Nudging economists in right direction

The Nobel Prize in Economics for 2017 was awarded to the American economist Richard Thaler for his contributions to Behavioural Economics. Even before this, in 2002, Daniel Kahneman was awarded the Nobel for his pioneering work in this branch of economics. Yet, despite its growing importance and recognition, behavioural economics does not seem to have found a stable place in the undergraduate and postgraduate economics courses in our universities, especially in India.

The apparent sluggishness in co-opting behavioural economics into mainstream economics courses is mainly due to the dominant economic thought starting from the 1970s that humans are rational and make decisions after weighing in all possible costs and benefits. Thus, human behaviour can be modelled using complex mathematical models which involve tedious calculations and solving of equations. However, behavioural economics moves away from the rationality assumption. It applies psychology to human decision-making and rightly recognises that humans suffer from certain cognitive biases that constrain their decision-making abilities. This explains why investors make rash decisions in stock markets and people eat junk food even when they know it’s bad for their health.

Thaler worked on this further and showed how positive reinforcements through non-coercive ‘nudges’ can achieve socially desirable outcomes. Nudge theory, thus, postulates that keeping junk food on a higher stack and healthy food on a lower stack in the supermarket will lead to perceptible changes in people’s eating habits. More importantly, this form of libertarian paternalism can be used by governments to change people’s saving habits, hygiene standards and educational outcomes.

In fact, governments and policymakers across the world are directly or indirectly incorporating the tenets of behavioural economics in general and nudge theory, in particular, in formulating schemes and policies. In the UK, a Nudge Unit has been opened by the government. So, has the NITI Aayog in India. The Swachh Bharat Mission is a massive exercise in nudging people towards toilet-use. Likewise, the Beti Bachao Beti Padhao campaign seeks to reinforce the importance of saving and educating the girl child.

Given that so much importance has been placed on behavioural economics by governments across the world, it is rather surprising that our universities teach very little of this field to aspiring economists. The over-arching reliance on rationality and mathematics has probably made it difficult to incorporate the rather unpredictable behaviour of a human being driven by cognitive biases. Yet, if we want our newly trained economists to nudge people in the right direction, they must first get their basics of behavioural economics right. Inability to explain irrational behaviour through mathematics cannot be an excuse. In fact, the math can evolve only if students of economics work on the various issues involving behavioural economics. Some of the math is already being developed in the best economics departments in Harvard and MIT. We, in India, should not lag behind.

To start with, there should be a compulsory paper on behavioural economics at least at the postgraduate level. An interdisciplinary course with the department of psychology would be even better. State governments can also set up their respective Nudge Units and recruit some of the specialised talent from the universities. This should nudge everyone in the right direction.

The author is a research scholar at Delhi School of Economics