Behavioral Economics in Policy

Traditional economics long assumed that people make decisions in a coolly rational way, carefully weighing the costs and benefits of each option in order to choose what is best for them. Anyone who looks honestly at human behavior, however, knows that this picture is not quite true. We put off saving for the future, eat food we know perfectly well is unhealthy, and are strongly influenced by the way in which choices happen to be presented to us. The field of behavioral economics studies these very human tendencies in detail and asks what they mean for the design of public policy.

One of the field's central insights is that small details, which standard theory would dismiss as completely irrelevant, can have surprisingly large effects on behavior. A famous example concerns saving for retirement. When employees must actively sign up for a savings plan themselves, many of them never quite get around to it, even when it is clearly in their own interest. But when they are automatically enrolled and must take action only if they wish to opt out, participation rises dramatically. The amount of money and the available choices are exactly the same in both cases; only the default option has changed.

Policymakers have eagerly seized on findings like these to design what are often called "nudges"—gentle changes to the way choices are arranged that guide people toward better decisions without forbidding anything or removing any options. Placing healthy food at eye level in a cafeteria, sending text reminders about appointments, and simplifying complicated official forms are all examples. Supporters praise nudges as cheap, flexible, and respectful of freedom, since people always remain free to choose as they wish. Many governments around the world have set up special teams to apply such ideas to everything from health to taxes.

Critics, however, are uneasy about the whole approach. They worry that nudges can quietly shade into manipulation, steering people without their full awareness or consent. Who decides, they ask, what counts as a "better" decision, and what is to stop the very same techniques from being used against the public interest instead of for it? Defenders reply that choices must be presented in some way regardless, so it is surely more sensible to arrange them helpfully than carelessly. The debate continues, but few people now doubt that understanding how human beings really think, rather than how economists once assumed they think, genuinely matters for good policy.