Richard Thaler’s Nobel Prize-winning nudge theory is making headlines across Canada and around the world, but what is it and what are its practical implications?
Thaler’s theory proposes people can be encouraged to do what is best for them and society by making subtle policy shifts that create a default choice without forcing people to comply.
Nudge theory offers governments, employers, and other decision makers an innovative and easier way to create their desired outcome. For example, instead of banning or heavily taxing certain junk foods, governments could require grocery stores to display healthy options at eye level. Shoppers still enjoy the same freedom of choice and wide range of goods they always have, but are subtly encouraged to make healthier selections.
Likewise, the United Kingdom’s Behavioural Insights Team found the nudge of simply informing people which of their coworkers were donating to charity encouraged them to do so as well.
At its core, nudge theory is about making the preferred outcome a default option. In order to increase organ donation rates, Spain introduced a policy where its preferred option was the default choice for all citizens. All Spaniards are considered organ donors unless they opt out, a subtle policy shift that immediately made the country a world leader in organ donation.
Thaler’s theory also has significant potential to encourage helpful wealth management practices.
By nature, people are more likely to choose short-term gain over long-term planning. Thaler, when asked how he would spend his Nobel Prize money, even quipped, “Irrationally!”
But he says we can do better.
A simple example would be automatically depositing a sum of money from every paycheque into a savings account. You still have the freedom to stop or spend that savings, but making it the default option increases the likelihood you will save it instead.
Some economists, and Thaler himself, promote a system called Save More Tomorrow that increases the amount people tuck away into their savings only when they get a raise. This ensures they do not see a decrease in their take-home pay and come to associate savings as a loss.
Labelled wealth transfers are another example, one that could improve the success of wealth transfers and succession planning. When people are given money that is labelled for a particular purpose, they are more likely to spend it to that end, even if they know they are actually free to spend it on anything they wish.
In Morocco, providing money to parents are telling them it was for their children to go to school was more effective than requiring children attend classes.
As nudge theory becomes more popular and its uses more varied, there are also downsides in the form of government manipulation or commercial exploitation – but its potential as an ethnic means of improving society are limitless.
As the saying goes, all it takes is a little nudge.