Lecture: Nudges and Everyday Decisions

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Good morning, everyone. Last week we looked at the traditional economic model, which assumes that people make rational decisions based on complete information. Today I want to complicate that picture, because in real life, people rarely behave the way the model predicts. Let's start with a simple example: retirement savings. For decades, many employers offered pension plans that workers had to actively join — you had to fill in a form. Participation was often surprisingly low, even though joining was clearly in people's interest. Then some companies tried something different: they enrolled everyone automatically, and workers could leave the plan if they wanted to. Participation rose dramatically, in some studies from under half to more than ninety percent. Nothing about the plan itself had changed — only the default option. This is what researchers call a nudge: a change in how choices are presented that influences behaviour without forbidding any option or significantly changing incentives. A second principle is loss aversion.