NUDGE THEORY

Group 3
Kanica Jain
Abhishek Murali
Harish
Saumya Saxena
Pramit Pal
Kamlesh Chaudhary
 NUDGES AND INCENTIVES
Nudges don’t -
– Forbid any options explicitly; choices remain unrestricted
– Change any economic incentives significantly
– Seem expensive and unavoidable
Eg: School Cafeteria Manager

“Econs” ignore nudges (like order of display) , embrace incentives

Eg: Increased taxation on fizzy drinks
Need of the Hour: Adopt subtle nudges in combination with suitable incentives
Eg: Programming thermostat of AC to indicate Cost per Hour
 NUDGES AND INCENTIVES
■ Denver State’s A Dollar A Day Program

■ CARES ( Committed Action to Reduce and End Smoking)

 When To Nudge
 When benefits and costs are time separated
– When a choice has costs now and benefits later, we tend to postpone. E.g:
exercising
– When a choice has benefits now and costs later, we tend to be tempted into
mistakes. E.g: unhealthy food habits or drinking.
 Frequency and Degree of difficulty
– Nudging is more effective and important when an individual faces difficult
problems. E.g: buying a house, which stock to buy etc
 Unknown Preference
– E.g: Nudge from a chef to order a dish
 Choice Architecture
 It is the environment designed so that the decision made by user are affected by it.

– Feedback: improves self awareness e.g: electricity companies comparison of bills

– Incentives: most basic way of nudge, should be attractive enough in the short
term to affect preference. Monetary incentives, calories burned option on
treadmill

– Mappings: relationship between choice and welfare. E.g: for food choices.

– Structuring complex choices

Underlying Heuristics Of Nudge Theory
 Nudge theory can sometimes take precedence over conventional means of enforcing rule or
coercion in terms of effectiveness and degree to which liberty is allotted to individuals being
nudged

WHY?
 People do not always make decisions rationally; rather governed instinctively
 Susceptible to often-fallible heuristics like anchoring and adjustment, availability, loss
aversion, following the herd
 Decisions not always governed by maximum utility function
 Role of judgement becomes imperative which is in turn governed by heuristics
Underlying Heuristics Of Nudge Theory
HOW?
 Use “positive” nudges which try to align heuristics to desired decision making
 Consumer faces a quandary in decision making, cognitive or heuristic?
 Introduced nudge overpowers strategic thinking, nudge wins
 Consumer feels the decision is in his best interest without realizing overarching
influence of the nudge
 True utility curve is altered
 Desired result achieved without coercion or impeding the liberty of choice to individual
 Libertarian Paternalism
 Libertarianism: An environment in which a person can make a decision according to
his free will
 Paternalism: An environment under which an authority takes control or regulates the
matters affecting the individuals.
 Middle Ground: If the individual’s choice can be affected either by changing the
context(paternalistic aspect) in which an individual can choose but not by changing the
available options. That way it can be both paternalistic and libertarian at the same time.
 E.g: Potato incident of 17th century king, novice and experienced player
 Arguments for and against Libertarian Paternalism:
– Individuals very often make bad decisions which they heart themselves. This is due to lack of
information, different processing abilities and limited amounts of self-control.
– Who determines what is a good or bad decision and which decision there is no such baseline to
determine that. Depend on preferences at that particular time and risk he is willing to take
determines the decision.
 Proponents And Opponents

For Against
 “Nudge is all it takes”  Creating an effective Nudge is
difficult
 2012 – UK government mandated
employers to establish an automatic  Too much expectations from Nudges
enrollment scheme for pension
 They can be infantilizing
related benefits
 Nudges can be coercive.
 Spain has organ donation open yes as
default
 Barak Obama hired Sunstein as an
advisor during his term
 Ethics Of Nudging
 Revisit Choice Architecture: choice architecture is the design of different ways in which
choices can be presented, and the impact they have on consumer decision-making
For Eg.: number of choices presented, how attributes are described, and a "default" can all
influence consumer choice.
 Revisit ’What is a Nudge?’: To qualify as a nudge, an intervention must not impose
significant material incentives (including disincentives).
For Eg.: Subsidies, taxes, jail sentences and fines are not nudges
 There is no freedom of choice involved and that forms the basis of distinguishing a
nudge from any other form of influencing mechanism
 There are 3 main principles of personal agency which evoke contention around Ethics in
using Nudge: Autonomy, Dignity, and Welfare – Promote or undermine these values
 Both nudges and choice architecture are inevitable:
For eg: Store Design, Menu Options, TV stations
 Ethics Of Nudging
 State’s role in nudging citizen behaviour
- setting defaults is an unavoidable task
- not feasible to require citizens to ‘choose’ option in every decision
- should face a burden of justification
- minimize nudging on welfarist or autonomy grounds
- transparency and accountability
 The trap of abstraction
 Some nudges from the government require or take the form of requiring some group X to nudge
another group Y – eg: Employer-employee
 System 1 v/s System 2
 Ethics Of Nudging
 categorised and distinguish on 3 bases:
- paternalistic nudges should be distinguished from market failure nudges
- educative nudges should be distinguished from nudges that lack educative
features
- nudges that enlist or exploit behavioural biases should be distinguished from
nudges that do no such thing
Legitimacy and Accountability of Nudging
 Thaler and Sunstein approach ensures freedom of choices but suggest sensible choices
– Freedom of Choices
– Autonomy of People, for Manipulating and for paternalistic
 Example: Mr. X visiting local supermarket where X is nudged towards healthy food and
he is free to choose unhealthy food
 Non Exploitative and Exploitative Nudges
 Are all Exploitative Nudges illegitimate? No
– Check context and consequence sensitive evaluation to assess each nudges on case
to case basis
– consequentialist analysis - harm and benefit
Legitimacy and Accountability of Nudging
• Electric Vehicle – Emission free environment
- Subsidy and favored policy acting as nudge for every stakeholders
Government sees limited choice is desirable over maximizing choices. However it raises
questions which are unanswered in nudges
• Is there a role for government to restrict the number of options or should it be self- regulated
by market players
• Implications of restricting choices to players, customers, clients
Legitimacy and Accountability of Nudging

Insidious nature of Nudges

• Empower government to align people in their desired direction and also provide tools to
accomplish the task
• Publicity principle
• Subliminal advertising is not acceptable because not of not informed to people but because
of deception which is not detected by people
• Transparency plays important role. If not sufficient transparent then vulnerable to
exploitation and hence it is illegitimate