Behavioral economics from nuts to ‘nudges’

Richard Thaler at ChicagoBoothReview: “…Behavioral economics has come a long way from my initial set of stories. Behavioral economists of the current generation are using all the modern tools of economics, from theory to big data to structural models to neuroscience, and they are applying those tools to most of the domains in which economists practice their craft. This is crucial to making descriptive economics more accurate. As the last section of this lecture highlighted, they are also influencing public-policy makers around the world, with those in the private sector not far behind. Sunstein and I did not invent nudging—we just gave it a word. People have been nudging as long as they have been trying to influence other people.

And much as we might wish it to be so, not all nudging is nudging for good. The same passive behavior we saw among Swedish savers applies to nearly everyone agreeing to software terms, or mortgage documents, or car payments, or employment contracts. We click “agree” without reading, and can find ourselves locked into a long-term contract that can only be terminated with considerable time and aggravation, or worse. Some firms are actively making use of behaviorally informed strategies to profit from the lack of scrutiny most shoppers apply. I call this kind of exploitive behavior “sludge.” It is the exact opposite of nudging for good. But whether the use of sludge is a long-term profit-maximizing strategy remains to be seen. Creating the reputation as a sludge-free supplier of goods and services may be a winning long-term strategy, just like delivering free bottles of water to victims of a hurricane.

Although not every application of behavioral economics will make the world a better place, I believe that giving economics a more human dimension and creating theories that apply to humans, not just econs, will make our discipline stronger, more useful, and undoubtedly more accurate….(More)”.