Nudges are a growth industry. Inspired by a popular line of psychological research and introduced in a best-selling book a decade ago, these inexpensive behavior changers are currently on a roll.
Policy makers throughout the world, guided by behavioral scientists, are devising ways to steer people toward decisions deemed to be in their best interests. These simple interventions don’t force, teach or openly encourage anyone to do anything. Instead, they nudge, exploiting for good — at least from the policy makers’ perspective — mental tendencies that can sometimes lead us astray.
But new research suggests that low-cost nudges aimed at helping the masses have drawbacks. Even simple interventions that work at first can lead to unintended complications, creating headaches for nudgers and nudgees alike.
Nudge proponents, an influential group of psychologists and economists known as behavioral economists, follow a philosophy they dub libertarian paternalism. This seemingly contradictory phrase refers to a paternalistic desire to promote certain decisions via tactics that preserve each person’s freedom of choice. Self-designated “choice architects” design nudges to protect us from inclinations that might not serve us well, such as overconfidence, limited attention, a focus on now rather than later, the tendency to be more motivated by losses than gains and intuitive flights of fancy.
University of Chicago economist Richard Thaler and law professor Cass Sunstein, now at Harvard University, triggered this policy movement with their 2008 book Nudge. Thaler and Sunstein argued that people think less like an economist’s vision of a coldly rational, self-advancing Homo economicus than like TV’s bumbling, doughnut-obsessed Homer Simpson.
Choice architects like to prod with e-mail messages, for example, reminding a charity’s past donors that it’s time to give or telling tardy taxpayers that most of their neighbors or business peers have paid on time. To nudge healthier eating, these architects redesign cafeterias so that fruits and vegetables are easier to reach than junk food.
A popular nudge tactic consists of automatically enrolling people in organ-donation programs and retirement savings plans while allowing them to opt out if they want. Until recently, default choices for such programs left people out unless they took steps to join up. For organ donation, the nudge makes a difference: Rates of participation typically exceed 90 percent of adults in countries with opt-out policies and often fall below 15 percent in opt-in countries, which require explicit consent.
Promising results of dozens of nudge initiatives appear in two government reports issued last September. One came from the White House, which released the second annual report of its Social and Behavioral Sciences Team. The other came from the United Kingdom’s Behavioural Insights Team. Created by the British government in 2010, the U.K. group is often referred to as the Nudge Unit.
In a September 20, 2016, Bloomberg View column, Sunstein said the new reports show that nudges work, but often increase by only a few percentage points the number of people who, say, receive government benefits or comply with tax laws. He called on choice architects to tackle bigger challenges, such as finding ways to nudge people out of poverty or into higher education.
Missing from Sunstein’s comments and from the government reports, however, was any mention of a growing conviction among some researchers that well-intentioned nudges can have negative as well as positive effects. Accepting automatic enrollment in a company’s savings plan, for example, can later lead to regret among people who change jobs frequently or who realize too late that a default savings rate was set too low for their retirement needs. E-mail reminders to donate to a charity may work at first, but annoy recipients into unsubscribing from the donor list.
“I don’t want to get rid of nudges, but we’ve been a bit too optimistic in applying them to public policy,” says behavioral economist Mette Trier Damgaard of Aarhus University in Denmark.
Nudges, like medications for physical ailments, require careful evaluation of intended and unintended effects before being approved, she says. Policy makers need to know when and with whom an intervention works well enough to justify its side effects.
That warning rings especially true for what is considered a shining star in the nudge universe — automatic enrollment of employees in retirement savings plans. The plans, called defaults, take effect unless workers decline to participate.
No one disputes that defaults raise participation rates in retirement programs compared with traditional plans that require employees to sign up on their own. But the power of opt-out plans to kick-start saving for retirement stayed under the radar until it was reported in the November 2001 Quarterly Journal of Economics.
When the company in the 2001 study — a health and financial services firm with more than 10,000 employees — switched from voluntary to automatic enrollment in a retirement savings account, employee participation rose from about 37 percent to nearly 86 percent.
Similar findings over the next few years led to passage of the U.S. Pension Protection Act of 2006, which encouraged employers to adopt automatic pension enrollment plans with increasing savings contributions over time.
But little is known about whether automatic enrollees are better or worse off as time passes and their personal situations change, says Harvard behavioral economist Brigitte Madrian. She coauthored the 2001 paper on the power of default savings plans.
Although automatic plans increase savings for those who otherwise would have squirreled away little or nothing, others may lose money because they would have contributed more to a self-directed retirement account, Madrian says. In some cases, having an automatic savings account may encourage irresponsible spending or early withdrawals of retirement money (with penalties) to cover debts. Such possibilities are plausible but have gone unstudied.
In line with Madrian’s concerns, mathematical models developed by finance professor Bruce Carlin of the University of California, Los Angeles and colleagues suggest that people who default into retirement plans learn less about money matters, and share less financial information with family and friends, than those who join plans that require active investment choices.
Opt-out savings programs “have been oversimplified to the public and are being sold as a great way to change behavior without addressing their complexities,” Madrian says. Research needs to address how well these plans mesh with individuals’ personalities and decision-making styles, she recommends.