While the Nobel Prize in Economics is lauded as the most prestigious in the field, the work of the winner, although undoubtedly worthy, does not always have much influence on our everyday existence. This year I beg to differ.
Richard Thaler, behaviour science professor and best-selling author, created the concept of ‘nudge’ theory – the notion that small prompts can change our behaviour.
Thaler has applied ‘nudging’ to a wide range of everyday challenges. He worked with Schiphol International Airport to reduce the unpleasant effects that thousands of travellers’ bad aim can have in toilets. He found that putting an image of a black fly into the male urinals reduced spillage by some 80 per cent. Men like to aim at a target.
Under David Cameron, Thaler created the ‘Behavioural Insights Team’ – often referred to as the ‘nudge unit’. He realised that millions of elderly people would be inclined to heat their homes if the government named the financial pay-out a ‘winter fuel payment’ despite there being no restrictions on how they could actually spend the cash.
In South London, Thaler reduced vandalism on shops by asking graffiti artists to paint babies’ faces on the shutters. No one is impervious to the sight of a cute infant.
Upon hearing Thaler’s prize win, president Trump tweeted: “Congrats to Richard Thaler…for his groundbreaking study of why people make irrational decisions.” Critics were quick to point out the irony of the vote which secured the White House.
In the words of the Nobel awarding body ‘Richard Thaler has made economics more human’.
In the area of behaviour finance, Thaler promotes that once we understand why and how people make decisions we can shape their future judgements.
While conventional financial theory dictates that people are rational ‘wealth maximisers’ – that is they are generally well informed, consistent and make decisions in their best interests, the evidence to the contrary is vast – the dot-com bubble, the financial crisis, backing ‘sure thing’ investments such as Tesco which suffered the worse downturn in UK retail history.
We have evolved mental ‘short cuts’ to allow us to make day-to-day decisions quickly. However, as a result of our own processing limitations, in complex situations these short cuts lead to ‘biases’ – a systematic pattern of deviation from rational thinking.
Biases can affect every type of decision, but have substantial implications when assessing financial choices. How we process information and the preferences that lie within our psyche can be detrimental to our long-term aims and objectives. These biases cannot be cured but once recognised it is possible to avoid the pitfalls they can cause.
Sometimes even the most self-assured decision maker needs a nudge in the right direction.