Nudge Economy

Written by: Gauri Jaitely, Delhi University

What's a Nudge?

In simple words Nudge means "to poke someone or give a light push."

 

But what is Nudge Theory/Economy?

Nudge theory is a concept in Behavioural Economics and Political theory as it includes psychological, political and economic aspects. It proposes the concept of "Positive Reinforcement" as to influence the behaviour of a group or an individual without any force and it seems to be a natural change in the economy and the lives of people.

For instance, in simple words, if a parent wants its child to be fit, s/he must get things which are healthy for the child rather than keeping cookies or chocolates in their environment as environment or a situation will bring a change in the habit.

A nudge can be defined as any aspect of choice architecture that alters an individual’s behaviour in a predictable way, without limiting his choices or significantly changing incentives.

 

The question is how is it relevant right now?

It has been observed that whenever an economy is in recession or panic there is always a change in lifestyle which brings a change in consumption pattern.

Before answering the question, there is a current situation or a live example which would help you to understand the concept better:

 

Economical Aspect

Britannia’s Q1 report showed surge in sales of “good day” and “tiger” biscuits, by almost 25%. Rs700 Crore plan has been introduced to expand the production by 25% in Bihar, Tamil Nadu and Uttar Pradesh as Rural markets have outpaced Urban markets/sales.

Since the Lockdown was announced in March 2020, 1.5 Lakh shops added in June, a network push in North India where it has been traditionally weaker against their rivals.

Wadia says it’s not going to be a sustainable growth, will last up to 1 year, or till the situations and trust over other alternatives get backs to normal. 

 

Shares of Britannia have seen a dream run over the past few months as a nationwide lockdown led people to consume more packaged food. The company’s managing director Varun Berry has been using this opportunity to sell a portion of his holdings. He has sold Rs 68.4 crore worth shares since the beginning of FY21 according to stock exchange filings. Over the past year, he has sold shares worth Rs 105 crore.

 

Here in this case there is a change in buying preferences of the consumers because of the pandemic, as many bakeries and shops are still closed and people are relying more on packed goods.

Though this is a short-term effect, but the real game changer would be including vitamins, etc healthy ingredients in their products to boom it in the market. Wadia told that they are considering to include such ingredients in their products which will attract the customers as health is something of which maximum people are getting worried about these days.

MD of Britannia believes the trend of consumers seeking immunity-giving, health-boosting products is here to stay. In a few months, the biscuits-to-dairy company intends to launch two biscuit varieties and two dairy products, all fortified with vitamins, minerals and also with turmeric, ginger and other Ayurvedic ingredients.

The study mentioned above shows how lockdown in India affected FMCG stock and made Britannia best performing company (gained 60% since lockdown). This is a clear example of nudge in the economy as eating habits of people changed in short run and to convert it into a long run success amendments will be taking place in the product and will be displayed in a more healthier way in order to have a healthy alternative (using people fear of getting ill).

During such crisis it is believed and seen the Nudge plays its cards very well as the economy tilts in a new direction and ordinary lives of people mend accordingly.

This might seem as a small change at micro level but at macro level it impacts the whole food industry and the decisions to be taken.

 

This is an example of one company, there are many more real-life examples. One of the current scenarios is, that travel companies have started collaborating with social media influencers to try nudge people to travel across the states as restrictions are uplifting. Many private companies such as Airbnb and Indigo plus Tourism board of Madhya Pradesh have started running tourism campaigns.

 

Social Aspect

All human beings are social animals and as an irrational being, we tend to go with the crowd or try to follow the influential people, who hold power or get incentives (like economically).

“Social Norm Nudges” inform the people about what others are doing and what are they benefiting from it, this induce human beings to alter their behaviour maybe for good or bad.

Nudge theory is applied directly or indirectly by Government, Businessman/woman, or other influential people to gain public attention either towards their product or policy.

Here policymakers hold the advantage to draw attention of people towards welfare programmes in the society and Nudge theory helps the government as people become more active towards the same.

For instance, In India “Swachh Bharat Abhiyan” or “Make in India” these two missions were largely supported and popularised and advertised across the nation as it was supported by industrialists (companies included these missions into decision making for their company), celebrities and law makers at the local level.

Not just the policies of government but Bollywood, which has the maximum reach across the nation started working on movies such as “Padman”, “Thappad”, “Pink”, etc which made people think in different direction about social issues they usually face. It is a fact that our environment determines what kind of person we are, thus to shape the general public in a particular way whether its for a product of a company or a law the environment around the people must change.

 

Policy making is the engine of change, if government wants to bring a change in the behaviour of public or a specific community, they first have to provide some incentives or barriers. For instance, the policy of “Hum 2 Humare 2” focused on controlling the exploding population in India during 1970’s, families following this were promised incentives from government’s side.

China also opted “One Child policy” to control its population.

 

By now we are pretty clear with the concept of Nudge Theory, but now let’s understand it practically or technically,

We all must have studied about 3 laws of Motion by Newton, in which First law states about “Inertia” which is resistance against change or “ a property of matter by which it continues in its existing state of rest or uniform motion in a straight line, unless that state is changed by an external force.”

If we look closely this means that to change the state of an object an external force is required, Same way Nudge theory works as it acts as an external invisible force which acts as a tool to change the behaviour of the population.

Flow chart given below depicts the relation or similarity between Physics and Social Science.

Thus, we can say Nudge is the external force of Social Science.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Empirical Events

Post WWII era is known for development and making life easy for people in United States. Under Richard Nixon, then president G.I Bill of rights to encourage home ownership and higher level of education by charging very low or no interest at all on loans for veterans, which made them wealthy enough and the economy grew.

Post WWII technological advancement began and lives of people started changing, we can call it life of leisure and comfort which was majorly enjoyed by “Baby Boomers”.

Baby Boomers represent the 76 million population born between 1946 and 1964. Baby Boom was a result of improvement in the living standard of people. In the United States the baby boom was attributed to the number of veterans returning home after the war ended in 1945.

One of the reasons was that, people had hold off their family planning due to WWII and Great Depression, once they felt safe and saw the economy booming that’s when it started.

Another reason was aid from government to veterans, which boosted this boom more.

Almost 70% of disposable income is held by the baby boomer population which means that the dependency ratio will increase in future or might have now only (The Census Bureau estimates that the dependency ratio in the United States will be 65 by 2020 and reach a record-breaking high of 75).

Now the question arises where is Nudge?

This explosion of population changed the economy and business, many businesses boomed and the best example would be Walmart, it is known as baby boomer company because as people had more money in their pocket. In short retail sector was on boom as consumption of families increased for food, and other essential commodities. Demand of housing and transportation also increased which also boomed the real estate. 2008 crisis is believed to happen because of Baby Boomers.

Bottom Line

Upon being lost his investments during the South Sea Bubble, Sir Isaac Newton ( he has  been credited  for inventing the Calculus, this math phenomenon also in use to calculate the trajectory of financial markets) reflected that he could “calculate the motions of the heavenly bodies but not the madness of people”. From Tulip Mania in 17th-century, Holland (Now Netherlands) to financial crisis of early 21st- century, history is littered with tales of investors who lost their heads due to nudge, in the grip of mass delusions described by Alan Greenspan, a former chairman of the Federal Reserve, as “irrational exuberance".

Reference: Economic Times, Vox, Wikipedia, Lalit Singh Rawat (Kaushilya IEBP, Think Tank).