When Push Comes to Nudge.....

Richard Ross MBA from Chadwick's Wealth Managers

Telling taxpayers that most people pay their tax on time reduces the number that do not – telling people from, say, Norwich that most people from the city pay their tax on time reduces late-paying still further.  Painting green footprints leading to bins reduced littering by 46% in Copenhagen.  Changing the layout of a Cafeteria so junk food is not as easy to reach as healthier options improves eating habits more effectively than, for example, increasing the price of junk food.  The cost of these interventions (or ‘nudges’) is tiny but the benefits are significant. 

In the five years since the publication of ‘Nudge – Improving Decisions about Health, Wealth and Happiness’, Thaler and Sunstein’s influential work on the application of Behavioural Economics their ideas have been enthusiastically adopted by Governments around the world.  Here in the UK, David Cameron established the Cabinet Office Behavioural Insights Team – better known as the Nudge Unit.  The attractiveness of low cost interventions against a background of constrained spending are obvious but an appreciation of Behavioural Economics extends well beyond public policy to embrace choice behaviour in all areas.

So, what is Behavioural Economics? It is an emerging science; a blend of concepts from economics, psychology and sociology. The classical economics starting point of a rational decision-maker is at odds with real-world observation and this new science tries to better understand what lies behind our choices.  In the fifty years since it started to be seen as a discipline in its own right Behavioural Economics has moved to the centre of economic debate.

Early pioneers such as Daniel Kahneman and Amos Tversky identified a number of underlying traits that lead us to routinely misjudge situations. These traits are driven by heuristics, the mental short-cuts we use to make life easier for ourselves. We tend to treat superficially similar problems in the same way;  we are herd animals, if we see a bandwagon we can’t get onto it fast enough;  we tend to be over-confident and we feel the pain of loss far more acutely than the joy of an equivalent gain.

One explanation for these responses is that our brain operates as two separate systems.

Here’s a couple of maths teasers:

2 x 2 =

23 x 17 =

As you looked at these the answer to the first question would have come to you straight away – an example of you using System One - our fast-thinking, automatic response. It can be thought of as an evolutionary development that meant that when our caveman ancestors heard a low growling sound behind them they ran rather than waiting to work out whether it really was a sabre-toothed tiger eyeing them up for lunch.

The second question (unless you’re a maths genius!) would have required a different approach. You may have been able to arrive at the answer quite quickly but the point is you would have had to work it out rather than just ‘seen’ the answer. For this you would have engaged System Two, the part of our brain that gives us our considered response. System Two needs time to weigh up the pros and cons and will probably come up with a better answer – if System One doesn’t jump in first.

Of the two, System One is dominant. It takes a conscious effort not to follow our first instinctive response and our rough and ready System One frequently ‘crowds out’ our more polite System Two so we don’t even start to think problems through properly. Nudges and other forms of ‘Choice Architecture’ can be seen as ways of redressing the balance between System One and Two by encouraging our brains to engage System Two.

Increasing our understanding of how and why we make decisions holds out the hope that we will be able to make better choices in the future.

We run regular Masterclasses introducing Behavioural Economics – why not come along to one and find out more about this fascinating field?

For more information and to book a place visit www.chadwicks.co.uk

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