Icing Without The Cake

My daughter much prefers eating the icing to eating the cake itself, and who can blame her? But, Tim Harford points out in a typically excellent column, that approach doesn’t take you very far in the field of applied behavioral economics.

Would we really have excellent universal pensions, a fit and healthy population, and a low-carbon economy, if only we hadn’t been distracted by Nudge? Of course not. But behavioural science is all too good at producing perfect icing for the policy cake; practitioners must never forget the cake itself.


The point of the column, and the academic paper it speaks about, is very simple: nudges are a complement to economic policies, they aren’t a substitute. And while behavioral economics, and nudges, are truly important, and relatively cheaper, they aren’t magic wands that will substitute for the time tested policies that economic theory will present.

And that is hard to disagree with!

The paper that Tim Harford refers to in his article is called “The i-frame and the s-frame: How focusing on the individual-level solutions has led behavioral public policy astray“. I’ll cover this paper and some of the points raised in it in greater detail tomorrow, but in today’s blog post, I want to cover an older paper written by them.

The paper in question is called “Putting nudges in perspective” and has also been written by George Loewenstein and Nick Chater. The paper (it’s a very accessible, short paper, please do read it) isn’t a mea culpa, nor does it excoriate behavioral economics and the power of nudges. But it does caution us, the readers, of the limits of behavioral economics and worries if the field has become a little too overrated.

First, some definitions and background. What is a nudge? Here is Thaler and Sunstein’s original definition:

Any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge,
the intervention must be easy and cheap to avoid.

Thaler, R. H. and C. R. Sunstein (2008), Nudge: Improving Decisions About Health, Wealth, and
Happiness, New Haven, CT: Yale University Press.

Please read the book to get multiple examples of what nudges are, how they have been developed and used. It is an excellent book to read, full of great ideas. And again, Loewenstein and Chater don’t mean to suggest that there is anything wrong about the idea or the way it has been deployed. As I said, they worry about excessive dependence on the idea of nudges.

In fact, they have a useful framework in the paper, which is worth looking at in greater detail:


What is the type of problem you’re looking to solve? That’s given along the rows of this table. And what solutions might work for these problems? Those are given along the columns. And the point of the paper is that we’ve been focusing far too much on “I” and not been thinking about whether it really is the best solution, as compared to alternatives “A” through “H”.

To use just one example: smoking. Why is smoking a problem? Broadly speaking, for two reasons. First, smoking harms the smoker, and while one might expect the smoker to be aware of this, they might well end up misestimating the risks, or they might end up preferring the immediate pleasure and ignore the long term consequences, or think that they might be able to shake the habit anytime they wish. But also, and this is the second reason, second-hand smoking is an externality that can/should be addressed.

Now, if you think about it in terms of the table above, the authors say that this means that the problem belongs to row 3 (an internality) but also to row 1 (an externality). And to the extent that you agree that tobacco companies are likely to create marketing campaigns designed to exploit the behavioral biases of their potential and current consumers, you might think that it will fall in row 2 as well.

What of the solution? Well, in a problem such as this one, the optimal response might be one in which we marry a traditional economic policy response (taxes on cigarettes) with a behavioral response (graphic advertising on tobacco packets). Just one, of either sort, may not be enough, and in fact, there is a case to be made for more than one policy response from each of the two sets. In other words, the optimal policy response most likely lies in column B-E-H, rather than A-D-G or C-F-I.

But beware:

The question of how different interventions aggregate is interesting and important. On the one hand, as perhaps illustrated by the case of smoking, it is possible that different interventions aimed at the same problem can have a super-additive effect. This could occur if, for example, a multifaceted response is more likely to result in a change in norms, or if there is some kind of threshold of apathy or complacency that needs to be exceeded for people to change their behaviour. On the other hand, multiple interventions, especially if aimed at different target behaviours, could potentially divide individuals’ attention and lead to fatigue, resentment and possibly even a consequent backlash from intervention-weary individuals.


Bottomline: behavioral economics does have a role to play in policy-making, but it isn’t a question of either using traditional economic ideas or using behavioral economics ideas. As the authors note, behavioral problems may have as an optimal solution traditional economic solutions, and vice versa.

Or, you might say – and old timers will have been waiting for this – the truth lies somewhere in the middle!

In tomorrow’s blogpost, we’ll take a look at Loewenstein and Chater’s latest paper on the topic.