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Nudge theory, the Nobel prize-winning concept (1)

By Floro Mercene

Richard Thaler, an American economist, was awarded the Nobel Prize in Economic Sciences in 2017 for his contributions to behavioral economics. He was a key proponent of the idea that humans do not act entirely rationally. By applying insights from psychological research, he helped the world better understand people’s economic decision-making in particular.

Richard Thaler’s “nudge theory” is a subtle push that aims to alter a person’s behavior without really being noticed.

It is about making it easier for them to make a certain decision. People have likely been nudging behavior throughout all of history, but the formal study of the principles and reasons why we act the way we do is fairly recent. Thaler says “by knowing how people think, we can make it easier for them to choose what is best for them, their families and society.”

A good example can be found in UK pension policy in 2012. Many people actually wanted to save more money aside for retirement but they put off from doing so thinking it is complicated decisions they have to make. The company shifted the direction at 180 degree and just made it automatic enrolment, this meant that workers would be automatically be placed into a firm’s scheme and contributions would be deducted from their pay packet, unless they formally requested to be exempted.

The idea was that auto enrolment would make saving the default for employees, and thus make it easier for them to do what they really wanted to do and push up savings rate. Since auto enrolment was introduced by the Government in 2012, active membership of private sector pension schemes has jumped from 2.7 million to 7.7 million in 2016.

(To be continued)