Nudge Theory

Throughout the last decade, nudging has been hard to miss in the worlds of behavioral economics and public policy. This new “hot topic” is intended to help individuals make better choices that they want to make in a predictable way while being sure to preserve their freedom of choice. Nudges (or good ones at least) are usually inexpensive or free to implement and take very little time, making them very enticing for organizational and public policy leaders looking to promote effective change! These could include something like putting healthier food choices at eye level, making public trash bins brightly colored so they’re easier to spot, or changing the default energy-use settings on appliances. 

Nudges usually appeal to our System 1 brain, the mode of thinking that provides us with automatic, unconscious, and emotional responses to stimuli. System 1 often leads us to outcomes that may not be favorable to ourselves, others, or even our planet in the long run—such as impulse shopping, alcohol addiction, or choosing the first thing on the menu, even when it’s not a particularly healthy or ethical choice. Understanding the power we have to efficiently and effectively ‘nudge’ our System 1 brains, which make thousands of micro-decisions for us on a daily basis, into healthier, safer, and more sustainable choices has been a booming field of research in recent years. 

Some examples of common nudges include: 

• Default Options: Automatically enrolling individuals in beneficial programs (e.g., retirement plans) with the option to opt out, increasing participation rates.
• Social Norms: Informing people about the behaviors of others, such as telling them that most of their peers recycle, to encourage similar behavior.
• Simplification: Reducing the complexity of forms or processes to make it easier for people to take action, such as simplifying tax filing processes.
• Framing: Presenting information in a way that highlights the positive aspects, such as stating “90% fat-free” instead of “10% fat.”
• Reminders: Sending timely prompts or alerts to encourage people to take action, like a text message reminding someone to exercise.
• Feedback: Providing individuals with immediate feedback on their actions, such as showing energy usage compared to neighbors to encourage conservation.
• Anchoring: Using initial pieces of information as a reference point to influence decisions, like suggesting a starting amount for donations.
• Commitment Devices: Encouraging people to make commitments to future actions, such as pledging to quit smoking by a certain date.
• Salience: Making key information stand out to capture attention, such as highlighting deadlines or important details in bold or bright colors.
• Priming: Exposing people to certain stimuli to influence their subsequent behavior, like playing slow music in a store to encourage more browsing and buying.

System 1 and System 2 Thinking:  The two distinct modes of cognitive processing introduced by Daniel Kahneman in his book Thinking, Fast and Slow. System 1 is fast, automatic, and intuitive, operating with little to no effort. This mode of thinking allows us to make quick decisions and judgments based on patterns and experiences. In contrast, System 2 is slow, deliberate, and conscious, requiring intentional effort. This type of thinking is used for complex problem-solving and analytical tasks where more thought and consideration are necessary.

Default Option: An option that is selected automatically unless an individual chooses otherwise.

Framing Effect: The cognitive bias that suggests our decisions are influenced by the way information is presented. Equivalent information can be more or less attractive depending on what features are highlighted. 

Behavioral Economics: A method of economic analysis that applies psychological insights to human behavior to explain economic decision-making.

Heuristics: Shortcuts that humans take when making decisions, often necessary for making quick choices, but can lead to suboptimal outcomes.

Bounded rationality: A decision-making process where we attempt to satisfice instead of optimize. Due to constraints in time, knowledge, and mental capacity, we make ‘good enough’ decisions instead of the ‘best’ decisions.

Loss Aversion: The cognitive bias that describes why the pain of losing is psychologically twice as powerful as the pleasure of gaining, leading us to prefer avoiding losses to acquiring equivalent gains.

Choice architecture:: The deliberate crafting of decision-making environments. By subtly shaping how options are presented, choice architecture influences individual decision-making, often without explicit awareness.

Homo Economicus:  Latin for “economic man,” this term describes a hypothetical figure who represents the concept of unconditional rationality. This caricature is what traditional economic models were based on—although today, we recognize that no actual person acts in a vacuum without cultural, emotional, physical, or mental influences. 

Libertarian paternalism: A concept in behavioral economics and public policy that aims to influence individuals' choices in a way that will make them better off, as judged by themselves, while still preserving their freedom to choose.

The concept of nudging is rooted in behavioral economics, a field developed in the mid-20th century that combines insights from psychology and economics to understand how individuals make decisions. During this time, Herbert Simon introduced the concept of bounded rationality, suggesting that humans make decisions within the constraints of limited information and cognitive capacity. He was a key figure in shaping this new field of economics, which questioned the idea of ‘homo economicus,’ the perfectly ‘rational,’ self-interested, and ultimately unrealistic human on whom economic models were based at that time. Instead, Simon suggested that humans make decisions within the context of a constantly changing and complex internal and external environment.¹

In the 1970s, Daniel Kahneman and Amos Tversky contributed to behavioral economics by conducting research on cognitive biases and heuristics, demonstrating systematic deviations from ‘rationality’ in human judgment and decision-making. This laid the groundwork for understanding how people often rely on mental shortcuts that can lead to suboptimal decisions—or at least, what economists may define as suboptimal. 

The formal concept of nudging was popularized by Richard H. Thaler and Cass R. Sunstein in their 2008 book, Nudge: Improving Decisions About Health, Wealth, and Happiness. In it, they defined a nudge as “any aspect of choice architecture that alters people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” Essentially, nudges make it easier for people to make better decisions without restricting their freedom of choice. 

Thaler and Sunstein focused their work on choice architecture and emphasized the importance of default options, framing, and many of the other ways in which the presentation of information can change the way it’s perceived. They looked for real-world applications and studied things like setting default options for retirement savings plans, organ donation registration, and the arrangement of food in cafeterias to promote healthier choices.¹ Their initial results were incredibly promising, but more recent research has called into question the validity and efficacy of some of these findings. 

Due to the apparent success of the preliminary studies on these types of nudges, nudging has been widely adopted in public policy and health initiatives. Worldwide, this type of intervention implementation has gained traction, with many governments forming Behavioral Insights Teams (or "nudge units") in an attempt to improve public services. However, as nudging has expanded, researchers continue to explore the nuances of nudging, including its long-term effectiveness and the interplay between different types of nudges. As we’ll discuss later, critics have argued that nudging can be paternalistic and may undermine individual autonomy by subtly steering people toward certain choices.⁴

In response to some of the concerns about transparency and the ethics of choice manipulation, Thaler and Sunstein have advocated for "libertarian paternalism," a philosophy that aims to steer individuals towards beneficial behaviors while preserving their freedom to choose. This stance, in turn, has been critiqued, asking whether introducing changes that don’t directly benefit the individual can be justified and highlighting the adverse consequences of poorly targeted libertarian paternalist interventions.⁵

People

Herbert Simon: American economist and cognitive psychologist known for his concept of bounded rationality, which explains how cognitive limitations affect decision-making. His work highlights why people might need guidance to make better choices.

Daniel Kahneman: Israeli-American psychologist and Nobel laureate known for his work on the psychology of decision-making, particularly his development of prospect theory. His research on cognitive biases and heuristics explains how people often make irrational choices and how small interventions can improve decision-making.

Amos Tversky: Israeli cognitive psychologist best known for his work on decision-making and judgment under uncertainty, co-developing prospect theory with Daniel Kahneman. His research on cognitive biases and heuristics laid the groundwork for understanding how people make irrational choices.

Richard Thaler: American economist and Nobel laureate known for his contributions to behavioral economics, particularly through his work on nudge theory. He co-authored the book Nudge, which explores how small interventions can help people make better decisions by addressing cognitive biases, and his work has shaped behavioral science in policy and economics.

Cass Sunstein: American legal scholar and co-author of the book Nudge alongside Richard Thaler. He’s known for his work on behavioral economics and public policy, particularly how governments and organizations can use nudges to improve decision-making and promote better outcomes without restricting individual freedom.

Nudges have been successfully applied across various domains to improve decision-making and promote welfare—leading to real results. 

Healthcare

In the realm of healthcare, nudges include strategies to promote vaccination, encourage healthy eating, and increase physical activity. Take vaccination, an example where we’re now keenly aware of its impact. Pre-COVID vaccination studies have found that including nudges like setting defaults or reminders to get shots may boost vaccination rates by up to 5%.⁶ Although this additional ‘boost’ may seem small, it could mean the difference in thousands or even millions of additional vaccinations, which in turn could mean lives being saved, as we’ve seen with HPV vaccination in Kenya. 

A notable case study of effective nudging is the implementation of opt-out systems for organ donation. Countries like Spain and Austria, which have adopted opt-out policies, have seen dramatically higher organ donation rates compared to opt-in systems. This nudge leverages the default effect, where people tend to stick with the preset option. By making organ donation the default, these countries have increased participation rates without coercing individuals to donate, thereby saving more lives.⁷

Finance

Financial behaviors have also been influenced by nudges. As discussed above, many companies use default nudges like automatic enrollment in pension plans, which significantly increases savings rates. These default options help individuals overcome inertia and procrastination in making beneficial financial decisions. Although the employees have exactly the same options as before (they can still choose how much they do or don’t want to contribute), having an established norm made salient and reducing the number of clicks they need to make to set up their accounts can encourage them to save more.

Beyond Default Nudges

There are more nudges than just changing the default options, though—here are some eco-friendly examples showcasing just that. Let’s say you’re a university student aiming to improve your campus’ environmental impact. Besides changing default options for people on campus, another common form of nudging involves removing or adding frictions. In the case of improving campus sustainability, this might look like installing timers on the showers and sinks to prevent them from running unattended (adding friction) or installing bike racks and storage lockers around campus to make things easier for green commuters (removing friction). 

Another type of nudge might involve invoking social norms. Signs on showers or elevators in a dorm could highlight others’ consumption habits to help encourage users to be wary of their own. Studies have shown that the more relatable statistics are, the more effective they are in promoting change. In this case, identifying the behavior patterns of students at that specific university would not only be helpful but more effective by emphasizing this is what your peers from this exact dorm room are doing. 

Limited Application 

Any type of nudge is limited in its applicability. Let’s take healthy eating nudges as an example (more on this later!). Although it may be easy to encourage healthy choices in grocery stores and restaurants (through restricted menu and portion options), when individuals return home, it is entirely up to them to decide their portion size. Unfortunately, many individuals may lack the means to make major adjustments to their environment (people generally can’t control how the stores near them are stocked or the portion sizes sold at grocery stores). The purpose of a nudge is that it’s working at an unconscious level. We have yet to analyze whether making people aware of such swaps (like. if they have to go out of their way to pre-portion snack sizes) will negate the effects of the nudges in the first place. 

Need for Systematic Changes

Although occasional nudges are effective, the evidence of their validity doesn’t negate the priority we should give to systemic changes. In this example of the food industry specifically, the few nudges that are effective aren’t relevant if supportive nutrition systems aren’t in place. Convenience enhancements provide people with easier access to fruits and veggies, but how can produce be made more convenient if it’s not affordable or accessible? These issues are clearly inextricable; food deserts are a wide-scale version of negative convenience enhancement. Similarly, the exorbitant price of fresh produce and the relatively inexpensive price of ultra-processed food make it nearly impossible to enhance serving sizes of healthy options. Choices at an individual level are important, but they are meaningless if families don’t have the physical ability to choose what’s best for them. 

Long-Term Effects

While nudges can be effective in influencing short-term behavior, their long-term effectiveness is often limited. Over time, individuals may become desensitized or revert to old habits once the immediate influence of the nudge is removed, particularly if the underlying motivations for behavior change aren’t addressed (or if the individual still lacks the means to achieve their goals). Additionally, nudges typically rely on subtle cues rather than deep cognitive engagement, which may not lead to lasting behavioral change or the internalization of new habits. The effectiveness of a nudge might diminish if individuals perceive it as manipulative or if it fails to adapt to changing circumstances and preferences. Therefore, while nudges can prompt immediate action, they need to be complemented with other strategies, education, incentives, and systemic change, to ensure sustained long-term effectiveness.

Ethics 

Lastly, nudging has raised significant ethical concerns, primarily related to autonomy, consent, and paternalism, as it subtly influences people's decisions without their explicit awareness. This potentially undermines individuals’ ability to make fully informed, autonomous choices. The lack of transparency in nudging can lead to decisions that individuals might not have made if they were fully informed, raising issues of consent. Nudging can be viewed as paternalistic, where an organization (the ‘nudger’) assumes it knows what is best for individuals, which can be condescending and limiting to the individual’s decision-making capabilities. The potential for abuse, such as using nudges for self-serving or harmful purposes, underscores the need for strict ethical guidelines to ensure nudges are used transparently and in ways that genuinely enhance individual well-being.

Nudge + 

All of this being said, there is hope for the nudge. Researchers at The London School of Economics have made ripples in the field by extending the classic nudge with their “Nudge +” concept.¹⁰ Nudge plus is an enhanced version, incorporating an element of reflection into the process. Traditional nudging interventions rely primarily on automatic, fast-thinking (System 1) processes, aiming to steer individuals towards beneficial behaviors without engaging their slow, reflective (System 2) thinking. However, nudge plus uses reflective strategies, encouraging individuals to engage in some degree of self-awareness and deliberation, which can lead to more sustainable and long-term behavior changes.

The reflective component of nudge plus means prompting individuals to think about the reasons behind their choices. This could take various forms, like a reflective survey before or after the nudge, commitment devices with pre-commitment reflection, or educational elements that explain the purpose and benefits of the nudge. These differences hope to preserve and even enhance individual autonomy, which addresses some of the ethical concerns about manipulation and consent.

Nudge Plus can be implemented in various ways, either simultaneously with the nudge or in sequence (before or after the nudge). For example, a default setting (the original nudge) could be paired with a commitment to a healthier choice (plus), making the nudge more salient and transparent. This fast and slow-thinking hybrid model leverages both processes to create more effective, sustainable, and ethically sound interventions. But since this is a relatively new concept, we’ll have to wait and see where the research nudges us next! 

Energy Usage

In 2011, Hunt Allcott analyzed the impact of providing households with information about their energy use compared to their neighbors. They sent some of the people a letter indicating how much energy their neighbors were using (a nudge). Households that received comparative feedback reduced their energy consumption by 2%, which is a lot of energy! Providing social comparison feedback nudges individuals to reduce energy usage, demonstrating the power of social norms in influencing behavior. ²

401(k) Auto Enrollment 

A 2001 study by Madrian and Shea found that introducing automatic enrollment (a default nudge) in 401(k) plans significantly increased participation rates. Before the nudge, participation rates were around 49%, but after implementing automatic enrollment, participation rates jumped from 86% to 96%.³ Clearly, just changing the default option can substantially increase savings behavior without restricting employees' freedom to opt-out.

Healthy Eating

Now, let’s use the lens of healthy eating promotion, where nudging has become particularly popular in recent years. Researchers Cadario and Chandon found that the most effective nutrition-related nudges were behavior-based (affecting the behaviors of the consumers). An example of this is convenience enhancements, which make healthier options more readily available and unhealthy options more difficult to consume. The other most effective type of nudge was in size enhancements, which provided larger portions for healthy options (and lower calorie options, like salads or fresh fruits) and smaller portions for unhealthy options (and higher calorie options, like fries and chicken fingers). These nudges decreased total caloric intake by an average of 209 calories per day.⁸ These results are certainly meaningful in a world where over 1 billion people are obese and 20% of deaths are related to poor diet. 

Unfortunately, nudges are only a small part of the picture. Even these types of behavioral nudges are only a fraction of the nudge types being used, they can’t be applied to every situation, and they provide little value without the support of systemic change. Even in the food industry, most of the nudges that have received hype in recent years, like color coding and menu labeling, have no correlation with actual food consumed.⁹ Cadario and Chandon also analyzed cognitively-oriented nudges, which include things like descriptive labeling (nutrition facts posted on boxes), and affectively-oriented nudges, which include ‘healthy eating calls’, (directly encouraging people to make better choices). The effect size of these categories of nudges was much closer to zero.⁸ 

All of this highlights the importance of differentiating between nudges; although we can celebrate the benefits of convenience and size enhancements when properly used, their success doesn’t indicate that all nudging has a meaningful effect on individuals. 

Why We Need More Than Just a Nudge

This thought piece unpacks some of the limitations of nudging, expanding on some of the potential shortcomings discussed here. 

How Effective is Nudging?

This excerpt from an interview with Dr. Dennis Hummel and Prof. Alexander Maedche explains their work on studying the effectiveness of nudges and their attempt at classifying them with the purpose of guiding future research.

How We Can Nudge Ourselves To Save More

Learn more about the potential benefits of integrating nudges for improved personal finances, a hot topic in the nudging world. 

The Continued Controversy of Nudging

Check out this newsletter which delves into nudging in the news, another case study example, and further discussion on potential limitations related to nudging. 

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2. Allcott, H. (2011). Social norms and energy conservation. Journal of Public Economics, 95(9-10), 1082-1095.
3. Madrian, B. C., & Shea, D. F. (2001). The power of suggestion: Inertia in 401(k) participation and savings behavior. Quarterly Journal of Economics, 116(4), 1149-1187. 
4. Kuyer, P., & Gordijn, B. (2023). Nudge in perspective: A systematic literature review on the ethical issues with nudging. Rationality and Society, 35(2), 191-230. https://doi-org.gate3.library.lse.ac.uk/10.1177/10434631231155005
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6. de Ridder, D., Adriaanse, M., van Gestel, L., & Wachner, J. (2023). How does nudging the COVID-19 vaccine play out in people who are in doubt about vaccination?. Health policy (Amsterdam, Netherlands), 134, 104858. https://doi-org.gate3.library.lse.ac.uk/10.1016/j.healthpol.2023.1
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8. Cadario, R., & Chandon, P. (2020). Which Healthy Eating Nudges Work Best? A Meta-Analysis of Field Experiments. Marketing Science, 39(3), 465–486. https://doi.org/10.1287/mksc.2018.1128
9. Bowen, D. J., Barrington, W. E., & Beresford, S. A. A. (2015). Identifying the Effects of Environmental and Policy Change Interventions on Healthy Eating. Annual Review of Public Health, 36(1), 289–306. https://doi.org/10.1146/annurev-publhealth-032013-182516
10. Banerjee S and John P (2020) Nudge plus: incorporating reflection into behavioural public policy. Grantham Research Institute on Climate Change and the Environment Working Paper 332. London: London School of Economics and Political Science