Definition
Nudge theory is the proposition that decisions can be systematically influenced through choice architecture changes that make particular selections more likely without restricting other options or changing their economic payoffs.
Why it matters
Nudge theory names a specific approach to influencing decisions that operates through the presentation of options rather than through economic incentives, prohibitions, or mandates. Distinguishing nudges from these other policy tools makes it possible to reason about which kinds of interventions apply to which kinds of decision failures, and to identify when a design element is functioning as a nudge whether or not it is labeled as one.
How it works
A nudge is any change to the choice architecture that alters behavior in a predictable way without foreclosing options or materially changing costs and benefits. Typical examples include changing the default outcome, changing the order in which options appear, adding or removing information, or changing the timing at which a choice is presented. The intervention is defined by what it does not do (compel action, add or remove options, alter payoffs) as much as by what it does. Nudge theory as articulated by Richard Thaler and Cass Sunstein in their 2008 book Nudge treats these interventions as design tools available to public and private choice architects across policy domains, and the theory has been applied extensively to retirement plan design, health choices, and consumer finance since publication.
In practice
For an individual, nudge theory is analytically useful chiefly as a diagnostic. If a decision environment is influencing you in a particular direction without giving reasons for that direction and without changing the underlying economic tradeoffs, you are being nudged. That recognition does not settle whether accepting the nudge is a good idea for you, only that the influence is present and is a feature of the design rather than of the choice. Plan sponsors and fiduciaries considering nudge-based interventions, including default enrollment, escalation defaults, or lifetime income prompts, should distinguish the nudge design from the substantive fiduciary evaluation of the arrangement being nudged toward.
Related terms
- Choice architecture
- Libertarian paternalism
- Default effect
- Automatic enrollment
- Framing effects
- Status quo bias
- Commitment device
- Choice overload