely on differences in race, with Africa and Asia being doomed due to their supposed racial inferiority. However, as time passes, this theory has been discredited with the failures of societies like Nazi Germany, and the sucesses of Asian societies like Japan. Today, the theories and reasons for differences in the wealth of societies can be boiled down into three different categories; geography, culture, and institutions.

The Geography Hypothesis

The geography hypothesis postulates, in short, that countries’ successes are bound by their geographies more than by the cultures, leaders, or institutions within. The most famous work supporting this hypothesis is likely Jared Diamond’s Pulitzer Prize winning Guns, Germs, and Steel. In this book, Diamond rejects the idea that culture, institutions, and actions by specific leaders are what have determined the course of history, instead believing that where the countries are, and the resources they contain, are the main determinants of a nation’s future success. The most famous example given within the book, and one that is growing increasingly prevalent today, is that cold nations are destined to be more successful than warm ones. 

Diamond argues that warmer, equatorial areas have many negative factors, including tropical diseases and worse farmable foods (such as rice, maize, and bananas). Compare this to colder areas further from the equator, which are relatively free from diseases, and have crops that contain more protein and are easier to farm and store (such as barley, wheat, and flax). Additionally, warmer areas tend to cause physical laziness, as anyone who has lived through a Texas Summer can attest to. In colder regions, one could not afford to be lazy during the Summer months, as hard work and collaboration was required to be able survive the harsh Winter months.

When looking at a map of the world today, his first hypothesis, that cold nations fare better than cold ones, seems to ring true. Countries such as Canada, the USA, western Europe, and the Nordic Countries have some of the highest GDPs per capita in the world, especially when compared to some of the warmest and poorest countries in the world. For example, the USA has 86 times the GDP per capita of Burundi. Even within the USA, the northern states have tended to fare better economically than the southern states, with the wealthiest state in terms of GDP per capita being New York, with a GDP per capita of over twice that of the poorest state, Mississippi.

This hypothesis, while tending to be true in the modern day (with some exceptions. Russia has a GDP per capita of $27,044, compared to Qatar’s $85,300), doesn’t hold up as well over history. Throughout history, the wealthiest countries per capita have varied greatly. For example, around the time of Christ, Iraq had an estimated GDP per capita (in 2011 dollars) of $1225, while the Netherlands had a GDP per capita of $600. Nowadays, the Netherlands has a GDP per capita more than 3 times that of Iraq. This isn’t cherry picking data either; warmer nations in the Middle East and Mediterranean consistently had greater GDPs per capita than colder nations in western and northern Europe until at least the middle ages. What caused this to change? Why did these nations lose their economic advantage? One potential explanation can be found in the differences between these nations’ cultures.

The Cultural Hypothesis

Proponents of the cultural hypothesis believe that properties of cultures, most often their religions, social values, and family ties, are the main determinants to whether a nation is financially successful or not. Proponents of this hypothesis argue that some cultures are better at promoting fiscal responsibility, hard work, and the acceptance of technological advancements.

A tenant of the cultural hypothesis is that different cultures are better at adopting technological advancements, thus allowing those cultures to excel in the long-run. An example of this can be found in how different cultures across Eurasia reacted to the Mongol invasions of the 13th century. Within both China and the Muslim world, their societies turned insular, with study of Confucian texts or the Qaran being treated as more important than the study of the real world. This led to both cultures, who had been at the forefront of worldwide scientific development, falling behind. The west, on the other hand, adopted Thomas Aquinas’s idea of Natural Theology; that reason and the study of the Earth, God’s creation, is of the utmost importance. This led to the west eventually surpassing the rest of the world scientifically, and beginning the industrial revolution first. 

Perhaps the most famous example of the cultural hypothesis in action is the so-called “Protestant Work Ethic”. Coined by German sociologist Max Weber, the concept asserts that Protestant ethics and Calvinist doctrine helped lead to the prosperity of western civilization. In Protestant doctrine, hard work, education, and frugality were thought to be among the most important applications of being a steward of God, something Weber argued was not present within the pre-Reformation culture of Catholic Europe. This, in turn, helped to launch the spread of capitalism among the countries of western Europe, leading to the prosperity in those nations in the modern day. 

When looking at a map of Catholic and Protestant nations, this tends to hold true in broad strokes (the USA and Canada are wealthier than Latin America and northern Europe is wealthier than Mediterranean Europe). However, Weber’s concept is not without its critics; some Catholic nations are wealthier than nearby Protestant counterparts, and some academics argue capitalism first emerged before the Reformation in northern Italy. Additionally, one can argue that it is not the culture that led to capitalism that is important and leads to wealth, but the laws and institutions of a capitalistic society.

Institutional Hypothesis

The third of the main three hypotheses, the institutions hypothesis, postulates that the differences in ways societies organize and set laws are the main influences on the differences in prosperity between nations. Proponents of this hypothesis point to the fact that countries who are very similar geographically and culturally can have vastly different economic institutions and outcomes.

An example of this can be found in the differences between North and South Korea. North Korea, with its centralized economic planning, lack of markets, and lack of property rights, has become very impoverished, especially in relationship to its main neighbors, South Korea and China. South Korea, on the other hand, has excelled economically since adopting its laws protecting property and other free market policies. Before the two countries were split, both halves of the Korean peninsula had similar cultures, and both still are similar geographically, with both nations being dominated by mountainous terrain.

Another example of different institutions impacting the economic success of nations is the economic outcomes of former British colonies compared to former Spanish colonies. British colonies, namely the USA, Canada, and Australia, are all world powers and economic juggernauts. This can be argued to be due to English Common Law being the foundation of these countries’ legal systems. This system of laws helps to protect the civil rights and property of those living under the law, helping citizens living within these nations, as well as increasing investment by increasing stability. Many other former British colonies, such as Egypt and British India (including Bangladesh and Pakistan), while being poorer compared to the previously mentioned British colonies, are still wealthier in terms of GDP per capita when compared to many of their neighbors. This difference from their former colonial peers can be argued to be due to both countries having eliminated some facets of English Common Law, such as strong property rights, for at least a time after their independence.

Former Spanish colonies, on the other hand, are much poorer compared to their English counterparts. These colonies were designed not as economic engines, but as extractive economies, much to the detriment of the modern-day economies of these now nations. In addition, governing power came largely from the foreign Spanish crown compared to the more concentration in the local residents of the colonies under the English system. This caused Spanish colonies’ decision making abilities to be hamstrung, and limited economic growth. Furthermore, without English Common Law to set a baseline for individual and property rights, former Spanish colonies have not been able to set up stable market economies without threats of military dictatorships or socialist regimes.

Which Theory is Right?

This list of theories is by no means a comprehensive list. There are many more examples to support the hypotheses of each of these theories, as well as additional theories (such as the Great Leader Hypotheses, in which great figures in history determine which nations are prosperous. Think Alexander the Great, Confucius, or George Washington). I personally believe that each of these theories has its merits, and none are the sole contributing factor to why some nations are more prosperous than others.

In some cases, such as the natives of the New World, the lack of good geography and fauna made a prosperous civilization extremely difficult to come by. Very few domesticated animals and poor accessible mineral resources made an urbanized civilization hard to create, meaning that very few natives would have been exposed, and thus gained immunity, to the diseases which wiped out much of their population. In other cases, the culture of a nation can hold it back, such as the historically passive Hindu culture and caste system of India, which allowed for very little social mobility. And in even other cases, the institutions of a nation can hold back a great geographic position or culturally strong people, such as how communism held back Eastern Europe from prospering. When analyzing why a country is successful, try to look at the whole picture, not just a few of the factors, to understand what could have gone right, or what could have gone wrong.