The Ethics of Nudging

Is it ethical to nudge people?

Photo: Polar Cruises. Source: Wikipedia

“Nudging” is all the rage. A nudge is structuring someone’s choice so they make the “right” decision. For example, putting fruit at eye-level in a cafeteria is a “nudge” towards healthy eating. Banning junk food and sugary sodas is not. That’s coercion. Participating in Social Security – at least paying into it – isn’t a nudge, it’s part of our Federal tax system. But the default settings on a 401(k) plan are nudges. You can opt out or have your investments all go into cash if you want, but it takes a little effort on your part. Most people just fall into the defaults.

But is nudging a good idea? Is it right to guide someone in the “right” direction? I see three major issues. First, does nudging interfere with our choices? That depends on the how the choice is structured. If we just have to check a box to opt out of a default, that doesn’t seem burdensome. But if we have to fill out three forms in triplicate, that’s too much.

Second, is nudging too convenient? Does it make it too easy for us to go along with the default option and never make up our minds? In that way, nudging could infantilize us. Again, it depends on how the nudge is structured. If the choice is clear, and the default is clear, it’s hard to argue with changing what the default is.

Finally, does nudging make us better off? That’s a hard question, because we can’t really say what “better” means for everyone. Going back to retirement savings, it may be good for me to save more for retirement – if I can spare the money right now, and if I’m going to be around to collect. But I’m the best judge of my own savings, not some bureaucrat in Washington or Brussels. Nudges can be very effective, even when all the choices are clearly disclosed. The best we can say is that nudging may be pragmatically useful for achieving policy goals that we – through our representatives – have somehow settled upon before.

Any time economists and policy wonks start to talk about “choice architecture” and their ideas of the “right” policy outcomes, I get suspicious. Who put them in charge? But we have to have defaults: something has to be at eye-level in the cafeteria. If the choices are presented honestly and fairly, nudges shouldn’t be a problem. Just don’t nudge us into morally fraught questions – like organ donation or family issues. In those areas, everyone has to take their own choices seriously.

Hypermarket. Photo: Lyza Danger. Source: Wikipedia

For good or ill, nudging will always be with us. Salespeople and marketers nudge us towards what they’re selling all the time. I expect that when I go into a grocery store. We need to be careful, though, when public policy issues are the question. We might end up being nudged right off a cliff.

Douglas R. Tengdin, CFA

By |2017-07-17T12:21:18-04:00May 24th, 2017|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

Leave A Comment