Dr Rajiv Prabhakar
So, if government wants people to save to avoid a looming pension crisis, then it should automatically enrol them into a pension scheme. This is a feature of the forthcoming personal pension accounts, and nudging is being explored in places such as Barnet for council services.
Nudging is undeniably attractive for policy-makers searching for how to make smarter use of public spending. But nudging is not a quick fix and should only be seen as part of a broader approach to tackle policy challenges.
The US academics Richard Thaler and Cass Sunstein popularised behavioural economics in their book Nudge, and Thaler is now an adviser to the Conservative party.
Behavioural economics
Behavioural economics suggests that people are not simply the rational choosers of standard economics. Instead, people are thought to be shaped more by habit, inertia, and social norms. This view questions some existing approaches to policy. If people are inert and driven by habit then we might expect that formal education and information to have a limited effect on behaviour.
More emphasis should be placed on the way that institutions and policy guide the choices that we make: the so-called 'choice architecture'.
But how valid is nudge theory? I have been reviewing this as part of an Economic and Social Research Council project looking at 'asset-based welfare', that is the Child Trust Fund and Saving Gateway.
Behavioural economics assumes that government knows best. But often this may not be the case. For good reason, government might find it difficult to unpick the different parts of a policy problem, leaving aside any moral qualms we might have about pushing citizens in specific directions. Furthermore, government might lack proper evidence to guide its decisions. Government might only know the right nudges in a limited number of areas where there is plenty of evidence.
Going beyond nudging
Even if policy-makers can decide on the right nudges, citizens still have to make choices. Thus nudging still means it is important to consider the help and support people may need to make choices. This means going beyond nudging. If people are defaulted into a particular savings scheme, then there is still a need to consider what types of support should be made available for those who decide they want to contract out.
However, nudging is not a catch-all solution. It is one of a series of approaches that may be useful for policy-makers. The challenge then is to see how nudges can combine with more conventional policy approaches.
Take efforts to boost saving to provide security in retirement. A behavioural approach might highlight the role of institutions such as automatic enrolment as a way of encouraging people to save. But, this should exist alongside the continuing importance of public spending on the state pension as well as financial education.
Relying on nudges alone is not enough. As with most shiny new toys, the gloss comes off once you take it out of the packet and start playing with it.
Dr Rajiv Prabhakar, a Lecturer at the Open University and fellow at the LSE
