C-minus. This was the grade awarded by journalist Martin Grieve for the accomplishments of the ‘nudging’ techniques implemented over the last few years by the US and UK governments. Nudging is the policy approach that seeks to encourage people to behave in ways that enhance their health, wealth and wellbeing by tinkering with the way choices are presented to them. The obvious appeal of nudging for politicians is that it avoids the need for compulsion, which often provokes electoral resistance, and it avoids the need to provide any kind of public guarantee for the wisdom of the choice finally made. It is also very cheap. This kind of ‘liberal paternalism’ was pioneered by scientists Richard Thaler and Cass Sunstein in an enormously successful book entitled Nudge. In the meantime, Thaler has advised the Cameron administration in the UK, while Sunstein has done the same in the US for Obama, with unconvincing results according to Grieve.
Nudging works because human beings have a systematic tendency to perceive losses about twice as keenly as they do equally-sized gains. In short, we really hate losses. Whether the proverbial glass is half-full or half-empty is nowhere near as important for most people as whether the glass has been half-filled from empty or half-emptied from full. So if politicians manage to present choices to the population in such way that the option they prefer not to be chosen appears as a loss, they can be relatively sure of the outcome.
One upshot of this loss-aversion is that we do not like swapping one thing for another. Even if the economic value of the two things is identical, the loss of the one will typically be perceived far more keenly than the gain of the other. As a result, people tend to adhere to the status quo, or default option. This discovery clearly informed the latest pension’s policy of the UK government. In order to encourage people to save more for their retirement, the default option for most employees was changed on October 1st so that they are automatically enrolled in a pension scheme unless they choose to opt out, instead of out unless they opt-in. For a good number of savers who formally perceived the loss of consumption in the present more heavily than the gain of consumption in retirement, the changed default will now mean they perceive the loss of a pension more heavily than the gain of some immediate disposable income. In the laboratory, as well as in the field, the technique works.
Given that Martin Greive also recounted some of the other successes of the UK’s Behavioural Insights Team, why is he still so dismissive of the scientists’ work? In fact his ire is principally reserved for the efforts of Professor Sunstein, who incidentally resigned from the US administration in August. Notwithstanding the differences in the complexity of law-making in the two jurisdictions, it is conspicuous that the British initiatives – encouraging people to save more, to pay their bills on time, or to make their homes more energy efficient – were all well-founded in decades of academic research in behavioural economics. In contrast, the US’s attempts to discourage smoking using bolder health warnings, or to reduce motoring accidents by banning advertising notices on vehicles, do not share the same scientific support. One could even go as far to say they have nothing to do with nudging at all. It is also noteworthy that Barack Obama’s advisor also proposed a pensions reform, but it was never realised. One could therefore suspect that Sunstein’s failed measures were simply the only ones he could get approved.