Professor Richard Thaler has gained worldwide fame as the co-author of the book Nudge. But now he says there are limitations to nudging as a solution.
Nudging is a powerful tool in encouraging people to take action and make the right decision for their circumstances.
Professor Richard Thaler, Nobel Prize winner and co-author of the seminal book Nudge, has described the practice as:
“A nudge is any small feature of the environment that attracts our attention and alters our behaviour, and it does so without requiring anyone to do anything and without economic incentives.”
Global positioning systems are a good example of nudging, Thaler says. They promise to get you to your destination the quickest and clearly show where you should go next, but nothing prevents you from taking a different route.
But there is a point where nudging is no longer useful or even desirable, Thaler said in a webinar with the University of Sydney last week.
Nudge can help any problem, but it is not the solution to every problem and maybe not the solution to any problem
“Nudge can help any problem, but it is not the solution to every problem and maybe not the solution to any problem,” said Thaler, who discussed the final revision of the book, which he co-authored with Professor Cass Sunstein, during the webinar.
He used the current coronavirus pandemic and vaccination rollout as an example of where nudging is no longer an option.
“My mantra is ‘make it easy’ and that was the key to stage one [of the vaccine rollout],” he said.
“Stage two was getting to the people who weren’t clamouring for the shot. Make it as easy as possible for them and often that means going where they are, especially in rural areas and having no appointments. Eventually, you would be able to walk into any drug store and get a shot. That is very important.
“We are now, in the United States, well into the third stage, where we are dealing with people who have very strong opinions that they should not get a vaccine. I’m not sure what those things are based on, but I think we are past the point of nudging when it comes to the vaccine.
“The reason for that is that vaccinations … this is a simple case of an externality: if you are unvaccinated, then you can make me sick, you can make your students and colleagues sick, and you don’t have the right to make me sick.
“So the University of Chicago has decided that if you want to come back to school in fall, then you have to be vaccinated. If you are a student, you have to be vaccinated. If you are a faculty member, you have to be vaccinated.
“That is not a nudge; that is a mandate.”
Nudge and Climate Change
Climate change is another issue that cannot be solved with nudging alone, Thaler said.
While much of his work on behavioural finance is often at odds with classical economic theory, especially where it concerns the idea of ‘homo economicus’, a concept he labelled preposterous during the webinar, he agreed with most economists that climate policies can only bring about meaningful change if they are linked to market prices.
“We believe that the first step to climate change has to be to get the prices right. On that we agree with every economist,” he said.
“The University of Chicago does a poll every few weeks of 50 economists of various persuasions and 100 per cent say that we should either have a carbon tax or carbon trading.
Firms maximise profits first, but if you set the prices right, they are going to react. Elon Musk is going to have a lot of competition if the cost of fuel goes up by a factor of three
“This maintains choice. You can’t opt out of the tax, but you can decide: ‘Alright, it is now going to cost me three times more to drive my car or heat and cool my home. How am I going to react to that?’ [It is the] same with firms.”
Climate change cannot be solved by individuals altering their behaviour; it needs to be a collective effort spearheaded by governments and businesses. There is still room for nudging, he said, as you can still make things easier, but solving the issue requires more than that.
“The key to climate change is largely going to be at the organisation level. Individuals matter, but how we generate power, whether we build roads versus transit, what kind of cars we build, how we build them … they are all firm-level decisions,” he said.
“Firms maximise profits first, but if you set the prices right, they are going to react. Elon Musk is going to have a lot of competition if the cost of fuel goes up by a factor of three.”
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