It cannot be denied that there are alternatives to economic education when it comes to everyday forms of assistance. One of these is called nudge, and is advocated by US authors Richard Thaler (economist) and Cass Sunstein (lawyer).[1] The idea is that, educated or not, people are inclined to be lazy and make mistakes. Therefore, regulations should be designed to ensure that although people are still free to choose in everyday situations, they will be gently nudged in the right direction. For instance, a school cafeteria should position healthy products towards the front. However, people who search can also find the unhealthy products.

Another example is the US study mentioned in an earlier blog article, which looks at employees who fail to collect an employer contribution amounting to up to 6% of their income, which they could easily apply for. In the questionnaire, the attention of some of the respondents was drawn to the amounts they were missing out on by not taking part in the pension fund scheme. Yet, some months later, virtually no change in their behaviour could be established. The authors therefore concluded that economic knowledge has little impact. However, in doing so, they failed to recognise a key distinction. Information is not knowledge and is most certainly not a decision-making tool.

By contrast, the following hypothesis does sound plausible. If these people had been faced not with an active decision to collect the employer contribution, but rather with an active decision to renounce it, the problem would have been solved without limiting their freedom of decision. This, precisely, is the nudge approach. Furthermore, the employer should offer a well-diversified investment fund as an alternative to the standard retirement plan. Those who wish to, however, may choose riskier placements for their money or stash it under the mattress. So far, so good. Yet, the practice of nudging also raises questions:

• How many complex decision-making situations can be designed in a way that allows people to be guided sensibly?
• Who decides which results are sensible? Lawyers? Ethicists? Politicians? Economists? Many a proposal is likely to make people shudder – although not all of them will be shuddering for the same reason ...
• Do the people making the rules really represent the interests of those affected?
• Does a nudging world not ultimately reduce freedom and – if everyone allows themselves to be nudged – innovation?

Certainly there is nothing to be said against rules that lead to the best possible results for all those who follow the path of least resistance. Yet, in my view, the nudging strategy faces limitations in many economic situations. Thus, in these cases, the argument in favour of a certain level of basic ‘equipment’ – including economic skills – remains plausible. This is particularly the case in a democracy, where people are even involved in making many of the rules themselves.

On behalf of the iconomix team

Michael Manz

[1] Cf. Thaler, Richard H., and Cass R. Sunstein (2009), Nudge – Improving Decisions About Health, Wealth, and Happiness, Penguin Books, ISBN: 978-0143115267.