In the UK, most private sector employees can have money deducted from their paychecks, pre-tax, and placed into an investment scheme that grows tax-free, until they withdraw the proceeds in retirement. In addition, employers have to match part of the employee’s contributions. Overall, it’s a pretty sweet deal.
In 2012, just 42% of workers chose this option. In 2016, 73% did, leading to billions more saved by millions of people.
What led to this stunning near-doubling in popularity?
The answer is so trivial, it’s hard to believe; while in the past, workers had to tick a box to opt in to the program, from 2012 onwards, they were automatically enrolled and had to tick a box to opt out. It was as simple as that.
In either case, the “transaction costs” involved were negligible (involving literally clicking a button on a computer screen). Traditional economic theory, which simplifies analysis by assuming that all people behave rationally in their economic self-interest, would have ignored them completely. Classical economists would assume that individuals would rationally decide whether they wanted to save for their retirement, and whether this particular method was appropriate. While some may irrationally save too much, and some too little, these outliers would balance each other out. There would be no place for the systematic irrationality that human beings consistently display—in this case, for having a very strong tendency to choose the default option presented to them i.e. to maintain the status quo.
That humans display systematic biases to simplify their lives, often at the cost of their own economic interest, is the crux of the findings and writings of Richard Thaler, who won the Nobel Prize for Economics this month
That humans display systematic biases to simplify their lives, often at the cost of their own economic interest, is the crux of the findings and writings of Richard Thaler, who won the Nobel Prize for Economics this month. He is the muse for a growing, research-driven movement being adopted by governments around the world, who are using these biases to make clever policy. The UK pension success described earlier was an initiative of what came to be known as the “Nudge Unit”, in the British government, inspired by the popular book he co-authored with Cass Sunstein (Nudge: Improving Decisions about Health, Wealth, and Happiness, 2008). And it was through this book that the world found a name for an important policy tool: the nudge.
So what are nudges? What sorts of biases do they utilize? And are Thaler’s findings of any value to us? Could there be some useful ways for policy-makers in Pakistan to nudge their charges towards better decisions for themselves and for the country?
In common usage, a nudge, of course, is a gentle push intended to get someone’s attention, or prod them into action. Thaler’s nudge is similar. To explain the concept, he first lays out the idea of choice architects or people who shape the context in which individuals make decisions. Examples of choice architects may include designers of election ballots, people who determine the location of foods in a cafeteria (or on a menu), and policy-makers trying to persuade people to control the size of their family or use less water. If you are a parent convincing your child to go to school, you are a choice architect. If you are a surgeon helping a patient decide whether to opt for a procedure, you are a choice architect. You decide what information to share with the patient, and the nature in which to share it.
Are Thaler's findings of any value to us? Could there be some useful ways for policy-makers in Pakistan to nudge their charges towards better decisions for themselves and for the country?
For an illustration of how the choice architect is critically important, Thaler refers a series of studies that show some variation of the following: If a surgeon tells a patient that he has a 9 out of 10 chance of surviving an operation, the patient is far more likely to undergo the procedure than if told he/she has a 1 in 10 chance of not surviving (hint: both statements convey the same information). In general, the number of people choosing the operation tends to double, if the odds are framed in the first way. Astonishingly, neither trained physicians nor business graduates performed any differently in these experiments.
Thaler describes a nudge as a self-conscious attempt by a choice architect to move people in directions that will make their lives better (although more loosely applied, it may include things that will make society better as a whole). The idea is to alter people’s behaviour in a predictable way, at a low or negligible cost, without significantly changing their economic incentives or mandating anything. So, to adapt one of Thaler and Sunstein’s examples: if a school cafeteria puts fruit at eye-level and samosas at higher than eye-level (a tactic that has been used by grocery store chains to promote certain brands for years), that is a nudge. If it bans samosas (an undesirable infringement of liberty), or makes fruit free (a significant economic incentive with significant costs), that may certainly be required or useful, but it doesn’t qualify as a nudge.
A few of the biases ripe for nudges in the Pakistani context may be: the desire for social conformity, the predisposition to passive decision-making, and the status quo bias.
Social conformity
In general, humans like to conform to societal norms (All the cool kids are doing it). In Nudge, the authors cite several experiments that show this at work in dramatically unexpected ways. One particularly interesting study, replicated in several countries, asks people to publicly identify two lines of equal length from among a few blatantly obvious options. Almost no one has trouble with this simple exercise. That is, until associates of the experimenters planted in the groups, purposely make the wrong choice. At this point, things go haywire with the adults starting to make errors in the range of 20-40%. So, in many cases, up to half of the adults studied, fail to correctly identify two lines of obviously equal length, just because a number of others made the wrong choice.
This has serious implications for choice architects. If you want people to do something, it’s often not enough to tell them it’s good for them, or give them economic incentives to do it. You should also tell them others are doing it. Thaler is a big fan of this idea, and has a wealth of studies behind him. A particularly relevant one was conducted in Minnesota in the 90s. This real-life experiment gauged the impact on tax compliance of a number of initiatives. the only one that worked was letting taxpayers know that 90% of their fellow citizens were in full compliance with their tax obligations.
It is easy to see potential applications of this insight in the Pakistani context. Family planning information programs on radio and television could experiment with messaging along the lines of, “X million families in Pakistan are happy with just two children and would struggle to provide for more—are you any different?” Similarly, with voluntary vaccination programs, “X% of your fellow citizens have protected their children from this terrible disease: have you?” Public interest campaigns aimed at raising demand for education could experiment with focusing on enrolment successes, not failures to signal to undecided parents what the rest of society is doing, e.g. “70% of all girls between the age of 6 and 10 are enrolled in primary school—is your daughter?”
Richard Thaler just won the Nobel Prize for Economics
Passive decision-making
Another bias, the predisposition to passive decision-making, can be utilized through what psychologists call “framing”. This refers to the presentation of information in a certain way to influence the choices people make. The example of surgery survival rates discussed earlier is an illustration of this; any choice architect who wanted to “nudge” people in the direction of electing for surgery would surely be well-advised to frame the statistics in terms of likelihood of survival.
Those old enough to remember General Zia’s 1984 referendum will recall it as a particularly pernicious example of framing that elicited the desired response: Do you agree with the President’s efforts for bringing the laws of Pakistan in to conformity with the injunctions of Islam as laid down in the Holy Quran and Sunnah? Thaler and his intellectual companions, supporters of a more benign form of framing, might see many areas in Pakistan as ripe for this form of intervention. Linking reporting suspicious activity with the potential to avoid terrorist attacks that occurred in the past, associating vaccination with the avoidance of graphical depictions of terrible diseases, and framing water conservation as the avoidance of terrible future shortages, are all potential applications. In India, framing is being used as part of a behavioural economics approach towards solving the open defecation problem. In all cases of course, it makes sense to test the impact of proposed interventions before scaling them.
If you want people to do something, it's often not enough to tell them it's good for them, or give them economic incentives to do it. You should also tell them others are doing it. Thaler is a big fan of this idea, and has a wealth of studies behind him
Status quo bias
The success of the savings nudge in the UK depended on the “status quo” bias. This high-profile success for the behavioural economists for whom Thaler is now the poster child, brought the human tendency towards inertia to the forefront of economic policy. In addition to the mounds of research that examine this, there is a particularly stark policy lesson to be gleaned from the case of elective organ donations. In many countries, people can express their desire to donate their organs in case they were to become incapacitated and supported on a ventilator. This consent is often recorded through a tick-box on the individual’s driver’s license. Thaler and Sunstein highlight a particularly stark example of the difference between having people opt in for such a system versus signing them up by default and allowing them to easily opt out. In Germany, where citizens opt in, 12% of eligible citizens have done so. In Austria, a fairly similar country, where citizens are included by default, but have the option to easily opt out, nearly 99% of people remain in.
This is stunning. Again, potential policy implications for Pakistan (each of which would need to be backed by randomised controlled trials) immediately come to mind. The use of a national ID card number as a national tax number (thereby registering everyone in a tax database by default) is one obvious example.
Sub-government choice architects like DHA might provide a pre-filled Zakat donation form linked to well respected charities at the time of property sales; sellers could easily opt out, but surely many, reminded of an important obligation at a time when they suddenly became flush with money, would end up donating.
A closely related principle for policy nudges is to make things as easy as possible in order to help overcome inertia and ensure maximum participation. Even seemingly insignificant ease-related tweaks can have a huge impact.
Again, our tax system is the first thing that comes to mind. Several countries around the world are moving towards pre-filled tax returns, based on payment information that is already available with the government
Again, our tax system is the first thing that comes to mind. Several countries around the world are moving towards pre-filled tax returns, based on payment information that is already available with the government. Citizens simply make amendments as needed and submit the return. Our current system couldn’t be further from this with no instructions (other than the legislation), cumbersome wealth reconciliation forms, and constantly changing deadlines, the real surprise is that over a million people actually go through the trouble of filing tax returns. It doesn’t take a Nobel prize-winning economist to realize that this must change.
The Nudge Unit
The UK, US, Australia, Singapore, Germany and the World Bank all have dedicated “nudge units”, staffed with behavioural experts who work with government departments to integrate behavioural insights into public policy. There is a similar initiative underway in India with the support of the Gates Foundation. Our political parties would do well to consider incorporating commitments to move forward in this direction in their manifestos for the upcoming election. This is especially important given that nudges, by definition, have a negligible cost. And remember: all the cool kids are doing it!
The writer is a Lahore-based columnist and consultant. He has served as a director in the global markets division of a major European investment bank. He tweets at @AssadAhmad
