Carsten Tams: A Noble laureate nudges for ethics

The work by Richard Thaler, this year’s winner of the Nobel prize in economics, has focused less on unethical behavior and more on savings, investing, and consumer choice behavior, but it has interesting implications for ethics practitioners.

First, his work challenges the rational choice approach to influencing behavior. The core premise of rational choice theory is that economic agents act as rational, selfish, and unemotional utility maximizers. This idea has dominated not just economic theory for much of the 20th century, it has also shaped the thinking on crime and how best to prevent it.

According to the rational choice model of crime, articulated by another Nobel laureate, Gary Becker, potential offenders weigh the costs and benefits of illegal conduct. The rational actor refrains from wrongdoing when the expected costs of such conduct outweigh its expected benefits. The cost is a function of the perceived certainty and severance of punishment.

To enforce compliance and deter crime it makes sense then to enhance surveillance, stiffen punishment, and to heighten awareness among constituents about the severity of punishment and the likelihood of detection.

Thaler, together with other founders of the school of behavioral economics, demonstrated the limited rationality of economic actors, describing the heuristics and biases (e.g., endowment effect, loss aversion, status quo bias) that shape their behavior. This school of economics produced a substantial body of research showing that punitive deterrence strategies may increase, rather than decrease, unwanted behavior.

Instead, and that is the second implication, Thaler advocates for an alternative, less coercive method for influencing behavior: a Nudge. In a book by the same title that Thaler co-authored with the eminent legal scholar Cass R. Sunstein, he defines a nudge as any aspect of a choice architecture that steers people’s behavior in a predictable way, without forbidding any options or significantly changing their economic incentives.

Unlike mandates or fines, nudges are specifically designed to preserve freedom of choice and avoid coercion. To qualify as a nudge, the intervention must be easy and cheap to avoid. The goal of nudges is to make desired behaviors easier, simpler, or safer for people.

Nudging techniques come in many forms. They include setting default rules, simplifying procedures, increasing the ease and convenience of desired behaviors, use of warnings, disclosures, and reminders, eliciting implementation intentions and pre-commitments, or invoking descriptive social norms.

The big power of small nudges in promoting pro-social behavior has been demonstrated empirically. A study on tax compliance showed that informing taxpayers that more than 90 percent of taxpayers had already complied in full with their obligations under the tax law had a significant effect on tax compliance, whereas threatening taxpayers with information about the risks of punishment for noncompliance had no effect.

Signs encouraging hotel guests to reuse their towels were more effective when they were informed that the majority of guests reuse their towels. Asking people to confirm at the top of a form rather than the bottom makes ethics salient and has been shown to significantly reduce cheating. Default settings have been found to significantly increase saving for retirement or participation in organ donation programs.

Applying the nudging methodology to business ethics holds equal promise. As structural elements embedded into the choice architecture, nudges are always switched on. Once put in place, they exert automated influence on behavior without depending on continued human operation.

Individual nudges can influence choices in significant ways. But when nudging is embraced as a generalized mindset, as a persistent curiosity in adding supports or removing obstacles for desired behavior, it can help shift an organization’s culture. The aggregate influence of co-oriented nudges, channeling behaviors towards a desired destination, can tilt the playing field in favor of ethical choices, all the while preserving people’s sense of autonomy.

A good starting point is to examine standard people management practices, such as competency models, recruiting, onboarding, training, leadership development, rewards systems, performance or succession management, looking for opportunities to implant nudges that make ethical behavior easier and modifying those aspects that inhibit it.

Great thinkers like Thaler open avenues to solving problems in new ways. He compels us to come up with non-coercive ways of influencing behavior when our first impulse might be to prescribe a mandatory rule. Thaler’s approach will not only be more agreeable to employees who care about their sense of autonomy; well-designed gentle nudges may also proof more powerful. Nudging should become a primary instrument in the toolbox of ethics practitioners.

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Carsten Tams, pictured above, is founder and CEO of Emagence, a boutique consulting firm based in New York City. Emagence partners with clients in private, public, and nonprofit sectors to develop evidence-based strategies rooted in behavioral science for solving organizational challenges. Typical areas of application include change management, governance, ethical systems, culture transformation, corporate responsibility, program assessment, learning design, post-crisis reputation recovery. He can be contacted here.