Behavioral Economics: Are Nudges Cost-Effective?

Carla Fried at UCLA Anderson Review: “Behavioral science does not suffer from a lack of academic focus. A Google Scholar search for the term delivers more than three million results.

While there is an abundance of research into how human nature can muck up our decision making process and the potential for well-placed nudges to help guide us to better outcomes, the field has kept rather mum on a basic question: Are behavioral nudges cost-effective?

That’s an ever more salient question as the art of the nudge is increasingly being woven into public policy initiatives. In 2009, the Obama administration set up a nudge unit within the White House Office of Information and Technology, and a year later the U.K. government launched its own unit. Harvard’s Cass Sunstein, co-author of the book Nudge, headed the U.S. effort. His co-author, the University of Chicago’s Richard Thaler — who won the 2017 Nobel Prize in Economics — helped develop the U.K.’s Behavioral Insights office. Nudge units are now humming away in other countries, including Germany and Singapore, as well as at the World Bank, various United Nations agencies and the Organisation for Economic Co-operation and Development (OECD).

Given the interest in the potential for behavioral science to improve public policy outcomes, a team of nine experts, including UCLA Anderson’s Shlomo Benartzi, Sunstein and Thaler, set out to explore the cost-effectiveness of behavioral nudges relative to more traditional forms of government interventions.

In addition to conducting their own experiments, the researchers looked at published research that addressed four areas where public policy initiatives aim to move the needle to improve individuals’ choices: saving for retirement, applying to college, energy conservation and flu vaccinations.

For each topic, they culled studies that focused on both nudge approaches and more traditional mandates such as tax breaks, education and financial incentives, and calculated cost-benefit estimates for both types of studies. Research used in this study was published between 2000 and 2015. All cost estimates were inflation-adjusted…

The study itself should serve as a nudge for governments to consider adding nudging to their policy toolkits, as this approach consistently delivered a high return on investment, relative to traditional mandates and policies….(More)”.