Have you been nudged today?

Austria and Germany are two very similar countries. They have the same language and religion, a common cultural heritage and comparable economic and educational status. Yet when it comes to organ donation, the countries are polar opposites. In Austria, almost 100 per cent of the population have effectively consented to organ donation, but in neighbouring Germany the consent rate is just 12 per cent.

Are Germans less altruistic than their Austrian neighbours? It turns out the difference in donation rates isn’t the result of deliberate choices by Germans not to donate their organs, but due to a subtle difference in the consent process. In Austria, people are automatically registered as organ donors and have to opt out if they do not want to donate, but in Germany, people have to opt in by registering as an organ donor.

A recent international study examined organ donor and transplant rates in 48 countries over a 13-year period and confirmed that ‘opt-out’ countries have substantially higher donor and transplant rates.

Indeed, Australia, an ‘opt-in’ country like Germany, has one of the lowest organ donor rates in the world. Yet about 1,500 people are currently waiting for an organ. Should we reduce the under-supply of organ donations by changing to an ‘opt-out’ system?

Such gentle changes in the decision process – changing the default option for organ donation for example – to make it easier for people to make good or healthy choices, are referred to as “nudges”.

Popularised by economics Nobel laureate Richard Thaler and law professor Cass Sunstein, nudges have attracted the attention of governments all around the world. The Australian Government, too, is setting up ‘nudge units’ to inform public policy.

Nudging is the subject of the latest The Policy Shop podcast. University of Melbourne Vice-Chancellor Glyn Davis spoke with Dr David Halpern, who set up the first nudge unit for the UK Government, and Professor Abigail Payne, Director of the Melbourne Institute of Applied Economic and Social Research, about the effectiveness of nudging as a policy tool and the ethical concerns it raises.

Traditional policy tools, such as taxes, are often ineffective. As Dr Halpern explains, most policy work to increase savings has been based on tax subsidies. However, research has shown this approach often fails to bring about the intended change in behaviour – for every $1 in tax subsidies, savings only increase by about 1 cent.

One reason for this, as Dr Halpern says, has been a neglect of the details of the decision-making process. Over the past few decades, research in behavioural economics and related fields has documented that people systematically deviate from the rational actor model in economics, frequently used as the basis for public policy, and that decisions are often influenced by small changes in the decision process.

Nudging draws on these new insights into human behaviour and asks how they can be used to design more effective public policy tools.

An early success of nudging was in the area of retirement savings. In the UK, automatic enrolment of people into savings programs led to an estimated additional 6.5 million people saving for retirement. It is a powerful example of how a small change in the decision process can have dramatic effects on people’s behaviour.

The nudge approach is not without criticism. A major concern is ethical – should governments be trying to influence people’s behaviour by interfering with the choice process, without the knowledge of those being influenced?

As Dr Halpern explains, existing policy does the same. The nudge approach is a tool to make policy more effective, without reducing the choices available to people. He says nudging is often done in a very transparent way, and that people are often aware of the nudge when making a decision.

The changes that the nudge approach brings to public policy are profound. One of its strengths is its use of a more realistic model of human behaviour, that integrates economics, psychology, sociology and related fields.

Even more important is the use of experimentation. Like a wind tunnel that is being used to improve the energy-effectiveness of a car, the nudge approach uses experimentation to make policy tools more effective.