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Should you be nudged away from making financial mistakes?

A man looking very confused

Is it right to shape people’s behaviour to help them make better financial decisions? In this guest post, Professor Liam Delaney explores the pros and cons of ‘Nudge’…

A debate’s raging about the implications of behavioural economics and psychology for the regulation of consumer markets. There’s lots of evidence that people find financial contracts confusing and are influenced by many surface features, such as headline cashback offers, often to the detriment of their long-term finances.

Firms are readily exploiting these biases, and because the markets are so confusing the normal competitive pressures don’t apply. So what can be done to help consumers make better decisions?

Nudged into better decisions

A relatively recent arrival to this long-standing debate has been the extremely influential book Nudge by Thaler and Sunstein.

They argued that a form of regulation should evolve whereby regulators actively attempt to shape people’s behaviour to help them make better decisions but, where possible, not force them to make decisions in these directions. They called this idea Libertarian Paternalism, with the idea being that the state and regulator have a role in guiding decisions (paternalism) but that freedom of choice and consumer sovereignty should ultimately not be trampled on (libertarianism).

Nudge in practice

Nudge was enthusiastically adopted in the UK, including the development of a dedicated Behavioural Insights Team in the UK Cabinet Office. This team is currently conducting dozens of trials across all areas of government, examining how to use insights from behavioural science to improve aspects of policy in non-intrusive ways.

Nudge has also been extensively discussed in the consumer regulation literature. If people find financial contracts complex then perhaps behavioural science can inform what information should be given to consumers, how they should be educated about key financial quantities and so on.

There have been many pilot experiments to see how complex factors influence how consumers react to financial products. The resulting knowledge could then be used by regulators to produce guidelines for how products like credit cards and mortgages should be sold.

In the best scenario this will lead to larger markets with more active consumers and firms innovating to create better products, rather than simply employing various tactics to retain and charge higher fees to confused customers.

Not everyone’s pro-Nudge

As you might imagine from such a harmonious scenario, not everyone sees things in this way. On the one hand there has been wide criticism arguing that Nudge is leading to an overstepping of the role of the State and regulators. They argue that autonomy includes the autonomy to make bad decisions and we potentially undermine people’s freedom and integrity by attempting to preserve them from harm imposed by their own actions.

On the other hand some have argued that Nudge is the wrong response to understanding the power that arises from financial firms being able to exploit consumers in lightly regulated markets. Given the systemic importance of financial markets and the widespread potential for consumer exploitation, many have argued that regulators should intervene with hard policies to a far greater extent.

A recent article by Lauren Willis in the University of Chicago Law Review, for example, documents the extent to which large financial companies are able to quite easily side-step attempts to force them to make consumers more active choosers simply by employing some of the very tactics studied in the literature. Some have argued that confusing features of financial products should be banned, and that much stricter controls should be imposed on aspects of financial advice and selling.

The future of financial regulation

This debate is vitally important to the welfare of British consumers. It will have dramatic effects over the next few years on key questions such as: how should products such as credit cards and mortgages be regulated? What responsibility do companies have to ensure that their customers understand their products and the range of alternatives? How should regulators intervene in cases where consumers are making predictable mistakes with damaging consequences to their finances?

The outcomes of these debates will shape what consumer financial markets look like and how they are regulated in the future.

Do you think regulators should use lessons from behavioural economics to nudge people into making better financial decisions?

This is a guest contribution by Liam Delaney, Professor of Economics at Stirling. All opinions expressed here are Liam’s own, not necessarily those of Which?


Perhaps it would help to point out early that the Nudge Unit has been sold cheaply off from the Government to the great benefit of its staff. See Private Eye pasim.

Reading the Wikipedoa article it provides examples of what they have done. I have to say it is positively laughable that they discover simple things that the Civil Service has never considered but which are commonsense or are un use in the private sector.

These being some of the more obvious:

Increasing fine payment rates through text messages:

BIT prompted those owing the UK Courts Service fines with a text message ten days before the bailiffs were to be sent to a person, which doubled payments made without the need for further intervention.[6] This innovation has reportedly saved the Courts Service £30 million a year by “sending people owing fines personalised text messages to persuade them to pay promptly”.[5]
Increasing tax collection rates by changing the default web-link

BIT ran a series of trials with HMRC that sought to improve tax collection rates by making it easier for individuals to pay. One of the simplest interventions involved testing the impact of directing letter recipients straight to the specific form they were required to complete, as opposed to the web page that included the form. This increased response rates by 19 to 23%.[6]
Reducing medical prescription errors

A study by Imperial College London funded by BIT sought to reduce prescription errors by redesigning the prescription forms. To make it easier to distinguish between micrograms and milligrams, distinct options that had to be circled were included. In simulation testing, the new charts were found to significantly improve correct dose entries.[6]

Alex says:
26 June 2015

It hasn’t been entirely sold off – it’s still one-third owned by government.

Agree that policy has been a lot slower to catch up in terms of using behavioural insights than the private sector, but surely anything that helps make government more efficient and saves the tax payer money is a good thing? My understanding is that they’ve led to a net gain for government (as in the savings they’ve produced has far outweighed their cost).


But it was a good nudge, wasn’t it. Minimal investment by the ex civil servants for a 12.5% stake in a company valued at £50 million, an immediate £5m consultancy contract, access to government, and no competition. This was our money – why devolve an apparently successful functioning Cabinet Office team? Not much of an advert for the integrity of a nudge concept – just another money-making wheeze perhaps? What’s in store for the rest of us?


I would have thought the most important thing would be to train people away from the want it mentality that so many have. Which leads to I’m poor and cant afford to live syndrome. But yet they still have all the things they wanted with their monthly payments that got them there in the first place.


Sorry for the layout errors and the typos.

Now to the main question. : )

Instantly the weakness of the case is that it appears to be looking at the average man and the one answer. As someone who worked in the financial area for decades I can tell you that most of the centrally despatched marketing either spoke above or down to most recipients.

On the basis of targeting customers efficiently I did a very specfic branch based mailshot written at the appropriate level which received a very high rsponse rate AFAIR in the teens or twenties, and more remarkably a sign-on rate of over 50%. This for the very sexy Tax and Finacial Advice service.

I absolutely believe that you can confuse, bemuse, and mislead consumers. If nudge is to work it will have to be aimed well. It would also pay to attack te nudge factors currently in use by industry! : )

For instance truth in statistics could become an area where fines – and a percentage going to the successful complainant[s] – would sharpen up any sector of busines – and for that matter government.

As an example of misleading statistics this is an excerpt from our CEO’s interview last August with the Independent:

“Which? now boasts it produces Britain’s biggest-selling monthly magazine, having overtaken golden oldies’ title Saga. It has a record 1.4 million print and digital subscribers, compared to 812,000 a decade ago”

You will appreciate that if I have three subscriptions to Which? I am included in the 1.4m. I know someone who has five subscriptions. There is a considerable difference between subcribers and subscriptions. If we say the average Which subscriber has two subscriptions then there are in fact only 700,000 people supporting the organisation.

The Ductch consumentenbund annually lists subscribers AND usefully the number of households it sends material to.

Number of members per 1 January of the
next fiscal year

#Leden exclusive trial members

Percentage of members/households [this is members to households in the Netherlands]

Number of subscriptions

You will see that for Consumentenbond around one in three subscribers has an additional subscription. As you can guess introducing a new title can increase subscriprtions dramatically if it has little additional cost to produce and membership take-up is good.


I’d be very suspicious about any groups using “lessons from behavioural economics to nudge people into making better financial decisions”. It implies those using the nudge technique totally understand the topic concerned, and that there is a clear good way to proceed simply for the benefit of the consumer. Judging by the performance of our civil service and regulators, for example, I doubt this would be the case. And outsourcing would be even more open to abuse.

At a commercial level, such tactics are surely employed by marketing organisations to persuade us to buy what they want to sell us – whether it is good for us or not. I’d hate to suggest politicians might use it for other than the public good.

Perhaps I am too simple, but I would like everyday financial products to be kept simple so we can understand exactly what we are buying. Why does a mortgage, credit card, pension have to be constructed in ways that we cannot understand? Perhaps if we don’t understand it we should simply avoid it – or be nudged to consult an expert independent adviser.

However, the examples dieseltaylor mentions are, as he says, common sense in the commercial world. Hardly nudge. I would suggest common sense should be an attribute encouraged in public life. Why is it only now, for example, the NHS has discovered the disparity between regions in purchase costs for identical items and thinking of acting on it? You would think someone with common sense would have got to grips with this years ago?


One might argue that the problem lies in the complexity of the market and the unwieldy ways in which we access it. If saving were genuinely clear and easy to do we might be more resilient and need a bit less nudging.

There was a TED talk by Rory Sutherland (worth a watch!) in which he suggested that if everyone had a button on the wall that transferred £10 into a savings account, it would probably result in a great deal more being saved. Similar could be achieved with apps or other simple mechanisms to move funds into standard, regulated savings accounts at a single (secure) tap.

In an age when we can spend easily and habitually, saving should be just as simple. Now who do I nudge to get it started?


Clear and easy is a good start:-). We could also think of looking at simple options other than bank savings (where we expect to earn money for doing nothing). If we were to put some money instead into simple, straightforward investments,like unit trusts or other share portfolios, if they could be offered with economical fees in small denominations, then we would be a step nearer using our savings actively. Helping industry and commerce albeit with a little risk. but who would we trust to make such offerings?

Alternatively we might use some money to trade on ebay for example. Many people do this in a small way to make more money than the current low interest rates offer – and no tax.

I know this is not for everyone but rather than just sit back and expect someone else to use your money and return a small amount as interest, we might encourage a spirit of enterprise.

It would have been nice to have been offered a stake in Behavioural Insights Ltd when the Govt disposed of a big chunk – only a select few seem to have benefited from the Govt.’s largesse (with our money).

David Leiser says:
28 June 2015

Psagot, a large financial company in Israel, does have such an app. Click on it and a fixed smallish sum is transferred to your savings account.


Hi David – how interesting. I like the simplicity of it, including the choice of different sums, encouraging you to add more if you can.

I’d be interested to know what effect it has had – whether savers using the app have indeed saved more. Have you seen any results?


I think the philosophy behind the nudge theory and the use of behavioural insights [pretentious label – why is the outcome of every observation an ‘insight’ nowadays?] is quite interesting and will be increasingly influential. I just hope we don’t abandon the direct way of protecting people from exploitation through education and information. It saddens me that after eighteen years of continuous education people are emerging into the real world of work and family and property with hardly a clue on how financial services operate and about the various forms of contract that condition virtually every form of consumer activity and the minefields that surround them.

Adam [above] points to the complexity of the market. It is, of course, in the interests of marketeers to increase complexity and a fair proportion of their business activity is devoted to developing more intricacies to catch out the unwary. They dress it up as improving consumer choice, but collectively it’s a racket.


nudges.org is interesting to look at.

On the subject of nudges and if you like unintended consequences we can look at Which? and the Best Buy scheme.

For instance over one third of all kettles tested are Best Buys. Some manufacturers have Best Buys and some of their range are average to poor. In the nature of things I can pay £15,000 to Which? and go to some serious advertising on TV for 6 months of my successful kettle with the Which? Best Buy prominent.

The average shopper will remember the name and vaguely that it is rated. This is the halo effect because the shopper now feels the brand is trustworthy. That the rest of its kettle range or toasters or mixers is not a Best Buy will probably not even have entered the shoppers consciousness.

SO the nudge to a sensible buy can be perverted by the advertising halo. I prefer the US Consumer Reports stance of NO Commercial USE of its tests.

There is also another rather insidious effect and that is the difference, as decided in tests at independent labs, of 1% is the difference between a Best Buy and not. Makes a considerable difference to the marketability and the advertising campaign.