Have you ever thought about how other people’s choices affect our own? For instance, you may have noticed that the price tags in supermarkets are often €2.99 rather than €3?
The truth is that the shops want to encourage you to spend more than you originally intended. Studies have shown how strategies such as 'odd' prices, decoding price, and freemium (where the service is provided free of charge, but additional features require payment) can affect behaviour, as consumers subconsciously perceive they are spending €2 rather than €3. However, to understand how this happens more clearly, we need to take a few steps back to the core of economics.
In economics, an important idiom is ceteris paribus, which is a Latin phrase for “all else being equal”. This dominant assumption is used to help isolate economic variables to show clearly their effects. However, this may not always be the case as we are humans, and so we are impulsive, short-sighted, and quite often irrational. This idea is more deeply explored in behavioural economics.
Behavioural economics, a subfield of economics, focuses on the psychological, social, and emotional factors we employ when making decisions. In the past, these components used to be ignored because it was believed that it would be harder to predict human behaviour in relation to economic laws. Nonetheless, this topic has recently started to be taken more seriously and many have started blending behavioural economics with psychology and other related fields. This is all done to understand when and why people behave differently from what the conventional economic models suggest.
Nudge theory applied to environmental care: reduced cigarette litter in London by 47% in 2017 according to Southend Council
An important concept in behavioural economics is Nudge Theory, simplistically described as gentle encouragements “to help people make better choices to lead a healthier, wealthier, and happier life”. It is based on the idea that people don’t always act rationally: they tend to act “irrationally - but in predictable ways”.
For example, to reduce the consumption of cigarettes, governments have imposed a regulation that every packet must contain a warning along with a graphic picture about negative health effects of smoking. The World Health Organisation shows the regulation’s efficiency as it states that former smokers found the pictures an important factor in their attempt to quit.
Nudge theory applied to promote healthy choices: Germany saw increased usage of stairs after installing a piano-sounding staircase (increased use by an average of 66%)
Nudge Theory was proposed by Richard Thaler, Noble Prize Winner, and Cass Sunstein, professor in Harvard Law School, in their book Nudge: Improving Decisions about Health, Wealth, and Happiness. Thaler and Sunstein clearly propose a different system of human thinking, which suggests we sustain two mindsets when making decisions. One is called the “Automatic System” (which they have associated with the figure of Homer Simpson) where the responses to decisions are rapid and instinctive. The other, the “Reflective System” (associated with Mr. Spock of Star Trek fame) expresses a self-conscious choice.
Unfortunately, Homer makes mistakes, such as eating one, two or three donuts. Fortunately, however, Homer’s mistakes are predictable, and he can be encouraged to make better choices. How? By giving him a nudge, which does not forbid or change the choice at all. The goal of such an action would be to ensure that healthy food would be consumed but junk food would not be banned. At the basis of all of this, there is the concept of libertarian paternalism by which it is reasonable and legitimate for private and public institutions to affect behaviour whilst continuing to respect freedom of choice.
With these factors taken in consideration, we can understand why ceteris paribus cannot be accurately applied if the psychological side of economics is also considered.
Nudge theory applied to promote public hygiene: poster by the World Health Organisation, published by the BBC
Can Nudge Theory also help us in this moment of the coronavirus epidemic? I believe so: by changing people’s behaviour, we can minimise the spread of the virus through correct, simple and clear information, thus strengthening public health and trust.