From Nudging to Budging: Behavioural economic-informed regulation of the supply side
Many politicians and policy makers in several countries have embraced the concept of ‘nudging’ in shaping policy and influencing citizens’ behaviour. Adam Oliver argues that we should refrain from limiting behavioural economic policy to nudge-style antiregulatory demand-side interventions. Behavioural economic-informed regulation of the supply side – or, in short, budge policy – is worthy of consideration.
Over the last decade, probably the biggest development in the field of behavioural economics has been the increased deliberation on the findings of this subdiscipline by public policy makers. These deliberations have, to date, been captured principally by the ‘nudge’ agenda, to the extent that most laypersons, and even some specialists, take as given that the sole use of behavioural economics in policy design must be to nudge citizens/consumers towards making decisions that would improve their wellbeing (with wellbeing being a function of the deliberative preferences of the citizens themselves).
According to the seminal writings on the topic by Richard Thaler and Cass Sunstein, a nudge policy must meet a number of requirements; namely, people should be at liberty to ignore a nudge if they so wish, and thus the policy ought not to impose regulations or bans; the policy should influence the automatic, reflexive reactions of individuals, and not rely on overt means of persuasion (i.e. it should use the way that people think, not aim to change the way that they think); it should avoid significant economic incentives; and it should be informed, in some way, by the findings of behavioural economics.
The potential to design nudges across the whole range of public policy seems almost infinite. One simple example can be found on the streets of Copenhagen, with painted green footsteps leading to litter bins, in an effort to encourage people to dispose responsibly of their trash. With this intervention, people remain free to litter if they so wish, there is no overt information campaign, there are no economic incentives, and it subtly reminds people, in the immediate moment (and thus relates to the behavioural economic finding – known as ‘present bias’ – that people place a very heavy weight on immediacy and very quickly and heavily discount the effects of their actions) that refraining from littering the streets is to everyone’s benefit. Thus, the green footsteps appear to be a classic nudge.
Many politicians and policy makers in several countries have embraced the concept of nudging due to an ideological dislike of further government-imposed regulations, due to the promise offered by the approach to improving people’s lives, and, perhaps most importantly given the straightened circumstances of public finances internationally, due to nudges being cheap to implement. A number of question marks can, however, be placed against the legitimacy of embracing too enthusiastically the nudge approach, most of which will not occupy our attention here. For instance, a nudge, by influencing people’s automatic, reflexive reactions would, it seems, normally necessarily have to be covert, and legitimising covert policy intervention by governments would appear to be worthy of concern. Moreover, the sustained effectiveness of most extant nudge interventions has not been properly evaluated. Also, some polices that have been proposed as ‘nudges’, such as mandated opting out of organ donation, confusingly appear to rely on regulatory activities that are disallowed by the original requirements of the approach.
Further discussion of the above noted contentions with the nudge approach are left to another place. The main question that I would like to raise here is, does a behavioural economics approach to public policy necessarily have to be anti-regulatory? In short, the contention is that policy makers can use knowledge of behavioural economics to recognise those circumstances when private (and indeed public) interests are using methods, that are essentially themselves informed by behavioural economic findings, that cause harm to others (for example, marketing techniques to get people to buy more alcohol and cigarettes than is good for them), and can thus use this knowledge to regulate appropriately against those activities. That is, rather than leaving the supply side alone and introducing interventions that affect the behaviour of the demand-side (a-la nudge), might it be more effective largely to leave the demand-side alone and introduce behavioural economic-informed regulation against any excessively exploitative goods, services and processes offered by the supply-side?
To take one example, also informed by present bias, let us consider the payday loan market (similar arguments can be made regarding subprime mortgages, but a focus on these would risk charges of closing the gate after the horse has long since disappeared over the horizon). Many people, and perhaps particularly those people towards whom payday loans are targeted, overweight the immediate pleasures afforded by spending and underweight the longer term pain of repayment. Payday loan companies know this and have historically tended to (quite rationally, given their profit maximising objectives) exploit the situation further by concealing, as far as is possible, interest rates that are often set at the thousands of percent. It is a market that, due to innate human economic irrationality, is invariably harmful to consumers. The UK Government has recently taken some steps towards regulating the payday loan market more appropriately (by, for example, requiring companies to make their interest rates more visible), but recognition of the strength of present bias may arm public authorities to regulate further, by mandating maximum interest rates, measures from which they have thus far shied away.
Richard Thaler and Cass Sunstein, among others, deserve much credit for getting the findings of behavioural economics onto the public policy making menu, and the discipline, vis-à-vis practical policy making considerations, would be an impoverished place without them. But the call here is to refrain from limiting behavioural economic policy to nudge-style antiregulatory demand-side interventions. Behavioural economic-informed regulation of the supply side – or, in short, budge policy – is, at the very least, worthy of consideration.
About the Author
Adam Oliver is a Reader in the Department of Social Policy at the London School of Economics and Editor of Cambridge Journal Health Economics, Policy and Law.