Using behavioral economics to cope with uncertainty: Expand the scope of effective nudging

Abstract

Within a framework of “libertarian paternalism”, the idea of nudge promotes the use of behavioral interventions to reduce irrational decisions that may collectively lead to “behavioral market failures” (Thaler & Sunstein, 2008; Sunstein, 2014). This approach has been criticized, however, for its lack of transparency in behavioral manipulations and for that nudging is not educating. In the current theory of nudging, whether a decision is judged as rational is largely based on a small number of neoclassic standards of expected utility theories under the assumption that all the expected consequences and their probabilities are available to the decision maker. In this article, the author intends to expand the scope of effective nudging to include decisions under uncertainty where the probabilities associated with decision outcomes are unknown. The author explored behavioral strategies to reduce different types of uncertainty. From this perspective, reducing uncertainty is seen as an important way of behavioral nudging. A key for effective nudges is “less is more”. Based on an analysis of the “Bertrand Russel’s Turkey”, the author exemplified how probability-based calculations fail in a real world of uncertainty. Next, the author proposed a quintuple classification of uncertainty existing in the following stages of information processing in decision making, including uncertainty in the information source, information acquisition, cognitive evaluation, choice selection, and immediate and future outcomes. The author further examined behavioral and psychological mechanisms that help reduce each type of uncertainty: Reduce information uncertainty using simple heuristics and one-reason decision making, reduce cognitive uncertainty using intuition, reduce behavioral uncertainty by understanding values of decision makers, reduce outcome uncertainty by replacing probability estimates with prioritized decision reference points, and reduce future uncertainty using time-to-time exchanges to decrease delay discounting. Many decision biases can be better understood in terms of the inconsistency between the modern market environment and the typical human evolutionary environment where behavioral adaptations evolved. Understanding functional reasons underlying decision biases will help improve the quality of human decision making. A new behavioral economics should ask questions of why in functional analysis to find psychological leverages for behavioral nudging.