A 'nudge' from Japan

A 'nudge' from Japan

Nobel-winning economist Richard Thaler traces his inspiration back to a visit to a museum dedicated to poet Mitsuo Aida.

Back in 2009, behavioural economist Richard Thaler found a kindred spirit in a small museum nestled in the heart of Tokyo. This year's Nobel Prize winner in economics was struck by the simple words of the calligrapher and poet Mitsuo Aida, written with brash, broad strokes in black ink.

"Happiness is decided by the heart," reads the translation of one poem at the Mitsuo Aida Museum. "We are only human after all," reads another.

Thaler was so taken with Aida's work that he bought a souvenir T-shirt from the gift shop and went on to quote Aida in his presentations. "I think the author, Mitsuo Aida, was a behavioural economist," Thaler said in an interview in 2009 with Nikkei Business, where I was a staff writer.

Aida was born in Ashikaga, in central Japan, in 1924. He became a prolific calligrapher, and his 1984 book Ningen Damono ("We are only human after all", or alternatively, "Because I'm human") turned out to be a smash hit. Since then, his artwork and words of wisdom have earned renown nationwide. He died in 1991.

"Otherwise he would be my next co-author," Thaler said in the interview. "Aida Mitsuo would be my next, for sure."

IMPERFECT SPECIES

Why did Aida's work resonate so deeply with Thaler, whose "nudge" theory posits that small incentives can influence human behaviour?

Traditional economists craft models on the assumption that people are rational. Thaler thinks differently. He grapples with our inherent irrationality and contemplates how to make life better.

"As you know, economists normally study [theoretical humans dubbed] 'econs': very smart people who never make mistakes and have no emotion, no self-control problems, no hangovers," Thaler said. "Instead, we study humans. Humans are not so smart, make many mistakes, are absent-minded, distracted, have self-control problems, some hangovers."

Many economists would also argue they are working to improve our society. For those who study the economics of well-being, their primary focus tends to be figuring out how to estimate or measure people's degree of satisfaction. In 2008, then-French President Nicholas Sarkozy commissioned a study on alternatives to gross domestic product. The research was led by the famed economists Amartya Sen, Joseph Stiglitz and Jean-Paul Fitoussi.

The Organization for Economic Cooperation and Development in 2011 published a report on "well-being" in its member countries. Bhutan is famous for measuring "gross national happiness". Another Nobel laureate, Princeton University professor emeritus Daniel Kahneman, delves into well-being from a psychologist's perspective.

When I asked Prof Thaler whether we can measure happiness, he replied: "I think we can measure it to some extent. We are making progress. But I don't think that we know how to make people happy."

Then he quoted Aida's sayings that "we are only human" and that "happiness is decided by the heart". In these words, he saw an answer to what does -- and does not -- bring happiness.

'BETTER CHOICES'

We humans tend to make irrational decisions when we are overconfident, or when we harbour cognitive biases. Understanding these tendencies, Thaler contends, can lead to better policies. His advice to governments is "to have some psychologist advisers, not just economists".

His core ideas are explained in his best-selling book Nudge. A nudge is a small push, often with the elbow. When it comes to policymaking, the key word is "small" -- as opposed to heavy-handed measures.

As Thaler put it: "Paternalism means the way a parent would choose. So normally people think of paternalism as forcing choices. So we don't believe in that. We believe in maintaining choice. But we want to still help people make better choices. And the strategy we use for that is what we call choice architecture."

This is not about coercion or, on the opposite end of the spectrum, laissez-faire. It's just a nudge.

Thaler gave an example of his office at the University of Chicago. Faculty members were working on the third, fourth and fifth floors. The floors were connected with open staircases. "As a result of this architectural feature, my colleagues on adjacent floors feel closer to me because I can see their offices, sometimes I can even hear them. And so I'm more likely to talk to them."

As another example, Thaler pointed to a well-known road in Chicago: Lakeshore Drive. He said that he took the route daily, but that there was a very dangerous curve. The lines on the road, however, offered an ingenious solution.

"Notice as you're reaching the curve, the lines are getting closer together. Now, when you're driving, that gives the illusion that you're speeding up. So you slow down. You hit the brake. That's a nudge."

Thaler said that even with signs saying "Reduce speed" and "Curve: 25 miles an hour", the lines were the "most effective".

He gave actual policy examples, too. "In the US, by switching the pension scheme from opt-in to opt-out, the speed at which people join greatly increased. Most people will eventually join, but under an opt-out system almost everybody joined immediately -- over 90%."

When a fund company was looking for ways to get people to save more, Thaler helped develop a plan called Save More Tomorrow.

"And the way it works is you invite people to join a plan where every time they get a pay raise, the proportion that they save goes up. So the reason we call it Save More Tomorrow is that many people have more self-control for the future."

The first company that adopted the plan saw its savings rates triple; today, such programmes are available all over the United States.

At the end of our conversation in 2009, I asked Thaler, "Do you think there will be a Nobel laureate behavioural economist, such as yourself?"

"You know," he replied, "that's up to the Swedes."

Now we have the answer.

Ayako Hirono is the assistant business and market news editor of Nikkei Asian Review.

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