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The Nudge Theory

People do not always choose what is best for them (Loewenstein, 1996; Thaler & Sunstein, 2003) in the long run (Thaler & Shefrin, 1981), therefore policymakers are interested in assisting people to improve their decisions and, consequently, social welfare (Lynch Jr & Zauberman, 2006). Individuals face limitations on their ability to process information due to mental capacity (Simon, 1955).

Our cognitive system can be split into two types, System 1 is fast and intuitive, and System 2 is slow and thoughtful. However, it can conduct us to some mistakes due to mental shortcuts when using system one instead of two in some circumstances, and vice-versa (Kahneman, 2011).

Each of them has its own advantages and disadvantages, System 1 takes information and reaches correct conclusions almost effortlessly by using intuition and rules of thumb (Kahneman & Frederick, 2002). We trust in System 2 to warn us when our intuition is wrong or judgment is more difficult due to emotional charge (Kahneman & Frederick, 2002). For the purpose of illustration, the intuitive and prompt answer (System 1) for the question retrieved from CRT: “A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost?” (Shane, 2005) is 10 cents. Although, when you employ System 2, I mean, you stop to think about the solution, you will probably arrive on the right conclusion, the ball costs 5 cents.

Following this, Nudge Theory can be applied in certain decision making processes to solve this issue. Nudges are imperceptibly modifications in the environment or how the problem is framed to deal with our cognitive systems in order to help people elect wiser choices (Thaler & Sunstein, 2008), without limiting or excluding the other options (Thaler & Sunstein, 2003), neither change the financial incentives linked to the alternatives in a significant way (Beshears & Kosowsky, 2020). Moreover, they often present a low cost to be implemented (Benartzi et al, 2018). In a nutshell, Nudge theory is an assortment of “choice architecture” strategies that gently guides people to better outcomes by psychology of decision making (Beshears & Kosowsky, 2020).

Nudges can be categorised in two main aspects: if they use automaticity or do not. Automaticity implies that a choice was already made to the individuals unless they explicitly pick another option (opt-out) (Beshears & Gino, 2015). For instance, U.S. companies used to offer retirement plans in which their employees needed to express their will to adhere (opt-in), they saw their retirement plans rate to rocket to 90% of adherence after modifying to an opt-out response (Thaler & Benartzi, 2004). Opposed to automaticity, the other category needs to trigger System 1 due to its biases and emotions, to engage System 2 or bypass both systems. First, there are plenty of ways to trigger System 1 like arousing emotions; harness biases, it means, policymakers and executives can use cognitive biases on their favour; simplify processes i.e. organizational and governmental processes often involve unnecessary steps that lower motivation or increase potential for cognitive biases, streamlining process can improve it (Beshears & Gino, 2015).

Nonetheless, engaging system 2 can be a great chance to enhance a considered decision. It can be reached out by several techniques such as use joint evaluations, rather than separate; create opportunities to reflection; use planning prompts; inspire broader thinking; increase accountability; encourage the consideration of disconfirming evidence and last, but not least, use reminders (Beshears & Gino, 2015).

Furthermore, another substitute to improve individuals’ decision making by avoiding cognitive biases or lack of motivation is bypass both systems. Set the default, it transforms the outcome when no option was actively selected; and automatic adjustments, this changes the outcome when an active selection was made. For instance, Microsoft automatically adds buffer time to projects proposed by their project owners, accordingly to the project complexity.

Social scientists have already proven that nudge significantly impacts individual outcomes (Benartzi et al, 2018) such as substantial increase on retirement saving plans (Thaler & Benartzi, 2004; Carrol et al, 2009; McKenzie & Liersch, 2011; ), raising in college enrolment rate for recent high school graduates (Bettinger et al, 2012), pushing up energy conservation (Allcott, 2011; Asensio & Delmas, 2015), enhancing influenza vaccination rates (Milkman et al, 2011; Chapman et al, 2010), reusing bathroom towels in hotel (Baca-Motes et al, 2013) and food consumption (Sparkman & Walton, 2017).


Leonardo Nogueira


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