Nudge Unit,” Is Just One Example of the Inroads Behavioural Sciences Are Making in Governments Everywhere

Does accounting for human behaviour lead to better IS A { policy? }

British political culture is wary of intellectualism — not for nothing is “muddle through” a British aphorism — and its governments are usually wary of big ideas. Yet Prime Minister David Cameron has placed intellectuals at the policy heart of 10 Downing Street, allowing a group of social scientists to apply behavioural insights to the design of public policy. The UK’s Behavioural Insights Team, or “nudge unit,” is just one example of the inroads behavioural sciences are making in governments everywhere. In the following pages, we ask how they are doing. Tout intellectualisme est objet de méfiance dans la culture politique britannique, et ses gouvernements se montrent généralement prudents face aux grandes idées. Le pre- mier ministre David Cameron a pourtant placé au cœur de son dispo- sitif politique un groupe de spécialistes des sciences sociales chargés d’appliquer les principes de l’économie comportementale à l’élabora- tion des politiques publiques. Cette équipe (souvent appelée « nudge unit ») n’est qu’un exemple de l’incursion des sciences comporte- mentales dans l’action des gouvernements de nombreux pays. Nous examinons dans les pages suivantes quelle est leur efficacité. nU ge ENdOUGH? nudgexxx nudge Making policy through they otherwise would have ignored. ished by using a gentle form of policy And in Canada, Quick Enrollment intervention. makes enrolment in retirement plans One example is organ donation easy. Furthermore, partnerships be- rates. Many people support the idea a behavioural lens tween academic centres and industry of organ donations but fail to follow have resulted in the creation of consult- through on their intentions. In many ing groups like ideas42, whose tagline countries, potential donors need to Dilip Soman “Using behavioural economics to do sign up at the department of vehicles good” sums up its work well. and licensing, and the burden of ask- Research} Nudging in action has given us more insight into the In short, five years after it came to ing for the forms that will indicate that shows that way people make decisions. The key now is to use that prominence as theory, nudge is gaining choice rests with the potential donors. a toehold in making real policy changes. In a “prompted choice” system, how- people make knowledge to design more realistic policies. ever, applicants for licences are active- decisions n Nudge, Thaler and Sunstein con- ly asked whether they would like to that are La théorie du nudge, la « méthode d’incitation douce », Itrasted their nudging approach to donate organs. In Illinois, this simple nous renseigne sur la façon dont les gens prennent two instruments that have often been nudge has increased organ donation emotional, used by policy-makers: economic in- rates from 38 percent to 60 percent. distracted, des décisions. Un savoir qui doit maintenant servir à centives, such as rewards and taxes, Examples like this show how élaborer des politiques plus réalistes. and restrictions, such as bans on behav- changes in the environment or con- impulsive iour. Consider, for example, two school text can influence behaviour without and cafeterias that want to help students requiring significant changes to finan- consume less junk food. One cafeteria cial incentives or restricting freedom inconsistent. places a “tax” on junk foods or bans the of choice. Indeed, recent research by sale of junk foods altogether. The other Raj Chetty and colleagues in the do-

cafeteria decides to change its food dis- main of retirement savings compares { ive years ago, Richard Thaler and Cass Sunstein pub- vironments that would nudge citizens toward preferred play so that it is inconvenient to reach a nudging strategy (automatic contri- lished Nudge: Improving Decisions about Health, Wealth choices. The book went on to be a New York Times best- out and choose the junk food. butions) with a more active incentive Fand Happiness, a book that asked us to fundamentally seller and was cited as the book of the year by the Econo- Both cafeterias are trying to in- (tax subsidies) and concludes that the change the way we think about how policy is made. Nudge mist and the Financial Times. But it was also the target fluence behaviour, but they are using former is significantly more effective challenged the prevailing approaches to policy-making of debate and controversy. Naysayers ranged from those two entirely different methods. The than the latter. and governance that were grounded in the appealing idea who took issue with the structure of the book (“What first cafeteria is influencing behaviour that human beings are rational decision-makers, cogni- the book needs is not more examples but more elabor- either by financially incentivizing stu- ecades of research in the behav- fect on our economic behaviour. An tively sophisticated enough to process all relevant infor- ation of the central idea” — the Sunday Times) to those dents to choose healthier options or by Dioural sciences has shown that overwhelming, growing and fairly mation and unswayed by emotion. It presented several with concerns about the thesis itself (“If the ‘nudgee’ restricting their options and thus their people make decisions — even con- conclusive body of evidence suggests years’ worth of research to demonstrate that, by contrast, can’t be depended on to recognize his own best interests, freedom of choice. The second cafe- sequential ones — that are emotional, it is past time to move away from a our decision-making is surprisingly malleable and there- why stop at a nudge?” — the New Yorker). So while the teria does neither, but uses a nudging distracted, impulsive and inconsistent. rational view of the decision-maker. fore dramatically influenced by context. And if that is the nudge theory caught the imagination of policy thinkers, strategy. Elements of this approach are We now know that humans suffer from In response, the fledgling field case, Thaler and Sunstein asked, is it not possible to create its applicability to the real world was questioned from evident in New York City Mayor Mi- option overload — an inability to make of “judgment and decision-making,” the context that steers people toward the right choice (or the start. chael Bloomberg’s attempt this year well-reasoned decisions in the presence or behavioural economics, provides a at least the one we believe brings about the greatest com- Since then, we have seen some governments begin (now held up in the courts) to get New of large assortments — and that their richer, more descriptive narrative for mon good)? to embrace this behavioural approach to policy. In Brit- Yorkers to consume less sugary soda. attention is a relatively scarce (and get- how decisions are made. Doing away The authors believed it was, and they used the term ain, the cabinet office has set up the Behavioural Insights Bloomberg sought not to ban the drinks ting even more scarce) resource. with the focus on rationality produces “choice architecture” to refer to the act of creating en- Team, which is charged with identifying traits that can be but rather to influence consumption In the domain of economic be- models of economic behaviour that are embedded into policy and governance initiatives. Vari- habits by limiting the size of drinks to haviour, there is further bad news more realistic. The models are also rela- ous divisions and agencies of governments in the United 16 ounces. for the proponents of rational man. tively inelegant. States and Singapore have developed behaviourally in- Policy-makers and welfare archi- Research in the area of mental ac- Consider this simple question: formed policies and programs (a follow-up book by Sun- tects often have to deal with subsets counting shows that the standard “How much should a given person Dilip Soman is a professor of marketing and holds the Corus Chair stein, entitled Simpler: The Future of Government, provides of choices: the “should” versus “want” principle of fungibility — the as- save for retirement?” Traditional eco- in Communications Strategy at the Rotman School of Management, an account of some of the work done in the United States choices. People should work hard, be sumption that any dollar is perfectly nomics has an elegant mathematical University of Toronto. This article is based on work done by the in this regard). honest in paying taxes and eat healthy substitutable for any other dollar — equation to capture the response. The Behavioural Economics in Action research cluster at the Rotman The list of behaviourally driven initiatives is growing. foods — but they often want to do the is routinely violated, and that people behavioural approach, by comparison, School. Nina Mazar, Claire Tsai, Min Zhao and Kim Ly contributed In the US, Save More Tomorrow, a behaviourally designed opposite. But if the right context can be have trouble making choices where is intuitively more appealing, yet more actively to the discussions. See http://www.rotman.utoronto. retirement savings program, has been shown to outperform constructed, the proponents of nudg- the consequences are spread out over complex. It can take several pages of ca/-/media/Images/Programs-and-Areas/behavioural-economics/ other savings programs. Enhanced Active Choice prompts ing argue, discrepancies between the time. Furthermore, a host of social, prose to describe, instead of a simple GuidetoNudging-Rotman-Mar2013.pdf people to make choices like renewing medication, which should and want options can be dimin- noneconomic factors have a large ef- formula. And whereas the behavioural

10 OPTIONS POLITIQUES POLICY OPTIONS 11 JUIN 2013 JUNE 2013 Dilip Soman nudge Procrastination approach to policy can lead to a num- been presented and information has to the cornerstone activity of democ- visit a doctor, whereas education is and guides policy-makers on the suit- include penalties on withdrawing from ber of guiding principles, a “grand uni- been structured — has influenced the racy: asking for a vote. paramount in nurturing activities, ability of nudges. participation in a plan, or rewards for fied theory” of decision-making has yet choice that was made. Some of these practices are perhaps like managing a portfolio or leading a We now have some experience following through on commitments. to be uncovered. even viciously manipulative. On the healthy lifestyle. The educating versus with nudges in action and its impli- And we know that social pressure can One key principle in behavioural iven that government budgets are other hand, a behavioural approach nudging debate is a false choice. The cations. We know, for example, that induce people to behave in ways that economics is the idea that people are not Gshrinking and public opposition to policy is conducted with the goal of appropriate question is how to use people are paralyzed when faced with lead to a desired outcome. Making it very adept at valuing objects, products, to taxes and bans is growing, nudging being beneficial to the decision-maker. these two approaches in tandem. too much information. The behaviour- clear that your neighbours have paid services or ideas. Instead, the context offers a good way to accomplish social Furthermore, the instruments of nudg- al approach leads us to advocate for their taxes has been shown to be an of the decision leads them to infer their good without the associated inefficien- ing are harmless. Every choice always hat can be done, then, to providing people with relevant and effective way to encourage laggards to own preferences. For instance, Mr. A cies of traditional policy instruments. has a default option, and there is always Wspread the word of behavioural meaningful — but not copious — in- pay their tax bills. might have little insight into which fuel But while the deluge of recent evidence a conventional, transparent approach insights and embed them more often formation, in conjunction with de- Nudge is not a panacea for all the — 87, 89 or 91 octane — he should pur- in favour of nudging has assuaged to presenting information. If one can in our policy choices? One of the key cision-making tools that organize in- problems that confront us. But it is chase for his car but might end up choos- some of the criticisms, some concerns meaningfully use these defaults to in- differences between the traditional formation in meaningful ways. These showing itself to be an effective way to ing the 89 because it is not an extreme still make the rounds. crease the public welfare, that can only and the behavioural approaches to “choice engines” could take the form encourage socially beneficial behaviour. option. Ms. B is not quite sure what The first of these concerns is that be beneficial rather than manipulative. economics is the nature of the sci- of online Web-based tools or mobile Most importantly, by getting our policy RAM and screen size are best suited to nudging is manipulative: the citizen A second criticism is that we should ence. The traditional approach is smart-phone apps, what Richard Thaler leaders to focus on how people actual- her needs as she is shopping for a laptop is being tricked by the technocrat be using education and not nudging to theoretical: it makes certain assump- and Will Tucker recently referred to as ly behave rather than on unproven as- online, so she simply chooses the default into choosing a certain path. Yet one achieve our policy goals, reflected in tions about the decision-makers and “smart disclosure.” sumptions of economic rationality, the option when asked to make a choice. of the most fundamental goals of hu- the idea that education is empowering, proceeds to make specific predictions We have also learned that given nudge approach kindles a fresh way And Mr. C is confused poring over the man enterprise is to influence and nudging is demeaning. This argument about their choices. The behavioural the gap between people’s intentions of looking at problems, offering hope multitude of options on the menu of his persuade others to follow a path — would have merit if the proponents of approach is empirical. It essential- and their actions, it is vital to get them where we now see only obstacles. n local Chinese takeout restaurant and is we are always being nudged. If nudg- nudging wanted to convert all policy ly points to the data as the primary to precommit to their choices, and to relieved to find (and choose) the “fea- ing is manipulative, then so too are and welfare interventions into nudges. source of insights. It is imperative to develop commitment mechanisms to tured item” recommendation. many interactions that we routine- They do not. Nudging is most effective build a widely shared, open-source help them follow through on these In each of these cases, the context ly accept as fair, from advertising to in initiating actions, such as getting database that measures the outcomes choices. Examples of commitment — the manner in which choices have parenting and teaching, from selling someone to open a bank account or of various behavioural interventions mechanisms are contracts that could

12 OPTIONS POLITIQUES POLICY OPTIONS 13 JUIN 2013 JUNE 2013 nudge nudge Making Inroads more than 60 million Facebook users domized trial to test whether daily lotter- in 2009 said they intended to use fer- were sent a standard message encour- ies could encourage older patients to take tilizer the following season, only 37 aging them to get out to vote. But two their Warfarin pills. Warfarin is an an- percent ended up doing so. The farm- Mark Egan other groups of 600,000 each were estab- ti-coagulant prescribed to stroke victims, ers displayed what economists call lished to test the impact of suggestion and failure to take it correctly can be fatal. “present bias,” which we all recognize There is evidence that social and psychological nudges on voting behaviour. One group — the Nonetheless, the trial indicated that the as procrastination. In the Kenyan case, can work for policy-makers. control group — received no message threat of dying is evidently not quite as the gap between intention and action about election day; the other was told effective a motivator as the excitement of was addressed by offering vouchers to which of their friends had voted. a lottery. This daily lottery offered a 1-in- buy fertilizer in the future, with free de- Plusieurs expériences montrent que des mesures A postelection analysis published in 5 chance of winning $10 and a 1-in-100 livery included. d’incitation psychologique ou sociale, selon la théorie the journal Nature found that the mes- chance of winning $100, and entry to That move resembled a nudge in du nudge, permettent aux décideurs d’obtenir les sage group that was told of their friends’ the lottery was conditional upon the par- which mothers in rural India were en- voting behaviour resulted in an addi- ticipants taking their medicine correctly. couraged to attend free immunization résultats escomptés. tional 60,000 votes being cast nation- Patients in the control group, which was camps for their children with the offer wide, and another 240,000 voters were not offered the lottery option, failed to of a bag of lentils. The results: 39 per- indirectly spurred to go to the polling take their medicine correctly 20 percent cent took up the offer of immunization station by friends of friends. This is what of the time. But among those who were when it was accompanied by a bag of psychologist Robert Cialdini calls in his offered a shot at lottery winnings, just 2 lentils; just 18 percent took it up when book Influence “social proof,” the urge to percent took their medicine incorrectly. there were no lentils on offer. s it better to tell taxpayers that they are late paying their decided it would spin off the nudge unit into a public-pri- act as we see others acting. Massachusetts Institute of Technol- Both these cases are examples of taxes and face fines? Or are they more likely to comply vate partnership. ogy economist Esther Duflo has exam- small nudges succeeding in altering per- Iwhen told that 9 out of 10 people in the country have paid Cameron is one of the strongest proponents of putting be- ealth care has become another ined the use of behavioural nudges sonal behaviour to achieve a broader so- their taxes on time? Better yet, does it help to tell them that 9 havioural theory into public policy practice. One year he put Hpromising area for nudges. In 2008, in her pioneering work on addressing cial policy good. They encourage us to ask of 10 people in their hometown have already paid (figure 1)? Thaler and Sunstein’s book on a summer reading list for his Kevin Volpp, founding director of the policies and programs aimed at allevi- whether a policy is failing, or if it is simply David Cameron’s government in Britain decided to find Conservative members of Parliament, and he set up the nudge Center for Health Incentives and Be- ating poverty in the developing world. being implemented poorly. Is it designed out. In 2011, a select group of laggard British taxpayers were unit with a mandate to see if a tiny band of academics could havioral Economics at the University of In one case, she found that while 98 to be as easy as possible to adhere to? sent a reminder-to-pay letter from Her Majesty’s Revenue and improve government performance. The team of 10 is headed Pennsylvania, ran a three-month ran- percent of Kenyan farmers questioned Does it take advantage of the academic Customs office that referred to the fact that 90 percent of their not by an economist but by David Halpern, whose training is literature on what motivates human be- fellow citizens paid their taxes on time. The results were signifi- in psychology. haviour? If it does not, then there is a case cant. Those who received letters that included a reference to There has been some criticism of a government initia- for using behavioural insights to make or Figure 1. Proportion of people paying their taxes on time compliance rates in their hometown were 15 percentage points tive whose mandate has the paternalistic-sounding goal of modify policy. more likely to then pay their tax than those who received the “encouraging and supporting people to make better choices 100 As we collect increasing amounts of customary form letter (figure 1). Had this touch of social pres- for themselves” (from its Web site). But Britain is not alone data, it is reasonable to imagine behav- 90 sure been applied across the board, the government estimated, in trying to tinker with people’s behaviour. In Ireland, the 83 ioural interventions becoming ever more it could have collected more than $250 million in outstanding government revenue commissioners have been employing a 80 79 effectively tailored. If stores such as Tar- tax, and freed another $45 million in money spent collecting it. range of treatment tools to address the failure of many pub 72.5 get can tap their customers with specific 70 67.5 The trial was a brainchild of the Behavioural Insights owners to pay their taxes. advertising based on their shopping hist- Team, established by Cameron in 2010, which operates Starting with letters sent to pub owners asking them to 60 ory, it is not unreasonable to expect that from inside his 10 Downing Street office. Popularly known renew their pub licenses, the Irish government has seen an policy-makers will start tailoring tax mes- 50

as the nudge unit, it was an application of a theory that increase of 6 percentage points in compliance by simplify- Percent sages, health care advice or the encour- rose to prominence on the back of Richard Thaler and Cass ing the letter’s wording and by informing the recipients of 40 agement to save more, smuggling social Sunstein’s 2008 book Nudge, which speculated on the po- the their fellow pub owners’ compliance rates. According to and cognitive psychology into the halls 30 tential contribution behavioural ideas could have to better Keith Walsh, an economist with Ireland’s revenue depart- of government. policy-making. Since then, the unit has run experiments ment, “Insights from behavioural research offer new ways to 20 As we collect increasing amounts ranging from ways to get more people to insulate their attics tailor their approach to improve efficiency.” of data, it is reasonable to imagine to improving traditional government forms and the ways It is not just governments that are using behavioural in- 10 behavioural interventions becom- people interact with bureaucracy. The results have been seen sights. The American electricity company Opower is appending 0 ing ever more effectively tailored. As as promising enough that in May, Cameron’s government smiley or frowning faces to monthly electricity bills for its cus- Control Country Postcode Town stores such as Target tap their custom- group tomers, the message dictated by how much electricity customers with specific advertising based on ers consume relative to their neighbours. The 600,000 Opower “9 out of 10 people in your their shopping history, we can expect customers who receive these messages use 2 percent less electri- _____ pay their tax on time” in coming years to see policy-makers Mark Egan is a master’s student in human decision science at city than those who don’t, and these savings have been shown start to consistently apply social and Source: “Applying Behavioural Insights to Reduce Fraud, Error and Maastricht University, The Netherlands. He compiled the nudge to persist over time and across regions. Debt,” 23. Behavioural Insights Team, UK Cabinet Office (2012). cognitive psychology research to tailor database, at economicspsychologypolicy.blogspot.nl/2013/03/ Facebook has investigated whether its users’ voting be- http://servicedelivery.fahcsia.gov.au/2012/02/13/uk-cabinet-office- tax messages, health care advice and publishes-report-on-applying-behavioural-insights-to-reduce-fraud- nudge-database_3441.html haviour is affected by their friends. On November 2, 2010, error-and-debt/ encouragements to save more. n

14 OPTIONS POLITIQUES POLICY OPTIONS 15 JUIN 2013 JUNE 2013 nudgexxx nudge Listen to your heart of everything is already established in itless. And because these assumptions opt-out occupational pension will work actors’ minds. There is no need for mar- are so pervasive, you will find an amaz- so well. Once most of your workmates keting, and no need for relationships, ingly large number of them have gone have a pension, you feel less lonely and Rory Sutherland reputation, commitment devices or unchallenged for years. paranoid about having the selfsame trusted intermediaries. The single goal So my approach to deploying the pension. To create public policies that work, we must take of this system is efficiency. new insights from behavioural science, A second assumption is that atti- into account the way people really are, not what We know the real world doesn’t game theory, neuroscience, evolution- tudinal change is a necessary and suffi- work that way. ary psychology and so forth to the cient precursor to behavioural change. we assume them to be. So enormous potential gains are world of business or government is Actually it isn’t. In fact the process there for the taking once the policy very simple: Look for areas where these often works the other way round. Pour élaborer des politiques publiques efficaces, process can consider designing policies new findings conflict with convention- We recently deployed this insight nous devons tenir compte des gens tels qu’ils sont based on how people really are, and not al economic assumptions. Then test in a major (currently confidential) on some strange, autistic assumption what happens if you assume that the water-saving program for the devel- et non tels qu’on voudrait qu’ils soient. about human behaviour that is rigged new science is right and the old science oping world. “Don’t even bother for a to fit a preexisting economic model. is wrong. second to mention the water savings, Doing this is easier except in passing,” we said. than it first seems. It’s not “Instead, simply make the necessary for policy to be environmentally friendly udge theory. Neuroeconomics. Reputational game rationality behind their recommendations protects them perfectly right (in a com- behaviour easier to adopt theory. Psychophysics. Behavioural economics. I from being punished or fired. plex world, perfectly cor- Sometimes we might than the old behaviour. Let Nlove them all. Relying on mathematical models, however poor they rect answers rarely exist). fail. But the cost of them think about the water Why? Well, self-interest plays a part. may be, to lend a semblance of logic to a decision may thus All you have to aim to do savings for themselves.” I work in advertising. And after a few years working in be the product of a kind of loss aversion. Any decision influ- is simply be less wrong experimentation is low Often the language of advertising, many people become just as frustrated with the enced by nonmathematical, subjective or emotional factors than you were before. and the potential gains environmental sustainability neoclassical model of human behaviour as you probably are. comes with no such insurance. The Save More nearly limitless. arouses an automatic feeling And for a surprisingly similar reason. Yet important emotions and desires — regret, uncer- Tomorrow pension, con- of “making compromises” Advertising, as the behavioural economist Daniel tainty, trust, affection, identity, purpose and meaning — ceived by Richard Thaler { } and tends to frame the new Kahneman himself has said, is a “System One” business — all play a huge part in our lives, for no less a reason than and Shlomo Benartzi, which behaviour as a task, not a built on intuition and quick impressions. Like you, I suspect, that it is to our evolutionary advantage as a social species to allows employees to allocate pleasure. One of the great les- people in advertising and marketing think that intangible, feel them. Some of these emotions and desires may be evo- a portion of future salary in- sons of behavioural science is seemingly irrational things — instincts, feelings, percep- lutionary hangovers we no longer need; many, however, creases to their retirement savings, is not Neoclassical economics assumes learning what not to say. tions — actually matter. And, also like you, we believe that it continue to be essential in the functioning of real-world a perfect pension. I am sure there are bet- that people have consistent time pref- Another assumption is the idea makes no sense to base all decisions on models of the world markets or societies. A species whose members casually re- ter designs for pension schemes yet to be erences. All available evidence shows that human beings act according to that are altogether blind to those very emotional or psych- turned to buy from shops that had short-changed them in discovered. But this idea for a pension is they don’t. All right, let’s assume that some fabulous sense of proportion — ological considerations that drive the greater part of human the past, and who did not bother to share their sense of better by a factor of two or three at get- conventional theory is wrong and em- that in order to make them change behaviour. outrage with friends and neighbours, would not produce a ting people to save for retirement than pirical evidence is right — what does a their behaviour significantly, you need In short, we are just as irritated as you are by the strange healthy retail economy. any other pension yet devised, despite pension look like now? Well, it looks a correspondingly massive interventions. and unhealthy monopoly that neoclassical economic theory And so it doesn’t seem a good idea for government to the hours of work previously invested by lot more like the Save More Tomorrow In the policy world, that means grand seems to enjoy among the social sciences when influencing proceed as though such emotions and desires don’t matter thousands of well-paid people working pension than like a conventional pen- schemes and usually millions if not bil- business decisions and social policy. simply because they are unquantifiable and hence don’t fit for government departments and pension, that’s for sure. lions of dollars. Ironically, the reason for the near-unbridled power of neatly into a preconceived mathematical model. Because sion companies. This isn’t rocket science. It doesn’t Not necessary. If high spending economic thinking may itself arise from what you might the price we pay for this methodological neatness is that we How did it achieve this spectacu- need to be. equalled success, then we would not call a cognitive bias. First of all, in decision-making, there repeatedly introduce into the world government programs lar uplift? Quite simply, it was brave have health systems that strain to meet is a known bias whereby any argument that contains math- (and consumer products) designed for a kind of human be- enough to challenge one of the fun- o what are some more of these com- the demands upon them. Instead, we ematics is assumed to be more scientific, rational and cred- ing that doesn’t exist. damental assumptions about human Smon assumptions? The first, a leg- can move the behavioural needle by tak- ible than any argument that uses merely words (see Carl “rationality,” which is a product not acy of the neo-classical model, is the ing human nature into account. That’s Bialik, “Don’t Let Math Pull the Wool over Your Eyes,”in .O. Wilson, the evolutionary theorist and the world’s of empirical observation but of a con- assumption that human actors are ram- already proven in the well-known ex- the Wall Street Journal, for details). Second, executives or Eleading expert on ants, once reacted to Karl Marx’s ideas trived economic model. pant individualists, making decisions ample of how to encourage more people policy-makers making decisions may be far more eager to with the comment “Beautiful theory. Wrong species.” If so, My contention is simple. When based on their individual utility. We to agree to be organ donors. A simple behave seemingly rational bases for their decisions than to perhaps Marx can be forgiven for proposing a theory for an we challenge the assumptions I will don’t. We are a herd species who have havioural cue, costing almost nothing, actually make effective decisions, since the semblance of inappropriate species, since modern economists, it seems, list here, the results may not always be intelligently evolved the instinctive can move behaviour more than millions have devised a model of economic activity for a species that spectacular. But they might be. Some- heuristic “When in doubt, I’ll feel safer spent on advertising. does not exist at all. times we may fail. But, in any case, the doing what everyone else does.” The slogan of OgilvyChange, the Rory Sutherland is executive creative director and vice-chairman, In the imaginary world inhabited by Homo economi- cost of experimentation is relatively This is one of the reasons why I behavioural change arm of Ogilvy & OgilvyOne London, and vice-chairman, Ogilvy & Mather UK. cus, trust is universal, knowledge is perfect and the value low, and the potential gains near lim- suspect the British government’s new Mather in the United Kingdom, is “Dare

16 OPTIONS POLITIQUES POLICY OPTIONS 17 JUIN 2013 JUNE 2013 Rory Sutherland nudge

to be trivial.” Self-aggrandizement often a name for yet. You can’t expect con- don’t know. But something in the en- highly unlikely that there are adverse emotional, the physical over the psych- leads policy-makers to seek solutions in sumers or citizens to tell you of these vironment is driving this. unintended consequences, but if there ological and the heavy hand over the proportion to the size of their available instincts if social scientists haven’t Environmental design can be an are, they will soon be evident. And light touch. budgets. This may be a terrible mistake. even got a name for it yet. inexpensive — and attractively libertar- even if the area is no safer than be- An important assumption is that Another assumption? That people ian — alternative to legislation or law fore, it at least has become more pleas- et me end by sharing a lesson people know why they act as they do, choose using absolute rather than enforcement. As a recent experiment ant for passers by to look at. Graffiti, Lfrom the direct-response advertis- can predict their choices and have intro- relative measures. I routinely choose involving OgilvyChange has shown, which had been a persistent problem ing industry of the 1930s. When writ- spective access to all areas of their brains. a medium coffee without knowing making a small aesthetic change to when the shutters were plain grey, has ing off-the-page advertisements, sell- They don’t. Many of our instincts how big “medium” is. I just want one shutters in high-crime areas of a Brit- not been scrawled on these pictures. ing corn feed, piano lessons or what- affect our behaviour in ways we don’t that’s “kind of in the middle.” Star- ish city centre may have helped reduce The shopkeepers say they are more ever, young copywriters were taught

} notice, don’t understand and can’t bucks sells a “short” version of its cof- crime in the surrounding area by al- proud of their shops. Unlike crime sta- to write and design the coupon first. I routinely verbalize. Hence an excessive reliance fees, but it craftily does not display most 20 percent. tistics, these effects are unquantifiable. Start with the behaviour you want, choose a on market research to design interven- this option on its menus for fear (or The area in southeast London There is no government metric for re- and work outwards. Only when you tions can be dangerous. Remember that knowledge) that the visible availabil- had been badly hit by looters dur- tailer pride. were happy with the coupon would medium “Most people recycle their towels” mes- ity of this option will drag consumers ing the 2011 riots. In an attempt to Now contrast that with traditional, you start to write the copy, and only coffee sage in hotel rooms, now famous as an towards smaller sizes. Perhaps New discourage antisocial behaviour, a more complex interventions: a heavy at the very end would you write the because I early nudge experiment? That was the York Mayor Michael Bloomberg did group of artists were enlisted to paint police presence, stiffer sentences. These headline. message people claimed would be the not need to attempt to ban the sale babies’ faces on the shutters of shops. are costlier, may have adverse conse- This process seems to have much want one least motivating; in reality, it was the of outsize sodas — he could have sim- Called Babies of the Borough, the ex- quences and may serve to make the to commend it. Start by looking at the “kind of in one that worked best. ply demanded that they not appear periment drew on research aimed at area more dangerous once the police behaviour itself and perfect the design Similarly, if you take the example on menus and are available only on promoting more caring behaviour, presence disappears. The shutters don’t of the choice you want someone to the middle.” of the “$300-million button” (http:// request. Sold under the counter, like with the facial images drawn from demand overtime. make. Only then move away from the www.uie.com/articles/three_hund_ dodgy porn. photographs supplied by local fam- I am not disputing the value of point of decision. million_button/) — the case of how Then there’s the assumption that ilies. The numbers showing a subse- larger interventions. But a general prin- Too much policy is written by changing a single clickable link on an people act purely in response to incen- quent drop in crime were supplied by ciple of all such actions should be to people who want to write a single { online shopping site led to dramatic tives or disincentives, rather than in the local police and may not be statis- insist on trying simpler, cheaper, less headline, and then ignore the detail. sales increases — you will see a psych- response to cues and signals they find tically significant (although as more authoritarian, more enduring interven- But these old copywriters understood a ological effect that is hard for anyone in their environment. In fact, people’s evidence comes in, it seems the effect tions first. If these fail, then try some- vital lesson: if the coupon was no good, to explain. In this case, the practice behaviour is far more driven by context is enduring). thing else. all your other effort, however com- of demanding that people register be- than we can imagine. Lufthansa recent- But let’s just imagine that this ex- But even though this approach mendable, was wasted. fore they buy online violated some ly asked why people in airport lounges periment had failed. seems to reflect common sense, insti- How many noble and well- deep-seated human instinct around and in the air drink far more tomato What’s the worst that could hap- tutions tend by nature to prize the big intentioned government programs fail exchange, but one we don’t even have juice than they do on the ground. We pen? You spent very little money. It is over the small, the rational over the because no one looked at the coupon? n

18 OPTIONS POLITIQUES POLICY OPTIONS 19 JUIN 2013 uncertaintyJUNE 2013 nudgexxx nudge The dangers of participate in the plan to opt out. Indeed, interests and the myriad reasons that can research has shown that this nudge does explain any choice. increase the percentage of new employ- Furthermore, nudges are not only ees enrolling in retirement plans, which paternalistic but coercive. They may not manipulation policy-makers interpret as evidence that foreclose choices in the way that outright employees are better off. bans on a certain behaviour do; nor do But all this nudge proves is that it they have direct cost implications the Advocates} Mark D. White steers new employees to the intended way taxes or subsidies designed to alter choice of the policy-maker. It offers no behaviour do. But nudges are coercive of nudge The evangelists for nudge see only the worst of human insight into whether employees see in a particularly insidious way by sub- seem more nature and have no faith in our ability to learn to be themselves as truly better off. Some new verting people’s rational decision-mak- interested employees may need money in the short ing processes rather than engaging them. better. run for other purposes, perhaps as a down By taking advantage of subconscious in steering payment on a home or to cover medical mental processes, nudges do nothing to people Les prosélytes du nudge, cette « méthode douce pour costs for aging relatives — both of which improve our decision-making abilities. toward inspirer la bonne décision », voient uniquement le pire could be considered an improvement in Nudges simply lead people to make the well-being for someone. Yet the nudge choices policymakers wanted them to certain de la nature humaine et refusent aux citoyens la capacité makes no distinction between those who make, relying on subtle coercion that choices than d’apprendre et de s’améliorer. need a push to enrol in a pension plan and engages unconscious psychological those who have more appropriate ways processes rather than deliberate ration- in helping to spend that money. The exploitation of al faculties. them learn to our cognitive bias toward choosing a default option works on all new employees. his point leads to the practical dif- make better ibertarian paternalism — or the idea of “nudge,” as it is gers around the world (think of our concern about global warm- Using this widely shared dysfunctional Tficulties with nudges. These choice decisions. better known — has been embraced by governments on ing or distant poverty). Their actions can be driven by support characteristic of human nature as a policy interventions have no definite relation- Lboth sides of the Atlantic as a way to increase people’s for principles such as fairness and honesty or broader societal tool makes no accommodation for the ship with individual well-being but do

well-being while preserving their autonomy. It does neither. ideals such as justice and equality. In pursuing these goals and wide range of interests that individuals have a clear predictable effect on our de- { Nudges steer people into making the choices policy-makers principles, people often make choices that run counter to their pursue. Nudges do affect our behaviour, cision-making capabilities. Because they want, with no certain effect on individuals’ welfare and at sig- own well-being; many may, for example, spend more of their but the lack of detailed knowledge about do nothing to improve decision-mak- nificant cost to their decision-making autonomy and ability. own money to purchase environmentally safe products. individual preferences means we cannot ing, nudges make no progress toward ertarian paternalists do not (though we Nudges are also self-reinforcing. By denying people the chance Policy-makers cannot possibly be aware of and take into make conclusions about whether they are ameliorating our cognitive errors and can hope they will learn from their own to learn from their bad decisions, policy-makers will continue account each citizen’s complex web of interests. Instead they improving people’s well-being. biases. Even when nudges take the form mistakes!). to see evidence that problems need to be fixed, justifying even select one basic goal, such as improving health or wealth, and of mandating that people are given in- It is a part of human nature that further interventions into the realm of personal choice. use nudges to influence how people choose to pursue it. This ubstituting a policy-maker’s idea of formation, such as nutritional labelling each of us makes bad choices from time As I argue in The Manipulation of Choice, the problem with approach is followed with no thought of how each person Sinterests for those of an individual on restaurant menus, the choice of the to time. But only we know which ones nudges can be split into three parts: epistemic, ethical and regards the goal or how it fits with his or her plethora of inter- also raises ethical issues. We already saw information provided is made with an are bad. We know our own interests practical. The epistemic aspect stems from policy-makers’ ig- ests. Policy-makers effectively substitute their idea of interests one: it violates the presumption of liberal eye to a certain goal. For example, food better than anyone else. Not only do norance of what truly matters to those over whom they hold for individuals’ actual ones and then claim to be improving neutrality regarding how people choose labelling necessarily focuses on a few se- policy-makers not know our interests, power. People’s concerns are complex. At the most basic level, well-being as people judge it for themselves. No matter how to live their lives. A more basic ethical lect measures, such as fat content, which but they would have no right to influ- everyone is concerned with his or her own well-being, which well-intentioned the policy-makers may be when they choose problem of nudge is its paternalistic na- are regarded by government nutritionists ence our choices for our own good even includes short-term and long-term considerations as well as the these goals, their limited understanding of people’s values ture. Even if policy-makers had sufficient as dangerous. But many people follow if they did. And if they want us to make “higher” pleasures (intellectual and moral) and “lower” pleas- and preferences means they cannot possibly be acting in the knowledge about people’s interests, they other scientifically valid dietary philoso- better choices in the future, they should ures (physical) that animated John Stuart Mill’s philosophy. true interest of every citizen, as they claim. have no right to influence people’s be- phies that encourage the consumption not even want to intervene in our choices All of these elements are combined and traded off according to This leads to judging the success of a nudge by its effect- haviour for “their own good,” unless of fats and discourage carbohydrates, with their nudges. each person’s tastes, values and psychological dispositions in a iveness in generating the intended behaviour rather than by there is evidence that the bad choices an approach to eating that labelling re- The advocates of nudge seem particular decision-making context. its impact on individual welfare. For example, automatic enrol- are involuntary (such as Mill’s example quirements do not accommodate. By more interested in steering people to- People also care about the well-being of others, from ment in government-subsidized retirement plans is the nudge of stopping a man who is unaware that steering people’s choices toward options ward certain choices than in helping friends and family to those in their community and even stran- recommended by libertarian paternalists as a way to increase he is stepping onto a decrepit bridge). that policy-makers determine to be best people learn to make better decisions. the amount of private retirement savings. Because people are Policy-makers may suspect that people — even when people might agree with It is a dismal view of human nature to often short-sighted and prone to procrastination, libertarian who they feel are not acting in their best the goal — nudges leave us unable to see presume that we must be led toward Mark D. White is chair of the Department of Political Science, paternalists feel that too few new employees choose to join re- interest — failing to enrol in a retirement the consequences of our bad choices that what is best for us and that we have no Economics, and Philosophy at the College of Staten Island/ tirement programs when nonenrolment is the default choice of program, for example — are doing so would help us learn to make better ones capacity for improvement on our own. CUNY, where he teaches courses in philosophy, economics and the plan presented to them. To correct for these cognitive flaws, involuntarily because of some cognitive on our own. Most parents realize that This attitude lies at the core of nudge law. His latest book is The Manipulation of Choice: Ethics they recommend changing the default option for pension plans failing. But this is an illegitimate infer- they have to let their children make mis- and is the true danger of libertarian pa- and Libertarian Paternalism (2013). to automatic enrolment, requiring those who don’t want to ence given the complexity of persons’ takes so they will learn from them. Lib- ternalism. n

20 OPTIONS POLITIQUES POLICY OPTIONS 21 JUIN 2013 JUNE 2013 nudgexxx Nudge for good nudge Pelle Guldborg Hansen

If they are clear about what they are trying to achieve, nudges can avoid the moral pitfall of paternalism.

till, it is hard to see how this pre- an understanding of how it works is En définissant clairement les objectifs visés, les nudges, Svents the nudge approach from col- part of what creates the willingness to ces manières d’inciter les gens à faire de meilleurs lapsing into paternalism. After all, if participate. choix, peuvent éviter le piège moral du paternalisme. nudges can be employed to influence Criticisms rooted in a general our choices without us noticing, how claim that nudges work by the ma- can a case be made for anything other nipulation of choice are based upon a than unfettered preservation of choice? logical fallacy. They extrapolate from The manipulation of choice has a single or limited number of exam- thus been the main critique levelled ples of nontransparent nudges — like against adopting the nudge approach that of the doctor presenting treat- in public policy. Opponents argue that ments — to cast all other nudges as he arrival of nudge theory on the policy scene has nudge “for bad” or “for profit” as well. A classic example is the concept of libertarian paternalism being more or less identical in how not been received with universal enthusiasm. Groups the question served to any customer at McDonald’s: “Should is an oxymoron because the nudge doc- they work. This cherry-picking argu- of academics and commentators have levelled harsh that be a large meal?” Adding complexity, even if one “nudg- trine is merely paternalism in disguise. ment ignores the significant portion T t i ence criticisms — political, practical and ethical — against the es for good,” certain subtypes of nudges influence behaviour They contend that the psychologic- of related cases and data that con- use of behavioural insights in public policy. In Britain, the without people even noticing it. This enables policy-makers al mechanisms being exploited work tradict that position. The criticism libertarian blog Spiked declared “war on nudge.” And there to nudge us toward prosocial behaviour change in ways that best in the dark, and that the effects of has another blind spot in that it fails are stirrings in public policy literature against nudge theory’s may preserve freedom of choice as a matter of principle, but nudges are likely to disappear if nudg- to notice that the traditional public

promotion of “libertarian paternalism,” the concept that in- not as a matter of practice. es become transparent. Furthermore, a policy tool of regulation is often non- dividual liberty is not endangered when people are nudged The classic example of nontransparent manipulation is they argue that nudging can encourage transparent as well: Who among us is toward making choices that serve their own best interests. the doctor who uses behavioural insights in presenting med- abuse of power by unelected techno- capable of knowing what taxes apply To critics, nudges often do work by manipulating personal ical treatment options to a patient. If the doctor is trying crats. to every good in a supermarket? choice, thereby putting the public at the mercy of evil-mind- to steer the patient toward choosing a particular treatment, My research has shown that such Policy-makers should still worry ed technocrats. she might describe the procedure as having an 80 percent criticisms systematically ignore the about the misuse of behavioural in- Richard Thaler and Cass Sunstein, authors of Nudge, the chance that 90 of 100 patients will survive. If she is trying complexity and diversity of the insights in public policy. But it is import- foundation text on nudge theory, were aware of these an- to discourage the treatment, the doctor could describe it as sights from behavioural economics ant to note that this potential for abuse

ti-nudge arguments. But they did not see them as obstacles having 80 percent risk that 10 out of 100 patients will die. and cognitive psychology that nudges is not particular to nudges; it applies to to using nudges in practice. They contend that subtle fea- While patients are free to choose as they like — in principle are based on. Take the example of the any regulation that seeks to achieve a

tures of decision-making contexts will always influence our — the doctor knows that she can influence the choice by the successful pension plan Save More To- certain kind of behaviour. Nudges, like

choices, whether we like it or not, and that manipulating way the odds of survival are presented. This example shows morrow, which was designed based on m p regulations, are intentionally applied these choices in ways that preserve individual freedom while how nudging behaviour is vulnerable to being used in a pa- the behavioural insights of Thaler and I in the knowledge that they will tend to promoting prosocial behaviour is an admissible option in ternalistic fashion. UCLA professor Shlomo Bernatzi. To affect behaviour. public policy-making. Yet the authors are aware of the risk Recognition of this is perhaps what explains Thaler and circumvent the loss-aversion bias that Thaler and Sunstein recognize this. that nudge could be used in ways that do not always serve Sunstein’s struggle at the end of Nudge to add some ethical blocks many employees from choosing If one reads Nudge carefully, it is apparent the public interest. In my own autographed copy of Nudge, considerations and constraints to align the nudge approach the optimal pension savings program, that the authors argue for a principle of Thaler has signed with the phrase “Keep nudging for good.” with the gist of libertarian paternalism. The goal of nudg- Save More Tomorrow allows employ- transparency, in which citizens are able His warning shows that the notion of nudge is not mar- es, they argue, should be consistent with the general prefer- ees to join a program that allocates a to recognize the means and intentions ried to his and his co-author’s more positive concept of lib- ences of citizens, and nudges should be devised in ways that portion of future salary increases to re- with which they are being nudged. And ertarian paternalism. As the many marketing tricks used to are publicly defensible. “If a government adopts a policy tirement savings. In contrast to the ex- nudges that satisfy this criterion suffer fool us into buying stuff we don’t need show, it is possible to that it could not defend publicly, it stands to face consider- ample above, where the doctor’s treat- only if citizens do not agree to the ends able embarrassment, and perhaps much worse, if the policy ment preferences are a hidden agenda, or means. By maintaining transparency and its grounds are disclosed,” they write. “The government employees in the original design of in the goals and the methods of nudg- Pelle Guldborg Hansen, a behavioural scientist, is director should respect the people whom it governs, and if it adopts the program join the pension scheme es, policy-makers can avoid the moral of the Initiative for Science, Society and Policy, University of policies that it could not defend in public, it fails to manifest voluntarily, well aware of the psycho- pitfall of paternalism. In so doing, they Southern Denmark and Roskilde University, Denmark; head of that respect. Instead, it treats its citizens as tools for its own logical elements of the program’s de- can apply nudges without fear of being the collaborative venture iNudgeYou.com; and chairman of the manipulation.” sign. Such transparency has no effect paternalistic, and live up to Thaler’s ad- Danish Nudging Network. [email protected] on the efficacy of the program. Indeed, monition to “nudge for good.” n

22 OPTIONS POLITIQUES POLICY OPTIONS 23 JUIN 2013 JUNE 2013 nudgexxx nudge Nudging Our Way Forward that we are generally rational beings. and dice their products and sell them of choice architecture problem: there We know what we want. We just lack to those most willing to bear the risk. were regions of the country and seg- the full set of necessary information. And then came the meltdown of ments of the population that were ex- In an effort to get people to exercise 2008. ploited, ill-served or not served at all by One Decision at a Time self-discipline, task forces have been mainstream financial institutions, all created and reported back. Hundreds of hrough it all, however, there was a situations that contributed to challen- Web sites have popped up, some more Tgroup within the financial services ges around money management. Marc-André Pigeon reputable than others. Seminars have sector called credit unions, which were In these early credit unions, member been launched, curricula developed. less enthusiastic about the impact this as owners volunteered time as tellers and Our banking habits show how the use of nudges Financial fitness gurus emerged, all de- structural shift was having on people’s managers, looked after the credit union’s can lead to both good and bad savings habits signed to help us take control of our be- saving and borrowing behaviour. In books, sat on loan committees that de- haviour much as we might like to take credit unions, customers are members. cided who got loans and who didn’t, and control over our diets, our exercise or They own the institution that provides educated each other about good spend- Nos habitudes bancaires montrent que les mesures our smoking. them their financial services. As such, ing and borrowing habits. When that incitatives peuvent à la fois susciter de bonnes et de There is one major drawback to each member is entitled to exactly kind of involvement was layered over a mauvaises décisions en matière d’épargne. this approach and it’s obvious to anyone vote for the purpose of electing a system that worked with the same kind of one who has ever reflected on their board of directors, which then guides predictable borrowing and lending costs own efforts to alter an entrenched be- the credit union’s practices. In Canada, as the banks, your average credit union haviour: it often doesn’t work. there are 348 credit unions outside of member was likely to behave in a fiscally In the profit maximizing world of Quebec’s Desjardins system, each one conservative fashion. banking, the shift in the underlying owned by people who use the institu- Of course, and as noted earlier, credit to shop around all that much because you couldn’t. Second, choice architecture of banking was tion’s services. unions were not immune to the changes “Banker’s hours”: it forced people to engage in sensible money management greeted mostly as a good thing. Enabling From inside the credit union cul- that subsequently took place in financial working or being open for the shortest behaviour if they wanted to avoid the hassle of leaving work consumers to borrow now and pay later ture, where I now sit after many years services; competitive pressures some- and most inconvenient amount of time and standing in line to get at their savings. People had to created a shift to on-demand credit that of studying financial services, I can times led them to adopt practices similar (10 a.m.- 4 p.m.). Also includes a long plan their cash flow depending on how frequently they got helped fuel record bank profitability and see how behavioural issues have made to those of the profit-maximizing banks, lunch break and every possible holiday off. paid. If someone came up short, they might turn to friends steady increases in dividends. credit unions sensitive to the destabil- albeit grudgingly and often belatedly. – UrbanDictionary.com and relatives for the kinds of short-term loans that, the re- From a policy-making perspective, izing effects of this structural shift in Credit unions also introduced their fair search tells us, almost always get paid back before other it also seemed to vindicate the “more banking. The first credit unions were share of innovations. They were the first { } forms of debt. and better information” claim. Many formed more than 100 years ago as a to lend to women in their own names in As a result, a kind of “financially literate” behaviour touted the “democratizing” effects of community response to another kind the 1960s, and the first to offer person- here was a time in the 1960s and 1970s when the arose naturally from the “choice architecture” implicit in expanded access to credit tailored spe- al lines of credit and ATM service in the business of banking was simple and functioned like the banking system: people didn’t take on risky debt be- cifically to different market segments 1970s, telephone banking and ethical Ta utility: bankers funded their loans at 3 percent, lent cause they couldn’t, people paid their debt because they felt and facilitated by hyperrational and mutual funds in the 1980s, interactive money at 6 percent and left for the golf course by 3:00 p.m. they should (i.e., it was owed to family/friends), and people efficient market mechanisms. These TV-based home banking in the 1990s From the banker’s perspective, there was a lot to be said for didn’t normally spend beyond their means because it was allowed financial institutions to slice and mobile cheque scanning in 2013. the 3-6-3 “business model,” so much so that its essence was too inconvenient. From a macroeconomic perspective, the encapsulated by the idiom “banker’s hours.” combination of the structure and the resulting behaviour For a customer, there was of course a downside to this probably helps explain the period’s relatively high saving simple but agreeable business model and the implied “value rates and low household debt, although strong income proposition”: inconvenience. Banks were effectively closed growth, low unemployment and activist governments also 82 percent of the time over the course of a week — closed help explain it. before 9 a.m., closed after 3 p.m., and closed on weekends. Never mind statutory holidays. ast-forward 40 or 50 years and it’s hard to imagine a more From a nudging perspective, there are two interesting Fdifferent world. Most of us hold one or more credit cards things about this model. First, the saving (3 percent) and that allow us to spend more than we earn. We use debit cards borrowing (6 percent) decisions were simple. You didn’t have tied to home-equity lines of credit that allow us to draw down on the accumulated equity in our homes whenever we need or want to. We still don’t like going to the branch, but that’s Marc-André Pigeon is director of financial sector policy for okay because we have access to online and mobile banking the Credit Union Central of Canada. He was an analyst for 100 percent of the time. Meanwhile, household savings rates T parliamentary committees, including the Senate Banking are at historic lows and debt at historic highs. Committee and the House of Commons Finance Committee; Under the rubric of “financial literacy,” the policy re- an economist at the Levy Economics Institute; and a financial sponse to this shift has been mostly to make sure that people journalist for Bloomberg Business News. have better and more information, the assumption being

24 OPTIONS POLITIQUES CON RACTSPOLICY OPTIONS 25 JUIN 2013 JUNE 2013 Marc-André Pigeon

But their fiscally conservative roots behavioural research accessible to af- of traditional branch and ATM-based were never far below the surface. En- filiated members through a partner- banking as the demand for physical abled by a cooperative structure that ship with the Filene Research Insti- cash disappears and new entrants — delivered a “profit for service” model tute, a think tank that specializes in travel agents, telecom companies or (as opposed to a service for profit model credit union research. Through that hardware stores — begin offering core at the banks), credit unions have nat- effort, it has connected credit unions banking services such as loans and pay- urally gravitated toward experimenting to research by well-known behavioural ment services. If this were to transpire, with behavioural interventions that economists like the University of Mich- then “banking” may come to resemble could benefit their members. igan’s Michael Barr, whose behavioural a true utility once again, with financial Consider, for example, the case of economics ideas helped shape some of institutions merely acting as intermedi- Mount Lehman Credit Union, a one- the Obama administration’s consumer aries for other organizations. branch credit union in the Fraser Valley protection legislation, and Princeton Unlike the banking “utilities” of community of Mount Lehman, British University’s Eldar Shafir, whose work yore, however, banks and credit unions Columbia. In 2009, it created a unique on the “packing problem” has opened would no longer easily “own” the rela- customizable real-time text/email alert up new insight into how the stress of tionship with the customer or member. system that members can use to detect making trade-offs, which are numerous This too would represent another ma- fraudulent activity on their debit card, jor choice architecture shift that could remind themselves to make mortgage further weaken people’s resolve to save payments or to notify themselves when and avoid debt. Will people resist the

their account balance falls below a certain } impulse of taking on more debt when member-specified threshold. This tool, The financial talking to their travel agent, signing up unique among financial institutions in service industry for a deluxe cable package or buying Canada, builds on a well-known behav- a gold-plated high-efficiency furnace? ioural insight: namely, that a well-timed needs to get better The research would seem to suggest nudge can make all the difference. at putting nudge that unless there’s some sort of circuit Or consider credit unions in Mani- insights into breaker — some kind of behavioural toba. Ten years ago, they pioneered the intervention that replicates some of concept of using a “best pricing” model practice. the default inconvenience of the early or “no haggle” mortgage that treated all postwar period — we can expect more members equally rather than provid- people to find themselves in more fi-

ing better rates to some members who { nancial trouble. just happened to be better at research in low-income households, can under- So the question then becomes, who and negotiating. This of course great- mine anyone’s ability to make strategic can or will offer the next generation ly simplifies what can otherwise be a and rational decisions. of financial services behavioural inter- complex decision — it’s a classic be- In its work with Dean Karlan, a Yale ventions and how will they do it? Will havioural intervention that has helped University behavioural economist, Filene it be financial institutions, regulators, make Manitoba credit unions among is helping credit unions offer their mem- customers or all three? Will it be about the most successful in Canada, holding bers a tool called StickK, which helps bind more information faster or more struc- almost 50 percent of the market. people to their commitments — weight tured nuggets of useful information? At the national trade association loss, fitness, savings or other — by getting Will it have opt-in or opt-out approach- level, Credit Union Central of Canada them to agree to a penalty for failure: for es? Will it use active choice techniques? has used behavioural economics to help example, a donation to a political party None of these questions has an ob- affiliated credit unions sift through more or cause that the member might not vious answer but one thing is clear: the than 60 financial literacy programs by agree with. financial service industry needs to get ranking their effectiveness based on the better at consciously putting nudging degree to which they employ behavioural n the past, the structure of banking theory insights into practice. The future insights. Those that use information-only Ihelped people save and avoid excess will not be kind to those who make it approaches or make heroic assumptions debt. Since the late 1980s, the reverse up as they go along, who ignore at their about an individual’s ability to make has been mostly true: the safe, sound peril the fact that our behaviour is more purely rational decisions get a low grade; and boring world of 3-6-3 banking, often than not determined by a set of those that deliver just-in-time informa- with its built-in disincentives to reck- nested and interacting nudges designed tion or use defaults and other interven- less financial behaviour, is no more and by someone somewhere, knowingly or tions get high marks. probably will never be again. not, hard to see or plainly obvious. Just Credit Union Central of Canada Some, like banking guru Brett ask the modern banker who dares leave has also helped to make cutting-edge King, are even predicting the demise work for the golf course at 3 p.m. n

26 OPTIONS POLITIQUES JUIN 2013