The Power and Pitfalls of Nudging: How Behavioural Economics Shapes Our Choices

 We like to think of ourselves as rational beings making decisions based on logic and careful reasoning. But behavioural economics argues otherwise, revealing how subtle cues and emotional responses shape our actions. This post explores how governments and firms use these behavioural insights, particularly framing-effect, fairness bias, and societal norms influencing behaviour. We will also see how positive externalities could be drawn from these behavioural phenomena, and we ask a timely question: can we harness these cognitive glitches for the public good?

How We're Being Nudged

Economists have long studied the ways our brains skip rational thinking in different situations. We call one of the most prominent influences the “framing-effect”. Have you ever noticed that you are more likely to buy yogurt labelled “90% fat-free” than “10% fat,” even though they’re the same product? Probably not, otherwise it wouldn’t be just pointed out to you; you see, it’s not the content that changes our decision, instead it’s how it’s presented (Tversky & Kahneman, 1981). These kinds of mental shortcomings can be helpful in daily life in the sense that we don’t go crazy by always acting like a machine, but simultaneously, we are left susceptible to manipulation.

Firms already use this peculiarity of our brains in exploitative ways for their benefit. Think of gym memberships difficult to cancel, streaming subscriptions with automatic renewals, or cleverly worded product labels that appeal to emotion over logic (Johnson et al., 2002). Such techniques rely on “predictable irrationality”, that is, we procrastinate, forget, or misjudge more so than we don’t in ways that benefit corporations more than ourselves (Ariely, 2009).

Even our deeper instincts, such as “fairness and generosity,” can be and are used against us. Let’s say you're asked to donate to a charity and shown the message: “90% of people in your area have already donated.” Enter social conformity nudging you to tag along, not necessarily because you've weighed the costs and benefits, but because it feels like the right thing to do, morally speaking (Cialdini et al., 2006). A trivial application is splitting a pizza evenly with friends; we often default to equitable behaviour even at personal cost, simply because it feels fair (Fehr & Schmidt, 1999). (Of course, we still eye the biggest slice in the process)

While these tendencies can have positive spillovers, in many cases, they’re exploited in ways that lock us into consumption patterns or make us feel guilty if we opt out; since they operate below our level of awareness, it can be difficult to tell when we’re choosing freely or when we’re being quietly manipulated (Loewenstein & Ubel, 2010).

GOOD NEWS! Sometimes, Manipulation Helps!

So, if we’re going to be tricked anyway, the question becomes: can we at least be tricked such that everybody benefits, not just corporations trying to squeeze out profits? Well, it turns out the answer is yes!. This is where governments, schools, or even public health institutions could and arguably should step in to save the day. The thing is, they shouldn’t stop the manipulation (because honestly, that’s probably not going anywhere); instead, redirecting it toward outcomes that make life better for people and society is a better alternative. For instance, consider pensions. Loads of people desire to save for retirement, but we procrastinate or think we’ll do it later, and then never do. Some governments now automatically enrol workers into pension schemes and make opting out possible, but just slightly effortful (Madrian & Shea, 2001). That tiny little push has led to a huge jump in savings rates, and most people end up glad they were “manipulated” into doing it.

Also, you can think about public health. Putting fruit at eye level in a school cafeteria (principally not trivially) or making stairs more visible and accessible than lifts isn’t “banning” junk food or “forcing” anyone to take the stairs, it’s just encouraging people toward healthier decisions (Wansink et al., 2013). Whilst these might sound minor, over time, those little tweaks can seriously reduce things like obesity and heart disease. The same goes for energy usage; people are more likely to cut back on electricity when their consumption compares to that of their neighbours (Allcott, 2011). It’s a similar thing to the charity example; difference? It’s not about guilt-tripping you into giving money, it’s about making you feel like the odd one out if you're being wasteful. And funnily enough, that works!

These are all instances of what economists like to call positive externalities. Basically, the idea is, when one person’s behaviour has a knock-on benefit for others (Hausman & Welch, 2010). Now, if more people save for retirement, there’s less strain on the welfare system. If more people adopt healthy habits, there’s less pressure on the NHS. If households waste less energy, that’s less damage to the environment, the list goes on… You see where we’re going with this? These things help “everybody,” not just the individual making the better choice. With that in mind, while it's a bit unsettling that we’re so easily influenced, it’s not all doom and gloom! When used transparently and with good intentions, behavioural insights can serve as a low-cost, low-effort way to improve social outcomes. If we're going to be manipulated one way or another, maybe it's not the end of the world if it’s done in a way that makes us all a little better off; wouldn’t you agree?

Final Thoughts: Nudge Me Gently

So, what do we take away from all this jazz? Behavioural economics shows us that we're not the perfectly rational robots that textbooks once imagined; rather, we're emotionally driven in our decisions and full of mental bugs. But that doesn’t mean we’re doomed to be lifelong victims of clever advertising and fine print. With the right kind of nudges -those aiming to help rather than exploit- we can steer our flaws in the direction of public interest, whether it’s saving more, eating better, or wasting less. A little psychological judo can go a long way.

Of course, the line between helpful nudge and sneaky shove can be thin, so transparency and good intentions matter. But if someone’s going to be pulling the strings, better it be someone trying to lower your cholesterol or shrink your electricity bill than someone trying to sell you a fifth streaming service.

BIBLIOGRAPHY:

1)      Allcott, H., 2011. Social norms and energy conservation. Journal of Public Economics, 95(9–10), pp.1082–1095.

2)      Ariely, D., 2009. Predictably Irrational: The Hidden Forces That Shape Our Decisions. HarperCollins.

3)      Cialdini, R.B., Demaine, L.J., Sagarin, B.J., Barrett, D.W., Rhoads, K. and Winter, P.L., 2006. Managing social norms for persuasive impact. Social Influence, 1(1), pp.3-15.

4)      Fehr, E. and Schmidt, K.M., 1999. A theory of fairness, competition, and cooperation. The Quarterly Journal of Economics, 114(3), pp.817-868.

5)      Hausman, D.M. and Welch, B., 2010. Debate: To nudge or not to nudge. Journal of Political Philosophy, 18(1), pp.123-136.

6)      Johnson, E.J., Bellman, S. and Lohse, G.L., 2002. Defaults, framing and privacy: Why opting in–opting out. Marketing Letters, 13(1), pp.5-15.

7)      Madrian, B.C. and Shea, D.F., 2001. The power of suggestion: Inertia in 401(k) participation and savings behavior. The Quarterly Journal of Economics, 116(4), pp.1149-1187.

8)      Tversky, A. and Kahneman, D., 1981. The framing of decisions and the psychology of choice. Science, 211(4481), pp.453-458.

Wansink, B., Hanks, A.S. and Just, D.R., 2013. From Coke to broccoli: Why did school food reform stall? Education Next, 13(1), pp.58–64.