Planning or Doing?

The ageing of society and the recent financial crisis have put pressure on our system of social security. There is a tendency to shift part of the responsibility for future income and healthcare from the social security system to individuals. Yet, one may wonder to what extent individuals can bear this responsibility. Classical economics assumes that people are perfectly rational. However, research in psychology and other social sciences shows that people systematically deviate from rationality. One example is the gap between planning and doing. Many of us repeatedly postpone investing in our own future such as saving more for our pensions, quitting smoking, or going to the gym. Such a psychological bias makes it difficult for individuals to bear the responsibility for their own future income and health.   

Behavioural economists enrich economics by using insights from other social sciences such as psychology. They, thereby, know how people deviate from the classical rational economic models. This knowledge can be used to design decision making environments, which help people take responsibility for their own future. Libertarian paternalism proposes nudging as a tool to create such environments. A nudge is a subtle push into a particular direction and leaves people the freedom to deviate from this direction. In order to implement nudging, one needs to know whom to nudge, in which direction to nudge, and how to nudge. Behavioral economics provides answers to these questions.