The Nature of Nudging

Behavioural Theory

November 30, 2017

When most of us think about a nudge, we consider it in terms of a physical or emotional incentive of some kind. For example, in order to nudge a toddler in the direction of a particular toy, you may combine a gentle push and then towards it while saying the words: “Go pick up teddy.” It’s part of a learning experience.

Nowadays, the idea of a nudge has started to assume a vastly different kind of meaning. Especially since the notion of a nudge has become embedded into a behavioural theory so important that a professor of economic and behavioural science at the University of Chicago was recently awarded a Nobel Prize for it.

Nudge Theory

Nudge Theory, originated by Professor Richard H. Thaler1, is the behavioural idea that demonstrates how to steer people towards better decisions by presenting choices in different, and more positive, ways.

Professor Thaler is co-author (with Cass Sunstein) of the 2008 best seller Nudge: Improving decisions about health, wealth and happiness. According to the Nobel Prize citation, he has successfully “built a bridge between the economic and psychological analyses of individual decision-making.”

We’ve explored the nuances of behavioural investing in the past – investigating what motivates people to do what they do, think what they think, and make investment decisions (sometimes questionable ones) for frequently unfathomable reasons – but now, and with the help of Professor Thaler, we want to push the idea further.

Healthy Nudge

Health and Wellness is an application of nudging. Researchers nudged the staff at Massachusetts General Hospital2 to avoid unhealthy choices in the cafeteria. Using a three light system (red, yellow, and green) they labeled unhealthy options such as pizza and soft drinks with a red light, and salads or vegetables with green lights. They also placed healthier options at eye level, and red light choices on lower shelves.

The result? Green sales increased from 41% to 46%, red items were down from 24% to 21%. For beverages, sales for cold drinks associated with the green light increased from 52% to 60%, and red saw a drop from 27% to 18%.

Life saving nudge

Let’s take another example. Spain is a world leader in organ donation. Is this because Spaniards are unusually generous and public spirited? Not necessarily. It’s because, as a matter of public policy, Spaniards are legally assumed to want to donate their vital organs in the event of death – unless they notify the government, by signing a simple document, that they do not. It’s an example of a nudge, as enshrined in a principle of public policy.

Hilariously effective nudge

Here is an example of a hilariously effective nudge that relates to public behaviour3. In the men’s washrooms at Amsterdam’s Schipol airport, all urinals have the image of a housefly etched into the porcelain just above the drain. Is this because the Dutch have especially aesthetic sensibilities, or an offbeat sense of fun? The true purpose is because they want gentlemen to improve their aim by offering them a target. The result? Spillage rates have been cut by 80%!

Pension savings nudge

In the U.K., pension saving rates among private sector employees were dangerously low4. In 2012 the U.K. government mandated that employers had to establish an automatic enrolment pension scheme. In other words, working men and women were automatically introduced into a firm’s scheme with contributions being deducted from their pay– unless they formally requested to opt out. The result? Membership of private sector pension schemes has soared from 2.7 million in 2012 to 7.7 million in 2016.

The unpleasant side of nudges

Nudges can have a dark side, as those of you who have been exposed to the improprieties associated with negative option marketing can attest to. You know how it goes. A supplier of a service you’re already paying for adds on a bunch of extras, assuming you’ll be happy to pay for them unless you inform them otherwise. Mobile telephone companies try this one on from time to time, and it tends to cause frustration for us all.

That said, nudges are with us and they’re growing. Look out for them, while recognizing this important caveat. Nudges are not necessarily mandates. So while there is encouragement, there is no compulsion to comply and people have the freedom to choose other options.

As Professor Thaler observes: “Putting fruit at eye level (in a supermarket) counts as nudge. Banning junk food does not.”5

The Wooding Group at CIBC Wood Gundy, 780 498-5065