Is ‘Nudge’ a desirable public policy tool?

Have you had the experience of entering an apparel, gadget or jewellery shop with a certain budget in mind and leaving with goods twice the amount? This is quite likely to have been the result of a very friendly sales person who, having gauged your taste and spending capacity quickly, kept showing just what you needed, but priced much higher. Or, it could that a piece on display fitted all your requirement perfectly, though it made you spend much more than you intended.

This is a classic example of businesses using behavioural foibles to upsell products to customers. There is now a school of thought that the understanding of human behaviour can be used by policymakers to nudge citizens to act in a way that is good for them or for the country at large.

For instance, the pension policy in the US asks employees to check a box to not enrol in a savings plan. This is because most people tend to go with the default option, because they are too lethargic to make a choice. So making enrolment the default option made enrolments increase dramatically.

The Economic Survey of 2018-19 had an entire chapter devoted to leveraging the behavioural economics concept of ‘Nudge’ in public policy. ‘Nudge Units’ now exist in many countries including Germany, the UK and Japan to help make policies that use this theory.

The NITI Aayog was also on course to set up a ‘Nudge Unit’ last year, and the use of this theory is being seen in some of the recent policy measures too. Combining policies with small ‘nudges’ that benefits citizens is not a bad idea, but the Centre has set boundaries so that an individual’s freedom of choice is not compromised in such exercises.

‘Nudge’ in public policy

The ‘Nudge’ theory is predicated on the assumption that the decisions we make in everyday life are not completely rational and influenced by behavioural biases. The supporters of this theory think that the way to make people make the right choice is to identify the psychological factors that lead to those choices and use behavioural interventions or ‘nudges’ to lead to better decision-making.

The theory was popularised by Richard Thaler and Cass Sunstein in the book, Nudge: Improving Decisions about Health, Wealth and Happiness. They define it as “any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives.”

The key here is that the citizens are not forced into any option and that they have the entire array of choices open to them. Small tweaks are done to gently push them towards a more desirable alternative.

For instance, in Africa, the government offered home-delivery of fertilisers to farmers because many farmers procrastinated the decision to buy fertilisers due to the effort involved in travelling to a market place to purchase it. The ‘nudge’ helped farmers buy fertilisers on time, which was good for their farm output.

There are many ways in which individuals can be made to act in a way that is good for themselves and the society. The first is plain campaigning, where the citizens are free to choose any option. The second is ‘nudge’, where behavioural economic inputs are used to make one choice appear better than others. The third is giving economic incentives to lead to one particular choice. And the fourth is setting up laws to prohibit certain choices.

A combination of nudge, incentives and mandate has been used by the policymakers so far in India. Swacch Bharat Mission, GiveItUp campaign for gas cylinder subsidy, and Beti Bachao Beti Padhao are some of the campaigns where nudge has been used successfully in recent years.

But simply using ‘nudge’ does not always give the desired result, so it is combined with incentives (income tax breaks for 80C investments) and, at times, prohibitive laws (alchohol ban in some States).

A combination of ‘nudge’ with incentives is seen in recent rounds of Covid-related stimulus too. The most obvious example is the LTC cash voucher scheme. The LTC money spent on domestic travel is tax-exempt if some conditions are fulfilled. But since most did not travel during the pandemic, this tax benefit could not be claimed. The Centre has said that instead of one LTC amount, Central Government employees will be given tax benefit on the leave encashment amount, and the travel fare, if the taxpayer purchases goods and services worth three times the travel fare and one time the leave encashment. The goods and services should attract GST of 12 per cent or more, should be bought from a GST registered vendor and paid through digital mode.

So here the Centre is using the loss-aversion bias — the taxpayer loses the tax benefit if he has not travelled during the pandemic — to nudge people to buy goods thus spurring demand, giving revenue to the government and nudging people towards digital payments. The taxpayer, of course, has the option of not buying the goods or services and foregoing the tax break, if he so wish.

To nudge or not to nudge

The use of ‘nudge’ in public policy is, however, tricky as care needs to be taken to see that the theory is not misused to the detriment of the individual. The term ‘Libertarian Paternalism’ used for describing the concept of nudge theory has received a lot of flak in recent times.

Daniel M Hausman and Brynn Welch, in a debate titled, “To Nudge or not to nudge”, argued that “some of their proposals constitute a distinctive variety of paternalism, whose libertarian credentials are dubious, even though their implementation would not be coercive and would not significantly limit freedom of choice.”

The government could use the insights it has on public behaviour to implement policies that may not be in the best interest of citizens. The up-selling tactics of retailers discussed earlier are clearly not in the consumers’ interest and the flaws in their behaviour are being exploited by businesses. The government should ensure that such practices do not creep into public policies’ use of ‘nudges.’

Hausman and Welch suggest that this can be avoided by: (a) the government being transparent about its intent and informing the people about the way in which their choices are being shaped. This should be done even though it may make the implementation less effective; and (b) persuading citizens through rational means (with campaigns, awareness drives, etc) should be the preferred course of action as only such methods respect the freedom of the individual.