This article was first published by Warwick Economic Summit here.
In 2010, the UK’s Prime Minister, David Cameron, founded The Behavioral Insight Team (BIT) – popularly known as the Nudge Unit – with a simple but impossible mission: Transform the approach of major government departments and deliver a tenfold return on its cost.
It was a risky trial, where public opinion vilified Nudge Theory as dark marketing, negative government interference, or self-serving paternalism. Failure in this mission would have resulted in the Nudge Unit’s termination on its second anniversary – giving voters enough time to forget this embarrassing episode. Fortunately, in the next eight years the Nudge Unit was so successful it not only survived but conducted 163 trials in 25 countries, becoming a household name in mainstream policy-making across the world.
The Nudge Unit derived its name from Richard Thaler’s concept of the Nudge Theory. In his influential book Nudge: Improving Decisions about Health, Wealth, and Happiness, Thaler explained Nudge as, “Any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not.” Last year, Thaler won the Nobel Prize in Economics for his work in this field of Behavioral Economics, which combines economic and psychological analysis to individual decision-making.
All governments ask this basic policy-making question: How do we design an effective, but inexpensive, public policy? Behavioural economics has the potential to answer this question by allowing governments to adopt a more realistic view of human behaviour while using small and inexpensive nudges to create huge results. People generally favour convenience and ease, seeking to achieve their goals with the least effort possible. Removing obstacles, therefore, is an integral part of the Nudge theory. To explain how the Nudge Unit achieves their goals, it is beneficial to understand their acronym – EAST, which shows how behavioural economics and small nudges hugely improve policies.
For a more specific example, we could look at Mexico, where the challenge lies in regulating the informal economy. Many firms stay below the radar of tax authorities, reducing tax revenues and leaving their employees without access to social security. In Mexico, this figure represents close to 30 million people. To combat this, the BIT constructed a series of text messages encouraging small businesses to declare bi-monthly revenues on time. A text trial to around 750,000 small informal businesses led to a 37% increase in tax declaration rates, and these messages continued to positively impact tax declaration in the following four months with no further reminder. The increased revenues represented a whopping return on investment of 400% for the text messages.
However, the main concern against the use of Nudge policies is that people’s freedom of choice will be stripped away through excessive government intervention into its decisions. For instance, recently, China implemented a social credit system for its citizens, where the government uses a point-based system to regulate and influence behaviour, painting a dystopian world. Fortunately, there is a clear distinction between China’s social credit system and Nudge policies, where the latter seeks to alter behaviour without significantly changing the economic incentives, while the former uses economic punishment and rewards to influence behaviour, such as preferred entry into top schools for highly rated citizens or denied train tickets for lower ranking citizens.
Many governments try to fit society into the mould of their assumptions, which is idealistic but usually detached from reality. They should instead draft public policies that factor in the unexplainable actions of an unpredictable consumer, while ensuring that they allow our freedom of choice to exist. Using behavioral economics achieves this.