Behavioural Economics (BE) has been hailed as the end all - be all when it comes to addressing the flaws of conventional economic assumptions and theories. Its foundation lies in describing heuristics and biases that guide and direct consumer decision making. The widespread acceptance of the transformative power of behavioural economics has led to its adoption in domestic policy making - modelled on the theory of ‘Nudge’ as proposed by Richard Thaler and Cass Sunstein. However, in this buzz, popular literature has failed to acknowledge and address how behavioural economics is developing as a theory of human ‘irrationality’ and the ethics of ‘nudging’ this ‘irrationality’ through policy making.
One of the foremost criticisms regarding the trajectory of development of BE is the abundance of behavioural models to describe almost every aspect of human tendency.
An interesting live example would be to explore the website run by ‘The Decision Labs’, a behavioural science research group. They host an exhaustive repository of all possible biases, heuristics and effects that humans exhibit. While it is commendable to create such a comprehensive resource, it represents how every aspect of human behaviour has now been analysed to fit these ‘models’, leaving almost no space for subjectivity. The moment human behaviour deviates from perfect assumptions, it is deemed to be ‘irrational’. As homo sapiens, it is possible to exhibit similar thought processes universally, but do these theories account for individual experiences influenced by diverse social-economic, political and psychological upbringing?
It exposes the existence of these theories as evidence of the idea of human ‘irrationality’. But does utilizing mental shortcuts and rule of thumb make humans irrational? Or does it make them smarter and faster in the conduct of recurring actions? Even Herbert Simon (1985) , the first proponent of the idea of Bounded Rationality quotes,
“Bounded rationality is not irrationality. On the contrary, I think there is plenty of evidence that people are generally quite rational; that is, they usually have reasons for what they do.”
Gerd Gigerenzer, one of the most prominent critics of the current form of behavioural economics begs to differ with his book, ‘Simple Heuristics that make us Smart’. He illustrates how human intuitions often lead to equally beneficial outcomes, as proposed by complex economic theories. A notable example is the ‘Gaze Heuristic’ used by sports persons to calculate how to catch a ball. They behave ‘as if’ they carry out complex differential equations to measure the motion and velocity of the ball, yet in reality, they simply fix their gaze on the ball and adjust their pace accordingly. Gigenrenzer (1999) proposes Fast and Frugal heuristics. These are simple, task-specific decision strategies that are part of a decision maker’s repertoire of cognitive strategies for solving judgment and decision tasks.
“Human rationality cannot be understood by the ideals of omniscience and optimization. In an uncertain world, there is no optimal solution known for most interesting and urgent problems.” (Gigerenzer, 1999)
Dan Ariely’s ‘Predictably Irrational’ is a monumental book in empirical research of behavioural economic theories. Yet, he chooses to term the fact that human beings are not ‘utility-maximising robots’ as ‘irrational behaviour’. Is that not ironic? To question the stringent assumptions of economics while, in the same breath, idolizing them as standards of rationality and logic. The debate in the development of decision making theories is divided between two extremes - of hyper-rationality on one side and animal irrationality on the other. But, neither captures the subjective, unique, and variable essence of human behaviour.
As we establish and question the notion of heuristics and intuitions as irrational or ‘second-best’ decision making, it becomes pertinent to question its real world application, in public policy, through Nudge Theory.
Nudging or libertarian paternalism refers to “choice architecture that alters people's behaviour in a predictable way without forbidding any options or significantly changing their economic incentives” (Thaler & Sunstein, 2008). In the current context, it is important to analyse the ethical concerns which arise from altering these choices and the extent to which this alteration can be acceptable, without infringing on one’s freedom.
The subtle modifications in ‘framing’ forms or changing the default rules can be interpreted as being manipulative to the free will and decision making of an individual. Nudges were conceptualised to assist in better decision making, but if these decisions exist due to external influence, is it really correcting the behaviour pattern it set out to fix in the first place? Saving for retirement is a smart social practice to incorporate, but policy changes modelled on nudge can only lead to short-term changes and not sustained long-term reform. They are counter-productive in the sense that ‘rational’ decisions are taken on the pretext of external influence and not individual understanding. “Nudges are a lot like the adage about giving a man a fish versus teaching him to fish: even if nudges lead to better choices, they don't help us to learn to make better choices in the future” (White 2013, p.102)
The second argument which questions the practicality and effectiveness of nudge as a policy measure originates from Friedrich Hayek, a 20th century economist known for his ideas on the price mechanism and epistemological concerns. He recognized the ‘knowledge problem’ - the idea that policy makers are human beings with limited knowledge and incomplete information. Hayek (1945) argues that the main problem is that policy makers tend to underestimate “the importance of the knowledge of the particular circumstances of time and place.” An extension of this idea these individuals are equally subject to the cognitive, psychological and behavioural biases as are the consumers.
Therefore, Thaler’s ideas of Nudge stand at an impasse against Hayekian ideas. We must review and acknowledge the restricted ability of planners to undertake measures that focus on the greater good and better decision-making of the population. Nudge relies on politicians and bureaucrats for implementation, who themselves are motivated by self-interest and incentives of power and money. The multi-layered caveats of implementing behavioural economics in policy need to be analyzed in order to prevent manipulations of the larger mass. Failure to address the flaws in Nudging makes citizens susceptible to interferences with individual freedom, which may amplify government and market failures as a negative consequence.
These criticisms acknowledge certain major ideas: heuristics and biases do not always make us irrational; intuitions can often be more effective given the contexts and pretexts of the decisions in question; merely applying nudge theory does not guarantee effective policy implementation since planners are equally subject to behavioural restrictions.
Today, behavioural economics is constantly evolving as a discipline. The pursuit of economics is to answer how human beings act as economic agents while acknowledging that these decisions are not taken in a vacuum. They are impacted by a wide gamut of social, political, psychological and environmental factors that cannot be controlled for. Like any field based on empirical and theoretical proofs, criticisms only provide opportunities to develop more robust ideas that model reality as closely as possible.
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Written by: Ananya Dhanuka (ananyadhanuka11@gmail.com)
Edited by: Divij Gera