Human beings are remarkably good at decision making. Millions of years of evolution mean we are capable of processing information and making decisions quickly and with minimal effort. We like to think of ourselves as rational, and much of economic analysis relies on the assumption that humans are always rational. However, the growing field of behavioural economics is symptomatic of a realisation that homo economicus, the consistently rational ‘economic man’, is in many instances far from reality. Homo sapiens unlike their Spock-like subspecies, do make a number of predictable mistakes because of a number of cognitive biases, heuristics and social influences. In other words, humans are susceptible to making very human mistakes.
The work of Richard Thaler and Cass Sunstein, summarised in their book Nudge – Improving decisions about health, wealth and happiness (2008) aims to prove how a concept called ‘libertarian paternalism’ can improve people’s lives by harnessing something called choice architecture to counter, or at least acknowledge the cognitive biases humans suffer and suboptimal decisions they make as a result. Libertarian paternalism, or soft paternalism, is the unlikely combination of two seemingly opposing political concepts; libertarianism and paternalism. Sunstein and Thaler explain how “the libertarian aspect… lies in the insistence that, in general, people should be free to do what they like, and to opt out of undesirable arrangements if they want to”. The paternalistic aspect “lies in the claim that it is legitimate for choice architects to try to influence behaviour in order to make [people’s] lives longer, healthier and better”. Choice architecture describes the way in which decisions are influenced by how the choices are presented. By engineering the choice architecture in a certain way, individuals can be ‘nudged’ in a desired direction without removing freedom of choice, for example, by placing healthy foods at eye level in a school canteen while putting junk foods in places harder to reach. Choice in what food to eat is not removed, but the rearranging of food leads to changes in consumption patterns. The use of nudges has the ability to appeal both to libertarians and paternalists by changing behaviour through methods less intrusive than outright bans, taxes or forceful regulation (e.g. the sugary drinks tax announced in this year’s Budget).
This nonpartisan nature of libertarian paternalism gives it great potential to gain support across parliament, and there has already been visible progress of its acceptance in the world of policy-making. In the UK, the Behavioural Insights Team (BIT a.k.a the ‘Nudge Unit’) was set up at the Cabinet Office in 2010 to improve government policy and save money through the application of nudge theory, and it has since undertaken a number of successful projects. In the US, President Obama appointed Cass Sunstein, co-author of Nudge, as administrator of the Office of Information and Regulatory Affairs for the same reason. One often cited effective application of nudge theory is the case of organ donation defaults. Austria, with an ‘opt-out’ system has a consent rate of 99.98% whereas Germany, a similar country in other respects, has an ‘opt-in’ system and a consent rate of only 12%. Setting the default to opting in retains freedom of choice by allowing the option to opt out, yet acknowledges that humans will often not bother to opt in for organ donation through the ‘status quo bias’ and procrastination, leading to inertia. The benefits aren’t just limited to public policy though, for example the setting of more desirable and clearer default options for automatic enrollment in pension saving schemes, which despite generous employer contributions have considerable levels of under-enrollment and low contribution rates. One of the more light-hearted applications include the use of house fly stickers in airport urinals. Pioneered by an economist who worked for Schiphol International Airport in Amsterdam, his idea was to etch the image of a house fly into the urinals and measure how much human behaviour changed as a result. By simply adding an aim, spillage was found to fall by 80%!
Suggestions have been made to apply nudges to finance, health, the environment, schools and even marriage. The possibilities are large, but before getting carried away in wishy-washy optimism, we must remember that the essence of nudge theory is that it must be evidence-based. If its effects are shown to be non-existent or lacklustre compared to alternative policy, it won’t be sufficient. So far, the evidence is promising but it is still early days and the field is constantly evolving. A 2011 report led by Baroness Neuberger warned of the danger of politicians’ love of quick fixes, “you have to look at a time span of 20 to 25 years before you get a full change in behaviour”. In an emerging post-truth era, where people have, in the words of Michael Gove, “had enough of experts”, and are ever wary of the intrusive ‘nanny state’, being told what is best for us may not be easy to swallow for many. Perhaps this is why retaining freedom of choice in paternalistic policy-making may be more important than ever.