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Hitachi Social Innovation Forum 2018 TOKYO

Special Speech

October 19 (Fri) 9:30 a.m. to 10:30 a.m.

Making the world a better place one nudge at a time

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Dr. Richard H. Thaler
Recipient of the Nobel Memorial Prize in Economic Sciences 2017
Professor, The University of Chicago Booth School of Business

Please Nudge, not Sludge.
Behavioral Economics Journey with Dr. Thaler

At the beginning of his speech, Dr. Thaler cited the definition of "behavioral economics" offered by Herbert Simon and questioned whether it really needs the word "behavioral" as economics itself is about the behavior of people in markets. However, the reason why we need that adjective is because of the assumptions of standard economics theories, which are that people "always choose the best" choice, that "people are self-interested" and that they "always know what's best for themselves and choose accordingly," implying that they have no self-control problems. Dr. Thaler, however, counters that this idea of humans as homo economicus ("Econs") who think in this manner is no more than a hypothesis thought up by economists and that it does not apply to real humans (i.e. homo sapiens).

Next, to provide an example of how not all humans make rational decisions all the time, he presented a quote from Mitsuo Aida: "I'll do it later. I'll do it later. And while I make my excuses, the sun goes down." Visually comparing himself with great historical figures as an example of decision making and self-control of humans, Dr. Thaler pointed out that we cannot have one model for every person and task, leading to the necessity of behavioral economics.

Then, Dr. Thaler introduced an example of how the market does not necessarily behave rationally, such as when former U.S. President Obama negotiated normalized diplomatic relations with Cuba, affecting the price of an investment fund with the ticker "CUBA" that had nothing to do with Cuba.

He went on to introduce his concept of "Nudge" to explain how what he called as "Supposedly Irrelevant Factors," that seem unrelated to human behaviors from standard economist's viewpoints, actually do affect human behaviors.
Dr. Thaler said, "A nudge attracts our attention and alters our behavior without changing incentives and without forcing anyone to do anything."

He then went on to explain the "choice architecture," a typical means of nudging, that arranges the environment in which people choose. Dr. Thaler used multiple examples, including good choice architecture for selecting colors at an interior design shop and automatic enrollment to increase contribution rates to a retirement saving plan.

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Dr. Thaler explains how markets do not necessarily behave rationally.

After that, he gave examples of good nudges: zigzagged-designed walking bridges in Japan that elegantly nudge visitors to take in the scenery from every angle, and a train station in Stockholm that encourages people to use the stairs with fun by turning the stairs into a giant piano keyboard. As a contrary, Dr. Thaler then provided examples of bad nudge (which he calls as "Sludge") that traps people, such as the commonplace 30-day free trial.

Lastly, Dr. Thaler concluded, "We're humans, not Econs. Markets are not perfectly efficient. It's possible to use choice architecture to improve people's lives, but it's also possible to use it to deceive. Please nudge, not sludge." At the end, he wrapped up his speech by providing the audience with a quote from Mitsuo Aida: "It's OK to stumble, isn't it? We are only humans after all."