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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?

Comments
Member

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]

Member
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).

Member

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?

Member

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.

Member

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
486.491

#Leden exclusive trial members
486.491

Percentage of members/households [this is members to households in the Netherlands]
6.4

Number of subscriptions
631.848

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.

Member

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?

Member

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?

Member

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).

Member
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.

Member

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?

Member

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.

Member

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.

Member

dieseltaylor, I share your disquiet at Which? allowing best buys to be advertised. As you say it can give a brand an unwarranted endorsement instead of just the individual item, Anyway, as advertisements rarely give the whole facts they do not adequately inform the consumer. The only way to do that is to subscribe to the magazine and study the test rerport. So why do it?

I would not like to link Which? increasing its turnover with the lure of huge bonuses, using ventures such as mortgages, Trusted Traders, and this advertising where there might be commercial considerations that slightly colour an independent outlook. I liked the days when Which? seemed to have a narrower and simpler brief.

Member

Hi Diesel and Malcolm, thanks for your comments. I do like reading your comments and we’re always open for feedback, but please try and stick strongly to the topic. Which? Conversation is a space for all consumers to debate the issues at hand, and I look to you as upstanding members of the community to bring things back on track, not to veer discussions off topic.

Briefly on our endorsement scheme – the independence of our testing always comes first – allowing good businesses to promote their achievements is only after the fact. It is an important part of championing those who deliver what consumers want and it also helps encourage others to raise their game. I’ve passed your feedback on. Thanks.

Member

Patrick, fair enough, I respect your point. In defence I would say that nudging – its use in marketing – influences decisions in favour of a good commercial outcome.The point I was raising, in other words, was that Which?, as a respected independent organisation, could be helping commercial organisations “nudge” we consumers by attaching best buy status without any further information in its advertising. Best buys are not always right for everyone which is why I think it important to look at the report and comments behind them. Perhaps Sony Xperia phones might be an example. I am sorry to be a bit cynical about such issues. 🙁

Member

I take your point Malcolm but I am sure you are more than capable of selecting a Which? Best Buy according to your own requirements and needs. I normally use them as guidlines that are not set in stone taking into account my own available budget and future usage at the time. Without these guidlines I would find it extremely difficult to plough my way through the enormous selection of goods on offer.

Back to topic: My apologies if the above comments come across as a paternalistic ‘nudge,’ they were intended as a more libertarian gesture to keep the subject topic in a more constructive vein:-)

Member

Beryl, I will no doubt be berated for replying, but in answer to your first point, an advertised Which Best Buy reaches far more people than have access to the Which report behind it. They are nudged without having access to the report and its guidelines.
Your example below of a polite message as as “social nudge” is something I have agreed with elsewhere. I still would prefer to see financial products presented in a straightforward way that I can decide upon without having to be “guided” by someone else’s interpretation of what might be best for me; responding to behavioural economics and psychology would be an act of faith that needs its credentials understood.
If I don’t understand a financial situation then I feel best advised to seek professional advice, or avoid it.

Member

Patrick –

A Best Buy is a nudge and that is the nature of the thread. It is not a strict financial nudge and for that I apologise. It would be interesting to research whether a consumer company recommendation would alter peoples behaviour.

I like to look at the big picture and what other countries do in respect of the subject.

This is an interesting [and old] use of a financial nudge. I find it impressive. The concept is not new the fact that they have a product and a system is crucial in it being effective. Whether it would be successful in signing up so many in a stagnating or deflating economy is interesting.

” The impact
The Save More Tomorrow program has been studied in three different companies, and has varied in structure in the different implementations. Despite this, the features described above, have proven to have a major impact on people’s ability to save. The results presented here, are from the first implementation of the SMarT program, presented by Thaler and Bernatzi (2004).

286 employees met with a financial consultant, who recommended a new savings rate, based on what the employees found economically possible, and what the software recommended.
To the 207 who refused the recommended savings rate, the consultant offered the SMarT plan as an alternative. In this plan, the employees savings rate would increase by 3 percentage points per pay raise, the next one being scheduled four months from then. 162 of the 207 employees joined the SMarT plan.

For the first group the average savings rate percentage was raised from 4.4 to 9.1 by the first pay raise. The SMarT plan group increased their savings rate from 3.3 to 6.5 at the first pay raise. Furthermore, the SMarT plan group continued to increase their savings rate, so that by the fourth pay raise, their savings rate averaged at 13.6, while the people who had accepted the financial consultants advice, had actually decreased their savings rate to 8.8. The graph below illustrates the progression of savings over time

So not only does the Save More Tomorrow program nudge a higher savings rate than the traditional approach – it is also able to appeal to people who are not attracted to the traditional approach.”

Whilst looking at the subject I came across this snippet from the Economist:
“Differences in culture can have a big impact, too. “Nudge” described an example in America, where telling high users of energy how their consumption compared with that of their neighbours prompted them to use less. This approach is now being tested in Britain. But hopes are low that it will work in France. “The French have a tendency not to comply as easily with perceived social norms the way Anglo-Saxons would,” says Olivier Oullier, a behavioural and brain scientist who advises the French government. “Telling someone in France that their neighbour is using less electricity or saving more water is not sufficient.”

This made me think of the various ethnic groups and certainly many Indian families are very effective at deploying money for the good of the group whereas it seems to me this is less common in other groups who may prefer to invest in their own “pot”. I cannot see how one can have a single message to cover these disparities.

I am left with better presentation of the relevant information such as :
Life span once you reach 60.
The effects of compounding and inflation.
The results of the Australian experience in allowing pensioners access to their pension pots.

Member

I find the whole concept of the economic nudge machine systemically categorizing people as Libertarian or Paternalistic quite lamentable. Utilising the science of economic psychology to nudge people into making choices and denying them the opportunity to grow and learn from those choices even when they get it wrong, will ultimately encourage a nanny state mentality and large scale dependency. For example to offer vouchers to women to encourage breast feeding is tantamount to dangling the proverbial carrot to the donkey.

The common sense and educational approach mentioned above must be be the only way forward. There are always going to be people who prefer to follow the herd instinct just as there are also people who, by their own unique and natural instinct would prefer to shy away from the flock and a whose answer to the question “should I save more tomorrow” might well be “tomorrow never comes because it’s always today so let’s act now and spend less today so no need to worry about tomorrow.”

On the other hand, if some economic psychologist could nudge nudge Mark Carney into increasing the interest rate on my savings account sooner rather than later, would that be considered libertarian or paternalistic?

Member

@beryl, it would be considered long overdue 🙂

Member

Beryl –

I can agree to an extent that finding guidance might be necessary is rather saddening. However certainly in finance – banking, life assurance , and pensions I have grave doubts about leaving the situation as is. My experience is that the majority of people are pretty poor at looking into the future.

I think as part of the education of the public we need to get away from the comfy feeling that the Government is friendly and that we acknowledge the nature of business is that we are the prey and corporations the hunter.

Individuals can be nice and give good advice. To prevent this natural state of affairs you make their pay and livelihood dependent on sales and just up the target when they are successful. I knew a bond salesman who against policy guidance and best practice put one couple into a single bond and his commission on £100,000 was a cool £8000. Did the compliance and branch kick-up. No – they were all part of the system.

I do think there are good companies as for instance:
http://citywire.co.uk/new-model-adviser/news/lv-and-gov-t-team-up-for-pension-passport-pilot/a805243

Member
Koenfucius says:
26 June 2015

To answer the question whether regulators should use lessons from behavioural economics, and nudge people into making “better” financial decisions, we need to ask: “or do what instead?”

One tool regulators have (and use) is enforcement of the rules they impose on the industry. The problem is that this is often lacking nuance, and restricts freedom. In some cases a nudge may be able to achieve much the same result, without unduly curtailing any liberties. Nudges should therefore certainly be in the regulators’ toolkit as an alternative to hard regulation.

But as Liam Delaney says, not everyone is pro-nudge. Some people believe that there is something paternalistic or even sinister to nudging: they see it as a backhanded way to manipulate people into doing things they don’t want to do. This is a mistaken view, certainly where proper nudges are concerned.

A nudge is a change in the choice architecture, the context within which we choose between options, or between doing or not doing something. It doesn’t restrict the freedom, nor does it force a particular course of action. The word change is key here: even without any nudging, there already is a choice architecture. And there is no reason why one architecture is more manipulative than another.

An example is the minimum payment on credit card statements. This functions as an anchor, and many people just treat it as the default. If the statement would provide, in addition to the minimum, also a suggested payment, for example the kind of payment that would see the current balance paid off in, say, a year, more people might choose that amount. Nobody is forced – anyone happy with paying the minimum could still do so.

So here too, regulators should certainly consider using behavioural economics knowledge to modify the choice architecture to counteract the biases that lead some consumers to make decisions that they would come to regret later.

Member

This presupposes most people cannot make their own rational decision – the caveat being they need to be presented with appropriate facts and information. Often the problem may be because the “choice” is on products that are needlessly complicated (possibly for reasons that benefit the provider). In your example of credit card balance, were it explained that borrowing on a credit card is very expensive when only paying the minimum, and that paying off your card monthly is a good idea – if the actual costs were presented on the statement to the individual, they could them make a considered judgement as to how to (try) to use the card in future.
Simple products lead to simpler decision making. Perhaps we should be campaigning for that?

Member
Koenfucius says:
27 June 2015

informing (and educating) the consumer better is definitely a good idea, but there is quite a bit of evidence that the effects of this are limited. Even well-informed people are prone to biases and are influenced by whatever the prevailing choice architecture is.

So, intervening from this angle should be an option for the regulator, irrespective of any other type of interventions.

Member

I think before we get into the highfalutin realms of choice architecture, which is no doubt a worthy if tantalising discipline, we need the regulators to regulate the markets back to a solid and responsible foundation. I think we have had enough soft regulation over the last two decades and could do with a new set of teeth in each watchdog. There are hesitant signs that this is happening in some quarters and it would be an unwise move to impinge on its progress by enticing the regulatory minds [that are already prone to floating on the zephyrs of fantasy] with abstract notions of suggestive optioneering.

Member

John, this approach also presupposes that the regulators are all experts who thoroughly understand what they are regulating and will become whizz kids at using the nudge concept – and much better at running our decision making for us than we can. I don’t have that view of regulators or anyone else for that matter. Those who regulated financial services and the CQC for example hardly epitomise altruism let alone common sense.
We should learn to make our own decisions. But then I’m biased.

Member
Koenfucius says:
27 June 2015

@Malcolm R
Nudging is *definitely* not about someone else running our decision-making for us. If that is what you believe, you have misunderstood the concept.

Member

For example “regulators actively attempt to shape people’s behaviour”. My concern is first, do regulators have the competence to do this for individuals, and secondly that there should be a need for it. I am more concerned that we should seek to have simpler products, not products shrouded in unnecessary complexity. We would then be more likely to understand a product and make a decision for ourselves. Whilst there are certainly areas we cannot understand and need help to make a decision – medicine for example – I see no reason why many financial products could not be made understandable to the masses.
Nudging seems to assume something is too complex for us to make an independent decision, and therefore someone has to point us in the right direction. That, to me, is diluting our part in the decision and placing our reliance on someone else. Past reliance on “someone else” has been quite disastrous – try the financial industry. Why should that have suddenly changed?

Member

There is something disturbingly messianic about the proselytisation of the nudge concept. I think we should keep our feet firmly on the ground for the time being and get the basics right so that people are both empowered and competent to make their decisions safely themselves. Making things more transparent and less mysterious will be a step in the right direction.

Member

Koenfucius – I think the tweak on credit card statements is a very good idea.

I support the concept of nudging wholeheartedly and I can give a couple of items that I think illustrate how use of words makes a subtle change to how something is viewed.

In Lincolnshire the automated speed signs that tell you if you are overspeed acually AFAIR illuminate to “Thank You” and possibly some phrase. But the game then becomes to collect Thank Yous – much more rewarding than seeing the LED’s remaining unlit other than if you are over.

Apparently in France in handicapped bays ” Take my parking space take my disability” Ouch!
In both cases a slight reworking has a better outcome in my eyes. Obviously there are people who do not have a better side to appeal to but they seem to be in a minority. [and work in specifc industries! : )]

Essentially a nudge may allow people to frame a decision in a different possibly better way. We also have to accept the the nudge is alive and well in the forces of evil so to ignore its power and the potential to combat is unwise.

If there is one danger it is that nudge is a wimp-out on direct regulation where it is needed.

Unfortunately politicians and relationships with industries and organisations sometimes to the layperson look far too cosy. This is aparticualarly so now we have regulators etc going from Government or Armed Services to roles in the industry they once regulated or bought from.

Member

dieseltaylor, I was approaching this conversation from the headline “Should you be nudged away from making financial mistakes?” and the role the regulators should have in “helping” the rest of us.

I totally agree with your comments about asking people to behave in social ways in a “nice, persuasive manner” rather than being threatened. But I don’t think that is what “nudge” is about in this context.

When I was young the Sheffield Star, an evening paper, used to run a “Knights of the Road” feature. Readers wrote in with details of road users who had been particularly helpful – usually in small ways. Stopping to let traffic out, getting out of their car to help an old person across the road, and the sort of courtesy the majority of us appreciate. I wonder whether it promoted a better overall driver attitude? I believe people do respond when altruistic actions are made.

Can we trust the financial industry to be so altruistic, or indeed those who oversee it in Government, without ulterior motives? When a senior treasury official, instrumental in introducing changes to regulation of the banking sector, then joins one of those companies that was a beneficiary – well, is it surprising to be cynical?

Member

Yes I did wander from the point but felt that nudges were being overly pilloried!

But the penultimate message was thinking of finance:
If there is one danger it is that nudge is a wimp-out on direct regulation where it is needed

Member

When nudging entered the world of finance, it became a different situation entirely. Subtle undertones used to feather financial institutions nests with down instead of coir, can weaken and undermine trust when things go drastically wrong as we witnessed during the economic crash in 2007/8. Regulators who work alongside such practices, often do so in order to ally apprehension and fear among members of the general public. We saw this happening with the energy companies when they were engaged in and were obviously operating a very lucrative cartel system which was conveniently `nudged` and interpreted into tacit cooperation by the regulator.

I am not opposed to nudging when used in other directions. In fact I unwittingly used it just last week when a neighbour parked her car immediately behind mine, entirely blocking my exit. I popped a little thank you card on her windscreen, adding the words “For not parking behind my car as you are blocking my exit.” She has so far not repeated her unneighbourly deed.

I note the concept of nudging has its routes in Chicago. I remember visiting there a few years ago and left there with not too happy memories as, having travelled extensively throughout the world, it was the only place where, on departing, I was followed out of the hotel by a member of staff who promptly accused me of not settling my bill. Fortunately I was able to produce a receipt to prove my guiltlessness but the expected apology never arrived. Not altogether surprising given that it was home to one of American societies most infamous gangsters whose motto paradoxically was “Be careful who you call your friends. I’d rather have four quarters than a hundred pennies.” I will not be returning to Chicago any time soon.

Member

Apologies routes should read roots and ally allay:-)

Member

When one takes out a financial product, in order to nudge, the nudger needs to know who you are; what your financial circumstances are; what reasoning there is behind the decision and how much sugar you take in your coffee. The nudger also has to be someone or some body who doesn’t have a vested interest in you, your money or the product you are choosing. The nudger also has to be philanthropic, since the friendly warnings and advice are given to help the investor out of kindness. I would have thought that anyone investing or putting money away somewhere, would need to have a clear idea of what he/she was doing, before signing the documents and making the transfer. Prior to doing this, the individual might need to seek advice and do some research. If the product is not understood then the investor should seek advice. Anyone rushing into a risky deal “blind” really deserves all he/she gets. School education is vital to prepare children for the raw financial world they have to negotiate. Legal legislation is also vital to regulate this complex world so that it is less easy to exploit those of us (and I include myself) who find the small print very threatening and clouded in mystery. It ought to be easy for anyone to get clarity on any investment and, perhaps, a nudging service should work that way round rather than tapping people on the shoulder at the time of finalising the transaction. I would have thought that financial advisors would have a thing or two to say if this service was free!

Member

Remember the conversation on “midata”? “midata could allow companies to develop insightful services………”
If midata (your data) was collated then these regulators (and others) would be in a much better position to help you with your decision making.
Perhaps this is taking the scenario too far, but the point well made is that each individual has particular circumstances that can generally best be addressed by understanding them. So, logically, detailed information about them would be necessary to make the best nudge.
Do we want that sort of a future? Some might benefit, but I would still rather have understandable financial products that allow, and encourage, me to make my own decisions.

Member

Quite agree. “Nudge” is the language of fruit machines and we all know how on our side they are.

Member

Thank for many interesting comments.

I have a reading list (linked below) for those who are interested in reading more about this issue including the applications, critiques and wider aspects of the debate – suggestions welcome if people feel I am leaving out anything obvious. As an economist, I find the move from a model where we assumed everyone was rational to a model where institutional context matters a lot more, due partly to the fact that people find financial products confusing, very welcome. It has improved substantially the realism of the debate at least in Economics and provided much more overlap between economics, psychology and law. But it undoubtedly opens up a plethora of complex ethical questions about personal responsibility, autonomy and the role of the state as witnessed by the comments above and the literature.

http://economicspsychologypolicy.blogspot.co.uk/2012/04/behavioural-policy-readings.html

Member

Thanks for your feedback Liam highlighting the broad spectrum and ethical aspect associated with the psychology of economics. There are always going to be more questions than answers in such a complex subject but it is good to be given the opportunity to debate at least some of them.

You will appreciate with the added experience and lessons learned that comes with maturity, much has been gained that is not always found in modern text. Nevertheless it is good to be given an opportunity to debate some of the issues relating, in particular to the subtleties and tactics used at an economic and commercial level, often disguised as advice and how consumers can differentiate between the two without becoming too compartmentalized in the process.

Member
Gordon Lawrence says:
30 March 2017

I find it strange that in attempting to encourage people to open bank accounts (a good idea I think) we have the banks closing their branches which does nor make them all that accessible: and I’m not sure that online banking is the answer as the use of a mobile costs money which you may not have.