Nudge Theory

02.2020 | Adam Edelstein

What do organ donation and sugar cravings have in common? A brief look at Nudge Theory.

Nudge theory and behavioural economics are terms increasingly used, even by those who are not economics scholars. This is most likely for two reasons: the departure from the mathematical rigour of traditional economics certainly makes topics like this more accessible, and the principles behind it are particularly interesting. However, nudge theory, despite the term being increasingly widely used, is itself vaguely defined. What is nudge theory and how is it used?

The definition of nudge theory as provided by its progenitors, Thaler and Sunstein, is itself hazy. According to them, a nudge is “any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives”. This confusion is not aided by the wide array of examples provided by Thaler and Sunstein in their seminal book, Nudge. Scholars will often rewrite the definition of nudge theory as is relevant for their works. Effectively, however, nudge theory is a toolkit of governance and choice architecture methods that are aimed at causing the targeted individuals to make the ‘right’ decisions, which they would not have made themselves. It involves the “organisation of the context in which people make decisions”.

Critically, nudge theory takes into account that which the traditional definition of man as a rational actor (a key principle in economic thought) does not. It is aimed at taking advantage of the widespread cognitive deficiencies that are typically exhibited by individuals: risk aversion, myopia, irrationality and so on. These knee-jerk, automatic decision-making processes that usually result in poor decisions are the key mechanisms in successful nudging. Nudge theory also aims to encourage committing individuals to make improved decisions at low financial cost and decreased levels of (direct) coercion from the choice architect. It revolves around those characteristics that anyone would claim they do not care about and is intended to be easily reversible. Importantly, the individual being nudged is often unaware that they are being manipulated. It is clear that defining nudge theory is not a simple task. The above definition, with its multiple facets, is vague and does not give a true indication of the essence of nudge theory to the novice. It is, perhaps, easier to examine nudge theory in contrast. Where traditional governance methods force outcomes through direct interference – taxation, incentive changing policies, fines – nudge theory is more subtly coercive and uses existing imperfections in human decision-making to direct individuals to make the ‘right’ decision.

The true appeal of nudge theory are the success stories. There are several tools that have been identified in successful nudge design. Specifically, choice architects seek to simplify choices, increase the salience of particular options and evoke ease of choice and mental association.

Two main nudging mechanisms have seen significant approval, although research has begun to indicate their limitations. The first is the setting defaults mechanism, examples of which many of us will know. The core concept behind default setting is that the choice architect decides what will happen to an individual in the case where they make no active decision. The best-known example is the opt-out rather than opt-in technique for improving organ donation. Research finds that nations that have individuals opt out of organ donation have far higher proportions of organ donors amongst the population, as opposed to countries that require opting in. This is a classic example of nudging behaviour. Further, individuals who are offered a default option of 6% contributions to pensions as opposed to 3%, unless explicitly chosen, greatly increased overall pension donations.

In these cases, individuals often believe that donating organs is the right thing to do, or that contributing relatively larger amounts to pension funds is the responsible path of action. However, many of us do not perform the actions we believe are best – we suffer from cognitive dissonance. Here, nudge theory has seen success in causing individuals to make the decisions they ought to.