As young boys collecting money for the local Ganesh festival every year, my friends and I usually played a trick on our targets. We first knocked on the doors of families that gave generously. Once they saw liberal donations at the top of the list of donors, the others tended to be less stingy. We managed to maximize the money we collected by playing a psychological game: insidious, but successful.
Teaser spread: Does the way food is arranged in a buffet attract you to certain dishes?
Richard H. Thaler and Cass R. Sunstein would say that we nudged the elders in the neighbourhood to do what we wanted them to do. Their book, Nudge: Improving Decisions about Health, Wealth and Happiness, is about more noble attempts at shaping human decisions. How public policy can be used to make people eat better, save wisely, not pollute the atmosphere, and such stuff.
The main insights in this book are from behavioural economics, a fledgling discipline that shows how humans are not the cold and efficient calculators that mainline economists assume them to be; humans are, in fact, full of contradictions and inconsistencies. Behavioural economists have also shown how people use mental short cuts — or heuristics — to take decisions. These rules of thumb lead to biases that can be manipulated.
One such heuristic is called anchoring. People decide based on a number that they know. Ask people to guess the population of a town that they do not live in. Those living in big cities will come up with a large number and those living in a small city will come up with a small number. Why? Because their guess of how many people live in a city is “anchored” in the population of the cities they live in.
Anchoring is used by NGOs to collect funds. Put bigger numbers in the form and people pay bigger amounts. Unknown to us, our gang of fund-raisers used anchoring to get more money out of our neighbours.
Thaler and Sunstein’s core idea is an oxymoron that they call libertarian paternalism. It is libertarian in the sense that the methods they recommend do not involve the heavy hand of the government, but rely on people making their own choices, though with a little nudging. The paternalism rises from the belief that there is something like a “right choice” that outside experts should push you and me towards. The idea is interesting, though not completely convincing. The moment you accept that experts in government know better than you do about what is best for you, the only debate is what works better — the heavy hand of regulation or the nudges that Thaler and Sunstein recommend. The debate is then about methods rather than principles.
Thaler and Sunstein are quite right when they say that nudging is inevitable in some cases. Take a couple of examples. The way food is arranged in a cafeteria affects the way customers eat. Does the manager put sliced carrots or French fries at eye level? Are the desserts placed at the very beginning or the end of the line? The cafeteria manager has to take decisions on how to place the various food items. What Thaler and Sunstein are saying is that he may as well place food in a manner that nudges his patrons towards healthy eating.
Or, take saving for retirement. Most people make a mess of it. Indian employees have compulsory savings in their provident funds; so do citizens in countries such as Singapore. But many Western nations have voluntary retirement saving schemes. An employee who joins an organization is given a form where he either chooses to join or not to join a voluntary scheme.
Most forget to fill the form, despite the tax breaks given to retirement savings. Employees have to make a specific request to join the relevant scheme for retirement savings. What if it is the other way around? An employee is automatically included in the retirement scheme; she has to fill out a form to drop out. Thaler and Sunstein argue that inertia can be put to work. Citizens should be nudged towards building a nest egg for old age by changing the default option in decisions on retirement savings.
Most of the examples used in this book are more relevant to the rich countries. But the basic idea can be tested in India as well. Take the issue of smoking. Most would agree that smoking is a health hazard. So, what is to be done? Let individual smokers decide for themselves? Fight the scourge with advertising and warnings on cigarette packets? Ban smoking? Raise taxes? Or force Shah Rukh Khan not to dangle a cigarette from his lips in his films?
Figure it out.
Niranjan Rajadhyaksha, editorial pages editor, Mint, writes the column Cafe Economics every Wednesday.