The nudge-nudge approach to policy

Where did the buzz word originate?
It's the title of a new book which argues that the basic premise of economics - that we are "rational" actors who always make choices that "maximise" our interests - is fundamentally flawed. In the real world, as opposed to the world of textbook economics, we eat too much, drink too much, don't take enough exercise and don't save enough. Rather than thinking things through, we rely on misleading rules of thumb - and we are heavily influenced by how choices are presented to us and what we think others are doing. Instead of making "rational" choices (see box), we "go with the herd" or stick doggedly to the status quo. In short, we are less like Mr Spock and a lot more like Homer Simpson.

How does that insight affect policy?
To persuade irrational beings to do the right thing, argue the book's authors - Richard Thaler, a behavioural economist, and Cass Sunstein, a law professor - you must slyly coax them into doing it. So you can't leave it to the free market to come up with the optimum solution (the traditional neo-liberal response) any more than you can rely on the "Big Clunking Fist" of state regulation. Instead the authors advocate a third way, "liberal paternalism", based on the use of "gentle non-intrusive persuaders" which they refer to as "nudges".

What sort of nudges do we encounter in everyday life?
At the simplest level, the self-help level, nudges consist in the use of reminders. If you want to save money on electricity bills, buy a Wattson, a device that tells you how much energy you're using in your home. If you want to lose weight, write down what you eat. A more subtle variant is to make small alterations in what the authors call "the architecture" of choice: thus, dieters should serve themselves on smaller plates. At the commercial level, nudges often take the form of implicit instructions. Managers at Amsterdam's Schiphol airport, eager to reduce cleaning costs in the men's loos, had a fly drawn on the porcelain of each of the urinals - a behavioural nudge that has improved the accuracy of penile aim by 80 per cent. In each case, a key attribute of the nudge is that it does not seek to impose an abrupt change in behaviour. "Putting fruit at eye level counts as a nudge," say the authors; "banning junk food doesn't."

And at the political level?
A key nudge in the realm of politics is to get people to conform to a desired norm by exploiting what the authors call "the default condition". In Minnesota, tax collectors trying to get laggards to file their tax returns on time got nowhere with threats and fines. So instead, they publicised the default condition - the fact that most Minnesotans had in fact already filled in their returns.

The result?
The number submitting tax forms shot up overnight. Another ruse is to alter the architecture of choice by making the default condition the easy option. In Spain people are presumed to have donated their organs unless they choose to opt out. So organ donation has now become the social norm. Or take corporate pension plans. Studies show that when employees have to sign up to a plan, participation rates are often as low as 50 per cent; but when they are enrolled as a matter of course (the default position), with an option to opt out, participation rises to more than 90 per cent. Have politicians taken to the idea? In the US, Barack Obama has picked up the nudge concept by promising to set up a government-operated insurance scheme from which those lacking any other form of health insurance (eg Medicare) would have to opt out rather than opt in. He also wants to do much the same for workers' pension schemes, as does Gordon Brown, whose new Pensions Bill will oblige employers to enrol their employees automatically into workplace pension schemes. However, in Britain it is David Cameron and the Tories who have been the most explicitly "nudgist", with Cameron insisting that social change is often more likely to be achieved through influencing behaviour than through direct regulation.

How has this translated into specific Tory policies?
Cameron explicitly invoked the idea of nudging in his proposal to reduce domestic energy consumption: he wants householders to be told, at the bottom of their gas and electricity bills, whether they are using more or less energy than their neighbours. By this subtle use of peer pressure, Cameron argues, people will be coaxed into being more energy-efficient. And shadow chancellor George Osborne has his own nudge schemes: for example, he wants councils to pay local residents for recycling their rubbish instead of penalising them if they don't. (In some US cities, waste companies have increased recycling by up to 200 per cent by paying households £20 a month for recycling - the money coming from savings in the landfill tax they pay.)

So is nudging the way forward?
The big attraction of nudging to the Tories is that it offers solutions that dispense with vast centralised bureaucracies and enable them to sound "caring" on social issues without being accused of "nanny statism". That's why they want to extend the nudge approach to knife culture, drug addiction, binge drinking and so on. The problem, as critics see it, is that in areas such as financial regulation and climate change, more draconian measures are needed: nudges are just not enough. Only tighter regulation, in most people's view, will prevent another subprime crisis (a view with which Thaler and Sunstein vehemently disagree). And isn't showing people how much more energy they use than their neighbours a rather piffling response when there is an urgent need to cut carbon emissions by 50-80 per cent? Nudge economics, say the critics, fails to recognise that individual freedoms sometimes have to be curtailed for the general good.

The irrational mind: how Homer thinks
Experiments by social scientists - and "magicians" like Derren Brown, for that matter - show how easily behaviour can be primed by manipulating the context in which people make choices. In one study, 40,000 people were asked if they intended to buy a new car in the next six months: the group bought 35 per cent more cars than expected, simply as a consequence of being asked the question. In another experiment, subjects were placed before a bowl of soup and invited to drink as much as they liked. Unaware the bowls were being refilled from below, a surprising number just kept on drinking until the experiment was halted. This lesson is one that charitable fundraisers have internalised. In their circulars they ask for a donation of £50, £100, £500 or, £2,000. Few will give £2,000, but by presenting this set of options rather than, say, £5, £10, £25, or £50, they manipulate people into giving larger amounts. Another quirk of choice behaviour, one long recognised by advertisers, is that people are biased towards the status quo. In one study, a class of students was divided into two, and members of one group were each given a mug to keep. After a while the mug-owners were asked how much they'd sell their mug for, and the mug-less how much they'd pay for one. Owing to our tendency to set greater store by what we already possess, those with mugs demanded roughly twice as much as the others were willing to pay. The experiment has often been repeated - nearly always with the same result. ·