Nudge, nudge: Why we behave the way we do

Behavioural economist Richard Thaler believes that choices are rarely free and neutral, and that we can be subtly pushed into making good decisions. He talks to James Kidd about the stimulating book that's making Barack Obama and David Cameron sit up and listen

There can't be too many American academics who are invited to address the London School of Economics, the Labour Party and the Conservatives as well. However, that's precisely what Richard Thaler, the Professor of Behavioural Science and Economics at Chicago University, is in London to do.

Thaler is the author of Nudge, an entertaining and influential guide to "Improving Decisions about Health, Wealth and Happiness", as the subtitle promises, that Thaler co-wrote with his sometime colleague, Cass Sunstein. Then a Professor at Chicago Law School, Sunstein has since moved up in the world – first to Harvard and now to Washington, where he will become "Regulatory Czar" for his old friend, Barack Obama.

When I talk to Thaler about his London visit, he is just completing a teaching semester at the University of San Diego. "I am a rational man," he says. "After an academic career at Cornell and Chicago, I decided that I deserved a few nice warm winters. So I spend quarter of the year in California."

While the 64-year-old expresses anxiety about the inclement British weather, he is downright enthusiastic about our attitudes to road safety. He is so fond of the signs reminding overseas visitors to "Look Left" or "Look Right" that he included them in Nudge. "Because you insist on driving on the wrong side of the road," Thaler says. "those messages have saved my life. I am very grateful for them."

The reminders – a low-cost hint that steers people to make choices beneficial to their lives – are a classic example of the book's central thesis. "I view Nudge as an exercise in asking, 'How far can we go in achieving socially desirable goals without forcing anyone to do anything?'"

Nudges can extend from the image of flies painted in the urinals at Schiphol airport (it gives men something to aim at) to helping American pensioners choose the best health-care package. Taking into account human frailties such as selfishness, forgetfulness and apathy, nudges could be prods towards caring for the environment or writing a novel. On this score, Thaler recommends the website stickk.com, which asks visitors to make a series of self-imposed bets. Meet your targets and you get your money back; fail and the money is donated to charity.

When it was first published last year, Nudge's innovative ways of influencing human behaviour impressed everyone from Obama to David Cameron and George Osborne. Commentators at the time expressed surprise at these seemingly incompatible bedfellows. Thaler was not among them.

"It's true that Cass and I have been Obama supporters, but I don't see any real conflict in having discussions with Cameron's crowd." For one thing, he finds it hard to tell the Democrats and Tories apart politically. "Cameron's view of the right is not all that different to Obama's view of the left. I think that reflects the difference between America and Europe."

Now released in paperback, with revisions and a postscript about the economic crisis, Nudge looks poised to follow Malcolm Gladwell's The Tipping Point, Nassim Nicholas Taleb's The Black Swan and Steven Levitt and Stephen Dubner's Freakonomics into the bestseller charts. Accessible and cutting-edge, it introduces readers to concepts and buzz-words such as "libertarian paternalism", "choice architects" (an individual who "has the responsibility for organising the context in which people make decisions") and the ongoing battle between "Econs" and humans. In neurological and psychological terms, this is a clash between our reflective and our automatic systems. Luckily, Thaler and Sunstein translate this into English: imagine an internal struggle between your hyper-rational Mr Spock and your lazy and self-centred Homer Simpson.

"Nudge can be read on different levels," Thaler explains. "It can be a self-help book, a business book or a marketing book. Some people have said they view it as a parenting volume. In some senses it was written to be read by people like David Cameron. But if you write that book, you'll sell 10 copies if you're lucky."

This mixture of intellectual debate and light-hearted populism offers a fair impression of Thaler himself. When Daniel Kahneman accepted the Nobel Prize for Economics in 2002, he praised Thaler both for his "sharp and irreverent mind" and his central role in establishing the field of behavioural economics.

"Maybe it would be fair to call Cass and I radical pragmatists," Thaler suggests, before admitting that he's just made this phrase up. "It's not that we have radical goals – we want to improve education, improve health, help people save better for retirement. The radical part is in saying that a bit of psychology makes government a bit more effective. Of course, that's not particularly radical at all. It's simply absurd that we haven't been doing that. It's because lawyers and economists have always had a monopoly on policy."

In this, the ideas proposed in Nudge are the logical and populist conclusion of Thaler's entire career. In 1977, he was a young assistant economics professor when he travelled to California to work with Kahneman and another esteemed Israeli psychologist, Amos Tversky, who were spending a year at Stanford. "I think it's fair to say that the field [of behavioural economics] got launched that year. The three of us spent countless hours together, part of which was them teaching me psychology, and me teaching them economics."

For Thaler, this meeting of minds helped release his frustration with the increasingly abstract and unrealistic direction that economics had taken. Kahneman and Tversky encouraged him to treat "the agents in economic models" not as rational Mr Spocks but as real Homer Simpsons: prone to inertia, irrationality, self-interest, heuristic biases and social conditioning.

Although behavioural economics took years to gain widespread acceptance, Thaler says that the recent economic crisis has vindicated the discipline he helped to found. "In certain ways, Nudge was published at a lucky time. If anybody was still stubbornly clinging to the view that everybody in the economy is a rational agent and that markets work perfectly, they're not any more. Even Alan Greenspan has formally admitted his mistake."

The collaboration between Thaler and Sunstein began in 1995, in the first week that Thaler began working at Chicago University. Sunstein, too, was something of an outsider in his field. "Cass had been arguing with guys like Richard Posner [a Chicago Law School faculty member and judge] for 15 years. Behavioural economics gave him a structure to rebut their arguments."

Thaler describes their ensuing writing partnership as much like a marriage: "Even in a good marriage there tend to be spats." While Sunstein enjoys writing books, Thaler hates it ("I don't have a long enough attention span"). While Thaler loves wine, Sunstein does not. Thaler initially believed this was a "serious character flaw", until the economist in him saw its advantages: "I get to drink twice as much."

Thaler admits that Nudge has its limits. It won't, for example, solve the economic crisis by itself. "It's not that we say, 'Thou shalt only nudge.' It doesn't mean you shouldn't also have laws against fraud. We do, and we should enforce them." However, Thaler argues, Nudge's ideas could help prevent other similar disasters from happening. "Certainly the approach that I advocate is that we should improve disclosure. People like Bernie Madoff should be required to reveal more. At least then people could see that he actually has the money somewhere."

Indeed, if major financial corporations were required to disclose their operations publicly, then they might also disclose those risks to themselves. Thaler cites Bob Rubin, vice chairman of Citigroup, who seemed unaware that his company was carrying $50bn of potential debt (or "liquidity puts"). "Perhaps if Citigroup had revealed their risks to their investors, they would also have revealed it to the vice chairman."

Whatever their shortcomings, the ideas in Nudge have already succeeded beyond its authors's "wildest dreams". For example, Thaler's plan to automatically enrol workers into a savings programme was adopted by Lord Turner in his 2005 report on UK pensions. With Sunstein shortly to work for Obama, even more nudges might be put into practice. "Cass's job will in part involve implementing some of these ideas. That's very exciting."

Thaler has also advised Obama from time to time. He first met the new president in 2004, when Obama was an unknown running as senator for Illinois. "A neighbour had a fundraiser for him in our apartment building. I'd never heard of the guy, but I was amazed by him. The intelligence, the charisma, the understated confidence and warmth. You really had the feeling that you were in the presence of greatness. At that time he was running third in the Democratic Primary. The idea that only five years later he would be president ..." Thaler trails off in wonder.

Before Thaler leaves to prepare for London's frozen wastelands, I ask if any other nudges might help him acclimatise to British life. After a moment's pause, he suggests signs on rural roundabouts. Apparently, when he drives in the British countryside, he occasionally gets confused about whether to go clockwise or counter-clockwise. This is not, he adds, a problem in the busy city. "As long as there's some oncoming traffic, I never forget which side of the road you use," Thaler laughs. "The other cars are a very good nudge."

'Nudge' is published by Penguin at £9.99. Thaler appears at the Old Theatre, LSE, tomorrow at 6.30pm. Admission is free. Tel: 020 7405 7686 or email events@lse.ac.uk

The extract

Nudge, By Richard H Thaler and Cass R Sunstein (Penguin £9.99)

"...In the experiment, half the moviegoers received a big bucket of popcorn and half received a medium-sized bucket. On average, recipients of the big bucket ate about 53 per cent more popcorn ... Wansink asked the recipients ... whether they might have eaten more because of the size of their bucket. Most denied the possibility, saying, 'Things like that don't trick me.' But they were wrong."