From Cashews to Nudges: The Evolution of Behavioural Economics:

Richard Thaler

We are concerned about the strength of our willpower: remove cashews from table before dinner
 Commitment

Self-control problem: fight between our passion and impartial spectator

Planner: farsighted / Doer: myopic

- Commitment strategies: remove cashews
- “Guilt”: the doer will feel guilty and stop consuming all available resources (tax on consumption)

Behavioural economics history:

- Kahneman: heuristics and biases
- Kahneman and Tversky: prospect theory
- Mental accounting and loss aversion

Mental accounting: The accounting system allows the principal to monitor the spending activities
of her managers (agents) and offer appropriate incentives. Individuals and households adopt a similar
strategy to handle their own financial affairs that I have called “mental accounting
- “Rules”: money from one account cannot be used for another purpose

Save More Tomorrow: programme where workers can save more for retirement voluntarily

Libertarian paternalism: is the idea that it is both possible and legitimate for private and public
institutions to affect behavior while also respecting freedom of choice, as well as the implementation of
that idea.

Nudge: libertarian paternalism and choice architecture

 People don’t manage themselves actively

Nudge is a concept in behavioural science, political theory and behavioural economics which proposes
positive reinforcement and indirect suggestions as ways to influence the behavior and decision making
of groups or individuals.
- Default option in pension plans checked in online form
- GPS maps give suggestion for what route to take but you can deviate from it

By paternalism we mean choosing actions that are intended to make the affected parties better off as
defined by themselves. More specifically, the idea is to help people make the choice they would select if
they were fully informed and in what George Loewenstein (1996) calls a “cold state,” meaning,
unaffected by arousal or temptation.

Choice architecture is the environment in which people make decisions. Anyone who constructs that
environment is a choice architect. Menus are the choice architecture of restaurants, and the user
interface is the choice architecture of smart phones. Features of the choice architecture that influence
the decisions people make without changing either objective payoffs or incentives are called nudges.

Sludge: when firms exploit nudges