Economists have come to understand that we don't always act in our own interests. Now politicians are starting to take noteby Tom Nuttall / July 26, 2008 / Leave a comment
Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H Thaler & Cass R Sunstein (Yale, £17.99)
To the contemporary list of endangered species one should add Homo economicus, or “economic man,” who for 200 years dazzled economics students with his feats of unbounded rationality and supreme self-control. Homo economicus is an abstraction used by economists in the classical tradition to predict human economic behaviour. He is a “rational maximiser,” in that in any given set of conditions, he will successfully pursue his own arbitrary goals to the furthest degree possible, unfettered by indecision, memory loss or lack of willpower.
The first threats to Homo economicus appeared around 20 years ago, when two psychologists, Amos Tversky and Daniel Kahneman, showed that under conditions of risk and uncertainty, people’s decision-making exhibited a number of systematic biases and irrationalities that were at odds with the predictions of classical economics. Since then, Kahneman and others have continued to churn out work (Tversky died in 1996) drawing on the findings of experimental psychology to suggest that the predictions of classical economics are at odds with real-world economic behaviour. In 2002, he was awarded the Nobel prize for economics—the first and as yet only non-economist to have been so honoured—for “having integrated insights from psychological research into economic science.”
Kahneman claims to have learned his economics at the knee of his regular collaborator, Richard Thaler, now a professor at the University of Chicago. Thaler, along with his law professor colleague Cass Sunstein, is the author of Nudge—a manifesto for the burgeoning field the authors call “libertarian paternalism.” It sounds oxymoronic, as the authors acknowledge, but the thinking behind it is coherent enough. It leaves intact the basic tenet of libertarianism—that individuals’ choices should not be restricted by outside authority—but uses the insights of behavioural economics to “nudge” people towards making “better” decisions. And, crucially, this means “better” not merely in the eyes of the nudger (often the government) but in the eyes of the chooser, once they are able to consider their options coolly and calmly—in the spirit, in other words, of Homo economicus.
Consider pensions. As corporations and governments become less generous with the pension plans they offer employees, concerns are growing over whether today’s generation of workers are saving enough for retirement. Many workers fail to enrol in pension plans or devote only a small slice of their income to them,…