How a little nudge can lead to better decisions
When Richard Thaler signs copies of the best-selling book Nudge, which he co-authored with legal scholar Cass Sunstein, he always writes “Nudge for good” next to his name.
“That’s a plea, not an expectation,” explains the Chicago Booth professor, and one of the fathers of nudge theory, which describes how small interventions in the environment or incentives can encourage people to make better decisions.
Is nudge good or bad?
Yet in those three words Professor Thaler encapsulates some of the biggest concerns of critics of nudge theory: that this area of behavioural economics, of which “nudging” is one element, can be used to manipulate people to their detriment as well as their benefit.
“People can nudge you for their own purposes,” concedes Prof Thaler. “Bernie Madoff [the Ponzi scheme fraudster] was a master in the art of winning people’s confidence and taking advantage of it. I don’t think he needed to read my book. I think he could have written a better version of it himself.”
Even those who advocate these theories, such as Max Bazerman, professor of business administration at Harvard Business School, point out the paradox. “The question is, are we affecting human behaviour, or are we affecting human behaviour for good?”
It is a complex dilemma, says Daniel Read of the Behavioural Science Group at Warwick Business School in the UK. “Behavioural economics is a way of looking at why people don’t make the decisions that would be best for them. There has to be some prior determination that this is the right thing to do. There’s a sea of moral dilemmas.”
Energy efficiency has widespread support, he says, whereas childhood vaccination is more controversial.
The rise of nudge in business
Nonetheless this discipline of behavioural economics, which brings together scholars from psychology and sociology as well as business and economics, is proving to be one of the hottest propositions in business education.
Sunil Kumar, dean of Chicago Booth, believes that the academic discipline of behavioural economics, or decision sciences, is critical for business. “It is important to equip future leaders of business with multiple different lenses through which they can make decisions,” says Prof Kumar. He argues that behavioural insights are particularly important in classes such as negotiations to understand how the other person is likely to make a decision.
To prove the importance of behavioural economics in business — or the lack of it — Prof Thaler cites the recent example of Martin Shkreli and his company Turing Pharmaceuticals, which acquired the rights to Daraprim, a drug often given to cancer and Aids patients, before raising the price 55-fold from $13.50 to $750 a pill.
“If you do that you’re going to make people furious,” he says. Even though a student that has just completed “Econ1” might see the price increase as a financially sound decision, he says, “this may not be the right answer if you want to stay in business for the longer term”.
Despite the flurry of business school interest in behavioural sciences over the past few years, Prof Thaler believes its application to business has always been there. Marketing, for example, uses behavioural science explicitly or implicitly, he says.
Harvard’s Michael Norton, a psychologist by training, also believes there is good research related to businesses. He cites the example of the way companies design their charitable giving policy.
Companies often tell consumers that a proportion of the profits from a specific sale will be donated to a designated charity, but they would get a better consumer reaction if, after the sale, the company gives the purchaser the money to give to their own designated charity, he says.
Harvard has started an executive programme on the topic of behavioural economics and also teaches large numbers of doctoral students. In January, MBA students will visit London and the Netherlands to work on projects in the area. However, although much of the recent research in the topic has been conducted in business school, it is the public sector that has adopted nudge with such alacrity.
Nudge in the public sector
Since 2008, when the Thaler and Sunstein book was published, governments have taken its teaching to heart. US president Barack Obama is a fan and as recently as mid-September he exhorted government departments to adopt behavioural economics to support national priorities, such as enabling Americans to find better jobs or lead healthier lives.
And in 2010 in the UK, the coalition government set up the Behavioural Insights Team — or “nudge unit”, as it was dubbed. It was partly privatised in 2014, when it had a staff of 14 all based in London; now it employs 70 people in London, New York and Sydney. Where the US and UK have led, others follow. Governments in Australia, Canada and the Netherlands are all now converting to the cause.
“Governments have been ahead of for-profits in using nudges,” says Prof Bazerman, though he says he would be very willing to work with companies. Not that this means that companies are not doing things that are “pro-social”. Persuading employees to take out corporate pension schemes is one of the most obvious examples, he says.
In the UK, the Behavioural Insights Team has as its mission to create social impact through its work, hence its collaboration with government departments, says Owain Service, managing director. “A lot of people say to us, why don’t you do more commercially lucrative work. It’s a principle part of what we do that we do something that has a social impact, a social purpose.”
UK leads the way
The success of the Behavioural Insights Team shows that although a lot of the research is coming out of the US, Prof Bazerman says: “We see the UK leading the world on the practical side.”
The most cited example of nudge in practice is arguably the UK workplace pensions scheme, or Nest, which automatically enrols employees in a workplace pension yet gives them the opportunity to opt out. This results in a greater take-up than if employees were required to opt in, which takes more time and effort.
“The mantra I always give, is that you have to make it easy,” says Prof Thaler. “I think of nudging as like giving people GPS. I get to put into the GPS where I want to go, but I don’t have to follow her instructions.”