A nudge easily as good as a wink

You can do a lot with a well-thought-out nudge, but you probably can’t solve either of the crises of the moment, covid-19 and climate change, according to Richard H. Thaler.

The behavioural economist and Nobel Laureate addressed a predominantly Australian webinar audience last week (August 24), organised by the University of Sydney Business School, where he taught a class in ‘negotiating’ last year.

Thaler, a behavioural scientist who has spent much of his career criticising the models used by traditional economics, and co-author Cass Sunstein, a law professor at Harvard, opened a whole new world to the power of a nudge in their best-selling book of the same name published in 2008.

They have recently published a comprehensively re-written version, ‘Nudge: The Final Edition’, but the word has been so well embedded in business, economics and government circles around the world that they won’t have to revisit it again to keep the theory alive.

We all know what a nudge is, but for the record, Thaler said it was “any small feature of the environment which changes our behaviour to do something”.

He said: “We all use them; for setting an alarm, by sending a calendar invite, in putting money aside in a retirement account. And other people nudge us, for good or bad. We define a nudge as something you can easily opt out of. It’s not to be confused with a push or shove, which are harder to evade.”

An example of an ideal nudge is a car’s GPS. “You can decide the way you want to go, and the GPS makes suggestions for the route. It never complains, it’s perfect. That’s our ideal life,” Thaler said.

A bad nudge or an inept one is called a ‘sludge’. Sludges are often encountered in clever marketing ploys, which are not far removed from being deceptive.

A recent example Thaler came across was to do with a London Times review of the new book, which was very positive, he was told, but existed behind a publisher’s paywall.

In order to read the review he could avail himself of the ‘free one-month trial’, which required a credit card number for a nominal subscription. He could later cancel this but had to give two weeks’ notice and in order to give notice, he had to phone the publishing company, in the UK, during its working hours.

To get around such a sludge, or perhaps series of sludges, “It helps to have a ‘burner’ credit card, for one use only,” Thaler said. He is not alone in not knowing where to get one of those, even in Chicago, where he lives.

Just prior to the original Nudge, in 2007, Thaler’s main brush with popular fame was a cameo appearance in the movie ‘The Big Short’, in which he explains to pop star Selena Gomez, the concept of the “hot hand fallacy,” a key behavioural feature that drove the rise of collateralised debt obligations leading to the subprime mortgage crisis.

Just as the movie successfully grappled with the challenge of explaining a complex concept to a mass audience, so did Thaler and Cass in the original Nudge, explaining how behavioural science works in a way that was easily as good as a wink for all to see. Its subtitle was: ‘Improving Decisions about Health, Wealth and Happiness’.

Traditional economics and the models that traditional economists build assume that people are rational, that people have perfect information sources and act only in their own best interests, as defined in monetary terms. Behavioural economics proves that that is not true.

In fact, everyone knows that that is not true, including all the traditional economists. That’s one of the reasons Nudge was wildly successful, selling millions of copies through three editions. (There was a “revisited” version before the “final edition”.)

Another reason is that, while he may be a bit wooden as a Hollywood actor, Thaler is funny. He likes to criticise traditional economists for continuing to study “Homoeconomicus”, the rational being who is consumer, seller, producer and, well, everyone. He does so, he said last week, because: “The rest of the world thinks it’s kind of amusing.”

He said: “Some of his critics say that ‘you shouldn’t be nudging’, but they are living in a world that doesn’t exist. How could they arrange books in a bookstore without ‘choice architecture’? There is no neutral way to do it. Even if you put them in piles, some will be at the front. A building has doors and stairs and where you put them affects how the building works.”

Following the success of the original Nudge, governments around the world formed their own “Nudge units”, he said, the first being the British Prime Minister David Cameron in 2010. “The nudge mantra is that if you want people to do something, make it as easy as possible,” he said.

Asked why traditional economists still made up the dominant force in the field, Thaler said: “Because economists are not that smart… The easiest problems to solve are in mathematics. The most difficult are problems with people.”

Traditional economics is based on optimisation and traditional economists talk about ‘agents’ rather than ‘people’. “These agents solve problems, they choose the best one, they calculate all things that could happen. That is preposterous… Economists took the easy way out.”

With respect to the current crises of covid-19 and climate change, Thaler thinks that they are both at the stage that governments need to do more than nudge. Now is the time for compulsion with covid-19 vaccinations, to deal with the anti-vaxxers. And now is the time to let price fix the emissions problem. Governments need a carbon tax or carbon trade system, or both, so that everyone can understand the cost.

“There’s still room for nudging to make things easier,” he said. “For example, for homeowners we can have smart thermostats to make lives simpler. Telling people how much energy they are using compared with their neighbours will reduce energy use by 2-3 per cent. Every bit helps…

“We didn’t invent nudging. Nudging was in the Garden of Eden. And evil nudging existed before we wrote the book. Bernie Madoff didn’t need to read our book.”

Greg Bright

Greg Bright is a busy former full-time journalist who refuses to use the word 'retiree'. He is still trying to think of a new one.