Something caught my attention in this year’s Economic Survey. One whole chapter was dedicated to something really interesting in an otherwise not so interesting document. (Depends who you are talking to) Anyways, it said-Policy for Homo Sapiens, Not Homo Economicus: Leveraging the Behavioural Economics of “Nudge” . Basically the whole chapter goes on to talk about how various public schemes have successfully employed behavioural insights and how the government plans to continue to use this tool in future public policy.

There are many who are skeptical of the Nudge Theory due to their belief in freedom of choice and rejection of any kind of paternalism. For them the standard is, give as many choices as possible and let people choose what they like best. This way of thinking is in fact flawed on three counts. First being the assumption that almost all people, almost all of the time,
make choices that are in their best interest or at the very least are better
than the choices that would be made by someone else. As much as we like to talk about the rational consumer in economics of models relying on lab like conditions, the real world says differently.

Second is the misconception that paternalism will surely involve coercion or force. The truth is a different arrangement of choices or a new default option can bring desirable changes in public behaviour all the while maintaining unrestricted choices. It will be clearer with an example-One can increase or decrease the consumption of certain foods in a buffet by simply altering the arrangement in which food is served. Here no one is removing anything off of one’s plate yet they eat differently now.

And lastly the notion that people’s choices can’t be influenced. Rather we are subjected to unintentional nudges all the time that a 100% affect our behaviour. With this out of the way I’d like to talk about the choice architecture (the said arrangement of choices) that for the major portion depend on our human inadequacies. Normally the human mind works remarkably. We can recognize people we have not seen in years and run down a flight of stairs without falling. Some of us can speak multiple languages, build supercomputers and come up with game theory. However all of us have biases.

1-Anchors as Nudges- When charities ask you for a donation, they typically offer you a range of options such as ₹100, ₹250, ₹1,000 or “other.” These values are not picked at random. The options influence the amount of money people decide to donate. People will give more if the options are ₹100, ₹250, ₹1,000 than if the options are ₹50, ₹75, ₹100.

2-Availability-This involves a biased assessment of risk. If you have personally experienced a serious earthquake, you’re more likely to believe that an earthquake is likely than if you read about it in a weekly magazine and more likely to buy insurance for it irrespective of the actual risk you face. Nudging towards true probabilities can help.

3-Representativeness- We find patterns even in places where they don’t exist. For instance, cancer clusters. In a population of millions, it is inevitable that certain neighborhoods will see unusually high cancer rates within any one-year period. The resulting “cancer clusters” may be products of random fluctuations.

4-Unrealistic Optimism- Asked to envision your future, you’d say that you are far less likely than others to be fired from a job, to have a heart attack, to be divorced after a few years of marriage, or to have a drinking problem. No chain smoker thinks she/he will contract lung cancer! All of us need help here.

5-Loss Aversion- Losses hurt us more than gains of equal amounts.

6-Status Quo Bias- All of us have a general tendency to stick to our current situation. We rarely change our network provider, our newspaper subscription that renews itself. We love defaults and so these can act as a wonderful nudges in weighty domains like our retirement and insurance plans.

Nudges can seriously help in matters like saving the planet or increasing organ donation. By keeping the default as ‘DONATE’ with a choice of opting out has resulted in more organ donation than if the default was ‘NOT DONATE’ with the choice of opting in to donate.

If you like this sort of stuff I suggest you the amazing book “Nudge-Improving decisions about Health, Wealth and Happiness by Richard H. Thaler and Cass R. Sunstein”.