CII Thinkpiece Tackles 'Nudging' People to Make Good Decisions18 September 2009
The latest Thinkpiece - "Risky Business: 'Nudging' you to make the 'right' choices" - from the UK's Chartered Insurance Institute (CII), written in partnership with RSA Insurance Group and the think tank Reform, explores politicians' current love affair with "nudge theory" and spells out how the public could benefit from its use by the financial services sector.
The problem, as the CII says recent events have shown, is that "no matter what you tell them people still don't put enough money aside for a rainy day." One explanation is simply that many people don't save enough because they're "unable to accurately assess their own risks - the risk of unemployment, an accident or ill health, for example - and thus conclude that it's okay to do nothing because there's no reason to act."
These cases are caused either by "poor information or human psychology," which somehow stops people from doing the right thing. Behavioral research has found that when financial decisions are involved, people are "frequently inclined to reach incorrect conclusions because of limited or poor quality information." They might know (or suspect) they are not saving enough for their retirement, but then they fail to really understand how much should be saved to avert poverty in their old age. Even those wo do save struggle with thei will poweras "saving can always be done later," and the "temptation to spend is stronger in the here and now."
'Nudge theory' combats this apathy by advocating a default choice that helps individuals make a "better" decision about their risks
Andy Haste, Group CEO of RSA, who commissioned the Thinkpiece, explained: "Nudge should be about making it easier for people to make a better choice. Insurers have been mitigating risks for centuries and are already using nudge to help shape behavior. That said, there is a risk that this can go too far and erode the ability to exercise basic judgment."
David Thomson, the CII's director of policy and public affairs, added: "Nudge theory offers an approach that helps people make positive choices. The financial sector has long relied on the principles of nudge theory to tackle inertia and is using them more and more."
As examples he cited the fairly common occurrence in UK health insurance policies that offers a discount on gym membership, or auto coverage, which uses financial inducements to dissuade young drivers from taking their cars out after dark. "Using nudge theory in this way benefits both the insurer and the insured," Thomson continued. Persons opting to follow the incentives in the above examples "might expect to live longer or experience fewer accidents. The decision of the Government to invest money in a default equity child trust fund if parents do nothing is another example of a nudge towards 'better' decisions."
Thomson said the concept of "nudging people into the doing the right thing," rather than compelling them to do something is "an idea worth debating. The Government's recent financial services white paper shows how nudge theory can be applied to improve access to fair and simple financial products."
He observed, however, that "nudge as a public policy mechanism is controversial - it is not a replacement for the exercise of individual judgment - but behavioral economics like nudge do offer a way to tackle the impasse of issues like under-saving. It argues that "an ideal system would allow freedom over product design, while at the same time guiding people who would be best served by basic, cheap and accessible products in that direction and ensuring that wherever people do choose other options, they know about the basic alternatives."
Risky Business: "Nudging" you to make the "right" choices was written by Elizabeth Truss, deputy director of Reform and Nick Bosanquet a consultant director of Reform and professor of health policy at Imperial College London.
Elizabeth Truss, said, "Whilst an element of government protection is necessary; we have to be wary of too much nudging leading to a 'Sat Nav society', where people lose their ability to assess risks and insure themselves."