Anyone familiar with Monty Python’s Flying Circus1 will remember their wildly hilarious nudge, nudge (wink, wink) skit, full of double meanings and provocative behaviour – both physical and linguistic. The emphasis here is on the word provocative, which means (when used as an adjective) to stimulate or incite a behavioural response.
Well, a very smart gentleman called Richard H. Thaler – a professor of economics and behavioural science at the University of Chicago – was awarded the 2017 Nobel Prize for Economics recently, as a result of codifying the concept of a nudge into an explanation of human bias and temptation.
His book, Nudge: Improving Decisions about Health Wealth and Happiness2, concerns what can be broadly defined as behavioural economics – an extension of behavioural investing, a subject I have written about before – and is based on the idea that human behaviour is, more often than we might care to admit, determined by influences that are both unconscious and irrational.
Such influences include bias, social pressure and cognitive inertia – specifically the natural human reluctance to alter or amend an ingrained practice, whether a personal habit or a business routine.
It’s all in the mind
Though dismissed by many mainstream economists – no longer, certainly not since Professor Thaler came on the scene – the notion that psychology influences economic decision-making is not new. Just read Adam Smith’s The Theory of Moral Sentiments (1759) – it’s all prophetically there!
As a result of Professor Thaler’s recent influence, nudge theory has gained increasing acceptance as a legitimate way to modify people’s behaviour in several important ways, from public policy to mainstream marketing.
Organ donation in Spain
Spain has an enviable record for being a world leader in organ donation, for the simple reason that its citizens are automatically enrolled in a system such that, upon death, their vital organs can be legally harvested for medically necessary use – unless they have alerted the authorities, through the simple procedure of signing a waiver, that they opt out. This is one example of nudge theory in action.
U.K. workplace pensions
In the U.K. it has been standard practice for some time to automatically enroll everyone on to a workplace pension, but give them the choice to opt out. The result? The majority stick with the default, and millions more Britons are saving for retirement. This is another example of nudge theory in action.
Darker applications of nudging
This is not to say that nudge theory lacks darker applications, negative option marketing being one of them. We’ve all encountered the situation where a service provider – mobile telephone and internet companies routinely try this on, or used to – bundle packages of add-ons to an agreed menu of options and bill us for them until we tell them to stop. This is another example of nudge theory in action, and it’s offensive.
The ethical use of nudges
Professor Thaler, to his credit, has been quick to protest the negatively manipulative applications of his theory. Writing in The New York Times (The Power of Nudges, for Good and Bad3, October 31, 2015) he stated:
‘Nudges, small design changes that can markedly affect individual behaviour, have been catching on. These techniques rely on insights from behavioural science, and when used ethically, they can be very helpful. But we need to be sure that they aren’t being employed to sway people to make bad decisions that they will later regret.’
Fair enough. He went on to observe, and I’m quoting him in full, that three principles should guide the use of nudges:
- All nudging should be transparent and never misleading.
- It should be as easy as possible to opt out of the nudge.
- There should be good reason to believe that the behaviour being encouraged will improve the welfare of those being nudged.
Conclusion: The incorrigible housefly
You’ll love this. Amsterdam’s Schipol Airport engraved the image of a housefly immediately above the drain in all the men’s washroom urinals. Result? Aim dramatically improved and spillage was reduced by 80%. Now that’s what I call a nudge!
Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management 604.535.4721