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A bilingual interdisciplinary journal 51
PUTTING THE ‘MENTAL’ INTO THE
GOVERNMENTAL: HOW CAN NUDGES IMPROVE
SHOCK COPING?
MARCO LEHMANN-WAFFENSCHMIDT1 AND BURAK ERKUT2
ABSTRACT
Nudging individuals towards improved decision making that serves their interest best is in
vogue, not only among governments of the rich economies. It has also received growing
interest from development agencies and development economists. Different experimental
studies in developing countries have tested the impact of nudging on behavior. While these
studies have mostly taken place on an empirical ad-hoc basis, our contribution proposes a
theory-led reflection of the limits and potentials of nudging, with the aim to empower agents
coping with external shocks such as droughts, floods, and earthquakes. We make use of
Hayek’s cognitive theory to point out how behavioral mechanisms may respond to nudges,
and address normative concerns.
KEYWORDS
Nudge, Behavioral economics, Hayek
1 Chair of Managerial Economics, Faculty of Business and Economics, Technische Universität Dresden (Ger-
many); email: manaecon@mailbox.tu-dresden.de
2 Chair of Economic Policy and Economic Research, Faculty of Business and Economics, Technische Univer-
sität Dresden (Germany) and Fellow of the Institute for Research in Economic and Fiscal Issues (IREF);
email: burak.erkut@tu-dresden.de. Authors wish to thank the organizers and participants of the Prague Confer-
ence on Behavioral Sciences at CEVRO Institut, the International Conference on Shocks and Development
at Technische Universität Dresden and Dr. Oliver Fiala for the feedback.
New Perspectives on Political Economy
52
1. INTRODUCTION
Giving behavioral impulses to individuals in such a way that they can alter their behavior
towards serving their own interests, also called nudging (Sunstein and Thaler, 2003; Thaler
and Sunstein, 2003), is currently used by both governments of rich economies and in the
context of developing countries. Whereas experimental studies focusing on nudging (e.g.
Beaman et al., 2009; Duflo et al., 2011; Gauri, 2012; Luoto et al., 2014) have mostly taken
place on an ad-hoc basis, no theoretical considerations have been made so far for the use of
nudging to cope with external shocks. Especially due to the recent developments in neuro-
science (Fuster, 2011), which show how individuals make decisions by generating patterns
based on their previous experiences, the effectiveness of nudges can be discussed from a
theory-led perspective.
In this contribution, we discuss the role of nudges in the context of development based
on a short overview, wherein we focus on the kinds of decision-making problems in which
nudging is potentially effective. Nudging has been designed for situations in which choice
architecture influences decision-making. We reflect on appropriate applications of nudging
against the background of the broader development discourse in general, and with respect
to previous applications of nudges by development economists and practitioners. We argue
that many of the problems people living under conditions of poverty and exclusion face
when exposed to external shocks are contingent on their individual behavior and decision-
making. Against this background, we sort out which kinds of nudging can potentially im-
prove people’s ability to deal with shocks. For this purpose, we make use of Hayek’s (1952)
cognitive theory and its empirical evidence (Fuster, 2011) as well as some recent theoretical
developments from the field of evolutionary economics (Erkut, 2016a) to propose a tax-
onomy of strategies of nudging in the shock coping context, and the behavioral mechanism
behind the knowledge generation processes of individuals based on shock coping.
Section 2 briefly introduces the idea of nudging, and presents some typical development
interventions and studies that have attempted to measure and evaluate the effectiveness of
nudges with respect to their ability to help people cope with shocks. Section 3 proposes a
theoretical reflection of the conditions under which nudges may be effective and focuses on
the importance of understanding the mechanisms underlying behavior and changes thereof.
Section 4 focuses on the challengers of nudging and concludes the study with some recom-
mendations.
2. NUDGING FOR DEVELOPMENT: A SHORT OVERVIEW
Nudges refer to “any aspect of the choice architecture that alters people’s behavior in a
predictable way without forbidding any options or significantly changing their economic
incentives” (Thaler and Sunstein, 2008, p. 6). Nudging aims to achieve a certain, desirable
behavior, and yields behavioral impulses instead of monetary incentives or sanctions. These
A bilingual interdisciplinary journal 53
impulses are called soft interventions, since they are not direct interventions into the deci-
sion making processes of human beings.
In the context of development, saving behavior is a topic which has been analyzed fre-
quently from the behavioral perspective. Increasing savings means the smoothing of con-
sumption in order to cope against shocks is faced by certain barriers such as transaction
costs, lack of trust and regulatory barriers, knowledge gaps, social constraints and cognitive
biases (Karlan et al., 2014). Two popular behavioral approaches that can be called soft
interventions are financial reminders and financial education. Introducing people to money
boxes with pre-defined targets increased saving behavior of poor people in Kenya, as it has
been shown in a field research by Dupas and Robinson (2013). A field experiment by Bruhn
et al. (2013) in Brazil targeted high school students’ financial knowledge and planning abili-
ties, which have been altered by financial education as a nudge; Berry et al. (2015) reached
the same desired behavior in Ghana. On the other hand, the field research by Rodríguez
and Saavedra (2016) used cell phone messages as reminders to alter the savings behavior
of low-income youth in Colombia. The authors found out that combining reminders with
financial education messages did not increase savings of the target group, and explained
this observation with proposing to focus on a more structured financial education approach
and a more intensive delivery of the messages. Gertler et al. (2015) used nudges in health
promotion campaigns in India, Indonesia, Mali and Tanzania to find out how investment
in health products and their use can be increased beyond levels achieved through subsidi-
zation. The authors recognized the main problem to be open defecation, which could not
be solved simply by encouraging people to build toilets, but also nudging them to use the
toilets for defecation purposes. The authors suggest that nudges shall be combined with sub-
sidy programs, and the intensity of nudges is decisive on altering human behavior regarding
the solution of this problem. Luoto et al. (2014) also provided free, safe water products to
households in Kenya and Bangladesh, and focused on the role of marketing messages to
encourage the use of these products, which delivered positive results. Fuentes et al. (2017)
employed the approach of informing workers on pension savings and forecasted pension
income, where the distinction between two groups of workers was whether the messages
they received were on their personal savings, or general information about the pension sys-
tem. The authors found out that personalizing information increased the amount of savings
significantly; however, they also noted that the effect of the nudge can be temporary, and
needs to be combined with other elements. These field experiments did not modify choice
options, but still had visible effects due to soft interventions.
To encourage private households in Japan to purchase earthquake insurance contracts,
the authors Sato and Saito (2011) made a field experiment based on two surveys. The
results of the initial survey highlighted the fact that the public earthquake insurance was
not popular due to high premiums; in the latter survey, the authors added a hypothetical
private earthquake contract to the choice menu, which had even more expensive premiums
than the public earthquake insurance. This resulted in a change in behavior of survey par-
ticipants; those who initially said that the public earthquake insurance was not affordable
changed their mind and found it affordable. Another field experiment by Duflo et al. (2011)
New Perspectives on Political Economy
54
focused on decisions of farmers to invest in and use fertilizers in Kenya. According to the
authors, even though the advantages of using fertilizers are known to the farmers, and they
planned to buy them in the future, the plan eventually changes in order to focus on con-
sumption rather than investing in fertilizers. This is explained by the impatience of farmers,
and that the timing of their decisions affected the change in plans. The field experiment,
which delivered positive results by increasing the purchasing of fertilizers, offered farmers
the chance to buy vouchers right after the previous season’s harvest, and the option of free
delivery. A similar approach was observed in the study of Barrera-Osorio et al. (2011) in
the context of conditional cash transfers for educational purposes in Colombia. With the
aim of preventing dropouts from secondary schools and increasing matriculation at tertiary
educational institutions, the field research, which delivered significant results, focused on
changing the structure of the conditional cash transfers by paying these as a large lump-
sum upon the decision of re-enrollment (Barrera-Osorio et al., 2011). Positive effects were
observed especially for the students from the poorest households. A similar approach was
employed by Benhassine et al. (2015), although the employed program was not a condi-
tional cash transfer. With the target of increasing school attendance in Morocco, the field
experiment involved an educational support program giving financial incentives to alter
parents’ beliefs towards the importance of education, which increased school attendance
of children. In comparison to the aforementioned experiments, these three field experi-
ments involve interventions that altered financial incentives. Even though in these cases
the nudges worked in the interest of the target group, and contributed to positive changes,
the financial incentives played an important role in the setup of the experiments. Although
altering financial incentives and beliefs does not strictly count as nudging, according to the
definition provided by Thaler and Sunstein (2008), these field experiments count as further
examples of the increased use of behavioral tools in the context of developing countries.
Altogether, this short overview provides some basic characteristics of nudges that can be
relevant for the context of shock coping.
In the context of developing countries, research frontiers are using randomized, con-
trolled trials to test specific interventions and how they affect human behavior. The work
of Abdul Latif Jameel Poverty Action Lab (J-PAL) has contributed to attempts of nudging
in research. Bringing together nudging with the subjective well-being of human beings for
policy designs in topics such as climate change, sustainable developments or malnutrition
can be advantageous, especially since “behavioral interventions may reduce the individual
capability to make critically reflected, autonomous decisions” (Binder and Lades, 2015, p.
23). For overcoming this issue, Binder and Lades (2015) proposed an autonomy-enhancing
paternalism in order to improve the capabilities of individuals in making critically reflected
decisions in their changed choice architecture, which aim to increase their individual wel-
fare over time. As it has been shown in this short overview, the scientific debate is mainly
driven by contextual, practice-based studies where the employed behavioral strategies may
not always coincide with the original definition of nudging. Prior to the expiration of the
Millennium Development Goals, Gauri (2012) made the contribution to increase the sa-
lience of development targets by introducing the concept of nudging. According to the
A bilingual interdisciplinary journal 55
author, the notions to be considered during the formulation of development targets are
ensuring that they are less cognitively demanding, more morally compelling, and that they
utilize politically legitimate processes. Political institutions such as the Presidency of USA
or the World Bank have developed their targets of improving the governance quality by us-
ing behavioral insights. Typical examples include human behavior on the issues of savings,
health or consumption as well as tax and working ethics. The World Development Report
2015 on “Mind, Society, and Behavior” highlighted the importance of behavioral strate-
gies in the context of developing countries. One point mentioned in this report is the use
of mental models to interpret the world. The focus on mental models and perceptions of
human beings is necessary in the development context, since knowledge generated in the
minds of human beings is tacit and subjective in character, and it may not necessarily lead
to rational behavior. This notion will be explained in detail in the context of the effective-
ness of nudging.
3. EFFECTIVENESS OF NUDGING
3.1. IRRATIONAL BEHAVIOR
Individuals may behave in a non-rational way for a number of reasons. From the perspec-
tive of economics, the fundamental concept of homo economicus or the economic man is
a basic way of understanding how the rational behavior shall look in a given decision situ-
ation. In reality, the individuals may – unlike the economic man – not act in a way which
serves their interests, and at this point nudging can be a way of correcting this non-rational
behavior. According to Thaler (2000), cognitive biases regarding human decision-making
can be summarized with four different categories. These are: optimism/wishful thinking,
overconfidence, the false consensus effect, and the so-called curse of knowledge. Optimism/
wishful thinking and overconfidence are straightforward categories that need no further
explanation. The false consensus effect can be summarized as the assumption that other
people share the same beliefs as one’s self. On the other hand, the curse of knowledge is
the tendency to believe that the knowledge possessed by one’s self is obvious to the others,
whereas others may not even have heard of this particular knowledge. What these four cat-
egories share in the way they affect rational behavior is their occurrence as a result of the
subjective character of knowledge, which is inevitable in a non-pre-determined economic
environment. From the perspective of Hayek, “knowledge relevant for economic decisions
exists only in a tacit form, and cannot, even in principle, be formalized in terms of explicit
rules” (Hunt, 2007, p. 54).
Regarding shocks such as earthquakes or floods, risk-related human behavior can be gen-
erally explained in terms of the availability heuristic. Thaler and Sunstein (2008) said that
the occurrence of a shock in the recent past can alter human behavior; therefore, human
New Perspectives on Political Economy
56
behavior is biased on assessing the risk of the occurrence of a shock. Such misperceptions
can be observed both on the individual level and on the governmental level, since “govern-
ments are likely to allocate their resources in a way that fits with people’s fears rather than
in response to the most likely danger” (Thaler and Sunstein, 2008, p. 25).
3.2. A TAXONOMY OF STRATEGIES
Correcting this availability bias can be done by designing nudges to either increase the
fear of a bad event (Thaler and Sunstein, 2008) and can be based on one of the following
categories from Sunstein (2015):
A. Default Rules: A default rule can be generated e.g. for an insurance to natural disas-
ters, which can automatically include all people.
B. Simplification: Complexity of bureaucratic procedures can be a disadvantage regard-
ing coping with shocks. These can be reduced by simplifying the bureaucratic pro-
cedures that take precautions on the issue of shocks, in order to include people’s
voluntary participation.
C. Uses of Social Norms: Informing people by focusing on the (desired) behavior of
the majority can alter the behavior of human beings regarding a certain subject. For
example, saying that “A vast majority of people living in floodplains are purchasing
flood insurance for themselves” can be effective in increasing the number of human
beings taking precautions by purchasing flood insurance.
D. Increases in Ease and Convenience: According to Sunstein (2015), reducing certain
barriers can encourage human beings to act in a certain, desired way. Based on the
example in C., it may not be enough to use social norms alone, but also support these
with a bureaucratic easing of purchasing flood insurance, especially with emphasis on
low cost options for the poor.
E. Disclosure: Disclosure can prevent ignorance and inattention (Sunstein, 2015). For
example, mentioning costs of flood damage in the case of no flood insurance can also
lead people living in floodplains to purchase flood insurance, as long as the numbers
and data are taken from reliable sources.
F. Warnings, Graphic or Otherwise: Especially in case of populations with high rates of
illiteracy, graphic warnings such as pictures can be used instead of written warnings,
which can increase the awareness of the target audience. These can be either person-
alized or localized to the neighborhood/village.
G. Precommitment Strategies: Giving people the courage to engage in certain activities
belonging to a target they want to achieve can be helpful in case of shocks. For ex-
ample, using community-based support groups to overcome the damages caused by
shocks can be encouraged, since these are often informally organized and very vulner-
able in terms of their organizational structures.
H. Reminders: People tend to forget things – and especially in case of shocks, they as-
sociate their precautions to their past experiences. Lack of a past experience in case
A bilingual interdisciplinary journal 57
of a shock can lead to forgetfulness in taking precautions. This can be changed by
reminding people to take precautions.
I. Eliciting Implementation Intentions: Going to people and asking them simple ques-
tions that can activate their implementation intentions can be effective in coping with
shocks.
J. Informing People of the Nature and Consequences of Their Own Past Choices: This
can be more effective if there is a past experience of shocks.
As seen from these categories, there is no single way to formulate and implement an effec-
tive nudge. Rather, the effectiveness is contingent on the context of the designed nudge, on
how this context is perceived by the initiators, and most importantly whether the percep-
tions of the initiators and those of the target audience match. This is the idea behind the
matching of the perception/action cycles of the individuals (Fuster, 2011), for which the
simplest example can be given as two individuals in a conversation – both having to under-
stand what the other one says, processing it, and reacting to the statements in a proper way
to keep up the conversation.
The idea behind Hayek’s (1952) cognitive theory states that “even the simplest form of
sensation is based on prior experience” (Fuster, 2011, p. 6) i.e. when we are confronted
with an event, our mind either associates it with experiences of the past that show a similar
pattern to the current one, where “perception is made of relationships, history, and an ever-
evolving cerebral cortex” (Fuster, 2011, p. 6). This pattern recognition is the starting point
of the generation of new knowledge. With new knowledge, individuals use their capabilities
to shape their environment with their actions. In the framework of Erkut (2016a) based on
Hayek (1952) and Fuster (2011), the following nano-micro-meso-macro scheme can be used
to identify at which stages of the perception/action cycle (illustrated in Figure 1) nudges
can be effective:
1. Nano: Perceptions based on previous experiences. In case of an absence of a previous
shock experience, nudges can be helpful to “substitute” for that previous experience
in the human mind. In this case, the individual needs to associate himself with the
“substituted” experience that nudging gives, i.e. identify one’s self in a shock situation.
In case of the presence of a previous shock experience, nudges can activate that part
of the memory to “remind” individual for taking precautions.
2. Micro: Generation of new knowledge. Individuals use the patterns recognized in their
mind to generate new knowledge. Learnings from a shock are bound together with
the contacts between neurons. This can be an association of the possibility of shocks
based on either previous experiences or “substituted” nudging experiences, which can
lead to a critical thinking and generating the tacit knowledge of taking precautions for
shocks in the desired way, since human behavior is biased in assessing the risk of the
occurrence of a shock.
3 Meso: Capabilities of individuals. Since generation of new knowledge is often not
the only relevant factor for taking action, the capabilities of individuals need to be
New Perspectives on Political Economy
58
heightened. A person noticing the danger of a possible earthquake, but not taking
precautions because e.g. he finds the insurance very expensive (Sato and Saito, 2011),
can be a problem where the individual does not have the capability to take action. A
second issue arises for the ex-post shock coping mechanisms, being initiatives to cope
with shocks, which can be vulnerable in their organizational structures. Instead of a
top-down approach, nudges such as precommitment strategies can empower individu-
als for shock coping by addressing to develop their capabilities.
4. Macro: Sociotechnical Artefacts. The outcome of this perception/action cycle is the
generation of sociotechnical artefacts, i.e. shock coping mechanisms on individual
or societal level, which are “practices, representation and knowledge, emerging from
the interdependencies between space, time and matter” (Pellegrino, 2014, p. 2). This
is the observable phenomenon on the marketplace, but its emergence is necessarily
based on the generation of individual knowledge by pattern recognition.
FIGURE 1: PERCEPTION/ACTION CYCLE OF A SHOCK-COPING INDIVIDUAL (SOURCE: OWN
ILLUSTRATION BASED ON FUSTER (2011))
Generation of New
Knowledge
Capabilities for
Coping with Shocks
Experience
Perception of Information
CortexEnviron-
ment
P
e
r
c
e
p
t
i
o
n
A
c
t
i
o
n
To summarize, the visible market outcome is an issue where nudging cannot be used,
since it is only the outcome of the knowledge generation process of individuals. While
understanding the processes is not usually the focus of research, it is important to mention
that understanding, rather than simply changing behavior, is a pre-condition for general-
izing knowledge gained through experimental studies (Grüne-Yanoff, 2015; Deaton, 2010).
Hence, nano, micro and meso dimensions are the three dimensions that nudges can ad-
dress, where the aforementioned taxonomy of strategies only focuses on the ideal-typical
cases and not the practical use, which can involve combining different strategies depending
on the context. In other words, it is a matter of degree.
4. POLICY RECOMMENDATIONS AND CONCLUDING REMARKS
Both from the practical and the ethical points of view, nudging receives criticism. Its em-
ployability is questioned on the issue of whether nudging can be effective forever, or if
its effect disappears after a certain time. Gaudeul and Kaczmarek’s (2016) experimental
evidence pointed out the fact that while a default based nudge was effective, it could not
change the behavior of the participants. The authors found out that those who opposed
the nudge were more motivated to show opposition over time than those who were initially
influenced by the nudge. A possible reason for the justification of these findings is that
nudging mainly influences those who are close to indifference between two alternate ac-
tions (Gaudeul and Kaczmarek, 2016). Hence, the effect of nudging can be limited to those
who do not strongly oppose to a certain behavior.
From the ethical perspective, the discussions focus on the issue of on which norma-
tive ground behavior is allowed to be manipulated. Especially liberal positions criticize the
fact that legitimacy is absent in this case. As it can be seen from the short overview of the
literature, many behavioral approaches in the development context cannot be qualified as
nudges, if we define nudge in terms of Thaler and Sunstein’s (2008) original definition. This
is due to their attempt to intervene in human behavior e.g. with financial incentives. What
we can learn, on the other hand, from Hayek’s cognitive theory (1952), and the empirical
evidence supporting this theory (Fuster, 2011), is that neither the human mind, nor the
market needs a central planner to generate new knowledge – hence; the spontaneous order
is more than a metaphor. The challenging issue for putting the “mental” into the govern-
mental is therefore the use of behavioral strategies that are enabling people to choose what
is best for them, and not for the central planner. Rizzo and Whitman (2009) listed six forms
of knowledge that are necessary for a decision maker to justify his nudging strategy. These
are: the knowledge on the true preferences of individuals, understanding that a certain bias
may differ across individuals, time and space, having extensive knowledge of self-debiasing
measures of individuals, the ability to account for the interdependence of biases, and antici-
pating the decreasing self-regulation effect of paternalistic policies and possessing knowl-
edge on these issues at the level of the whole population.
The basic concerns from the perspectives of ethics and governance are especially weak,
because like any other laws, bids and bans nudges also serve a certain target, which is set by
the initiators. Therefore, the criticism on the issue of absent legitimacy cannot be specific
for nudging – the method is the only difference in laws, bids, and bans because of these
three are normative stipulations given by parliaments, governments, police etc.; failure to
comply with these are punished by sanctions. Nudging, on the other hand, works with be-
havioral impulses instead of monetary incentives or sanctions, which is described as “soft
paternalism”. Of course, also nudges can be misused by means of deliberate manipulations
(Akerlof and Shiller, 2015).
Observing nudging in the context of the “pretence of knowledge” leads one to notice that
the critical points Hayek (1974) mentions are very relevant: First of all, the use of nudging
New Perspectives on Political Economy
60
is necessarily involved with increasing the quality of life of certain groups of people. In this
case, there may be variables that are non-measurable based on the conventional methods
of economics, which may have an influence on how people perceive the quality of their
lives. Categorizing a behavior as irrational, and proposing the alternative that is rational is
challenging. Either by focusing on the subjective well-being of the individuals (Binder and
Lades, 2015) or by using nudging for self-empowerment as a self-management tool (Erkut,
2016b; Kaya and Erkut, 2017), progress still is to be made in this issue. Second, observing a
certain complex behavior is not enough for designing a nudge; the complex behavior needs
to be represented in a reduced form. As any evolving socioeconomic process has some
predictable and some unpredictable components or variables, the focus can be put on the
predictable variables, which can be done by analyzing the structural similarities of different
evolving processes (Lehmann-Waffenschmidt, 2008). This method can be useful to capture
some recurring patterns regarding human behavior and socioeconomic processes (Erkut
2016c). Third, predictions on the outcomes of nudges can be limited due to the complexity
of human behavior. Some general pattern predictions can be made, but specific outcomes
cannot be predicted.
Happiness research questions whether nudging can have a positive impact to the subjec-
tive well-being of humans. One emerging field of research related to happiness research sees
nudges as behavioral strategies that can generate critical thinking, hence not only nudging
an individual to fulfill a certain behavior, but also to critically think and question why he
does it (Binder and Lades, 2015). Even though these new developments in the fields of be-
havioral and evolutionary economics are promising, a lot has to be done for the successful
formulation and implementation of nudges without falling into the trap of the conventional
strategies such as laws, bids, and bans. These discussions all address the fact that nudging
is new in use and therefore subject to a number of concerns.
Certainly, nudges can be helpful in shock coping, when they are designed “carefully”
– by considering aforementioned factors and by making a clear distinction between a soft
intervention and a behavioral strategy altering financial incentives. These challenges are
demanding ones, but putting the “mental” into the governmental is still possible – it only
depends on the question “how?”, which must be answered by theoretical investigation, ex-
perimental tests, and political implementations.
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