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Need a nudge?

April 2018

How the government is using behavioural economics to drive corporate change.

In 2017, Richard Thaler won the Nobel Prize for economics for his work on the concept of nudge – non-financial behavioural interventions designed to influence our decisions to bring about better outcomes for ourselves.

The UK government has used this approach in a number of ways to intervene in the way that private companies do business – from pensions to apprenticeships.

Work in behavioural economics finds that we are prone to mental errors which sometimes lead us to do things that are not always optimal for ourselves or society. What Thaler and his colleague Cass Sunstein did in their book Nudge was to explain why we act the way we do, and how nudges aim to remedy our ‘mental errors’.

So has the UK government become what Thaler and Sunstein describe as libertarian paternalists?

What is a libertarian paternalist?
A libertarian paternalist is someone who believes that people should be nudged towards choices that are better for them, while retaining their freedom of choice. In their book Thaler and Sunstein give the example of a school canteen where the same food is presented in a different order to encourage children to eat more healthily. They are encouraged using unconscious nudges to choose healthier food but are still free to choose chicken and chips.

What is a nudge and when do we need one?

“Offer nudges that are most likely to help and least likely to inflict harm.”1

What is a nudge?

Automatic pensions enrolment, the apprenticeship levy and the modern slavery act. These are all more or less examples of the government providing nudges to companies or their employees.

Some of the tactics used in a nudge

  • Status quo bias – we have a tendency towards decision-making inertia; people prefer the status quo and are reluctant to deviate from it. Planning a default option that is most likely to help and least likely to inflict harm is the core tenet of nudge theory.
  • Social pressure – the idea that others are doing something can be enough to make you follow them. Experiments have shown the effect of social pressure to be surprisingly powerful.
  • Priming – the simple act of asking a question can encourage people to take an action2. Studies have shown simply asking people if they intend to vote tomorrow can increase their likelihood of voting by 25%.
  • Loss aversion – research has shown that losing something makes a person twice as miserable as gaining the same thing makes them happy3.

1Thaler & Sunstein (2009), p79
2Thaler & Sunstein (2009), p76
3Thaler & Sunstein (2009), p36

Pensions

Pensions auto enrolment is still ongoing but it has arguably been one of the most successful policies in terms of long-term benefits for individual citizens in a generation. By automatically enrolling employees into private pension schemes – and mandating that their employers match their contributions – there has been a huge change in the uptake of pensions saving.

Between 2012, when auto enrolment began, and 2016, private sector membership of occupational pension schemes in the UK grew from 2.7 million to 7.7 million people.

Auto-enrolment is a policy that recognises a person’s status quo bias – the tendency to retain the default setting, whether or not it’s the best for them and/or society. Crucially, there is an easy mechanism to opt-out, which means the freedom to choose not to save remains.

For businesses, of course, the cost of matching employee contributions alongside increases in the national living wage and the apprenticeship levy is not optional.

Apprenticeships

The apprenticeship levy itself could also be said to be an example of a nudge. The 0.5% levy on payroll in excess of £3m is held in a pot for up to two years to be reinvested in the business. If it’s not spent in this time the money is kept by the Treasury.

This is playing on loss aversion techniques to encourage investment in skills training.

Utilising the pressure of the press

The government have in recent years implemented two policies – the modern slavery act and more recently gender pay gap reporting – that have relied on journalistic policing to shine a spotlight on businesses approaches to their supply chains and remuneration.

While there are potential penalties for failing to report under these policies, there are no specific provisions to fine businesses that could be seen to have a large gender pay gap or minimal approaches to ensuring their supply chain is suitably ethical. But the reputational damage of not doing more – driven in part by the press and social media – aims to challenge the inertia that big businesses may have by nudging them to look at these areas again.

How might you be nudged next?

If the UK government is using behavioural economics to inform policymaking and taking a nudging approach to corporate businesses, then one can begin to speculate on what they may or may not legislate for in the future.

The ‘sugar tax’ is already in place, could the much-discussed minimum alcohol unit pricing be set to follow, potentially impacting both the retail and hospitality sectors?

For all businesses, might the introduction of shared parental leave be taken further, offering fathers the opportunity to take more paid leave than they are today?

The OECD recommended in their 2017 study into gender equality that fathers should be given their own non-transferable entitlements to paid leave, and that where they do so this “can help reduce gender discrimination in the work place … and with it the subsequent negative effects on female earnings and career advancements.”4

Men would be nudged towards taking leave, and in turn this could lead to a reduction in the gender pay gap.

4OECD (2017), The Pursuit of Gender Equality: An Uphill Battle, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264281318-en^ (opens in a new window)

What we can say though, is that the corporate world has been nudged – from the start of a career through apprenticeships to the end of them through pensions enrolment, the nudge is being utilised and is almost certainly here to stay.