The reminder letters sent to citizens of Britain who hadn’t paid the road tax would get a lowly 11% response. It was recommended that the messaging of the letter be changed and tested. Simpler language was used in the trial drafts. The letter's headline now read, “Pay your tax or lose your [make of car]”, in big font. Another letter was drafted, and this included the photograph of the recipient’s car. The former’s payments increased almost twice as compared with the initial approach. The latter approach (with the car’s photograph) tripled it.[i]
This was one of the tests (among many others) of application of “nudging” that the “Behaviours Insights Team” set up by David Cameron’s Cabinet successfully conducted. The advice to create this “Nudge Unit”, as it is popularly called, came from Mr. Richard Thaler. It was set up in 2010. In 2017, Mr. Thaler was awarded the Nobel Prize in Economics for his decades of work in behavioral economics – the concept of “nudge” being a subset and the pinnacle of his work.
Richard Thaler advised the UK government to form a Behavioural Insights Team (BIT). Riding on its success in reshaping public policy, BIT has spun out as a limited company and is also working in the USA, Singapore and Australia.
Challenging the conventional
Thaler’s critique of the standard economic theory with behavioral economics
Richard Thaler is one of the few behavioral economists to become a Nobel laureate. His work in behavioral economics challenged the classical microeconomic theory which assumes people to take 100 percent rational economic decisions in every situation – decisions which are of economic benefit to them. And rationality in economics is defined differently than how it is deduced in the English language. Rationality, in economics, assumes that people have perfect foresight and are selfish in a material sense. According to Thaler, classical theory is often highly simplistic and reductive. Standard economic theory’s projection of a person is like of the best economist – as if (s)he makes the perfect forecasts (or is rational). The new laureate has labeled such perfect forecasters as “homo economicus” or “Econs”[ii]. But homo sapiens or humans aren’t the perfect economists, Thaler has argued in his years of research. They make certain choices based on their cognitive biases, and those choices may be contrary to their best interests. Thaler gives an example of people who eat too much and save too little. Even if they do not have an intention to return to the restaurant again, they still leave a tip. He says in an interview to Deloitte University Press, “I’ve been pleading with economists that we should be studying Humans, not these mythical Econ creatures.”
“I’ve been pleading with economists that we should be studying Humans, not these mythical Econ creatures” – Richard Thaler
Thaler also came up with the idea of mental accounting. His research concluded that people collect their savings in different mental categories (such as daily expenses, vacation money, and retirement money). Thaler said that people fail to see money as a fungible item.[iii] In a situation where an individual needs money for a consumer product (say a car) – an Econ would liquidate the long-term saving for another mental category (say saving for vacation) and use it for short-term needs (of buying a car), and slowly coagulate the long-term savings (put money back in the savings for the vacation) as the short term needs are met. Humans, often in such situations, refuse to touch the long-term savings and instead take out an expensive consumer loan – something that is not an economically rational decision.
Pioneering the nudge
Thaler’s conceptualization of the Nudge that changed the face of public policy
Richard Thaler co-authored a book with Cass Sunstein in 2008, called “Nudge: Improving Decisions about Health, Wealth, and Happiness”. The book introduced the idea of nudging i.e. to steer people towards better decisions by presenting choices in a different way. The authors argue that humans make predictable mistakes owing to the influence of their social interactions, and hence there are always question marks on the rationality of the economic judgments and decisions that humans make. The idea of a “nudge” is to introduce tiny interventions (like changing the message text, personalizing an email, including graphics in simple written communication) in the consumer’s environment and nudge them into making better decisions. For instance, the default options for corporate pension plans have been changed in Britain.
Employees are automatically enrolled unless they opt out. This has increased the retirement saving in the nation.[iv] Nudging has been instrumental in reshaping public policy in different parts of the world, with success stories in retirement savings, taxations, pension plans, aiding and abetting employment, organ donation and charitable giving, among others[v]. Thaler’s work in behavioral works has not only stayed in research papers and academic journals, but it has also been adopted on a mass scale and has in fact been instrumental in reshaping public policy of several countries. Thaler has pioneered both the theoretical findings in behavioral economics and the practical implementation of his concepts.
The idea of a “nudge” is to introduce tiny interventions (like changing the message text, personalising an email, including graphics in simple written communication) in the consumer’s environment and nudge them into making better decisions
Nudging the HR function
Thaler’s “nudge” can be potentially applied to different facets of the HR function for good
Richard Thaler only worked in the field of behavioral economics, not in the HR function or organizational psychology. But what if the talent pool in the applicant tracking systems could be nudged towards new vacancies in the company because of the creative placement of the opening on the careers page and interesting usage of words; or the people left out from the periodic team recognitions could receive a personalised emails which boost their morale and makes them happy for their peers and drives them to perform even better for the business; or the imagery used in training high potentials change, and nudge them towards success and make them accomplished leaders (and not loathed managers). The possibilities of Thaler’s nudge in HR are immense. And subtle variations in messaging done in accordance with the principles of behavioral economics, can nudge HR to create a lot of value to the employees and the business.
The tone of reminder letters for pending vehicle taxes has changed in the UK. The Nudge Unit has spun out as a quasi-private company and now advises foreign governments like the US, Australia and Singapore, and organizations like the UN and the World Bank. It all started with Thaler’s research in behavioral economics, the landmark in public policy came from Thaler’s advice to form the Behavioural Insights Team. Will Nobel to Thaler be HR’s initiation?
[i] The Guardian - https://www.theguardian.com/politics/2013/may/02/nudge-unit-has-it-worked
[ii] Deloitte - https://dupress.deloitte.com/dup-us-en/deloitte-review/issue-18/behavioral-economics-richard-thaler-interview.html?lipi=urn%253Ali%253Apage%253Ad_flagship3_pulse_read%253BBUPsaZNORZmur7Jk6XcuGw%253D%253D
[iii] The Wire - https://thewire.in/185884/richard-thaler-wins-nobel-prize-for-economics/
[iv] The Economist - http://www.economist.com/node/21551032#footnote1
[v] The Guardian - https://www.theguardian.com/public-leaders-network/2015/jul/23/rise-nudge-unit-politicians-human-behaviour
Research Log: https://www.one-tab.com/page/BWZu-DPLTxaUa_OWV0pREg