Behavioral economics, based on the premise that people do not always think rationally

Behavioral economics has attracted attention for its attempt to understand social phenomena which are difficult to explain using conventional economic theory from a perspective of human psychology and behavior.

The fundamental premise behind this is that people do not necessarily act rationally.

For example, we have a tendency to overvalue items once we have obtained them. It becomes difficult to part with them for this reason. This is known as the endowment effect.

In fact, this does not apply only to objects; it is also thought to be true of the habits which we have acquired.

For example, even though the COVID-19 pandemic made it necessary to change various past habits and behaviors rapidly, this was very hard to do. That difficulty can be attributed to this tendency in people.

It is also called the status quo bias. The point is, because we overvalue the current situation, we tend to undervalue the risks of and difficulties caused by maintaining it. In other words, it is the feeling that keeping things as they are will probably turn out fine.

If it were possible for everyone to act on the basis of rational judgement, avoidance of the “three Cs” would perhaps have spread more promptly, and without resistance.

We can also point to the characteristic known as the present bias, which is the tendency to accord excessive importance to value which we have in front of us right now, rather than future value. This tendency is said to be strong in people with debts, smokers, gamblers, and those with a propensity for obesity.

In other words, even though, considered rationally, they ought to act prudently for the sake of future goals, they are unable to forgo immediate enjoyment, gravitating towards this instead.

However, this kind of tendency is not limited to certain people: all humans have it, to a greater or lesser degree.

Research therefore began to be carried out into the behavior of actual people, making use of a variety of knowledge about human behavior taken from fields such as psychology, sociology, cognitive science, and neuroscience, as well as economics. The results of this research have also taken form in the marketing field.

One example is “your recommendations”. The background to this is the large volume of information and number of choices available, meaning that there are many things to consider and it is impossible to choose. Basing your choice on the opinion of someone you trust or a sales clerk, or online reviews by many people, can make it easier to decide among these options.

Online shopping sites use the recommendation method, in which they analyze user preferences and recommend products which match these.

Online shopping and other sites also have the boxes accepting recommendation emails or user registration checked as their default setting.

If you do not want these services, you can uncheck the boxes, but most people leave them as they are. In other words, they are making use of the human tendency to want not to alter the status quo.

The “nudge” theory, which is based on the accumulated results of such research, is attracting attention lately.

Nudges to guide people to make better choices of their own free will

The national or local governments or administrative agencies want people to take certain actions, such as wearing a mask during the COVID-19 pandemic. This is because these are rational behaviors which are good for society as a whole.

However, even if they suggest to or ask people directly to do something, or tell them straight out that doing it is good for society, people’s behavior does not easily change.

The reason for this is that people prefer to make decisions of their own free will than to have someone order them to or forbid them from doing something. The nudge theory researches and attempts to utilize this phenomenon.

An interesting example was an initiative to post pictures of politicians who speak up frequently on environmental issues in the shower rooms of dorms at American universities. This resulted in reducing water and electricity bills by around half.

In other words, the presence of the photographs made people feel that someone else was peeping into the shower room and, because it was someone who talked frequently about the environment, the amount of time they spent in the shower got shorter.

In a similar project in Japan, models of the torii gates found outside shrines are placed on roadsides, or stickers depicting these gates are stuck in various places. This has resulted in deterring activities such as the illegal dumping of garbage or urination in public.

It can be thought that environmental issues or the gods are ways to make ordinary members of society feel that they need to reflect on their actions. Putting this kind of psychology or ethics to work led people to choose better behavior of their own free will.

In Hiroshima Prefecture, an investigation showed that by changing the call to evacuate in case of disaster from “Evacuating helps to save other people’s lives” to “If you don’t evacuate, you put other people’s lives in danger”, the number of people willing to evacuate increased.

It is a fact that if you do not evacuate early on, your rescuers may suffer secondary damage. It can be thought that appealing strongly to the Japanese psychology of not wanting to cause a nuisance to others improved its effectiveness.

In these ways, the principles of behavioral economics have gone beyond the realms of economics or marketing and are being used in policies to improve society or build local communities.

We need to think together about the issues with nudge theory

On the other hand, there are causes for concern. One of the important principles of nudge theory is not to use financial incentives to make people act.

Making people act due to the effect of monetary rewards often leads them to expect ever greater rewards, and to stop the action once the rewards disappear. In this way, it deviates from the fundamental tenet of nudge theory, which is to guide people to act based on decisions made of their own free will.

However, abuses may occur if such principles of nudge theory are used in distorted ways, such as removing or reducing incentives which should originally have been provided.

For example, are the handouts for those complying with the request to shorten opening hours during the COVID-19 pandemic sufficient? Many eating and drinking establishments may have complied with the request in order to avoid criticism and attacks for non-compliance.

In other words, if they are being forced to take the action of shortening their hours due to external pressure, rather than of their own free will, this is also inconsistent with the basic principles of nudge theory.

I do not think that there are easy answers to this question, but it is an issue which we need to consider.

Nudge theory basically takes a position which is called libertarian paternalism. This is the idea of guiding people to make “better choices” without infringing on their individual freedom of choice. Libertarianism is a way of thinking which places high importance on the freedom of choice of individuals, while paternalism has one party intervene in the choices of another party for the benefit of the latter, so the two concepts are generally in opposition.

For example, in the case of evacuation in times of disaster, there are local governments seeking to encourage evacuation, but there is also the freedom of individuals who refuse to evacuate. In some cases, there may be people who judge that evacuating is more dangerous. Individual freedom is limited in evacuation centers, and I think that this causes some people to suffer.

However, local governments probably cannot evaluate these freedoms or suffering as greater than the risk to life.

As a result, the message that not evacuating risks not only your life but those of the people around you could be called a last resort to encourage people to choose to evacuate voluntarily.

We cannot deny that there is an aspect of making people feel that they are deciding freely, even while calling it libertarianism. However, it may actually be cruel. Even if paternalism guides people towards choices which make society better, for whom is this “good society” good? Is it really a good society for each individual citizen?

I think that there are issues surrounding nudge theory that need to be examined much further. However, these are not issues which can easily be resolved. They are issues which require everyone, including us as citizens, to think about and debate together.

I believe that nudge theory will be utilized to a greater and greater extent from now on – not only in marketing or corporate organization, but also in familiar areas in our daily lives. When this happens, it will be important for us to pay attention to how it is used, bearing in mind the kinds of issue I have raised.

Always taking an interest in what these initiatives based on nudge theory aim to achieve will perhaps lead to true freedom of decision for us.

* The information contained herein is current as of April 2021.
* The contents of articles on are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.

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