First Obama, now Cameron embraces 'nudge theory'

Andy McSmith reports on the doctrine sweeping Downing Street

Many years ago, when David Cameron was still at school, boys of his age would fall about laughing at a Monty Python sketch involving two men in a pub, one of whom was desperate to draw out information about the other's sex life. His continually repeated phrase was: "Nudge, nudge, wink wink, say no more!"

Nudge – with or without a wink – has a special meaning in modern political theory, and was very much in vogue in Mr Cameron's circles two years ago, before the current economic crisis began. Then it disappeared, as if they had decided to say no more. Now, it appears, it is back. The man who elevated "nudge" into a political catchphrase, the Chicago-based academic, Richard Thaler, says that his idea is at last getting serious attention in Downing Street, as it is in Barack Obama's White House.

A "behavioural insight team" – known colloquially as the "nudge unit" – is reported to be growing in influence inside No 10. The team includes the academic David Halpern, a former adviser to Tony Blair. He reports to Steve Hilton, Mr Cameron's director of strategy, and the Cabinet Secretary, Sir Gus O'Donnell. Vince Cable, the Business Secretary, is said by Professor Thaler to be "very much on board".

Professor Thaler visited Britain in 2008 to promote his theory, met Cameron, and made such an impression that for a time he acted as unpaid adviser to the Tory leader. His day job is directing the Center for Decision Research at the University of Chicago where he "studies behavioural economics and finance as well as the psychology of decision-making which lies in the gap between economics and psychology". He also "investigates the implications of relaxing the standard economic assumption that everyone in the economy is rational and selfish, instead entertaining the possibility that some agents in the economy are sometimes human".

To some people this may sound a statement of the bleeding obvious. Young people would be behaving rationally if the money they spend on iPhones was put into a pension fund instead, but most are not going to do anything so far-sighted without very heavy prompting. According to Professor Thaler, we would all invest in the stock market if we were rational, but we do not. Smoking, overeating and taking no exercise are other examples of irrational behaviour.

Nudge theory is an attempt to resolve a classic Conservative dilemma: since they believe in the small state and low taxation, should the Conservatives just leave us to our bad habits, and accept the undesirable social consequences that will follow, or use the levers of state to try to improve our behaviour?

There is a powerful libertarian wing within the party whose general prejudice is to allow people to do as they please provided they do not break the law. There are also paternalists who believe that the fortunate in society have a duty to protect the less fortunate from the consequences of their own folly. Libertarianism and paternalism are assumed to be necessarily in conflict.

In 2008, Professor Thaler and Cass Sunstein wrote a book called Nudge: Improving Decisions about Health, Wealth, and Happiness in which they claimed that there is a middle way that enables the state to be both paternalist and libertarian. Instead of ordering people around or leaving them to behave in self-defeating ways, the state can nudge them into behaving sensibly.

The example they gave which has attracted most publicity – not because it is the most important, but because it is so wacky – is the success story of the public loo in Amsterdam airport where men were nudged into urinating in the pan, despite the many distractions which were apparently spoiling their aim. This small, but desirable, improvement in male behaviour was achieved by painting a picture of a house fly on the porcelain. The quantity of misdirected urine is said to have fallen by 80 per cent.

In the UK it has long been assumed that if people are given financial inducements to cut their fuel bills through better insulation, they will do it. Nudge theory allows that they are not necessarily that rational, but will be influenced by what their peers are doing. Therefore, the way to persuade people with excessive fuel bills to do something about it is to tell them what the average bill being paid along their street is. Very few consumers will willingly pay more than their near neighbours.

The authors called their philosophy "libertarian paternalism". Another phrase they introduced was "choice architecture", a concept implying that the state can be the architect that arranges personal choice in way that nudges consumers in the right direction.

Not everyone who had read their book was overwhelmed. The writer Peter Wilby thought it was "pretty marginal to what politics ought to be about". But it impressed David Cameron, who met Professor Thaler at around the time that the book was published. He and his adviser, Steve Hilton, were looking for a neat idea that would suggest the Conservatives had found the ideal median between state intervention and laissez-faire. In August 2008, the book was included in a list of suggested summer reading circulated to Tory MPs.

Then all went quiet. As the economic crisis hit the UK, there were important things to talk about, and the next time the Tories reached for a big idea, they produced the Big Society. But the Big Society left the Civil Service cold – despite the fervent conviction David Cameron put into his exhortations to the public to be more civic-minded – because it did not translate well into policies.

It does not answer the question whether it is government's business to deter people from adopting bad habits that damage their health or wealth, yet ministers have to make these choices. If they intervene, they can be accused of running a nanny state; to do nothing risks appearing irresponsible and uncaring. But if the theory works, they can avoid either of those extremes – by nudging.

Wonks at the White House

They are the wonk's wonks: two middle-aged scholars from Chicago whose gift for explaining even the most complex legal and economic conundrums, in terms that Joe Public can understand, has turned them into cult figures in both the dusty halls of academia, and beyond.

But for men who are frequently hailed as visionaries, and whose books – in particular the hugely influential Nudge – have achieved the rare distinction of filling libraries, holidaymakers' suitcases, and presidential bedside tables, Cass Sunstein and Richard Thaler boast surprisingly dodgy political antennae.

The first time they encountered a local politician called Barack Obama, they presumed that his career was headed nowhere. "I met him at a neighbour's apartment," Thaler once recalled. "At the time he was running third in the primary [for the Senate election]. So we thought: great guy; probably never hear about him again."

Fortunately, for their careers at least, they were wrong. Mr Obama's rise has propelled the academic career of Thaler, hitherto an largely anonymous 64-year-old economic theorist, into orbit.

Sunstein, a formidably brainy law professor, has done even better: he now earns a crust as the White House regulatory "tsar", bringing the ideas that informed Nudge to bear on White House decisions on everything from shaming companies so they pollute less to getting people to make use of their tax-free pension plans. With his wife Samantha Power, who sits on the National Security Council, he forms one of Washington's foremost power-couples.

Guy Adams

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