Nudging – a relatively recent buzzword, involves slightly changing the playing field to make it easier for us, or more tempting for us as so called ‘rational economic agents’, to make changes to the way we act, without us feeling any pressure or force to do so, as we might through official legislation. Choice is maintained – we can still do the opposite, but it becomes more attractive for us to make choices that indirectly, but very purposefully, have positive impacts for the environment or society – or most commonly practised for the benefit of  businesses.  A business example is a magazine subscription. If your subscription continues automatically for the next year without you having to actively renew it (such that you have to ‘opt out’ rather than ‘opt in’)  larger subscription rates are achieved than in a scheme where you have to make the effort to sign up to each year.

Another example of a nudge might be the idea of ‘framing’. For example, people told that an ice-cream is ’90 per cent fat-free’ are far more likely to agree to a second scoop than those who are told it contains ’10 per cent fat’. Thus a business might sell more if it frames facts in the right way. This can also be put to more meaningful uses.

The book ‘nudge’ is co-authored by Richard Thaler, a professor of economics and Cass Sunstein a professor of jurisprudence, who were both at the University of Chicago when the book was written. The idea is that nudging takes a ‘third way’ between proponenants of interventionism and those of ‘Laissez faire’.

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Thaler and Sunstein use behavioural economics ‘to justify their belief that nudging is truly liberating rather than manipulative or coercive; that is to say, nudges are devices to overcome the unreliable rules of thumb or irrational biases that inhibit us from acting on our own genuine preferences, and are not instruments to make us realise the preferences of others’ (Kerr, 2008).

For the environment, nudges might involve charging a small fee for plastic bags at the supermarket or not having an infinite amount of bags available at the end of a check out. Instead you have to ask the till assistant to give you each bag you require. It might involve having smaller bins to cut down on the amount of rubbish people throw away or having smart energy meters that compares your energy usage to your neighbours. The options are almost endless.

For the economy ‘nudges’ are also thought to be particularly relevant in a recession and to the current banking crisis: ‘This is because, unlike conventional economists, Thaler and Sunstein accept that people act irrationally and banking reform has to be based on the acceptance that markets are irrational too. ‘ As George Osborne from the Conservatives argues:

‘Markets can behave irrationally. The people who make up markets can behave irrationally. This isn’t a failure of capitalism, it is a feature of capitalism’ (The Guardian).

Mr. Thaler believes that carefully applied nudges might help ameliorate some of the problems that led to the financial crisis. However, according to the New York Times ‘some nudges need to be more forceful than others. For example, rigorous public disclosure of leverage (the ratio of debt to capital) would be a burden. But it might be necessary to induce the people who run hedge funds, insurance companies and big banks to behave more sensibly.’ Greater disclosure might allow people to make wiser choices.

Thaler is a fan of electronic disclosure and uses the example of credit cards to show how this might work:

‘Once a year your credit card provider would have to send you two electronic files. The first would be essentially a spread sheet that characterized every way in which the provider can charge you for something, from late payments, to interest rate changes, to charges for currency exchanges. The second file would just be a list of everything you did in the past year that incurred a charge. We predict that Web sites would quickly emerge to translate and evaluate these files so consumers would understand how they were being charged and what they did to incur charges. The web sites would also provide information on alternative suppliers that would be better given the customer’s usage.’

Could ‘nudging’ be the future of sustainable economic growth that avoids future economic crises and makes headway towards environmental progress? Obama and the Tories certainly seem to think so……

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