A nudge in the right direction?
Can nudging become the solution to the greatest challenges of our time such as economic inequality and climate change?
A small, but brilliant change was made at Schiphol in Amsterdam to end the splashes and spills at the airport's many toilets. The initiative was directed towards male passengers and became an instant success. No wonder perhaps, since the theories behind the initiative were awarded the Nobel Prize in Economic Sciences in 2017.
‘The fly in the urinal is my favourite nudge,’ says a smiling Kjetil Bjorvatn. He is a professor and leads the FAIR Insight Team at the research centre FAIR at the Norwegian School of Economics in Bergen.
Bjorvatn and two research colleagues from FAIR Insight Team, Mathias Ekström and Hallgeir Sjåstad, have made their way to Finance Innovation in Bergen to share the latest within behavioural economics and nudging – or ‘dulting’ as it is known in Norway. An audience from the finance sector is paying close attention.
Nudges towards desired behaviour
Changing somebody’s behaviour in the desired direction with almost unnoticeable and cost-effective initiatives, is called nudging. The idea is to change the choice situation, so that it becomes easier to make good decisions. It was nudging that changed the behaviour of the men in urgent need at Schiphol.
The airport placed a little sticker of a fly in the urinal in order to get rid of spills. And it worked. Apparently, men like to aim for the middle of the urinal, if only there is an incentive for doing so.
In 2017, the American economist Richard Thaler was awarded the Nobel Prize in Economic Sciences for his work on nudging. Thaler is one of the founding fathers of behavioural economics. He is the co-author of the bestseller ‘Nudge’ from 2008. The book explains why we make impulsive and irrational choices, and how psychological mechanisms influence economic decisions.
Conducting research on inequality
Together with their colleagues at FAIR, Bjorvatn, Ekström and Sjåstad use theories from behavioural economics in their research projects. Last year, FAIR was awarded Centre of Excellence (SFF) status.
‘We conduct research on inequality,’ says Bjorvatn and highlights three of the main questions they work on:
Which forms of inequality are considered unfair? What are the driving forces behind unfair inequality? And, what forms our view of fairness?
Much of the thinking behind behavioural economics, which forms the basis for the research, stems from the field of psychology.
'The traditional approach in the field of economics is to view the individual as rational and sensible, and as someone who does not make systematic mistakes. Behavioural economists choose to look at the whole human being with its limited rationality. In other words, we are empathic beings who make a lot of impulsive decisions,’ explains Bjorvatn.
The tool box
Daniel Kahneman and Amos Tversky’s development of the prospect theory at the end of the 1970s, made a defining contribution to behavioural economics. It states that we make decisions based on points of reference, and that we put more consideration into what we lose than into what we gain, based on the reference points. The psychologist Kahneman, incidentally, was awarded the Nobel Memorial Prize in Economic Sciences in 2002.
‘The basis for this is that people want to make good choices, but it is not always that simple,’ says Ekström.
Behavioural economics has identified several factors that impact the choices we make. For instance, the initial price people perceive for a pair of shoes will become the ‘anchor’ for all future evaluations when buying shoes.
'This also happens in situations where the anchor is completely arbitrary. It shows that we place a lot of importance on the first value we are given. ‘This is called "anchoring",’ explains Ekström.
The compromise effect describes the choice between many alternatives with different benefits, such as, for instance, price and quality. Most people will then choose the middle alternative.
‘The consequences are, for example, that a product portfolio with different qualities not only reflects what is being offered, but also has a direct impact on people’s choices,’ says Ekström.
The tool to change people’s behaviour comes with increasing insight into people's scope of action. The authorities in a number of countries are already implementing these theories.
Prevented tax evasion
Great Britain was one of the first to start applying nudging theories. In 2010, the then British Prime Minister David Cameron put the Nobel Prize winner Thaler’s theories into practice in order to, among other things, reduce the harmful intake of alcohol and obesity in the population.
One of its greatest successes, however, became the increase in tax revenue. This happened after active nudging by sending letters to bad taxpayers.
‘We have also done this in Norway.’ It is regarded as unfair that someone should evade taxes through hidden assets abroad,’ says Bjorvatn.
Together with Tax Norway, the researchers from FAIR sent similarly worded letters to 18,000 Norwegian taxpayers in order to test the effect of nudging. One letter was neutral, while the other two contained a mild threat of punishment or an appeal to people's morals. A couple of additional sentences was the only difference.
‘When undertaking an experiment like this, it is important to know what exactly we are measuring. Sending a standard letter also has an effect. To measure the effect of the two other versions, a completely neutral letter was included’ says Bjorvatn and concludes:
‘In our case, we saw that nudging had a significant effect on people’s tax morale.’
Another example the researchers bring up, is pension savings. From a purely socio-economic perspective, it is important that people save for their own pension because a growing pension crisis is emerging, particularly in the USA. The number of elderly people is increasing, while the number of taxpayers is decreasing.
However, many of us have a psychological barrier. We think too much in the short term. We tell ourselves that we cannot afford to save towards a pension today. A nudge about future saving could be the solution.
‘By postponing the decision to bind savings to the future, more people will choose to start saving towards their pension now. It is easier to enter into a binding agreement that enters into force in a year's time, than to start saving today,’ explains Sjåstad.
‘This example of nudging is also smart because the employee uses future salary increases as savings.’ People then barely notice that they are saving.
We nudge people towards good causes with the assumption that whatever is good for the individual, is also good for society. However, can closing the gap between our long-term goals and life’s temptations in the short term also be the answer to the greatest challenges of our time, like economic inequality and climate change?
Criticism of nudging
There are also critical voices towards nudging. One objection is that the influence is being exerted in secret. Another is that it is fully possible to abuse nudging.
‘There is a difference between “nudge and sludge”, Thaler wrote in an article recently,’ says Sjåstad and explains:
‘For an initiative to be qualified as a nudge, you cannot, for instance, use misleading marketing. It has to be a choice people would make if they had a full overview of all the alternative courses of action, and a choice that the person will actually be happy with in the future. Nudging is the method; better decisions are the aim.’
No magic solution
It is easy to get carried away when you see what can be accomplished with small, cost-effective measures. However, the three FAIR researchers underline that nudging will never be a magic solution to everything that is wrong in the world.
‘Nudging is not meant to substitute political priorities and good regulatory measures. It is meant as a supplement, as part of the tool box. Some of this research has probably not been communicated adequately,’ says Sjåstad.
‘An easy “quick-fix” thinking surrounding nudging can arise, which is unfortunate.’ Researchers in the field are normally careful to underline that this is not an adequate solution on its own to the great challenges the world is facing.
Sjåstad brings up climate change as an example. If the population gets a nudge that reminds them about what they consume during a year compared with their neighbours, studies have shown that consumption could be reduced by a couple of percentage points.
‘This must be considered an excellent benefit of a cheap initiative, and it shows how important our social surroundings are for the decisions we make. However, if you really want to do something to fight climate change and reduce the annual global emissions, this is not enough,’ he underlines.
‘The point is that nudging can make up part of a greater solution,’ says Sjåstad and concludes:
‘We must not forget that international cooperation and effective regulations are needed to have any chance of reaching the goals of the Paris Agreement. An international carbon tax, as argued by one of the year’s Nobel Prize winners, is an example of a solution that could really contribute to reducing emissions. Not nudging on its own. That is why we have to conduct research on both, to ensure that the toolbox used by politicians and decision-makers is as knowledge-based as it can be.’