Tuesday, August 17, 2010

Nudge Theory Makes Its Way Across the Pond

First it was the Obama White House that adopted nudge theory by appointing Cass Sunstein as regulatory czar, examining all new regulatory proposals. Now it is the coalition government of PM Cameron which has provided a home for it in 10 Downing Street with the setting up of a nudge unit as reported by Andy McSmith of the Independent UK.

The fact that this new theory which is sometimes referred to as libertarian paternalism by its founders appeals to both conservative and liberal leaders alike is evidence that it in fact serves as the real Third Way. It is paternalistic in the sense that it supports the idea that people may not necessarily act in their own self-interest at times, an insight revealed by behavioral science. 

But on the other hand the manner by which to correct this according to the theory is not by imposing a "one-size-fits-all" solution that often limits choice. Instead nudge theorists look at ways to improve the "choice architecture" or to frame the decisions for individuals in such a way that they come to make better informed decisions.

Cognizant that nudges are present all around us, and that they can be used for good as well as for ill, the idea behind applying nudge theory is to correct bad nudges that might lead to predatory practices that abuse the rights of consumers or to improve the poorly designed nudges with respect to personal individual decisions that could have profound public and social impacts such as the amount of savings to set aside for retirement or the kind of health insurance to purchase.

These nudges are cheaper for society in the long-run and lead to greater personal and societal happiness as well, which is probably why the leaders of both the US and the UK are both seeking to apply them, given the tight fiscal situations they are facing which require major reforms in the coming years.

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