Is a nudge as good as a wink to a blind bat?

Anyone who knows the irreverent Monty Python sketch, to which the title alludes, will spot my obvious mistake. But perhaps that’s my point. Where either a nod or a wink is indeed of no consequence to the blind bat, a nudge could be far more effective.

Eric Idle and Terry Jones in 'Nudge Nudge', from Monty Python’s Flying Circus

A nudge - which according to Google is to prod (someone) gently with one's elbow in order to attract attention / a light touch or push - is clearly harder to overlook.

Nudge theory

Nudge theory, as one may imagine, works around exactly that principle – a prod or light push. It was first proposed in 'behavioral economics', but really gained traction in 2008 when Thaler and Sunstein published the book, 'Nudge: Improving Decisions About Health, Wealth, and Happiness’. It suggests that if we understand why people and/or institutions behave the way they do, we can nudge them into changing their behaviour if presented with better choices.

We know that to err is human, which unfortunately means we’re prone to making mistakes. Our lack of self-control, distractedness, irrational fears and impulses can often lead us to make decisions that are not in our best interests. Whether they result in debt, poor health or bad relationships depends on individual weakness. But, if we know what and how people think, choice environments can be designed around negative behaviours to improve personal outcomes.

The critical factor in the success of Nudge theory is that it advocates using indirect methods, rather than direct enforcement or instruction; to help people first understand the issues, and second choose what should produce the best outcome for them while maintaining freedom of choice.

Does it work?

There’s no doubting the evidence that nudging works. A well-known example is that of Aad Kieboom who came up with the idea of etching a fly on men’s urinals to subliminally encourage, shall we say, a more accurate aim. This simple nudge achieved 80% cleaner facilities. Where this becomes interesting for business and economists is the resulting cost savings for cleaning.

Unsurprisingly, the proven effectiveness of the practical application of the theory has heavily influenced public and private institutions in recent years. The UK government was the world’s first to establish a ‘nudge unit’, or behavioural insights team in 2010. An early trial with HMRC which told late tax payers that most people in their town had already paid their tax bill increased payment rates by 15%. If you’re unconvinced of the economic argument for applying the theory, that example alone could generate an extra £30m in taxes a year.

So, whether it’s placing healthier foods at eye level in school cafeterias or giving new mothers cash incentives to breastfeed their babies, exponentially soaring health and welfare costs might seem to justify a paternalistic approach to steer people towards a desired outcome. Especially if the outcome also improves lives and, crucially, maintains individual freedom of choice.

How does it apply to pensions?

Automatic enrolment is a classic example of a nudge – the goal to reduce the financial burden on the state, while improving people’s lives after work and allowing freedom to opt-out. The support campaigns surrounding the introduction of auto-enrolment (TV ads, media coverage etc) were designed to warm people up to the idea so that when it finally became law the majority of people chose to remain opted in, as they either think it’s the right choice for them, or can’t be bothered to opt-out.

Influencing members

Pensions aren’t sexy (harsh I know, but true) and most people find the topic dull, the language turgid and often technically hard to understand. So, it follows that the majority, including active scheme members, aren’t very engaged in retirement planning.

The Trustee, performs a supportive role in encouraging members to make the right choices for them. Members receive regular communications asking them to complete a nomination form, to review their fund allocations, to think about contributing more. But, is that gentle encouragement enough?

If we know that a reasonable proportion of 20-30 year olds are in a low-risk fund unlikely to keep up with inflation, or that a significant number of 60+ year olds have their money in high-risk equities, what should we do about that? While we may recognise that for those members their choice probably won’t produce their desired outcome, are we right to nudge them into changing their behaviour?

If we’re comfortable thinking that members don’t always know what’s right for them, and really do want to change their behaviour to make better decisions we need to understand how and why people make personal financial decisions. Then we can start to apply Nudge theory effectively to really help improve members’ pension outcomes.

Further reading:

Richard H Thaler and Cass R Sunstein, 2008: 'Nudge: Improving Decisions About Health, Wealth, and Happiness’.