The judges for Nobel Memorial Prize in Economic Sciences have a special affinity for economists teaching at the University of Chicago. This year, another Nobel has gone to a Chicago Economist, Richard Thaler. But ‘nudge’, the theme that won Professor Thaler the award is extraordinarily important in the space of economic decision making, expanding the behavioural economics’ refutation of a core assumption of conventional economics that says individuals are rational economic actors.
Professor Thaler is considered among the founding fathers of modern behavioural economics, ranking along the likes of Daniel Kahneman (another Nobel laureate) and the late Amos Tversky. Operating at the intersection of economics and psychology, his work demonstrates the limitations of human rationality. Several of Professor Thaler’s behavioural experiments have demonstrated that humans are biased, over-confident, struggle with self-control, are deeply loss averse, and thus quite capable of making poor choices.
When ‘Nudge’, a book which Professor Thaler co-authored with Cass Sunstein, came out in 2008, it divided opinion among economists, public policy practitioners, and libertarians. The nudge theory talked about ways in which governments and corporates could subtly guide people to make better choices in everyday life issues from health to wealth.
Proponents liked the idea of ‘choice architecture’, whereby a simple design tweak – such as making participation in public-benefit programs a default option instead of an opt in – could lead to significant positive results. But opponents dismissed the theory as another ploy by big government to take over citizens’ choices. Some foresaw liberal western democracies becoming a nanny state if ‘nudge’ became pervasive enough.
Regardless, the idea caught on among some policymakers in the west. Professor Thaler went on to advise the American, British and Swedish governments on policy designs to help improve governance and public delivery outcomes. Even though this field of economics has gained traction among academia and the policymaking elite, the debate on benefits and pitfalls of a nudge approach still continues.
While the developed society is taking notice, when will the developing countries start experimenting with beneficial choice architecture in policy design? Talking of Pakistan, it is apparent that the country missed the boat on traditional economics, which is loaded with legacy in any case.
If they don’t want to be left behind again, Pakistani universities must start investing in human capital linked to behavioural economics, Neuro-economics and decision sciences, to better understand local society, state, and the markets.
The onus lies on the government as well. As highlighted in this column earlier, it might pay to hire non-economists, such as experts in psychology and decision sciences, in the public sector.
Planners have so far not been able to crack perennial Pakistani issues like low savings, poor tax collection, electricity theft, water wastages, etc. Given the scale of problems, a nudge or two won’t bite.