“Nudges” are small changes designed to have a big impact on individual behavior. Richard H. Thaler, a behavioral economist won this year’s Nobel Prize for his work on the idea.
Automatically enrolling employees in retirement programs, for example, instead of asking them to opt in, leads to more savings. Nudges have been adopted to make all sorts of public policies more effective, from increasing car registration to getting kids to choose healthy school lunches.
Impact investors have taken note. The Gates Foundation has “nudged” biotechnology startups to tackle neglected diseases in the developing world.
Don’t ask investors to “opt in” to environmental, social and governance reporting, Matthew Weatherley-White, a managing director at Caprock Group, suggested at SOCAP last year. Instead, they should have to opt out. “If we made ESG the opt-out setting, the system would change fundamentally and irrevocably,” he said.
Nobel-winner Thaler has three principles for the use of nudges:
1) Nudging should be transparent and never misleading;
2) It should be as easy as possible to opt out of the nudge; and
3) There should be good reason to believe that the behavior being encouraged will improve the welfare of those being nudged.