Undercover Economist

To nudge is one thing, to nanny quite another

Behavioural economics, the application of psychological insights to economic theories and problems, has been growing in influence for decades. But with the publication of Richard Thaler and Cass Sunstein’s Nudge, it seems to have struck policy primetime – and as with many once-good ideas, it has mutated. I recently attended a meeting at one government department at which the conversation rarely strayed from the question of how the latest marketing tricks could be used to get citizens to behave as the nanny state preferred.

At a seminar for the UK’s government economic service on applying behavioural economics to public policy, I therefore expected to be the lone voice of caution – especially since fellow panellists included Dan Goldstein, a psychologist, and Pete Lunn, author of Basic Instincts, a popularisation of behavioural ideas. I was wrong: while everyone was impressed with the potential contribution of psychology and neuroscience to economics, they all seemed queasy about how quickly behavioural economics has appeared as a policy panacea.

Lunn began by displaying Poggendorff’s optical illusion, in which a diagonal line passes behind a vertical block, creating the impression of two separate but parallel lines. Thaler and Sunstein have a similar optical illusion at the beginning of chapter one of Nudge. Their point: the human brain has evolved to take short cuts in the way it processes information, short cuts that sometimes lead us astray. Hence, sometimes we could use a little help in nudging us towards the correct decision when we make mistakes.

Lunn may be a champion for behavioural economics, but he is also originally a neuroscientist specialising in optical processing. And he makes a telling objection: we don’t yet know why Poggendorff’s illusion fools us. Are we so confident that we want the government to furnish us with spectacles that nudge the line straight, when we don’t know why it looked crooked in the first place?

Dan Goldstein’s caveats came from the sharp end of policy design. He has been studying the question of default options in policy and business. When you order from Amazon, should the default be express shipping or standard shipping? Should Amazon refuse to post your books until you express a preference?

For a business, the choice is not straightforward, even if the aim – to maximise profit without alienating customers – is simple. For a government, the decision should be harder still. Goldstein points out that 12 per cent of Germans and 99.98 per cent of Austrians are registered organ donors. Germans have to opt in to the donor scheme, Austrians have to opt out. The implication: few people really have a strong preference as to whether to be an organ donor or not, so they stay where they’re put.

The response to this is not obvious. Perhaps the government should use the default to maximise organ donations. A more cautious approach would be to try to figure out what people would prefer if they could be persuaded to give it some proper thought. One indication comes from research by Goldstein and Eric Johnson: in an experiment on organ donation, people forced to choose one way or the other acted like people who were placed in the donor pool by default. In this particular case, maximising the donor pool and doing what people really want seems to be much the same thing. Other cases will be less clear-cut.

Much of this was implicit in Thaler and Sunstein’s original – less sexy, less concise – concept of “libertarian paternalism”. The monosyllabic version has been debased in policy circles; it now needs a firm nudge back again.

Also published at ft.com.