A Theory For New Year’s Resolutions
It is the year end and perhaps we need to reflect ourselves; how much have we achieved in 2017 and what is our new year’s resolution for 2018? Do we feel like we have not achieved or accomplished much this year?
Research by Richard H. Thaler, the recipient for Nobel Prize in Economic Sciences 2017, provides an explanation of why the New Year’s resolutions, for example, can be hard to keep. By using a planner-doer model, his analysis on behavioural changes explains that short term temptation is a reason why our long term plans such as saving for retirement or living a healthier lifestyle often fail.
Thaler has incorporated psychology into an analysis of economic decision making. By exploring the consequences of lack of self-control along with other factors i.e. limited rationality and social preferences, he has shown how these human traits systematically affect individual decisions as well as market outcomes.
In his applied work, Thaler has also demonstrated how nudging may help people to exercise better self-control in achieving their goals. In simple words, nudge refers to a concept of an indirect positive reinforcement to influence the motives, incentives and decision making of groups or individuals.
In general, there are two types of policies to influence people’s behaviour; either a punishment for not doing 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, nudge comes as the next alternative.
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 successful nudge is the practice of default option in the UK pension policy.
In order to increase the low pension saving rates among private sector workers, the UK government has mandated every employer to establish an automatic enrolment scheme. All workers would be automatically placed into a company’s scheme, and every contribution would be 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 their retirement but keep putting it off. Therefore, auto enrolment fulfils the saving needs at their convenience. The results showed a significant increase for the active contribution since the auto enrolment was introduced for the private sector pension schemes in 2012.
Thaler alleges that the nudge concept or theory is not his new invention and argues that religions have been nudging human beings for many years. It is interesting to see how Thaler’s propositions on the psychological effect on individual’s decision making pose some similarities with the concepts postulated by Al-Ghazali, a Muslim philosopher and theologians who lived hundred years ago.
Adimarwan summarized the similarities between Ghazali and Thaler’s works eloquently. For instance, according to Thaler, humans have the tendencies to act based on their limited rationality due to their short term, direct and limited knowledge. In the book of Mizan al-Amal (Balance of Action), Al-Ghazali described this situation as a lack of wisdom. While Thaler described human’s irrational behaviour is due to acquiescent to social preferences, Al-Ghazali portrayed it in the context of social justice. For Thaler’s explanation on the lack of self control which refers to one’s sense of tension between a long term planning and short term doing, it resembles Al-Ghazali’s expression of courage and moderation for every choice of decisions.
Nudging is claimed to be more, or at least, equally effective 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 the UK, Germany and Japan, as well as a number of international bodies (e.g. OECD, World Bank, UN). It is also gaining traction to 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 the 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 a mizan (balanced) and right worldview of healthy, wealthy and happy life. Only with the right worldview, the decision making theory that worth a Nobel Prize can turn into a noble decision maker.