Based on the concept invented by behavioural economists Richard Thaler and Cass Sunstein, nudges have become a world-renowned method of improving decision-making processes for people in a variety of scenarios. From governments to firms, nudges are being used everywhere – but what counts as a nudge, and how do they actually work?

Nudges are a concept invented by Richard Thaler and Cass Sunstein, who are both highly-respected economists with their work in behavioural economics is renowned by academic peers across the subject. Thaler himself was awarded the Nobel Prize in Economics in 2017 for his contributions to the field. According to their definition, an action can qualify as a nudge if it is ‘any part of the choice architecture that predictably alters people’s behaviour without forbidding any options or significantly changing their economic incentives’[1]. Firstly, the term choice architecture simply refers to how a system for decision making is organised – any time a person needs to make a choice, how the choices are arranged, in what format and where all come under this idea of choice architecture. Therefore, anyone in control of how these decision-making interfaces are designed, whether it be on a menu or a vital government document like a tax form, becomes a choice architect, and if they want to apply nudges, then they will have to follow this next concept of libertarian paternalism.

The paternalistic nature comes from influencing an individual’s decision to encourage them to choose what is best for them. At the same time, the libertarian aspect is shown by still keeping the same range of choices so as not to be restricting. Essentially, the person making a choice should be encouraged to take the better or more rational option for them (or for the choice architect if it is being applied immorally) without removing any of the options. In addition, nudges have to be cheap and easy to avoid – for example, taxes are not nudges as they are very costly to avoid, nor would banning junk food be a nudge as this restricts the options of the decision-maker. However, putting fruit at eye level when purchasing lunch can be considered a nudge, encouraging a healthier option. Still, it is easy and free to look and buy another option, nor have the other options been removed from the choice architecture.

Nudges can be applied to any situation, to the point where they are even implemented on national scales, such as with the UK government’s Behavioural Insights Team. We will look at some of the problems nudges aim to solve, how they can be used in the specific example of retirement savings schemes, and then observe other applications of nudges over the next few articles.

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[1] ‘Nudge: The Final Edition’, Page 8 – Richard H. Thaler and Cass R. Sunstein, 2021

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