Can you explain “behavioral economics” and “nudge approach” in a simple way?

An answer at Quora:

Simple way? People are weird. We can exploit that.

Slightly less simple way. Human psychology has some known twists in it. We’re really pretty good at working out the costs and benefits of something out to 15 to 20 years ahead. We’re not so good at 40 years out. This is known as “hyperbolic discounting”.

There’s good reason for it for us humans. Through the process of evolution very few adults then lived more than another 20 to 30 years. 40 years out is something for the grandchildren to worry about. But when we start to think about, say, climate change, this might not be the best manner of dealing with things.

Or, another point. Getting people to do something is more difficult than getting them to stop doing it. Well, OK, as long as we’re not talking about hitting the wall with our head, that’s pretty easy to stop people doing.

So, we’ve got much longer life spans now (see above) than our brains really developed for. So, we should probably be investing for our pensions more than just free action will lead to. The “nudge” insight into this is that if we just register everyone into a pension plan then fewer will fall out and be without a pension than if we do it the other way around – leave it up to people to register if they want to.

Human behaviour has some twists in it meaning that some of our actions might not be entirely and wholly rational – rational in that non-economic sense of being fully calculating to reach the best end state. We can exploit certain of these to nudge people into that behaviour that leads to that best end state.

We do have to be very, very, careful here though. Because all of it depends upon who gets to define what that best end state is. Human history is not replete with people who managed to identify that for other people.

It’s also true that the experimentation into finding those behavioural quirks is in its infancy. We’ve already had a Nobel awarded for – in part, in part – work on the ultimatum game. No, doesn’t matter what it is, it’s the next bit that does. The results of that game from rich world undergraduates, where the work was originally done, are different from what we get when we do the same thing with poor world peasants. So, err, which results should we be using to guide nudges and policy? For the results are not just different they’re entirely opposite.

Of course, we could just say that the clever people (Cass Sunstein for example) should be left to nudge us all the way they think we should be best living our lives. But, again, human history is not replete with people who managed to identify that for other people.

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Michael van der Riet
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Michael van der Riet

Just a teeny bit obtuse, no?

Esteban
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Esteban

I’d suggest a slight modification to this bit “Getting people to do something is more difficult than getting them to stop doing it.” Getting people to take action is the challenge. Just for example, here in the U.S. there was great consternation in the retirement industry that so many people would fail to sign up for a 401(k) plan. The problem is that they take the materials home to look over – got to decide on investment options, etc. and never get around to it. In response we now have automatic enrollment. People who don’t really want to be in… Read more »

Spike
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Spike

Sure, take part of your income and put it into a tax-favored account where the government can block your access to it? The government can change the terms with impunity, we WILL have another socialist President before you qualify to start withdrawing funds, and she knows you didn’t vote for her. Low enrollment rates might be about more than not getting around to paperwork.

Spike
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Spike

The “nudge” is a cutesy euphemism for disguising the threat of armed force. Opt-out rather than opt-in. But if you want to collect that 13% taken from you (and your employer) for decades, you must opt-in to Medicare, the “free” healthcare where it is a CRIME to pay for care WHEN and HOW you want it, some treatment isn’t covered, each Congress considers cutting reimbursements to providers, medical data are likewise moved to Washington “for safe keeping,” and your only redress is to write your Representative. The recurring solution to the resulting problems is to opt-in everyone (“For All”).

MrVeryAngry
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MrVeryAngry

The pension thing interests me greatly, what with me being in the business and all. It’s very hard, as you say, for someone to think ‘pension’. But the question isn’t ‘do you want a pension?’. It’s ‘do you want to be financially independent’?’. That’s the real ‘nudge’. Of course that’s NBG to politicians and bureaucrats. The last thing they want is a financially independent population. Their ‘nudge’ is to keep proving their usefulness with endless interventions. Hence they design policies that keep that gravy train going. So we have to keep politicians and bureaucrats out of the ‘nudge’ business. How… Read more »