Embracing new technology and the ‘nudge’
Nobel Laureate on the relationship of psychology, behavior and economics
In the modern capitalist world, behaviors and decisions are shaped through external influences created by the architecture of the environment in which we interact. The “psychology of the person” often forms the basis of the views of Richard Thaler, 2017 recipient of the Nobel Memorial Prize in Economic Sciences and professor of behavioral science and economics at the University of Chicago, according to whom human behavior and the decisions we make are often biased against economic rationality or even against our personal interests.
Known as the father of modern behavioral economics, Thaler explains in his works “Misbehaving” and “Nudge” that the psychology of the person has a direct impact on market behavior, and through small “nudges” we can improve our decisions.
Kathimerini interviewed Thaler, former president of the American Economic Association, and asked him about the existing difficulty of bridging psychology and economic science and the driving force behind his involvement in behavioral science, the volatility of the market based on individual-psychological factors and the impact of artificial intelligence on our daily lives.
“What motivated me to think about the topics that have become known as behavioral economics was ‘looking out the window.’ Standard economic theory analyzes the behavior of economic ‘agents’ who are highly rational, unemotional, and have no self-control problems. Even in graduate school, I found these assumptions to be unrealistic and the predictions of models based on such assumptions make poor predictions about behavior. I thought adding some insights from psychology and other social sciences might help economics become stronger and more accurate.”
However, regardless of the potentially high level of education of many people, and the diverse economic models of managing economic data, many tend to act “irrationally” in their decision-making. According to Thaler: “I do not like to use the word ‘irrational’ because it is pejorative. It is not ‘irrational’ to be unable to play chess like a grandmaster or determine how much to save for retirement. Behavioral economists do not think people are dumb, we think the world is hard! Even getting a PhD in economics is not sufficient to be able to decide what portfolio is best. We all can use some help.”
Going deeper into the theory and the professor’s understanding of how human characteristics (psychology) influence decision-making by changing market indicators (economics), the importance of the “Nudge Theory” and its applications in real-life situations is mentioned, according to which small “nudges” can contribute to the improvement of our decisions. As Thaler explains: “My co-author Cass Sunstein and I define a nudge as some feature of the environment that attracts our attention and alters our behavior without limiting choice or altering economic incentives. Nudges take place in the context of what we call ‘choice architecture.’ Think of a website of a giant retailer like Amazon. It is organized in a way that makes it easy for shoppers to find what they want, even though they stock virtually every book (in many languages!).
“In that vast cyberspace, there are also numerous nudges trying to get the attention of busy customers. Nudges can be used to make money or to improve public policy. The biggest application so far has been to retirement savings plans that have adopted three key nudges: 1) automatic enrollment: participants are included in the plan unless they opt out; 2) automatic escalation (or Save More Tomorrow): saving rates are gradually increased over time; 3) default investment funds: low-cost, diversified investment products that depend on a participant’s age make the task of choosing a portfolio safer and easier. All three of these features are included, for example, in the NEST retirement fund adopted by the UK.”
Continuing the discussion with Professor Thaler we focused on the so-called “architecture of choice,” in which the consumer interacts and which has been accused of indirectly manipulating consumer behavior. Rejecting the reasoning that “nudges” are used to “cure” deviant non-rational behavior, Thaler argues that “we do not try to ‘cure’ people. Instead, we try to make it easier for them to succeed. GPS is a good example. I have a terrible sense of direction, but I now have an app on my phone that lets me choose a destination and then helps guide me to it. I get to decide where I want to go and can opt out of the app’s suggestions. Nudging at its best.”
In recent months, the international scientific community has been engaged in debates that are more about the future than about current problems, with artificial intelligence playing a dominant role. Responding to a question about his possible concerns or reservations arising from the integration of AI into our lives, Professor Thaler is reassuring. “At least for now, I think the benefits of AI greatly exceed the dangers. Again, GPS is a perfect example. The app knows the traffic situation in real time and can make changes to the route on the fly. No human can do that. Even in a self-driving car, the user chooses the destination (and, we hope, pays attention to override the system if necessary). Am I worried that someday my car might kidnap me? Not in my lifetime. Of course, I am old.”
Rounding off our discussion, Professor Thaler points out that he would trust an “intelligent” machine to replace part of his daily tasks. “Of course, I would trust her. We take for granted that we have an up-to-date encyclopedia on our phones. And my car beeps at me if I get too close to another car. Is not that good?”
