A Nudge In The Right Direction? How We Can Harness Behavioural Economics

The Turnbull Government last week announced the formation of a behavioural economics unit inside the Department of Prime Minister & Cabinet.

The unit has a real title (Behavioural Economics Team of the Australian Government) but everyone is calling it the “nudge” unit, after the book Nudge, by Cass Sunstein and Richard Thaler.

The nudge unit could backfire badly or be incredibly good. At its worst, it will provide new excuses for petty meddling and over-regulation. At its best, it will lead to a fundamental rethink of the authority of government-appointed experts and the dangers of political power.

The idea behind behavioural economics is to bring psychology back into economics. You’ve probably heard the caricature of economic thinking that it assumes all people are “rational”. At its simplest, behavioural economics tries to identify patterns and circumstances where our choices aren’t perfect – when they are irrational or inconsistent.

For instance, we tend to rationalise our opinions, looking for evidence to confirm pre-existing views rather than threaten them. We imagine we are more competent – better informed and more skilled – than we actually are. We are loss averse: we fear losing money or status more than we enjoy gaining them.

These quirks are, strictly speaking, cognitive errors. They mean we make worse decisions than we would if we were meticulously rational, profit-maximising algorithms.

Behavioural economists overstate the novelty of these findings. Pre-modern economists knew very well that people were motivated by more than money – what Adam Smith called the “passions”. But that sort of “humanomics” was lost when economics got all mathy. Economists are groping back to the earlier, richer picture of human motives and flaws. Behavioural economics is just one of the paths on the return.

All very interesting. But Sunstein and Thaler argue the lesson from behavioural economics is that policymakers should alter the environment in which we make decisions in order to help us make better choices. Not eliminate bad choices, as traditional nanny state paternalism suggests – just nudge us into making less bad ones. Nudging involves such actions like rearranging choice hierarchies and changing defaults so that better choices are more prominent.

In practice, however, these “nudges” are either trivial, or tend to be more like shoves. Policy inspired by behavioural economics is rarely able to find the sweet spot: passive, respectful interventions that also offer significant benefits.

Take, for instance, one of the most famous apparent nudges. In his Fairfax piece on Turnbull’s nudge unit, Peter Martin cites the case of officials at Amsterdam’s Schiphol airport who embossed images of little flies on the urinals. Now men have targets of what to hit. Spillage reportedly declined dramatically.

Yet, it is not clear how this is a manifestation of nudge theory or the application of behavioural economics to policy. What systemic cognitive error is being fixed here? As the economist Riccardo Rebonato points out, urinal flies are a “clever ruse”, not a “major breakthrough in social engineering”. Yet it is regularly trotted out as the classic nudge.

The Australian Tax Office has its own nudge program. Late taxpayers now receive a letter stating that, “When you pay this debt you will be joining the millions of Australians who pay their tax to support our country and Australia’s way of life.” Because humans are social animals who like to conform, payment rates have apparently increased.

Other ATO nudges are less impressive. Why, contra Peter Martin’s article, is sending text message reminders to late taxpayers a behavioural economics trick? Debt collection is one of the world’s oldest industries. Harassing debtors is not a new idea.

The reliance of nudge supporters on such trivial examples does not bode well for the usefulness of behavioural economics as a public policy project. The Schiphol toilets example comes straight from Sunstein and Thaler themselves. It’s the first real-world example of a nudge in their book.

But there is something very important the Turnbull Government could do with its nudge unit. The findings of behavioural economics should be applied to policymakers too. Politicians, advisors, policy consultants, bureaucrats, regulators and legislative drafters are all as susceptible to loss aversion, seeking evidence that confirms their prejudice, choosing irrationally, and assuming unwarranted competence as anybody else.

The nudge unit shouldn’t spend its time thinking of clever ways of government to regulate irrational citizens. It should consider the implications of the fact that the people in government are just as irrational as the citizenry.

This is, admittedly, new intellectual ground. The field of behavioural economics is a young one, and its significance for political behaviour has not yet been deeply considered. An early attempt from 2011 argues that viewing regulators as irrational as those they regulate would suggest a “humbler approach” to regulation is necessary.

Governments would do fewer things if they were less confident in their own abilities. But, then, overconfidence is one of the core cognitive errors.

Defending the nudge unit in parliament last week, Arthur Sinodinos said it would “test these concepts in a way that is consistent with our broader deregulationist philosophy”. But the nudge unit could be better than that. Used creatively, behavioural economics could underpin the entire deregulation program.