Questions: Nudge Theory

Question 1

Which of the following qualifies as a 'nudge' under Thaler and Sunstein's definition?

• A. A law mandating that all employees contribute 5% of salary to retirement savings
• B. Automatically enrolling employees in a retirement savings plan with the option to opt out
• C. A tax penalty for failing to save for retirement
• D. Eliminating all retirement savings plans

Answer: (B)

A nudge must not restrict options or significantly change economic incentives. Automatic enrollment preserves the employee's freedom to opt out (no restriction) and does not impose a financial penalty (no changed incentives), but it leverages status quo bias and default effects to dramatically increase participation. A mandate (option A) restricts choice; a tax penalty (option C) changes incentives; eliminating plans (option D) removes options entirely. Only option B qualifies as a nudge.

Question 2

Libertarian paternalism is a contradiction in terms because paternalism always restricts liberty.

• T. True
• F. False

Answer: False

The 'libertarian' component means that people always retain the freedom to choose any option — nudges do not ban or mandate anything. The 'paternalism' component means that the choice architect designs the environment to make it easier for people to choose what they themselves would consider best (often their long-term interest over short-term impulse). It is paternalistic in steering behavior but libertarian in preserving options. Whether this truly avoids restricting liberty is debated — critics argue that framing and defaults are themselves forms of influence — but the definition is internally consistent.

Question 3

What are the main criticisms of nudge theory as a policy approach?

Model answer: Key criticisms include: (1) it may be a substitute for more effective structural interventions (nudges address symptoms while leaving root causes intact); (2) the 'choice architect' imposes their judgment about what is best for people, raising autonomy concerns; (3) it can be used manipulatively by governments or corporations; (4) effectiveness may be limited for complex problems requiring systemic change; and (5) nudge effects may diminish over time as people become aware of them or when they counteract strong preferences.

The structural criticism is particularly sharp: nudging people to eat healthier cafeteria food does not address the food industry, agricultural subsidies, or poverty that drive unhealthy diets at a population level. Critics like Hausman and Welch argue that even 'libertarian' paternalism undermines autonomy by influencing choices without transparent reasons. Proponents counter that all choice environments involve architecture, so the choice is not whether to design the environment but whether to do so thoughtfully.