My congratulations to Nobel prize winner Richard Thaler

US economist Richard Thaler, one of the founding fathers of behavioural economics, has won this year’s Nobel Prize for Economics. Professor Thaler, of Chicago Booth business school, co-wrote the global best seller “Nudge”, which looked at how people make choices. To mark the award, I reproduce below my review of his seminal book.


“Nudge” by Richard H Thaler & Cass R Sunstein (2008)

Like “Predictably Irrational” by Dan Ariely (which I read first), this is a work essentially about behavioural economics from an American academic stable – Thaler is a Professor of Behavioural Science and Sunstein is a Professor of Jurisprudence, both at the University of Chicago – but it is a duller read than Ariely’s book, although it covers broader ground in being concerned with non-economic as well as marketplace decisions.

Thaler & Sunstein present their writing as about choice architecture which they describe as “organizing the context in which people make decisions”. The choice architecture which they advocate is what they call “libertarian paternalism”: the libertarian element derives from their stance that people should be free to do what they want and to opt out of undesirable arrangements if they wish, while the paternalism bit lies in their claim that it is legitimate for choice architects to try to influence people’s behaviour “in a way that will make choosers better off as judged by themselves”. The means of achieving this is what they characterise as a ‘nudge’ which is defined as “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives”.

What sort of ‘nudges’ do Thaler & Sunstein suggest? Options include simplification of choices, careful presentation of choices, provision of relevant and timely information, early and useful feedback, application of peer pressure, use of priming, application of default options, and use of incentives. The authors review the use of such ‘nudges’ in a whole variety of contexts including selection of a mortgage, use of a credit card, selecting a prescription drug scheme or a social security plan, choosing a pension plan and paying into it over its life, deciding how much to invest and where to do so, designing an organ donation programme, and even the privatisation (as they term it) of marriage.

In terms of when and where ‘nudges’ can be most useful and appropriate, they argue that ‘nudges’ are necessary when decisions are difficult and rare (such as chosing a mortgage or a pension arrangement), for which they do not obtain prompt feedback (such as diets and long-term investments), and when they have trouble translating aspects of the situation into terms that can be easily understood (such as the implications for the environment of consumption choices).

The main messages of this valuable work are that people do not make wholly rational choices based on what classical economics and traditional economists predict or politicians and policymakers expect, decisions can and should be shaped or influenced by a wide variety of ‘nudges’, and – since ‘nudges’ cannot be avoided – we should use choice architecture that is based on the principle of libertarian paternalism. It is a practical and pragmatic stance which should appeal to both conservatives and liberals.


If you’re interested in how we take decisions, check out my essay on “How consumers and citizens make choices”.


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