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Nudge theory is a decision-making framework brought to prominence in 2008 by economist and Nobel Prize winner Richard Thaler and Cass Sunstein in their appropriately entitled book Nudge.

The primary function of this framework is to help people make better decisions that lead to desirable outcomes.

Often the decisions we make on an everyday basis involve a choice between two options, such as eating something healthy or something unhealthy, signing up to a pension scheme or not, becoming an organ donor or not, and so on.

Nudge theory suggests that when given two alternatives, people tend to choose the option that is easier and more convenient, rather than one that could lead to better outcomes. In this context, a ‘nudge’ is essentially a small push that guides people to make decisions that most benefit them in the long term.

In other words, to encourage people to make better decisions, behavioural scientists, economists, governments, organisations, policymakers, business leaders, or other parties can ‘gently direct them’ towards a certain decision, by ensuring that choices linked to better outcomes are also the easiest to make.

Since it was first formalised by Thaler and Sunstein, nudge theory has been applied in a vast variety of fields and settings. While it can undoubtedly promote highly positive change, in some cases it can be ineffective or even counterproductive. Here, I list the advantages and disadvantages of nudging people.

 

Advantages

1 Better outcomes for individuals

The first and perhaps most obvious advantage of nudging is that it can help make better choices that will make them healthier and richer.

For example, a Government could increase the number of people who sign up for pension schemes by introducing a system that forces people to opt out from these schemes after starting a new job, rather than opting in. This opt-out system could result in far more people receiving pensions after they retire, increasing their quality of life and financial security in the long term.

Similarly, banks and financial services could use nudging to encourage their customers to set up saving accounts and save money. For instance, by asking them to commit to transferring a certain percentage of their salary to their savings every month.

Nudging can also be used to promote healthier lifestyle choices, such as placing fruits, vegetables, and other healthy foods on shelves that are easier to reach, or offering gym memberships along with other related purchases.

2 Better outcomes for society

In addition to improving the choices of individuals, nudging can have positive outcomes for society. For instance, it could be used to encourage more people to become organ donors, reducing the wait for people who require organ donations and thus saving more lives.

The UK Government recently switched from an opt-in to an opt-out system for organ donations, which has already been adopted in Argentina, Brazil, Austria, Belgium, Spain, and other countries. Opt-out schemes have been found to increase organ donations from 20 per cent to 80 per cent on average.

 

3 Informing and empowering people

In some cases, nudging can also be a very effective way of informing people about the risks associated with specific choices or behaviours, and so improving their decision-making.

A good example of this was when nudging was used in the battle against growing antimicrobial resistance because of the abuse and over-prescription of antibiotics.

The UK's National Health Service (NHS) started testing the use of nudges to reduce the use antibiotics or other drugs that can have adverse long-term effects. More specifically, some General Practitioners (GPs) were sent letters simply informing them that they were prescribing antibiotic drugs at a higher rate than their peers. The implicit social pressure of highlighting that they were behaving differently to their peers resulted in a noticeable reduction in their over-prescribing.

After the COVID-19 vaccine was introduced, some governments also used nudging to increase vaccination rates. This included sending reminders or informing people about the benefits of the vaccine through the voice of healthcare workers or other expert speakers.

Some messages were targeted to ensure they came from people who were representative of an individuals’ own community, who were similar to them and who they could directly empathise with. These different elements of expertise and similarity in the messenger help to reassure and encourage people when making decisions.

Disadvantages

1 Getting it right is not always easy

While nudging can have overwhelmingly positive effects, using it effectively is far from an easy task. Before introducing a nudge, one should consider many different factors, including the extent to which it could have a positive impact.

For instance, the UK Government made it mandatory for people who work a certain number of hours to pay into a pension scheme. As this pension scheme was the minimum that one could possibly pay into, it would most likely not be enough to grant them financial stability after retirement. However, since they were paying for this minimum pension scheme, many people assumed the issue was dealt with for them so did not sign up for better ones, which means that the nudging intervention backfired.

An area in which nudging can be tricky to implement is to promote the protection of the environment and increase sustainable behaviours. For instance, some researchers found that by attaching a fake set of eyes above a light switch, they could encourage people to turn the light off more often while leaving the room.

While this is an interesting finding, these interventions might end up having very little impact on climate change and emissions overall, given that many people now use energy efficient lightbulbs. Even worse, such conspicuous interventions allow people to reassure themselves that they are 'doing their bit' and can distract from other, more impactful changes that they could make.

 

2 Unexpected outcomes

One of the reasons why nudging is difficult to implement is that its outcomes are not always easy to predict. Even in cases where the behavioural effects of an intervention seem obvious, nudging can backfire and even lead to entirely opposite outcomes.

For example, one project aimed at reducing the average household'senergy consumption by sending out letters informing people of how much they were using compared to others in their neighbourhood.

While these letters prompted some high consumers to limit their energy use, it also had unexpected effects, with people who learned that they consumed less energy than others in their area started increasing their usage.

In some of my own work with the Financial Conduct Authority, I examined how people respond to adverts for financial products. Such promotions are strictly regulated in the UK and must provide relevant warnings about potential risks of the investments and loans they are trying to sell. While this should result in better informed consumers who more carefully examine and avoid risks, we found that they can have the opposite effect.

Unexpectedly, we found that when these ads were shown on a price comparison website, the risk warnings led to consumers perceiving all products being more similar. They then did less shopping around and spent less time learning about the products. This led to people choosing investments or loans that were worse or less appropriate for them.

3 Inappropriate use

Ideally nudging should be used to encourage people to make wiser, healthier, and overall better choices that benefit them and others around them.

At times, however, nudging is implemented in ways that do not necessarily benefit individuals or consumers. For instance, when devising deceiving marketing strategies that encourage people to buy a specific product.

In some cases, interventions aimed at increasing people’s motivation at work and improving their performance can also backfire, particularly if they place too much emphasis on competition in a collaborative environment, such as bonus schemes or incentives for individual employees.

When trying to use nudging to improve productivity, it might be wiser to offer collaborative teamwork incentives that encourage employees to perform well as a group.

 

Nudging has become an effective and relatively inexpensive way for policymakers and organisations to persuade people to do the right thing.

But it is important to consider the possible disadvantages of nudging while devising new interventions as this could help to significantly mitigate against unexpected outcomes and undesirable effects.

 

Tim Mullett is an Associate Professor of Behavioural Science. He teaches Business Statistics on the MSc Business Analytics and Behavioural Economics on the Undergraduate programme. He is also the Course Director for the Warwick Executive Diploma in Behavioural Science.

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