Nudge for a better world Fredrik Carlsson University of Gothenburg

Three types of policy instruments 1. Economic incentives: Taxes, tradable emission permits, subsidies 2. Mandates and bans: Emission standards, technology standards, pure bans 3. Nudges: Steer people in particular directions, but allow them freedom of choice

What is a nudge and where does it come from?

The definition of a nudge Thaler and Sunstein: “... any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.”

Dual-process theory I System 1: Automatic, unconscious process: quick and intuitive System 2: Explicit, reflective process: slow and rational Mr Spock is System 2: consider decisions carefully, use logic, no emotions. Homer Simpson is System 1: does not think much before deciding, emotional, use his instinct.

Dual-process theory II To use system 2 requires higher effort / cognitive capacity and a willingness to elaborate on a decision When system 1 is used, decisions are more susceptible to cues, norms, emotions Enters the role of nudges!

You can find them at airports but it is serious research!

Policies and welfare

Behavioral insights team An increased interest from governments to use nudging. The UK Behavioral Insights team (“Nudge squad”) set up in 2010 is the most famous one. Explore ways to use nudges to improve government policy and services (and to save money!). - Add notice that most people pay their taxes on time to the letters to those that have to pay  increased payment rates Add pictures of the car in letters sent to non-payers of the vehicle excise duty  increased payment rates. Many other agencies in Europe and US have taken an interest in using nudging in policy.

Libertarian paternalism Thaler and Sunstein: Nudging should be used by governments to improve peoples lives. With nudging freedom of choice prevails (libertarian). But nudging still suggest what people should do (paternalism) Important to put this argument in a US context, where freedom of choice is often at the center of the political discussion around regulations.

How to nudge and how to test the effect of a nudge

Types of nudges Presentation of information Changes in physical environment Changes in default Social norms and salience Commitment / implementation plans

Experimental design to test the effect of a nudge Theory on human behaviour (economics, psychology, biology). Define what aspect of choice architecture you want to alter Outcome you want to measure? Make sure you can measure it! Randomly assign users into treatment and control group Observe outcome and compare outcome in both groups

Examples of nudges related to presentation of information

Information on lifetime energy costs (Kallbekken et al. 2013) Provide labels on lifetime energy costs and train the staff No effect on fridge freezers, for tumble driers 3-5% effect on average energy use. Strongest initially

Examples of nudges related to changes in the physical environment:

Changing plate sizes (Kallbekken and Saelen, 2013) Reducing plate size and giving social cues Reduced the amount of of food waste in hotel restaurants by around 20% ”Welcome back! Again! And again! Visit our buffet many times. Thats better than taking a lot once”

Examples of nudges related to defaults

Egebark and Ekström (2015) Default: simplex or duplex printing Daily paper consumption drops by 15 % with duplex printing as default

Löfgren et al. (2012) Default on CO2 compensation: No choice, opt-in, opt-out They find no effect! Argue that this has to do with experience. Experienced consumers are less susceptible to nudges.

Automatic enrolment in saving plans (Madrian and Shea, 2001) US setting: pension saving at the work place, have to decide to participate and what to invest in. In 1998 a large US firm changed from opt-in to automatic enrolment. Participation increased from 37 to 87 percent. Note, with automatic enrolment the default option matter a lot. Many people will stick with a default option (if it exists).

Examples of nudges related to social norms and salience

Social information and contributions I Providing information on what others are donating can affect contributions. Shang and Croson (2009): Contributions increase by around 12% is you get info on a high contribution by a previous person. Alpizar et al. (2008): Providing high reference contributions increases contributions to a national park, but rather small effect.

Social information and contributions I!: Alpizar et al. Four treatments: (i) No information about others contribution (ii) Solicitor says: ”A common donation is $2” (iii) Solicitor says: ”A common donation is $5” (iv) Solicitor says: ”A common donation is $10”

Conditional contribution Social information and contributions I!I: Alpizar et al. Nobs Share positive Conditional contribution Sample contribution No reference 250 47% 6.00 (10.49) 2.84 (7.79) $2 reference 249 61% 3.61 (3.99) 2.20 (3.58) $5 reference 50% 3.95 (2.84) 1.98 (2.82) $10 reference 49% 5.97 (6.06) 2.95 (5.20)

Social information and resource use Providing social information (own consumption and others consumption) can have both short- and long-run effects on water/energy use. Allcott (J Pub Econ, 2011): 2% reduction in electricity use Ferraro, Price (AER, 2013): 3-5% reduction in water use Jaime (2015): 6% reduction in water use

But be careful…. Cialdini et al (2006) Problem: visitors to Arizona’s Petrified Forest national park steal petrified wood (wood turned into stone). Normative and weak “The vast majority of past visitors have left the petrified wood in the park, preserving the natural state of the Petrified Forest“ + pic 3 visitors taking photo of petrified wood Normative and strong: “Many past visitors have removed the petrified wood from the park, changing the state of the Petrified Forest’ + pic 3 visitors taking wood Injunctive and weak: “Please leave petrified wood in the park” + pic visitors taking a photo of petrified wood. Injunctive and strong: ‘‘Please don’t remove the petrified wood from the park’’ + pic visitor stealing wood with a red-circle-and-bar over it.

Results.. Injunctive norms more efficient than descriptive. At least when there is a strong focus (in this case negative wording) Descriptive and strong focus might even backfire.

Examples of nudges related to commitment

Commitment and behavior The idea is that people like to be consistent. So if you can get them to commit (with nothing at stake) or make a plan for what they should do, it is more likely that they will follow the plan.

Milkman et al. (2011) A firm providing influenza vaccination to its employees. Control: mail listing location and times that were available. Treatment: same + respondent could write down (i) date or (ii) date and time they planned to be vaccinated. Results: - Control: 33.1% - Treatment i: + 1.5 percentage points - Treatment ii: + 4.2 percentage points

Save more tomorrow (Thaler and Benartzi, 2004) This focus on self-control problems. Basic premise: people actually want to save more than what they do….  Ask them to commit to save a share of future pay increases Four characteristics of the program: Asked about decisions well in advance of pay increases Increase savings only when pay increase is realised The share set aside for saving increases over time (up to a certain limit) Voluntary, so participatns can opt-out 78 percent participated (again in the setting of pension savings at a firm in the US). Average savings increased from 3.5 to 13.6 percent.