By Patrick Luciani (AIMS Senior Fellow)
Over the past two or three decades, behavioural economics has become the rage with swarms of newly minted PhDs running experiments showing how inconsistent and irrational we all are when it comes to retirement planning, consumer behaviour, taking care of our health or saving energy. This is a replay of the 1960s and ’70s when economists educated in Keynesian theory were looking everywhere for market failures to justify more government tampering with the economy. Today those departments not only have behavioural economists, but neuroeconomists who are convinced that mapping the brain will ferret out the truth of why we are so illogical when it comes to making decisions.
Now we are in the age of “nudging” thanks to the work of University of Chicago Professor Richard Thaler who was rewarded in 2017 with a Nobel Prize in economics for his work on irrational consumers. He has spent his career studying people doing purportedly stupid things that betrayed their best intentions. Traditionally, neoclassical economics relied on the assumptions that consumers and firms were rational economic agents that behaved in a way to maximize happiness, or in the case of firms, profits. Economists such as Milton Friedman, who knew better than most that people were complicated, said it didn’t matter if they seemed irrational as long as economic models were decent predictors of things such as unemployment and interest rates. For behavioural economists, that wasn’t good enough since traditional economics couldn’t explain things like the financial crisis of 2008. They argue that we have to look more deeply into the human psyche.
Why do we save too little for retirement when we say our plan is otherwise? Why do so many of us eat too much when we all want to lose weight? Most of us say people should sign their donor organ cards, but few of us do. That’s where nudging comes in. Rather than forcing us with more rules and taxes, what we need is a little “paternalistic libertarianism” to align our wishes and actions. Are we saving too little? There’s a nudge for that in changing the rules to get our employers to put more of our retirement savings into higher-yield equities, unless we go to the effort of opting out. Are we eating too many sweets? How about changing the “choice architecture” of how we shop. That’s a fancy word for putting all the desserts on the top shelves and all the healthy foods at eye level.
Ever since Thaler and his co-author Cass Sunstein wrote Nudge: Improving Decisions, About Health, Wealth, and Happiness in 2008, there has been a flurry of similar books on the subject. Now over 75 countries have set up “nudge” units in their governments. Even Ottawa and some provinces have jumped on board with their own “nudge” departments.
But does it work?
If we are all now being nudged, we should be healthier, richer and happier. In some case we are doing better. In Austria, 95 per cent of citizens are registered to donate their organs in case of death. But that was done by a change in donor-card wording. Rather than opt in, which takes some effort, Austrians now have to opt out. And since most of us are lazy and don’t like filling out cards, more organs are available for transplants.
But how do you nudge the unemployment rate to drop, increase investments and competitiveness, or shift government deficits or debt? Or how do we nudge lower suicide rates or runaway deaths from opioids? Most nudges are done to change eating and drinking habits, but so far benefits are marginal. A recent Ontario study found that calorie counts on restaurant menus have no effect on our health.
Nudging is about the enlightened few making decisions for the many stumbling in the dark. What makes bureaucrats and politicians more rational than the rest of us? And what’s to be said of nudges when the government owns, controls and regulates liquor distribution, gambling and cannabis consumption? Aren’t the “choice architects” here in a conflict of interest, pushing us in both directions?
When it comes to consumer behaviour, marketers and “Madison Avenue” have known for years what economists are just beginning to understand. And what possible insight can behavioural economics provide to prevent another 2008 financial disaster?
This new branch of economics has excited many who want a bigger role for the state in meddling in the economy. But nudging is quickly moving in the direction of junk science and remains a case of overpromising and under delivering.