Have you ever needed a last nudge to do something you had been thinking about for a while? Changing jobs, going on a diet, going to the gym? Nudge theory was introduced in 2008 by economist Richard Thaler to explain how to “nudge” people to take decisions that can be difficult but benefit them in the long term.
Many of the decisions we take are based on two alternatives: Should I have pizza or salad for dinner? In order get ahead, should I continue at my current job or change? Should I open a term-deposit savings account or not? Nudge theory states we usually choose the easiest option rather than the most suitable one and, therefore, we need “a nudge” to do what best suits our needs.
And how can we be “nudged”? Let’s look at an example: We know we want to put a specific amount of our monthly salary into savings. Although we know it is in our interest to do so, we have a hard time going through with it. Therefore, we need a “nudge”. What if we tell our bank to automatically transfer 20% of our salary to a savings account each month? Then our bank will be giving us the nudge we need each month.
Richard Thaler’s theory
This theory was developed in 2008 by economist Richard Thaler. He reasons that the concept of “nudging” means helping people have more self-control to take decisions, especially in regard to their finances. Not having enough time to think, personal habits or not properly evaluating the situation can lead us to choose the least suitable option. Nudge theory suggests placing small, practical stimuli or “nudges” to guide us towards the decision that benefits us the most in the long term.
Thaler’s ultimate objective in developing this theory was to prompt more people to pay taxes. However, he and his influential theory laid the foundations of household finance for an entire generation, particularly in English-speaking countries. Thaler even made a significant contribution to behavioural economics, which studies why we spend money the way we do. He won the Nobel Prize in economics in 2017.