Book review: Nudge Theory in Action

Richard Thaler and Cass Sunstein's book Nudge set policymakers on a path to taking advantage of the insights of behavioural economics to modify our behaviour, in areas such as retirement planning, nutrition, tax payments, and so on. It spawned the Behavioural Insights Team (otherwise known as the 'Nudge Unit') in the U.K., and similar policy units in other countries. However, it also caused a lot of controversy, particularly from libertarian groups that would prefer less government intervention into private decision-making.

I recently finished reading the book Nudge Theory in Action, a volume edited by Sherzod Abdukadirov. I have to say it was not at all what I expected. I thought I was going to get a lot of examples of nudges applied by governments and the private sector, and hopefully with some explanations of the underlying rationales and maybe some evaluations of their impact. The book does contain some examples, but mostly they are examples that have already been widely reported, and not all of them would necessarily qualify as 'nudges', under the definition originally proposed by Thaler and Sunstein.

Essentially, most of the chapters in this book are libertarian critiques of nudges in theory and in practice. Richard Williams sums up the underlying premise of book well in the concluding chapter:

The purpose of this book is to demonstrate that there is a strong private sector that helps people's decision making and that stringent criteria ought to be met before governments attempt to improve on private decision making, whether through structuring information to "nudge" people into making the government-preferred decision or using more stringent measures to achieve the same thing. Where people have difficulty matching their inherent preferences into real life decisions that satisfy those preferences, a private market will almost always arise that can help to match decisions with preferences.

Thaler and Sunstein defined a 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". The second part of that definition is important, and most of the chapters pay lip service to it, while at the same time ignoring it in favour of critiquing almost any government policy proposal that would restrict decision-making. The most cited example is the failed attempt by former New York mayor Michael Bloomberg to ban sales of large sodas. Given that it involves a ban, and therefore does forbid an option, under the original Thaler and Sunstein definition it is not a nudge.

However, policy makers do themselves no favours in this case by referring to policies like the New York large soda ban as a "nudge", and invoking behavioural economics principles in favour of all sorts of policies that are not, in fact, nudges. So, a more reasonable critique would be directed at policy makers' incorrect usage of the term 'nudge', rather than damning all nudges using examples that are not even nudges.

Having said that, there are some good and thought-provoking chapters. Mario Rizzo has an excellent theoretical chapter, and while I don't buy into the arguments he made, it definitely made me think more deeply about what we mean when we refer to rational behaviour. Jodi Beggs (from Economists Do It With Models fame) presents a great framework that differentiates private sector nudges into those that improve welfare for consumers (which she terms 'Pareto nudges', invoking the idea of a Pareto improvement from welfare economics), and those that make consumers worse off to the benefit of firms (which she terms 'rent seeking nudges'). Beggs also notes the subversion of the term 'nudge' to mean almost any policy change that aims to change behaviour. Several chapters raised the (very valid) point that not only are consumers (or savers or whoever) subject to the behavioural biases that behavioural economics identifies, but government decision makers are also likely to be subject to those same biases. In that case, we should be cautious about the ability of government to create the 'right' choice architecture to achieve their goals.

However, there are also some notable misses among the chapters. In his chapter, Mark White critiques government attempts to alter the choice architecture to favour some option over others, but never engages with the fact that there will always be some choice architecture in place. In many cases, there simply isn't a way to avoid presenting decision makers with options, and in those cases there has to be a choice architecture of some type in place. Why not attempt to make it one that will steer people to making decisions that improve their long-term wellbeing? Similarly, Adam Thierer argues that nudges prevent 'learning by doing' or learning through making mistakes. That is good in theory, but how many opportunities do we have to make mistakes in our own retirement planning, for instance? He also fails to acknowledge that governments can also learn from nudges that don't work as intended. As Steve Wendel notes in his chapter:

We should be skeptical that behavioral nudges will work the same (or at all) once they are translated from an academic environment into consumer products, because of core lessons in the behavioral literature itself - that the details of implementation and decision-making context matter immensely.

That isn't an argument not to attempt nudges. However, it is an argument that applies equally to government nudges - they may not work as intended, so they should be rigorously evaluated.

Ultimately, if you are looking for ammunition to mount a libertarian counter-attack against nudge theory applied by government, you will find a lot of suitable material in this book. However, as a general guide to 'nudge theory in action', I believe this book falls short.