Richard Thaler’s book “Nudge” which he has co-authored with legal scholar Cass Sunstein in 2008 has become a best-selling sensation by now and media outlets such as the Financial Times have reported about it.

So what’s behind the nudge theory?

The nudge theory is an area of behavioural economics. It describes how small interventions in the environment or incentives can encourage people to make better decisions. Critics often mention that it could also be used to manipulate people into taking the wrong paths but overall it’s meant to lead people into a positive behaviour they might not display otherwise.

An example would be a company that signs up employees automatically for a corporate pension scheme. The scheme includes everyone, but also allows people to opt out if they wish. That way more people will invest in their pension whereas if you offer the scheme and people need to sign up, the take up will be less as it affords an action from the individual employee. Another example would be if companies – instead of giving a portion from their profits to charity – gave the right back to the purchaser to choose their own designated charity and therefore nudging them into action.

Studying behavioural economics also helps business people to understand how other people decide on topics in negotiations or react to propositions. Business schools like Harvard have even started executive programmes on the topic and governments all over the world have incorporated the concept.

According to the Financial Times, U.S. president Barack Obama has advised government departments to adopt behavioural economics to support national priorities, such as enabling Americans to find better jobs or lead healthier lives. The UK government as well as the governments of Australia, Canada and the Netherlands have also taken up nudges.

“The mantra I always give, is that you have to make it easy,” Prof Thaler is cited in the FT. “I think of nudging as like giving people GPS. I get to put into the GPS where I want to go, but I don’t have to follow her instructions.”

Find full report here: Business Education - How a little nudge can lead to better decisions