Thaler & Public Policy

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Thaler & Public Policy

Nudges are more important than nagging. That perhaps summarises the essence of the nudge theory for which Chicago University’s Professor Richard H Thaler was awarded this year’s Nobel Memorial Prize in Economics. The nudge theory is a normative prescription based on his another important theory which concludes that people have ‘bounded rationality’. 

This theory has immense scope of application in public policy – especially in modification of public behaviour. For example, in efforts to increase school-college enrolments, to discourage smoking and encourage regular health check-ups, to encourage saving for retirement etc. 

The power of Thaler’s theory can be estimated from the fact that “Nudge: Improving Decisions About Health, Wealth and Happiness” coauthored by Thaler was published in 2008 and US President Barak Obama set up Nudge Unit in his administration in 2009. That was immediately followed by British Prime Minister David Cameroon. Now it is estimated that 70 or more federal or provincial governments across the world (including India’s Niti Ayog) have Nudge Units. Perhaps it is a good idea to set up Nudge Units in a few public institutions of Nepal too.

However, Thaler’s message is being wrongly propagated as being in total contrast to the principle of self-interested rationality on which traditional Economics is based. Thus there is a danger that his theories will be used as a pretext to justify government intervention in individual behaviour. 

There are two aspects to be considered. First, the fundamental human trait of being self-interested is not proven wrong by any research. 

However, self-interest is not limited to maximizing financial gain. In broader sense, self-interest includes also the objective of gaining social status (open donations for charity) and improving self-satisfaction and after-life (secret donation for charity).  

Second, there are limits to rationality (‘bounded rationality’ as Thaler terms it). So, every theory of economics is based on certain assumptions which lead to certain exceptions to these theories. This is quite similar to the theories of natural sciences – physics, chemistry, biology etc. 

Though the theory of physics that anything thrown up in the air ultimately falls down to earth is not proven wrong by any subsequent research, there are exceptional situations on which the engineers have capitalized and developed aeroplanes and rockets. Similarly, the policymakers too should capitalize on those exceptional situations to the theory of self-interested rationality. Thaler and other behavioural economists have provided ways for this.

Thaler’s contribution has importance precisely on these lines. And the beauty of his theory is that policymakers can guide the people (nudge them) to certain desired behaviour by designing ‘choice architecture’ without being dictatorial. Though there are lots of criticisms to Thaler’s idea of Nudging, it is already being practiced successfully in business management – from marketing/advertising to motivation. There are benefits and no harms in adopting in public policy the same theories that are being successfully adopted in business management. 

One important field where this theory needs to be used is in drafting public communications from the government bodies. Quite often, the notices from the government bodies in Nepal are found perceived by the people in a wrong way because of the wordings/language used. If the government bodies simply run the A/B test on those drafts before actually making them public, as the advertising agencies do, the results may improve a lot.

Madan Lamsal
[email protected]

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