087：What is Nudge Policy？

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Hello, Himalaya’s subscribers. My name is Timothy Taylor, and today  we're going to discuss what are nudge policies. When we think about a government policy, usually what we have in mind is a law or a rule or a tax. And if you violate the law or the rule or you don't pay the tax, and the government can punish you. But in this lecture, we want to think about a totally different kind of government rule. It doesn't involve any punishment. It doesn't force you to do anything you don't want to do. So you think, well, how can that kind of government policy even work? 

Let me give you a simple example. Imagine a government rule that you need to have a warning on a package of cigarettes, that smoking isn't good for your health. Now, of course, the purpose of the label is to discourage smoking. But a warning label is not a law against smoking. It's not a rule that you can't smoke in certain places. It's not a tax on cigarettes to raise the price and discourage smoking. It's just a little mental push. Sometimes we call it a nudge. It makes something unhealthy look just a little bit less desirable. Nudge policies are what happen when you take the ideas of behavioral economics and apply them to public policy. 

In this lecture, let's split up our discussion into three parts. First of all, we'll talk about what are some nudge policies. Second, we'll talk about some strengths and limitations of nudge policies. And third we’ll wind up our discussion of behavioral economics by talking about how nudge policies and behavioral economics might change a little bit. How you actually perceive yourself. Let's start off with what are some nudge policies. And let's talk about some broad categories of such policies with some examples. For example, one broad category is nudge policies can provide information, including warnings and reminders. In some cases, this might be pure information. For example, some countries have rules that in restaurants, the restaurant has to provide information about the number of calories in each meal. 

It doesn't have to say anything or warn you about anything. It just has to let you know. Another example is in the US when you borrow money to buy a house, you often have a lot of different choices to make. Sometimes the loan you have could be an interest rate, which is fixed in place, or an interest rate that adjusts up and down. Sometimes there will be high upfront fees for a lower interest rate over time, where there might be payments that shift after a year or two, and other kinds of choices you need to make. 

So there's a rule in the US which is you have to take a certain formula and boil down all of these choices into one single interest rate, so that it's possible for people to compare more accurately across the choices. Maybe you'll choose something that has higher interest rate. Maybe there's some reason for that, but at least you know what the choices look like. Other options here might include, say, a public information campaign aimed at, say, the danger of using your phone while you're driving, or a public information campaign aimed at parents about healthy nutrition for children. 
All these kinds of information or warnings are all about trying to get your attention, sometimes to overcome shortsightedness or myopia, and make you take action now, or in some ways, to trigger your loss aversion, by making the chance of losses or unwelcome events more clear to you than before. Other categories of nudge policies might involve rearranging some of the choice options. We talked before, for example, about how offering many many many choices can sometimes be counterproductive, because people can't even really think about. So perhaps when offering people choices, it can be useful to limit that number and have the government say, if you're offering investment options to people, there's only a limited number of options you can provide, that are clearly separate from each other. 

Another choice might be in a grocery store. There could be a rule that healthy food options need to be displayed in certain obvious ways, like maybe right in the front of the grocery. Or maybe there's a rule that you can't have sweet treats right by the cash register, where you pay for your food, the store can still offer all the same products you understand, people can still buy all the same products, but we're trying to re-arrange them， so that they catch your attention in a different way. There are some nudge policies that involve social norms. One example involves energy use. 

When I get my electricity bill at my own house, there's always a little diagram, and it shows the amount of electricity used by my family and how that compares with the average used by other houses in our neighborhood. I don't have to do anything about it, but there are a number of studies that show that if you get a statement showing your way above average in the amount of electricity you use, you tend to reduce your energy use in the future. Or you can imagine something about， say, health check ups where the government publicize is how many people are getting regular health check ups or getting vaccinated. If you know lots of other people are undertaking a certain activity that can affect your behavior as well. 

And a final category of nudges are called default rules. The idea is to think about what happens if people don't take any particular action, what would happen by default? And then let other people make a choice if they don't want to accept that default. One of the prominent examples we talked about in the previous lecture was a choice to set up an account with your employer or your bank that automatically puts some money from each paycheck into a savings account, or not, in many places, setting up this account is your choice. 

The default is if you don't do it, it doesn't happen. But you could take an action if you want to. But we could switch the default. We could say it will always be set up automatically. And if you want to, you can take an action not to do it. These default rules really make a difference. We sometimes say the default rule is sticky. Whatever the default is, people stick with it. Another example involves organ transplants. If I was to die in an accident, could the hospital take some of my organs and transplant them into other patients? 

And most places, we want people to have some choice there. But what if I don't say anything? I don't write down what I want. The hospital doesn't know. Well, one option here is to have a default where you need to make a choice. And so on your driver's license or your identity card, you have a little box to check off if you are willing to donate your organs, if you should have an accident and die, so not saying something isn't an option anymore. They're even sometimes proposals which say there should be a legal rule where your organs will be automatically available to be donated for the use of others if you die in an accident, unless you specifically choose to opt out and carry a card that says you're doing so. Again the default rule will matter. 

There are many other examples of nudge policies we could talk about, but let's just move to the strengths and limitations of these policies overall. Maybe the main limitation of nudge policies is by their nature they usually have somewhat limited power. Some people will be nudged into different patterns and some won't. Ah. It might help in counter balancing all the other nudges in an economy, but a lot of the time nudge policies don't cost a lot of money, but they also may not be enough to cause a fundamental change or to solve a big social problem. 

Now, this is a problem, but you know in a way, it's not a huge problem. After all, the government doesn't have to limit itself to nudge steps. If some of a goal can be achieved in an easy low cost way using policy nudges, well, that's helpful. And then maybe in addition, you need taxes and government spending, real rules, like requiring children to go to school or prohibiting pollution, to really take effect and cover the rest of the problem. In a way, nudge policies are at their best when they give people little help in an area where many people are glad to be nudged. 

A lot of people don't mind being nudged to eat in a little healthier way, or drive in little safer way, or be aware of how much energy you use, or save a little bit more money. In those ways a nudge policy just helps people push back against some of their inner biases. It helps you do what you really want to do, but it's worth remembering that a nudge policy can lead to bad results. For example, in the US in the early 2000, there was often a lot of public encouragement to encourage people to buy their own home because it helped build up saving for the future. It helped make you financially secure. 

But then in the great recession in 2008, the average price of houses in the US fell all over the country. And so some people were nudged into something which wasn't actually good for them. You can imagine other situations where people might be nudged into investing in the stock market, or nudged into certain behaviors that maybe they aren't really wanting to do. It stops being a nudge and starts being more of a push. It can be especially difficult because you can't nudge people to do everything you want all the time, and sometimes nudges go in opposite directions. 

For example, in the earlier lecture on women and the glass ceiling, you could imagine one set of nudges that encourage women to have more children and look after elderly parents. And you can imagine another set of nudges encouraging women to work hard and try and get promoted and have high powered jobs in the labor market that would break the glass ceiling. Well, it's gonna be hard for all those nudges to work because the nudges are sort of pushing in opposite directions. The great strength of nudge policies really is that most people, most places seem to like them. There have been international surveys looking at how people in different countries feel about different kinds of nudge policies, information, warning, social norms, default options, and so on. 

It turns out that people in some countries don't like nudge policies very much. Japan seems to me to gain example of that, along with some countries in central Europe. In other cases, um there are many nudges involving information or warnings or social norms seem okay. But there's a lot more controversy with default rules, especially if the default rule involves making monetary payments. And the US is an example of this kind of in between country where a lot of nudges are fairly acceptable but some of them are more controversial. And finally, in some countries, people really seemed like the idea of nudge policies, and two countries that really stand out in this way, China and South Korea. 

Now I'm not clear on the survey doesn't really explain why those two countries have such a high approval rate for all different kinds of nudges. But I think sometimes the idea is, “Look, it's a fairly mild step. It's still allowing a lot of choice. And if the government's planning to do it, there's probably at least some reason for it. So why not give it a try? ”Let's end here by talking about what behavioral economics and nudge policies might teach us about ourselves. In our economic lives, acting as consumers, workers, savers, investors all the different roles we play, we all live in a world of nudges. 

Some of those nudges happen by accident. It just how something happens to be framed at a certain time and that triggers are loss aversion, or myopia, or our sense of social norms, or brings up a certain reference point. All these built in human psychological biases we've talked about. Some of the nudges don't happen by accident. They're done by businesses trying to sell us stuff, or trying to make us work harder,and they're done by employers trying to get us to act in a certain way, like those we've been talking about in this lecture. It's important to remember that not living in a world of nudges is impossible. 

We're all human. We all have built in biases. We all have things which are nudging us all the time in different directions. The real issue for us is to be awared that these things are happening no matter where the nudges are coming from. Now I should say it is not easy for me to think in this way and maybe it's not easy for you either. Let me explain why I say that I like to think of myself as a person who thinks over facts and opinions and what's good for me, and what's good for my family, and makes up my own mind. I think of myself as someone who considers things and decides things with my preferences in my rational mind. But what behavioral economics and nudge policies teach me, and maybe teach all of us, is that thinking of myself in that way is only part of the truth, not the whole truth. 

The truth is that a lot of decisions are not made by carefully thinking things over, considering costs and benefits and preferences. Instead, many choices do depend at least partly on how issues are framed, on loss aversion, on reference points, on thinking short term rather than long term, on making quick decisions using rules of thumb,because my attention is too limited to make a more complicated decision, on thinking about how other people are acting in social norms all these issues. Now, it's easy to say, oh, that's true for everyone else. They are affected by those things. 

But what I'm emphasizing is it's not just true about everyone else. It's true of me. And it's true of you too. Remember it.Be aware of it. Let's finish here with a few review questions. What is a nudge policy? And how are nudge policies different from most other government policies? What are some examples of nudge policies? And what are some strengths and weaknesses of nudge policies? In the next lecture, we're going to need to start the process of saying goodbye. We're getting close to the end of our journey through economics and the economy. 

The end is always a little sad, but it's also a little exciting for me, because we can start using all our ideas about trade-offs, our language and terminology of economics, our background and issues of economic policy. And we can talk about it like economists. 

I'm Timothy Taylor. Thank you for listening to Himalaya.