Nobel laureate in economics, Thaler, has recognized that small changes can often have big effects. His concept of "nudging" works in the corona pandemic as well as in retirement provision.
By Angela Gopfert, boerse.ARD.de
Sometimes a little nudge is enough. This finding forms the center of Richard Thaler’s research. The US behavioral economist and Nobel laureate in economics will celebrate his 75th birthday on September 12th. His concept of "nudging" is experiencing a real revival worldwide in the wake of the Corona crisis.
"Nudging" is about consciously "nudging" citizens in order to motivate them to behave in a certain way. To this end, the framework conditions, the decision architecture, are changed in such a way that decisions that make sense for the good of the individual and society are easier. In times of pandemics, life can save.
Supermarkets – the strongholds of nudging
If you look at everyday life in Germany with “nudging glasses”, you can see many such “nudges”. For example, pictograms in washrooms remind us to wash our hands correctly. The real strongholds of nudging, however, are the supermarkets: loudspeaker announcements, signs and adhesive strips on the floor should remind us of the minimum distance and the need to wear a mask.
From the perspective of traditional economics, however, such nudges would not be necessary at all. The rationally acting "homo oeconomicus" would of course keep the minimum distance and wear a mask in order to reduce the risk of infection for himself and others.
Revolutionary and cross-border commuter
Richard Thaler, on the other hand, assumes that people often do not act rationally, that they do not always have the best for themselves and society in mind. Thaler is thus a revolutionary in classical economics – and a crossover between behavioral economics, psychology and economic policy.
Thaler introduced the "Planner-Doer model" into economics. In this model, humans have two I’s: the far-sighted planner who strives for the best long-term solution, and the short-sighted doer who seeks short-term satisfaction. Often the "doer" wins. Unfortunately, one has to say – with regard to retirement provision, for example.
The Nobel Prize in Economics
In 2017 Richard Thaler received the Nobel Prize for Economics. The Royal Swedish Academy of Sciences justified the decision that he had built psychologically realistic assumptions into economic models and managed to make behavioral economics from a sub-area of science mainstream. "He made economics more human."
The eternal struggle between "planner" and "doer"
In Germany, the pension reform of 2001 lowered the level of the statutory pension and gave people more personal responsibility. It would therefore be rational to provide for old age with additional capital – be it through company or private pension schemes.
But de facto, many people do not save or save too little. They prefer to consume. To put it in Thaler’s language: the short-term oriented "doer" wins over the long-term oriented "planner".
"Many people tend to avoid decisions and stick to the current status quo," said Andreas Knabe and Joachim Weimann, professors at the Otto von Guericke University Magdeburg, in an Ifo paper. "In the case of old-age provision, this means that you only have the statutory, but not an additional private old-age provision."
The look to Sweden
Admittedly, in Corona times, the Swedes are not always suitable as a role model. But when it comes to private old-age provision, it is definitely worth taking a look at Sweden. And to Great Britain as well.
Employees there automatically pay into a savings plan – unless they explicitly object. Private retirement provision is practically the default solution. In the technical language this is called "opt-out" instead of "opt-in".
The Germany pension
In Germany this model is being discussed under the name "Deutschlandrente". This is a concept developed by the economists Knabe and Weimann and the Hessian state government.
On the supply side, competition is to be strengthened in order to create a transparent and cost-effective range of pension products. On the demand side, it is about switching from opt-in to opt-out.
"After that, everyone who does not actively express themselves will have an additional, private pension at their disposal. But since it is possible to deselect the pension at any time, personal freedom of choice is not impaired," said Knabe and Weimann.
Better financial literacy – also a nudge
So the idea is to push people towards their retirement happiness and let the far-sighted planner win over the short-term doer.
A Germany pension is not the only way to motivate more people to provide for old age. Better information, better financial knowledge and education, for example in the school setting, would also be nudges in the sense of a decision architecture that could positively influence the financial decisions of individuals.
The fear of the "dictatorship of happiness"
But there are also critics of the nudging concept. Quite a few see it as patronizing the citizen. People would be tricked into doing something they normally wouldn’t do with "psychological tricks". They would be incapacitated and forced into a "happiness dictatorship".
One can argue that way. But what is the alternative in terms of old-age provision? An increase in the pension contribution rate? An even later retirement age? Or simply let today’s generations of not-yet-pensioners sink into old-age poverty one day?
Better a little nudge then.