How to nudge people with simple rules and make nations happy
Prof Richard Thaler is interested in why people do things even against their own good — like not saving for retirement. It’s called behavioural economics. And his work in the field has disrupted traditional thinking
For more than two centuries, many people have tried to shake that peculiar branch of the tree of knowledge called economics. Perhaps no one has done it better in recent decades than Richard Thaler, a University of Chicago professor who has challenged the traditional idea that free markets reflect the selfinterests of rational individuals.
On Oct 9, he was awarded the 2017 Nobel Economics Prize for recognising, as the Nobel committee put it, that “human behaviour is very complex.” Economic models cannot be easily simplified and must be “more human” by admitting that theories based on self-interest are not always correct.
Indeed, the field of economics has long been overdue for a humility check. Thaler showed his own lack of hubris in his response to a question of how he would spend the $1.1 million that comes with the Nobel prize: “I will try to spend it as irrationally as possible.” In other fields of knowledge, the fact that people do not always act in their self interest is pretty obvious. Yet most economists still rely on Adam Smith’s notion of markets being guided by “the invisible hand” of forces driven by people seeking their own well-being.
What is often overlooked among economists is that Smith himself was more complex. He also took a noble view of human behaviour. In his 1759 “The
Theory of Moral Sentiments,” he wrote: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”
Thaler’s work largely focuses on why humans often do things against their own good, such as not save money for retirement. His theories have created a whole new field called behavioral economics. It looks for ways that either governments or companies can encourage people to act in their long-term interests by ‘nudging’ them with small rules. One popular result of such ‘nudge economics’: Many companies now enroll new employees in a 401(k) plan without asking, only giving them the choice to opt out.
Even this new field is subject to the similar critique of being too rational. Can bureaucrats and corporate officials operate any more rationally in trying to ‘nudge’ people whom they deem too irrational?
Perhaps behavioral economics is still too young to answer that question. In a recent paper from the Brookings Institution, liberal scholars Richard Reeves and Dimitrios Halikias argue that trying to direct people’s actions is the wrong approach. They suggest that society and its economy are best developed through ‘self-efficacious’ attributes of character, not paternalistic nudges to change behaviour. A humane society, they write, “is one in which men and women possess the discipline, selfcommand, and personal autonomy needed to live with a sense of purpose and direction.”
Unlike the other types of Nobel prizes, the one for economics has been given only since 1969. The field remains fluid in its theories. Perhaps a future prize can go to an economist who can take Thaler’s ideas even further and show how prosperity relies on traits of character in a society. Models of economics are best built on models of thought.