Nudging as an Instrument of Consumer Policy


Seminar Paper, 2019

14 Pages, Grade: 1,5

Anonymous


Excerpt

Inhaltsverzeichnis

1 Introduction

2 Theoretical Methdology
2.1 The rise of nudge
2.2 When do we need a nudge?
2.3 Limitation
2.4 Literature review
2.5 Toolkits

3 Nudge as Practical Applications
3.1 Nudge as CO2 reduction
3.2 Nudge as waste reduction

4 Conclusion

Reference

1 Introduction

Climate has dramatically changed throughout the history. Governments in many countries have taken practical measures to save our planet in recent decades; however, many political regulations have been time-consuming and costly. Thus, policy makers have been attracted considerable attentions by nudging, which leads human behavior in a desirable direction without forcing them. How can nudge apply in policies that attracts people consume sustainable? This is the main research question we discuss in this paper. First, we focus on a conceptualization of nudging and toolkits, then bring the theoretic tools into practical cases, which present concrete examples of nudging.

2 Theoretical Methdology

2.1 The rise of nudge

The term ‘nudge’ is stemmed from the book, 'Nudge: Improving Decisions About Health, Wealth, and Happiness', which written by Richard Thaler and Cass Sunstein and popularized in 2008. It was first used in the context of behavior change and was defined as: “A nudge is any aspect of the choice architecture that changes people’s behavior in a predictable way without forbidding any options or changing their economic incentives.” In this concept, choice architect has the right to design choice architecture, formulating or providing options to make choices that can nudge a person towards a desire option at the end. Based on behavior economics, it is the environment that help an individual to make a decision.

2.2 When do we need a nudge?

What behavior is suitable for us to apply the nudge instrument? Thaler and Sunstein (2008) suggests that people need a good nudge to make the choice which has delayed effect, degree of difficulty, infrequency, poor feedback, and ambiguity between choice and experience. For the choice architect, it is very important to know what kind of environment that nudge can have an outstanding effect. I will introduce the possibilities below:

1. Delayed effects (Benefits Now—Costs Later)

Nudge have a significant effect on both investment goods and sinful goods. Although the order when people benefits and costs are quite different, they can still make good use in nudge. Investment goods are good habits we want to maintain, such as exercise, dieting, and flossing. For these goods, we meet costs immediately, but defer the benefits. On the other hand, sinful goods are those we gain the pleasure first, and suffer the consequences later. Smoking, drinking alcohol, and eating more chocolate are the examples in this category.

2. Degree of Difficulty

Problems are not always simple and solving intuitively. We face variety of problems in our lives, and some of them are very difficult to solve. What’s more, there is no technology available to help. Thus, in order to choose the right answer, we seem to need more assistance from others.

3. Infrequency

We are fully aware that practice makes perfect. However, we do not have many chances to practice important decision-making in our lives. Generally, the higher the risks, the less likely to practice. This is the reason why we need nudge to make the best decision in some important occasions.

4. Poor Feedback

If people lack good opportunities for learning, no matter how much practice you do, it cannot reach to the perfect situation. Learning is an effective way people can sum up their experiences, but only if there is feedback. Feedback helps people learn from mistakes and know how to do better next time. Therefore, when feedback does not work, a nudge would be welcomed.

5. Ambiguity between Choice and Experience

Not all people do well in translating the choices they face into the experiences, not to mention making good decision from those experiences. This happens when people are not familiar with one thing, so they need somebody to give the advice or even choose for themselves. Therefore, we may need and benefit from nudge.

2.3 Limitation

Some of the main limitations of nudging are its ineffectiveness and inefficiency. Humans, as complicated creatures, adjust and change their behavior according to the changes of environment. As a result, there is no effective way that can be used for a long time. The environment is not always constant, but alter with external factors throughout the time. In order to achieve the result, first we need to focus on the context of decision-making process from individual. However, the decision-making process varies from person to person. Because of different circumstances, we need to gather data as much as we can. Such repetition is often expensive and time-consuming. Thus, when understanding what people think, we might lose the efficiency at the same time.

Another limitation is a lack of evidences. If we want to design an effective and proper policy intervention, we need to make sure what work in environment has the positive effect on a population level. However, collecting a sample from the entire population is very difficult. In addition, based on House of Lord (2011) demonstrated many experimental studies, suggesting that there is only few of evidence on cost effectiveness and long-term effect. It is very difficult to change the results from laboratory environment into population in the real world. Therefore, Kopelman concludes the choice architecture often need to be adjusted in a trial-and-error process again and again before it achieves the desired outcome.

2.4 Literature review

Neoclassical economics, one of the mainstream of economics today, assumes all the consumers are rational when they make economics decisions, so that they maximize individuals’ utility and firms’ profits. Simon (1959) states people evaluate and collect information as much as they can until the incremental cost of additional information equals the incremental gains from that information. Because of full and relevant information, people act independently, whose perceptions of a product affect its price and demand. Therefore, the government cannot intervene, instead leads to an efficient allocation of resources by competing within an economy. The forces of supply and demand create market equilibrium. Consequently, in traditional economics theory, Johnson et al. (2012) concludes there are three main mechanisms for changing behavior in economic activity: altering prices, providing information, and placing restrictions. First, alter prices can make humans change the utility among choices. If the utility changes, they will shift to the other decision for optimization. Second, acquiring the complete and symmetry information is favorable for human to compare and contrast among choices. Needless to say, they will select the best option with the lowest cost under full information revelation. The last mechanism placing restrictions is very common in economy, such as quantity restriction from government, limiting the production and sale of goods to the fixed amount. Because of the government intervention, people are forced to change their behavior.

However, these mechanisms are still failure in many situations, and neoclassical economics assumes individual are fully rational and perfectly informed, has already excludes many potentially problematic behaviors. Human decision making is a complex process, and individuals cannot ignore choices but maximize utility. Simon (1955) argues research in psychology has showed that people often act with bounded rationality, so that they make suboptimal choices.

Hutchinson and Gigerenzer (2005) states that people often exhibits representativeness heuristics, which means they make decisions based on their practical experiences rather than theorectical prior database. Applying standard procedure from experience is easier and faster than learning new theory. Here are the evidences that prove people are irrational and not perfectly informed.

Base on cognitive processes and social psychology, people employ behavioral biases when making decisions which often systematically and routinely, and therefore violate a series of assumptions and axioms contrary to neoclassical economics. Simon (1987) concludes that behavioral economics is associated with human behavior, and it violates the neoclassical assumptions. Further, Kahneman (2013) verifies that behavioral economics can be put into the policy design so as to deal with the economic questions.

In behavioral science, the environment where individuals making decisions is very crucial, it is what Thaler and Sunstein (2008) refer to as “choice architecture.” The design can be presented in different ways, and impact the presentation on decision-making of people. Furthermore, choice architect is a person who can organize the context in order to influence individuals’ behavior. Based on this concept, policy makers have ability to alter the social and physical environment or change the way options are presented to people by framing of choices.

Apparently, behavioral economics is derived from cognitive and social psychology in economic evolution. Such situations of the environment or elements of human’s behavior have been associated with ‘nudges’. Due to the various choice architectures, which include changes the environment, making individuals change their decisions automatically. Thus, “nudging is the systematic and evidence-based development and implementation of nudges in creating behavior change.” (Hansen, 2016)

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Details

Title
Nudging as an Instrument of Consumer Policy
College
University of Hohenheim
Course
Verbraucherpolitik
Grade
1,5
Year
2019
Pages
14
Catalog Number
V1022278
ISBN (eBook)
9783346419217
ISBN (Book)
9783346419224
Language
English
Tags
Nudging, green, environmental
Quote paper
Anonymous, 2019, Nudging as an Instrument of Consumer Policy, Munich, GRIN Verlag, https://www.grin.com/document/1022278

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