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Module III
Introduction to Behavioral Economics & Nudge Theory
• The concept of 'nudging' was first explained in Nudge: Improving Decisions about
Health, Wealth and Happiness, a book by American academics Richard Thaler and
Cass Sunstein.
• “A nudge is … any attempt at influencing people’s judgment, choice or behaviour in
a predictable way (1) made possible because of cognitive biases in individual and
social decision-making posing barriers for people to perform rationally in their own
interest, and (2) working by making use of those biases as an integral part of such
attempts”.
Nudge theory is based on a libertarian paternalist approach. Libertarian
paternalism contends that people should be free to do what they choose; but that
it is legitimate for people‘s behaviour to be influenced in a positive health
direction.
SOME PERTINENT QUESTIONS (Application & Use of
Nudging)
Q1. What knowledge and practical experiences about nudging exist in general
and in the field of consumption and the environment?
Q2. In which consumption domains and behavioural contexts is nudging most
efficient and effective?
Q3. What are the critical factors of success of nudging strategies?
Q4. In what way may nudging contribute to devising more successful policies
for sustainable consumption?
What is Nudging?
Rationale for Use of Nudging & Its Diversified application
• In the United Kingdom, it is estimated that fraud costs the economy about
£38.4 billion per year. In particular, about 10% of people do not pay their
self-assessed taxes on time.44 The Behavioural Insights Team partnered
with HM Revenue and Customs to conduct a series of trials to test the
effectiveness of various messages on self-assessed tax repayments. The
trials revealed that tax letters stating that the majority of individuals pay
their taxes on time and the importance of paying taxes, resulted in a 15%
increase in tax repayments compared to the control group letters.45 If these
tax letters were sent out to self-assessed tax debtors, it is estimated that
about £30 million of extra revenue could be generated for the government.
Where to nudge?
• “Nudge” interventions are most appropriate in what marketing
researchers call “low-involvement” decisions, i.e., ones that involve
little conscious deliberation, and also in high involvement decisions that
are complex or unfamiliar.
• However, it is not self-evident that nudges are likely to work (even in
principle) in the case of high-involvement decisions that are perceived
to have low complexity. Examples of such decisions where (at least
individual, one-off) nudges might not be effective could be the choice
of a car brand in the case of people who have high brand loyalty.
How Nudges are Used?
• Policy makers can use nudging in two ways, 1) to counteract the negative
impact of other actors’ (e.g. business, media) attempts to subconsciously
influence human behaviour and thus reduce behaviour deemed undesirable
(e.g. consumption of fatty, salty and sugary food), and 2) to promote certain
behaviour and thus increase behaviour deemed desirable (e.g. Consumption of
healthy food) (Reisch and Oehler 2009).
Who Nudges?
• ENERGY USE IN THE HOME -Decades of evidence suggest that people consistently under-invest in energy
efficiency, even from a private economic viewpoint – a phenomenon which is often referred to as the
“energy efficiency gap.”
• FOOD- Food production and consumption have major impacts on the environment. Agriculture is
responsible for 13% of all greenhouse gas emissions in Sweden (Naturvårdsverket 2014), and overall food
consumption represents about 25% of the climate impact of an average Swedish consumer (Röös 2012).
• PERSONAL TRANSPORT- Transportation is the area where facilitating “good behaviour” has been going on
for a long time, but where nudging as a concept has not been popularised yet. The transport sector alone is
responsible for up to 30% of household emissions and its impact is expected to grow in the future following
the annual growth of 1,3% in terms of passenger kilometres recorded in the period between 1995 and 2010
(EEA 2011).
What Research Says….(Use of Nudging for Pro-Environmental
Behaviour)
• The use of social norms has shown that offering peer comparisons in
combination with information on individual consumption patterns can be an
effective way of reducing resource use in the energy and water sectors. In the
pilot experiment, social norms provided the largest impact on donation
behaviour. The focus should be on situations where consumers have, or can
have, information for their own usage and are able to benchmark this usage
towards credible reference groups and encourage more energy-efficient
behaviour. Evidence from the pilot experiment suggests that a similar
approach could be used for waste sorting and recycling.
CONCLUSION
• Choice architecture and nudging are still relatively fledgling approaches to
behaviour change, especially in the world of policy and welfare. However,
the results demonstrated by early adopters like the UK have shown much
promise. Furthermore, general insights from behavioural economics are
being used in several countries to design traditional policy tools like
regulation. While choice architecture is not a panacea, it is a policy tool
that can be implemented at a low cost yet provide significant results. As
governments continue to deal with increasing resource constraints,
nudging might become an increasingly popular and effective toolkit.
• In our pilot field experiment, we compared the relative effects of three
different types of nudges on donation behaviour. The results indicate that
subtle interventions such as appealing to social norms or providing
information affect environmentally friendly behaviour in the context of
donations