Richard Thaler bagging this year’s Economics Nobel for his work on behavioural economics has shone the spotlight on the ‘Nudge Theory.’ Thaler’s and Cass Sunstein’s 2008 book Nudge: Improving Decisions about Health, Wealth and Happiness has had a wide impact with some governments even setting up ‘nudge units’ in their countries.

What is it?

Humans, being not-so-rational, often need encouragement or intervention — a nudge — to get going and do what’s best for the country or society at large. The ‘Nudge Theory’ recognises this behavioural trait. It says that people, rather than being forced, can be encouraged and influenced to pursue or desist from certain actions through nudges. An oft-quoted example of a nudge — the image of a housefly etched into the men’s room urinals at Amsterdam’s Schipol Airport; this is intended to “improve the aim”.

Public policy examples of ‘Nudge’ at work include automatic enrolment of employees into pension schemes in the UK and the opt-out system for organ donation in Spain. By making the optimal choice the default option for all citizens, these nudges have helped improve public participation in these programmes.

Nudges are not mandates. So, while there is encouragement, there is no compulsion to comply and people have the freedom to choose other options.

As Thaler and Sunstein put it, “Putting fruit at eye level counts as nudge. Banning junk food does not.” While it is finding increasing applications, the ‘Nudge Theory’ has gotten its share of brickbats too. Among other things, critics accuse it of being used to manipulate behaviours. There’s also the risk of the powers-that-be using nudges to promote what’s in their own best interest rather than the society’s.

Why is it important?

The ‘Nudge Theory’ has potential applications in varied fields such as public policy, influencing citizen behaviour, healthcare, personal finance and investment planning. For example, tax breaks under Section 80C are a nudge to encourage people to invest in financial instruments such as the Public Provident Fund and equity-linked savings schemes, in place of gold or property. Insurers use the ‘nudge’ of lower premiums on life covers to encourage customers to keep away from smoking. Stretching this a bit, mutual fund SIPs, by making regular investing the default option, are also a nudge to investors to avoid panicking during market falls.

By offering insights into how humans think and act, the Nudge Theory can be used to drive favourable behaviour and avoid unfavourable ones, without resorting to drastic interventions such as penal action or outright bans. For instance, the not-so-effective SC ban on sale of firecrackers this Diwali season in Delhi could have been avoided had people been ‘nudged’ well in advance into realising the adverse effect on air quality and public health due to widespread firecracker usage.

The Government’s Swachh Bharat drive could also benefit from nudging people into understanding the ill-effects of unclean surroundings.

Why should I care?

Often, inertia, lack of knowledge, or poor incentives lead us to select sub-optimal choices. If a nudge helps us choose an option that is also socially desirable, it could mean better public healthcare, civic sense and social harmony.

The bottomline

A nudge is sometimes all it takes.

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