The problem with nudge

There are alternative ways in which the marketplace naturally nudges people to make decisions

Updated - December 04, 2021 10:43 pm IST

Published - October 16, 2017 12:15 am IST

many people talking for a solution. vector concept

many people talking for a solution. vector concept

The Nobel Prize for Economics awarded to the American economist, Richard H. Thaler, has provided yet another opportunity for the many fans of his work to sing praises about the greatness of behavioural economics. The very smart insights offered by behavioural economists into the various quirks of human nature have decisively refuted the faulty assumptions of mainstream economics, it is said. In particular, the neoclassical idea of an ‘economic man’, or homo economicus , who acts in a perfectly rational manner and cares only about material things, has been beaten to death for the sin of offering an unrealistic picture of reality. While the assumption of perfect human beings can indeed lead to some very flawed economic conclusions, it is a stretch to argue that economists were simply unaware of the complexities of human behaviour before the dawn of behavioural economics. In fact, the simplifying assumption of a world filled with rational individuals, for all its many drawbacks, has been able to provide a pretty good account of how the world works; hence its widespread use.

Governments’ interests

The problem with the nudge theorists, like Mr. Thaler, who argue that people are incapable of making the right decisions to attain their goals lies with the policy conclusions that they derive from their findings. Human beings may well be irrational fools in many cases. But that’s hardly enough reason to arrive at the conclusion that governments can act as successful caretakers steering citizens down the right path. For one, behavioural economists who ask governments to nudge citizens presuppose that governments have a clear picture of the true preferences of their citizens. Central planners in the past faced a similar problem when they tried to allocate resources in the absence of consumer preference expressed through market prices. Two, the recommendations of behavioural economists could offer sanction to governments that want to engage in massive social engineering under the guise of nudging people to make better decisions. Three, behavioural economists assume that governments that nudge people will have the best intentions and only seek to do good for citizens. In reality, politicians/ bureaucrats care only about their own interests.

Further, behavioural economists ignore the fact that there are alternative ways in which the marketplace often naturally nudges people into making better decisions. Often enough, businesses that compete against each other have the incentive to present choices in a way that customers are able to opt easily for choices that are in harmony with their actual goals. When it comes to personal finances, there is a widespread market for financial planning services that helps individuals make and stick to rational saving and spending decisions. Of course, many times people may not even be aware of their own cognitive biases, which stops them from taking ameliorative action. Even then, there exists a huge profit opportunity for businesses that can make people aware of their own biases and solve them. The world, despite its many imperfections, can live without a nudge.

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