Behavioral Economics: Nudges, a concise look

Tom Urbaschek
Tom Urbaschek is currently studying for his Economics and Business economics bachelor’s degree (BSc). Writing for Asset | Economics' Blog Committee is one of his extra activities alongside his study. Subjects of his interest are the fields of behavioural economics, marketing and macroeconomics.

In modern day society the relatively new field of ‘Behavioral Economics’ is booming and its applications are ubiquitous. This field studies the non-rational psychological side of economic decision making. One of its main theorems is the so-called ‘Nudge theory’, which concerns indirectly influencing the behavior and decision making of groups or individuals, by the means of nudges. Are nudges useful to society and by whom can they be used? This article aims to elucidate the answers to these questions.

How it works

The Nudge theory is for the most part developed by the American economist Thaler and American legal scholar Sunstein in the book ‘Nudge: Improving Decisions About Health, Wealth, and Happiness’. Essentially, a nudge helps you make the ‘right’ choice, but leaves you the freedom to deviate. Instead of forbidding options or significantly changing economic incentives, it leads to the ‘right’ direction. What can be defined as ‘right’ can be put in general economic terms, by looking at informative decision making.
So, according to Thaler and Sunstein (2008) people have two systems of information processing. The first system is highly influenced by external environmental factors, and the second system is more well thought-out, more reflective and therefore being slower. When individuals are for example in a somewhat emotional state, they are more likely to be subjected to impulse buying. A classic example of using the second system in contrast to the first –impulsive- system, is making a grocery list before one goes to the supermarket and actually using it. In this case the individual creates his/her own nudge, disregarding the nudges in the form of special deals and product placement imposed by the supermarket. A nudge helps these individuals make the decision they’d want to make, but wouldn’t have without the nudge.


In reality however, one cannot clearly see or define what is right or wrong, leading to a divergence in practice, which is generally the case regarding economic concepts. Certain parties have different ideas of this concept and have different goals, leading to all sorts of nudges. The government makes use of regulation and, for instance, obscene pictures on packages of cigarettes to discourage consumers to buy these products, since these are seen as particularly harmful. The fact that these measures are not yet taken regarding alcoholic substances, may however imply a different motive. Business and firms could make use of it by framing products; by placing certain products in more prominent positions or by designing their website in a more consumer stimulating way. Nudges are also heavily used by social media in order to get users to disclose as much information as possible. In a broader sense, nudges can be identified as omnipresent.


Additionally  there are plenty of critiques, of which two are analyzed in this section. Nudges are often seen as manipulation of choice -and therefore autonomy- , which intuitively seems plausible. Thaler and Sunstein’s argument against this is that nudges should be transparent. Consequently, the problem arising is trying to define ‘transparency’. Perhaps specifying the idea of nudges in the context of information obscurity is necessary, and additionally in the grey area of real world applications, like social media. Another critique is that no matter how well intentioned government’s measures are, nudges often make use of cognitive fallacies, regarded as a weakness. In this context a couple of important examples of cognitive fallacies are ‘framing’ and the ‘status quo bias’. So, nudges could be seen as manipulative and unjust.

Thus, nudges are changes in the external environment of individuals, influencing the way they make decisions. Applications of the Nudge theory can nowadays be seen as omnipresent. However, the Nudge theory is subject to some criticism, which should be taken into account. Whether nudges are desirable and  acceptable is up for debate and therefore left up for society to decide.


Reference list and further reading

R.H. Thaler & C.R. Sunstein. (2008). Improving Decisions About Health, Wealth, and Happiness. Penguin Books.

D.M. Hausman & B. Welch. (2010). Debate: To Nudge or Not to Nudge. The Journal of Political Philosophy, 18(1), 123-136.

E.J. Cooper. (2017). To Nudge or Not to Nudge: Promoting Environmentally Beneficial Behaviors. Bard Center for Environmental Policy, 10.

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