Imagine you are entering your school cafeteria. You see the normal stations with pizza, noodles, and hot dogs, but before you reach them, you have to pass the salad bar. You stop and put some salad on your plate, which leaves less room for the French fries at the next station. Great! Your lunch is healthier, but what made you take the salad? Well, you were nudged. According to Richard Thaler, co-author of , Nudge: Improving Decisions About Health, Wealth, and Happiness, and as of 2017 Nobel prize winner, the placement of the salad bar before the other stations makes customers more likely to eat the salad because they see it first. The placement of the salad bar was intentionally implemented to help people eat healthier by “nudging” a person towards the healthier decision. A ‘nudge’ is a change in an environment, detectable only by the subconscious that boosts the probability of a person making a certain decision.
Richard Thaler is credited with modern development of nudge theory. The theory derives from behavioral economics and observes the way people make daily decisions and how manipulated factors in their environment affect them. The theory has influenced policy makers and the health departments alike. For example, organ donation has two general systems, opting in or opting out. The first system requires citizens to take the initiative to fill out paperwork and give consent for hospitals to use their organs, and the second system assumes that everyone in the country is an organ donor, and citizens have to opt out of being a donor. If human instinct was removed from the choice, then theoretically there should be no difference if a country uses one system over the other.
In an article Thaler wrote for the New York Times, he references a study conducted by two psychologists, Eric Johnson and Dan Goldstein that shows the different results of these two systems. The study revealed that in a country using system one , only twelve percent of the population gave consent, yet with system two ninety nine percent gave consent. Thaler theorizes that this difference is due to human nature. He writes, “Many Americans say they want to be organ donors, but they just don’t get around to acting on their intentions.” Because the process is so difficult for people to opt-in for organ donation, few ever have the time or energy to do it, even if they want to. By “nudging” hundreds towards being donators by default, more people end up donating organs to save hundreds of lives. This theory was tested in England when Theresa May announced that the country would be adopting the opt-out system.
While, nudge theory has been praised by many, it has its fair share of opponents. As explained by Cass Sunstein of The Guardian, the main argument of critics is that the theory is controlling. People are wary of anyone trying to influence their decision making, because they will not even realize when it is happening. The theory is thought to interfere with the freedom of choice.
The basis of nudge theory follows the irrational way human emotions affect decisions. In fact, in an interview with The New York Times, Thaler mentions that he keeps a list of ridiculous things people do. In one example, he shares his experience with a friend who refused to pay a neighborhood kid to mow his lawn, “He said it would cost $10 and he wouldn’t pay it. So, I asked, would you mow your neighbor’s lawn for $20? He said, come on! Not even for $50! But to traditional economics, that makes no sense.” Thaler explains that this is silly if analyzed through the lens of traditional economics. If normal economics were applied to this situation, the results would be inconclusive, because in that respect the friend’s decision makes no logical sense. Rationally the supply should match the demand, but because humans are irrational, his friend believed his reasoning makes sense, Thaler explains. It is this rationale that helped formulate Thaler’s Nobel theory.
The Nobel Prize is an extremely prestigious honor, although economics was not originally a category. It was not until 1969 that the Sveriges Riksbank Prize in Economic Sciences was added to the lineup. Thaler is the most recent addition to a now lengthy list of winners, and he notes that there is still work to be done.
Currently, he is working on the application of nudges in pension plans, but only time will tell what new theory Thaler will concoct next.