February 9

Purposeful Business – Nudges and Sludge

Axel Kravatzky

Purposeful business uses behavioural techniques such as Nudges to move people to make choices themselves which are to their benefit. Purposeful businesses also work to remove Sludge – any aspect shaping people’s choices that makes it harder for them to end up better off (in their own conception of better).

Nudge emerges out of one of the social science disciplines, behavioural economics, within which there has been a lot of progress. Richard Thaler and Cass Sunstein, influential behavioural economists, wrote the book called ‘Nudge – improving decisions about health, wealth, and happiness’ in 2008. That book became hugely influential and ‘Nudge Units’ were set up by governments around the world to support public policy – the first one in the UK.

In 2017 Richard Thaler received a Nobel Prize in Economics for his contribution to behavioural economics – particularly the inclusion of three psychological factors: the tendency not to behave completely rationally, notions of fairness and reasonableness, and lack of self-control.

In August of 2021, Thaler and Sunstein published the second, and ‘final’ edition. They revised their successful book because of the change and experience accumulated since then – to illustrate that extent of change. In the intervening period, think how different Iphone 1 is from Iphone 13.

The COVID-19 pandemic has shown how difficult it is to agree on collective societal action: to take the vaccine, even when people are facing mortal risks in the short term, the science is clear, and the vaccine is free for individuals to take.

When it comes to climate change, the challenge is even larger and Thaler & Sunstein refer to the nature of the challenge as a perfect storm. The climate change challenge requires humans to act against many known decision making biases and on top of that poses the challenge of overcoming temptation to free-ride (not contributing but benefitting from the value generated by actions and efforts of others).

Natural science will remain critical for understanding what is happening around and within us and to create new and effective solutions. Social science will also remain critical – because the realities we experience are socially constructed and we need to find ways of effectively transforming them.

The ongoing pandemic has exacerbated inequalities and tensions in societies across the world – including the Caribbean. The rich have gotten richer, the poor poorer, and social tensions and anger are rising.

Examples from very different parts of the world illustrate how deep underlying tensions can lead to massive breaks in society based on relatively small triggers linked to reforms such as energy related subsidy systems. In Chile, the trigger was an increase in public transportation costs; in Kazakhstan an increase in fuel price; in France the yellow vest protests were triggered by rising crude oil and fuel prices.

The recently released annual survey of global risk perceptions by the World Economic Forum’s (WEF) has shown that all around the world people are worried: climate and sustainability related risks have settled to take the top three spots, though for the next two or five years, livelihood crises and erosion of social cohesion, societal inequity risks are seen to be even more serious.

Given the collective view on what the risks are, there is consensus that business-as-usual cannot be sustained even in the short and medium terms. What is required is systemic transformation that allows us to adapt to the climate and other biosphere related crises that are already with us and that will only intensify for the foreseeable future. Even while we are seeking to actively stop doing harm, for example by achieving Net-Zero greenhouse gases, we need to also try to restore nature, one cannot be achieved without the other.

Fragile economies have been and continue to be rattled by the pandemic. Those that are seeing any kind of economic activity coming back are glad for the financial lifelines that these bring.  

Economic interests are entrenched in the traditional sectors and ways of doing business. Social contracts are already hanging on a thread. Most people can imagine a better future, but not seeing credible signs that we are transforming in a way that enables us to adapt to the unavoidable climatic changes and transform to restore and thrive.

To succeed we need to strengthen our social contracts and build up enough political capital that allows us to transform our ways of doing business in fundamental ways. We need to live and work within our planetary boundaries. The world has already agreed on specific sustainable development goals to be achieved by 2030. We are within the decade of action, and are facing the last hope of staying within a 1.5 Celsius temperature rise – but only if we scale up our efforts and effectiveness by multiple orders of magnitude during the next five years.  

Ernst Fehr and Simon Gächter, two behavioural economists, have shown that people are ‘conditionally cooperative’. We can construct cooperative agreements with a chance of success if we enable agreement partners to punish non-co-operators at their own expense. In addition to that, policies need to ensure that economic incentives created through tax regimes for undesirable consequences – e.g. carbon emission – are aligned with the results we are seeking.

Legislation and regulation that requires organizations to disclose  their greenhouse gas emissions and align with science-based targets as currently implemented in several parts of the world have been shown to be powerful and effective.

Behavioural economics shows that it is possible to design the choice architecture in such a way that we are more likely to make decisions that are in our own best interest. Behavioural economics should therefore be in the competence and toolbox of organizations, public policy makers and legislators.

This article is part of the "Purpose with Profit" Column and an earlier version was published in the business section of the Newsday (Trinidad & Tobago), Business Authority (Barbados). our.today (Jamaica), and The Voice Newspaper (Saint Lucia) in January 2021.

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