Theory of Nudge By Richard H. Thaler

The theory of nudge , a term that can be translated into Italian as “goad”, has revolutionized classical economics and contributed to the consolidation of a new field of knowledge, behavioral economics. A nudge is, in essence, an intervention that directs a choice in a more positive way by altering the context in which it is made. From its definition to today it has acquired more and more importance, so much so as to be worth the 2017 Nobel Prize for Economics to its creator, Professor Richard H. Thaler  (2017 Nobel Prize for Economics). But what makes this approach so innovative? Let’s retrace its origins with practical examples to understand its scope and potential.

 

You are at the ATM near the house and you are about to withdraw. Once the banknotes have been dispensed, a question appears on the screen: “Print receipt?”. On the left a YES, on the right a NO, with the image of a blue-green terrestrial globe and the caption “Ecological choice”. You have, in spite of yourself, just made acquaintance with a nudge , or if you don’t like foresters, with a “goad”. Nothing strange, considering that for some years it has been a trend that has been talked about in economics and beyond.

 

With this term the behavioral economists Richard H. Thaler and Cass R. Sunstein, authors of the homonymous book Nudge: Improving Decisions about Health, Wealth, and Happiness (2008) refer to a series of expedients that would allow to direct people’s choices more rationally and above all more economically convenient. In the case of the ATM, the “goad” allows you to avoid wasting paper and ink simply by leveraging your ecological spirit.

 

But where does this idea, as simple as it is profitable, come from? The authors begin with the criticism of the concept of homo oeconomicus , a key element in classical economic theory. The homo economicushe is endowed with an iron rationality and is therefore able to make choices based on a mathematical-probabilistic logic. In other words, his choices allow him to maximize benefits while minimizing the resources used. This conception of a human being capable of analyzing and predicting the consequences of one’s actions has met with many criticisms, both internal to the environment of the study of economics by prominent figures such as Keynes (father of macroeconomics and supporter of the welfare state), and external, by cognitive psychology. Since the 1970s, the rationality of our choices has in fact been challenged by studies on social cognition, or the mental activity through which human beings come to know the social world around them.

 

Of particular relevance were the discoveries of Tversky and Kahneman, Nobel Prize for Economics in 2002, regarding those cognitive mechanisms now known as heuristics, “mental shortcuts” that we use to make quick decisions starting from a small number of information . This is what happens, for example, when we meet someone for the first time and in our mind the first impressions are formed extremely quickly (less than a second), which although based on very few characteristics, such as physical appearance, way of dressing, handshake, they immediately allow us to be able to affirm some judgment (“he seems to me a nice person”, “inspires confidence”, “I would like to know you better” and so on). This mechanism does not occur only in everyday situations, but also in economic choices,

 

In this regard, we have seen how investors are generally unwilling to risk ( risk aversion ) in relation to small losses, but completely indifferent to large losses if linked to low risk. How to explain this discrepancy? We could say that they fall victim to the “tendency to optimism” ( optimism bias ) whereby the possibility that something negative can happen to us is underestimated compared to the probability that it happens to others. Errors of this type occur in every area, influencing the attitude that each of us assumes towards the economy (investments, taxes), health (in terms of prevention) and consequently the behaviors implemented (from smoking to donation of blood, tax evasion).

 

Many of these behaviors are reflected in real social plagues, which afflict the coffers of the States in an era of structural lack of funds and continuous cuts. From here, some countries have thought of channeling certain systematic tendencies (known in psychology as human systematic errors, or cognitive bias ) in a positive way, encouraging virtuous behavior through small, but effective shrewdness. Barack Obama first of all commissioned Cass Sunstein to design some behavioral nudges to encourage citizens to “do the right thing” without being forced. Great Britain has also set up its own Nudge Unit, which has been successful in promoting organ donation. Experts asked people if they would like to receive an organ if they needed it; Positive responses to this trivial question resulted in an increase in registrations for the donation of 100,000 per year. Again, following some studies conducted by the Behavioral Insight Team (BIT) in Singapore, printing taxes on the pink paper typically used for debt collection has led to an increase in payment within the expected terms between 3 and 5 percentage points.

 

In conclusion, nudging shows how it is sufficient to restructure the architecture of the decision-making context to facilitate functional choices for individual and collective well-being. Is it really that simple? In fact, it is natural to ask what and how much space remains for individual freedom of choice. On the one hand, the practices suggested (literally) by nudgingtheir main purpose is to improve the quality of life, with a view to efficiency and maximization of resources. On the other hand, the “liberal paternalism” proposed by Thaler and Sunstein risks turning out to be another, subtle method of control and intrusion by the economic world into the freedom of the individual citizen to decide what is really best for himself, beyond easy tricks. Perhaps, rather than “goads”, there would be a need to put people in a position to choose consciously, soliciting what Kahneman defines “slow thinking”, that is the system of reflective, intentional and logical thought, which according to research would be activated when the individual pays attention, he is given more elements of judgment and sufficient time to make the choice. By combining “slow thinking” and “fast”,

 

Leave a Comment