A theory for New Year’s resolutions

If you want to improve yourself, a nudge in the right direction can start with the right intentions. 

IT is the year-end. Perhaps we need to reflect on how much we have achieved in 2017 and what our new year’s resolution for 2018 is. Do we feel like we have not accomplished much this year?

Research by Richard H. Thaler, the recipient of the 2017 Nobel Prize in Economics, offers an answer as to why New Year’s resolutions can be hard to keep.

By using a planner-doer model, his analysis on behavioural changes explains that short-term temptation is often a reason for the failure of our long-term plans such as saving for retirement or leading a healthier lifestyle.

Thaler has incorporated psycho­logy into an analysis of economic decision-making.

By exploring the consequences of the lack of self-control, along with other factors (limited rationality and social preferences), he has shown how these human traits systematically affect individual decisions as well as market outcomes.

Through his applied work, Thaler has also demonstrated how nud­ging may help people to exercise better self-control in achieving their goals.

In simple words, a nudge refers to an indirect positive reinforcement used to influence the motives, incentives and decision-making of groups or individuals.

There are generally two types of policies to influence people’s beha­viour – either a punishment for not doing something or a reward for doing something.

While the punishment policy may not always work, the issue with the reward policy is that it may not be sustainable. Thus, a nudge comes as the next alternative.

The nudging concept has been widely applied in the context of behavioural changes within the financial market, particularly in savings and investments sectors. An example of a successful nudge is the practice of default option in the UK pension policy.

In order to increase the low pension savings rates among private sector workers, the UK government has mandated every employer to es­­tablish an automatic enrolment scheme.

All workers are automatically placed into a company’s scheme, and every contribution is deducted from their payroll, unless they formally request to be exempted.

The assumption for this nudge theory is that many people want to save for retirement but keep putting it off.

Therefore, auto enrolment fulfils the savings needs at their conve­nience. The move in 2012 resulted in a significant increase in active contributions to the private sector pension schemes.

Thaler says the nudge concept is not his invention, arguing that religions have been nudging human beings for many years.

It is interesting to see how Tha­ler’s propositions on the psychological effect on an individual’s decisions bear some similarities with the concepts postulated by Al-Gha­zali, a Muslim philosopher and theo­logian who lived hundreds of years ago.

Adimarwan has eloquently summarised the similarities in the works of Al-Ghazali and Thaler.

For instance, according to Thaler, humans tend to act based on their li­­mited rationality due to their short-­­term, direct and limited knowledge.

In the book Mizan al-Amal (Ba­­lance of Action), Al-Ghazali des­cribed this situation as a lack of wisdom. While Thaler attributed man’s irrational behaviour to an acquiescence to social preferences, Al-Ghazali portrayed it in the context of social justice.

Thaler’s explanation on the lack of self-control, which refers to one’s sense of tension between long-term planning and short-term doing, resembles Al-Ghazali’s expression of courage and moderation for every decision.

Nudging is claimed to be more effective – or at least equally so – than direct instruction, legislation or enforcement. It is also consider­ed to be a cost-effective approach to nudge people towards desired choices.

Hence, several nudge units exist in countries such as Britain, Ger­many and Japan, as well as a number of international bodies (eg OECD, World Bank, UN).

It is also gaining traction in other parts of the world such as Qatar, Lebanon and Saudi Arabia.

However, some have cautioned that nudge success in the West may not produce the same behavioural outcomes in the Middle East consi­dering the religious and cultural differences between both regions.

In the Islamic worldview, how­ever, the emphasis is always on the right motivation. Getting a good result is just as important as the effort and means to achieve it.

A hadith mentions that all actions are judged by niyyah or intentions. No doubt this too applies on nud­ging for good, but one ought to be ikhlas and to take the right motive into account.

As the New Year is approaching, let us be wise enough to nudge into the mizan (balanced) and worldview of a healthy, wealthy and happy life. Only with the right worldview, the decision-making theory that is worth a Nobel Prize can lead to noble decisions.

Suzana Md Samsudi is a Fellow with Ikim’s Centre for Economics and Social Studies. The views expressed here are entirely the writer’s own.

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