The 6 Principles of Nudge: a Noble-Prize Winning Idea

September 30th, 2009   •   1 comment   •   Author: Walter Lim   

Courtesy of Management Pocketbooks

Congratulations to Richard Thaler for winning the Nobel Prize for Economics!

I’m glad that his ideas in behavioural insights have shaped how governments operate – including ours here in Singapore.

In a world that tends to swing to extremes, Richard Thaler and Cass Sunstein’s book Nudge proposed a radical approach which looks at embracing a middle road to making better decisions.

Liberal Paternalism

Terming their approach as “libertarian paternalism” – a seeming oxymoron at first glance – Thaler and Sunstein mooted that people are often unable to make good decisions when they lack experience, expert knowledge, or are overcome with inertia.

Think for example about the last time you invested in an insurance policy.

Were you aware of how its terms of premium payments were like compared to others? Or the penalties that are imposed if you surrender it early? What happens if (touch wood) you are unable to keep the policy going?

Or how about the proposed mileage of your car and its impact on the environment? How does it compare to similar saloons of the same engine capacity? If it is fuel efficient, wouldn’t you appreciate it if somebody calculates that for you?

Behavioral Economics Made Practical

Laced with plenty of fascinating cases of both essential (like Investing, Credit Markets, Social Security, Health, Education) and controversial (demolishing the state instituted role of marriages) examples, Nudge is one of the rare books tackling behavioural economics which goes heavy on practical approaches.

According to the authors, humans are prone to making decisions almost unthinkingly (if at all), allowing the Automatic System to take control of one’s choices rather than the Reflective System.

When choices become overtly complicated, like the infamous health plans in the US which offered a bewildering hundreds of choices, people may end up choosing randomly. This may inadvertently lead to less ideal outcomes.

6 Principles of NUDGES

To circumvent this, public and private sector organisations could do well to develop positive choice architectures. The mnemonic used in the development of good choice architectures is NUDGES itself.

This embodied the six principles of a good choice architecture, which are as follows:

iNcentives

Provide the right incentives for the right people to enable good decision making processes. For governments, this should benefit the population rather than stakeholders with vested interests.

Understand mappings

This looks at how people can better relate to the consequences of different decision pathways. One such approach is termed RECAP: Record, Evaluate, and Compare Alternative Prices.

Citing the example of mobile phone markets, the authors suggested that governments should not regulate how much telcos charge for services, but would regulate their disclosure practices. By doing so, they will make it easier for customers to compare what they are truly paying for and to ensure that all hidden fees are exposed.

Defaults

Defaults are “ubiquitous and powerful”. People often leave the default decision on if they are too lazy to make a decision.

To accommodate this, policy makers can ensure that the default position is one that would benefit as many people as possible, rather than make it a “zero” choice which opts out completely.

Give feedback

A good way to help Humans (whom the authors term as people who don’t just decide based on reason and logic) improve their performance is to provide feedback.

An example is the development of a fake “shutter click” sound on digital cameras which lets people know that a photograph is taken.

Expect error

To err is human and forgive divine. Unfortunately, few humans can follow instructions down to a T.

To allow for this, designs should be made such that people are forewarned before a more disastrous outcome happens. An example is the design of drug taking – once in the morning after breakfast for instance, is better than 3 times a day.

Structure complex choices

When choices become too abundant, people tend to find ways to simplify them and break them down. Good choice architecture will find ways to make this more evident for people.

An example cited was the choice of paint, and how words alone – like “Roasted Sesame Seed” or “Kansas Grain” – may not be as effective as arranging the colours next to each other.

Conclusion

Overall, the book provided much food for thought and its emphasis on a “Third Way” is refreshing.

By allowing people some freedom yet egging them towards a more beneficial option (for themselves) when the need arises, nudges may help to improve how the world functions in many different areas without going to the extremes of complete freedom or complete paternalism.

Admittedly, this is going to be difficult to apply, especially for private enterprises driven towards self-serving profitability. However, it may just be the approach needed by both the public and the people (non-profit) sectors.

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One comment

  1. posted on Aug 02, 2018 at 4:32 AM

    […] he won the Nobel Prize in Economics in 2017, he articulates 6 principles of behavioral economics. [4]  The first principle states that government incentives should “benefit the population rather […]

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