A talk by Richard Thaler of “Nudge Theory” in New Delhi

So i was literally “nudged” into attending the talk by Nobel Laureate Richard Thaler in Delhi on January 9, 2020.

Although clueless about the event, i was barely 2 km from the venue when an acquaintance shared info about the talk being organized by UChicago. Basically an alumni-event, i was still granted permission to attend as i reached a few minutes before the conversation began.

For those who are not familiar with his work, Richard Thaler is a distinguished Professor of Economics and Behavioral Science at the University of Chicago’s Booth School of Business. He was the 2017 recipient of the Nobel Prize in Economic Sciences for his contributions to behavioral economics.

The conversation at Nehru Memorial Museum & Library was hosted by Mr. Luis Miranda, who did his MBA in 1989 from Booth School. After working in major banks like HSBC, HDFC and Morgan Stanley, he is now serving as Chairman of the Mumbai-based CORO and Centre for Civil Society.

I missed a few opening minutes of the session where works of 2019 Nobel Laureate Abhijit Banerjee were being discussed. Some personal anecdotes by Prof. Thaler were being wrapped up as i made my way to the seat.

Through brief notes taken during the interview, i have tried to share as much as possible!

Richard Thaler and the Concept of “Nudge”

Let’s say i’ve never been very academically inclined towards behavioural economics, but i do appreciate its impact in every day work life. Including my formal interactions in business settings. So listening to the Nobel Laureate himself was like a live crash course in Nudge theory for me!

Though the idea existed for a long time in academic circles, it was made popular by Thaler and Cass Sunstein’s book Nudge: Improving Decisions about Health, Wealth and Happiness (2008). Over the years, “Nudge Units” have been set up at national level in countries like US, UK, Germany, Japan and in international organizations like the UN, World Bank and European Commission. India may soon have one too!

Simply put, nudge theory combines ideas from behavioural science, political theory and behavioural economics to propose “positive reinforcement” and indirect suggestions to influence decision making and behaviour of both groups and of individuals.

In this blog post, the various facets of applications of nudge are provided, as discussed by Luis Miranda and Richard Thaler himself during the interactive session.

Long-term Nudge impact on Savings and Investments.

This application was in the context of partial privatization of the social security system in Sweden. Major reforms in the pension system were undertaken since the 1990s. Changes in the system were done for preventing frauds. It was like the Swedish equivalent of the libertarian approach. There was an intrinsic default option in the mechanism through nudge, but they wanted people to choose.

So one of the biggest ad campaigns in Swedish history was made. It offered pensioners to pick from 4-5 funds. While some continued with the default option, 2/3 (two-thirds) of the people picked funds as per their liking. And each year, new people joined the funds.

The default fund was great. But in 2017 there were nearly 1000 funds for people to choose from!

“So we can say that Nudges last forever. You don’t always need a diamond” 🙂

– Richard Thaler

The central idea behind having privatized pension accounts was to protect individuals from political risk. So far this system in Sweden has survived market volatility and even the 2008 global recession.

The challenge of making people choose from funds other than the default option was accomplished through nudge (Ad-Campaigns) in this case!

Richard Thaler on 2015 Sanitation Conference at UChicago Centre in New Delhi

‘Its a hard problem, to make the country Open defecation free. Building toilets is necessary but not sufficient. The idea related to Swachh Bharat Mission was to “nudge” people to use toilets.

We have various examples of achieving something like this, for instance, setting up the Nudge Unit in UK, which is mainly about policy making.

We shared our experience with the Indian government: Not every thing works. And this is the biggest lesson, which means you have to test.’

Nudge Unit in the United Kingdom

‘Creating a Nudge Unit in the UK, now also known as the “Behavioural Insights Team”, was  prompted by a young guy, Rohan Silva (Sri Lankan). He bought 10 copies of the book Nudge and piled them in the Tories (Conservative Party) HQ. People read them. And that acted as a nudge (to set up the Nudge Unit)!’

“Don’t go and tell people what to do. Instead, go and ask them what their problems are!”

– Richard Thaler

‘You need an early way (to implement nudge). We were lucky. For instance, the guy who collected taxes from those who owed money asked to file tax return if they were self employed. He began to write 5-6 letters, stating “90% ppl paid taxes. You are in minority who haven’t”. As a result, people started paying!’

Likewise, my former project mentor Mr. Kunal Kumar, Mission Director, Smart Cities (India) had mentioned an example about reducing consumption of electricity in Chicago, USA. In order to nudge people to save energy, the electricity bill would mention what percentile of the amount the household fell in. “You are among top 10% of the bill payers”. This nudged people into consuming less electricity!

It is no coincidence that a dedicated Nudge Unit exists in the Chicago Mayor’s office. Soon India will have one as well.

Connection with Abhijit Banerjee

When asked how his work connects with that of 2019 Nobel Laureates Abhjit Banerjee (Indian American Economist at MIT), Esther Duflo and Michael Kremer, Richard Thaler said he thinks of them as his cousins. Their goal is to figure out what works, like taking water to buildings. So they concentrate on what works for poor countries. You can read more about their book and work on Poor Economics at the official MIT website.

Impact of Artificial Intelligence on Nudge

The host for the talk, Mr. Luis Miranda, asked the inevitable, whether more rational decisions for nudge can be made due to AI/ML? And what would be the impact of AI on Prof. Thaler’s work?

AI has a lot of potential in healthcare. ‘For young people, one has to understand how American hospitals treat patients. For instance, if a patient has symptoms of heart attack. While going through gigantic datasets of 20 million, it was discovered that there is too much (unnecessary) intervention. Doctors could open up the heart and look around and so (by doing this) they get paid more’ – even if the disease is absent’.

‘If they used Machine Learning (on these datasets) to see precisely who should get the invasive procedure, decision-making errors can be improved to a great extent’. And avoid opening up every patient who has only symptoms of a heart attack… ‘When ML was applied, patients came in with chest pain, and the computer gave recos for fewer interventions’.

Think of AI in GPS, as a nudge to take a particular route. ‘Cass Sunstein has in fact studied this in detail. GPS is the analogy of an ideal nudge. Once we pick a destination, it gives advice (on the route) but doesn’t complain if you stop on the way to check something else. We need more GPS in our lives. More AI to help us navigate’.

‘GPS and Google MAps are being used worldwide. Businesses based on Google Maps, like Uber, are serving a purpose as well as making money. You can even look up recipes for what you can cook (based on AI). In the classroom, you can plan what to study’.

Nudge for Good

‘Cass (Sunstein) & I didn’t invent nudging. Title of the book “Nudge (2009) was suggested by a publisher who rejected the book! We initially went with ‘Libertarian paternalism’, which is not an oxymoron, as a title. But “Nudge” is a better title!’

‘Con artists have been nudging people… Car salesmen have nudged people to buy defective cars! But how do you know what’s good?!’

‘In case of retirement savings – encouraging to match savings is good. To exercise more is good. Being more environmentally sensitive, etc, is good. Diet recommendations…’

“It may not be obvious always. But you have to make a cost benefit analysis, what’s best for you. Nudge also exists in the private sector (CSR)”

Nudges for Evil

Luis Miranda asked Prof. Thaler whether nudges for evil also exist?

‘Misbehaving (2016). When the first review of the book was out, it had the worst paywall of all publications! One month trial subscription for 1 pound. To read (just) the first review. A higher price of 37 pound per month to read more reviews. But to cancel it, one had to  call London in their business hours. And then give 15 days notice to quit!’

‘So i asked the Editor if i could “subscribe”. He was younger. I suggested lifetime subscription. So online should be easy to subscribe. And also easy to quit.’

‘If we look at the topic of CSR, it is up to every company to decide how far to push things within legal limits. The only responsibility of businesses is to maximize profits. And there is a strong role for corporate social responsibility, and still make money as a responsible business person.!’

Next question posed by Mr. Miranda was: “If you were a regulator… Any thoughts on that?”

To this, Prof Thaler responded: ‘There’s an idea in nudge I’m fond of. We called it “Recap”, an acronym rather. An Obama administration lady liked the idea. Called it “Smart Disclosure”.
Take the example, when you shop at a supermarket. There’s a Shoppers club with Members. If the shop collects data on what you buy, they have to share it with you in machine readable format.’

‘If we had a similar disclosure of mortgages, and every feature was visible to me, we could avoid financial crisis! Use a Disclosure form. Give option to prepay this mortgage. But if you don’t want that, give alternatives. There’s a movie featuring this, “The Big Short”‘.

Advice on marriage by Richard Thaler

Moving on to the less formal part of the conversation, Prof. Thaler was asked for advice on marriage. The best part about listening to stalwarts is their wit and sense of humour, and Prof. Thaler did not disappoint.

‘The one rule’, he said, ‘is that you can’t be happier than your spouse. Your happiness is less than or equal to your spouse’s happiness’. The anecdote was well received by the audience with amusement and mirth. He went on to add, or rather conclude, ‘The more miserable of the two will bring down the other one to their level of misery. So, to be happy in a marriage, make sure your spouse is happy!’

Of course, this wasn’t all. There were several questions from the audience too.

Questions from the Audience for Richard Thaler

The nearly 1.5 hours long talk concluded with some really interesting questions by members from the audience, mostly alumni of UChicago.

Question 1: “Is there a research program (at your University) to integrate Nudge in classical models?”

‘There are behavioral economists and theorists. We do have unified theory of economic behavior. Neoclassical economic theory. But look at psychology – there is no grand theory of psychology. There won’t be a grand theory’.

Question 2: “In the adoption of SDGs, how can behavioral economics contribute?”

‘We can add nudges to Sustainable Development Goals. Most advances would come from technology. But add pricing as a nudge’.

Question 3: “If you had to design SDGs? There are 20 of them”

‘I’m a fan of carbon tax. Set the price right. Let people adjust. Like they would fly less, etc.’.

Question 4-5: “Is Nudge seen as overly paternalistic? How can we reorient incentives so that the private sector doesn’t abuse it?”

‘Our rule with nudge is: no mandates. No compulsion! If you don’t like the nudge, ignore it. Slippery slope argument drives me crazy! Wrote in an NYTimes column about it. No proof of the slope! Ban tobacco! Ban rock n roll music!’

Well, even I believe nudge is about the message, in a subtle way. To put forth the idea in a non invasive way. Through a pull mechanism, direct people towards a certain kind of behavior. It is a fine line to be tread… to softly nudge, but ensuring that the liberty is not abused!

Prof. Thaler further adds, ‘Take Uber with surge pricing, which they (later) modified. I did a paper with Daniel Kahneman. Another example is, during blizzards, a hardware store raises price of shovels from 15 to 20 dollars. People said no. But MBA students said yes! More demand so high price justified – just like Uber surge. Uber increases 10x but landed in court next day. So put a cap on surge.’

‘Another instance is of high room prices in hotels. Ratio of highest to lowest price in hotels… 5x! But my experience in hotels is 3x. That seems fair. Uber, I’d advise to do same. Now they (explicitly) state that prices are higher than usual.’

‘When i went to a UK hotel, price during Christmas was 20%. But I asked why aren’t they much higher? They answered, if they gouged customers at Christmas time, they wouldn’t come back in February!’

‘In US people save in 2 ways. Mostly they are paying off mortgages. People don’t save by will power in US. So, how to encourage people to save unobtrusively? Take it away before they see it!’

When asked how to put structure to theories which don’t follow rational economic framework, Prof Thaler’s reply was ‘I am a storyteller’!

Nudge in a post-Covid World

Nudge theory has all the more relevance in the times of Corona, with tolls going as high as 479,000 on June 24, 2020. Behavioural change is the mainstay of prevention and checking spread, given that precautions for Covid need to be observed for a long time.

“It is thought that nudges can target cognitive biases and subsequently promote desirable behaviour. Nudges are routinely applied to promote health-promoting behaviours, such as smoking cessation and making nutritious food choices.”

-NS Healthcare

The same would be applicable for the use of masks in public, and practicing hand hygiene through regular washing. This NS healthcare article further states that 3 phenomena would be effective in nudging people towards compliance:

1. The Bandwagon Effect – probability of an individual adopting an activity or behaviour increases when more people have already done so (Eg, ‘Half of all healthcare workers perform well in hand hygiene. Which category do you belong to?’)
2. Loss Aversion – avoiding losses is a more powerful driver of decisions than the corresponding gains (Eg, ‘40% increase in hand hygiene, 40% decrease in healthcare-associated infections’)
3. Relative Risk Bias – people are more likely to choose an activity when presented with relative risk than when the same information is described as an absolute risk

UK Government has linked the Covid-19 page to the Behavioural Insights Team website as well, emphasizing the importance of Nudge in efforts to control the spread.

In India too, significant emphasis is being placed on behaviour to fight the pandemic. Have a look at a Ministry of Health and Family Welfare poster below:

During his India visit, Prof Richard Thaler also interacted with Prime Minister Narendra Modi. They discussed application of Nudge in driving digital transactions, in bringing about cleanliness and in the ‘Give It Up’ campaign.

Books by Richard Thaler

For those interested in learning about Nudge Theory in greater detail, here’s a list of books by Prof. Thaler in random chronology:

• Nudge  (2009) – Improving Decisions About Health, Wealth and Happiness from Richard Thaler and Cass Sunstein focusses on providing direction to readers, so that they are able to pick the best choices. Available on Amazon

• Misbehaving (2016) – “Richard Thaler has spent his career studying the notion that humans are central to the economy – and that we’re error-prone“. Available on Amazon

• The Winner’s Curse (1992)
• Advances in Behavioural Finance (1993)

Usually ‘meet the author’ events are accompanied by book signing. But since this was an interaction at an alumni event and not exactly a book launch with an option to buy hard copies, there was no signing by Prof Thaler. So i ordered the books online, starting with Nudge!

Like i said before, i don’t happen to know a lot about behavioural economics, but nudge is applicable in a wide range of areas. And attending the session organized by UChicago was more like a crash course on the topic, straight from the Nobel Laureate!

Sometimes, being at the right place at the right time makes all the difference.

At other times, you are simply nudged into it! 🙂

 

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