Libertarian Paternalism

Following the challenge to neoclassical economics by behavioral economists, Cass Sunstein and Richard Thaler have developed a new political philosophy (Thaler & Sunstein, 2003; Sunstein & Thaler, 2003). Specifically, they develop a new normative account for how the state should interact with its citizenry, which they call libertarian paternalism. They claim that, in certain domains, a state enacting libertarian paternalist policies can “nudge” its citizens to make better decisions without restricting the autonomy of its citizenry to make free and independent choices.

Sunstein and Thaler’s philosophy rests on three assumptions: that people often lack stable and well-formed preferences when faced with choices, that individuals do not always make decisions that maximize their own welfare, and that some form of paternalism is unavoidable in certain situations.

The first assumption is based on research from behavioral economics which suggests that, in many domains, people lack stable and well-formed preferences (Tversky & Kahneman, 1981). That is, when presented with choice situations with which individuals are not commonly faced, the alternative that they choose will depend on how the choices are presented to them.

The second assumption is that people do not always make decisions that maximize their own welfare. Sunstein and Thaler (2003) claim that individuals are more likely to make welfare maximizing choices when faced with choices which they frequently make (for example, choosing a flavor of ice cream at an ice cream shop) than when making a choice that they do not frequently make (for example, deciding whether or not to enroll in a 401(k) plan).

The third assumption is that there are many situations in which some form of organizational paternalism is unavoidable. In defense of this assumption, they offer the following example (Thaler & Sunstein, 2003; Sunstein & Thaler, 2003). Suppose the director of a cafeteria notices that customers are more likely to purchase the food that is presented earlier in the cafeteria line than the food that is presented later in the cafeteria line. Armed with this information, how should the director of the cafeteria present the foods? In this scenario, it is said that the cafeteria director is a choice architect and that, in deciding how to arrange the food, she is shaping the choice architecture consumers face. One possibility is for the choice architect to place the least healthy food items earlier in the cafeteria line. However, it seems likely that most observers would detest this arrangement. A second possibility is to place the food items that the director believes most people would prefer to consume at the front of the line. But this option is likely to be difficult to implement because of assumption one: the individuals may lack stable and well-formed preferences. Another option is to place the food items randomly. But, to Sunstein and Thaler (2003), it seems likely that most observers would detest to this arrangement as well. A fourth possibility is for the director to place the healthiest food items earlier in the cafeteria line, with the intention of encouraging customers to eat the healthiest foods. And while this option may seem paternalistic, Sunstein and Thaler (2003) see this option as the least objectionable.

To summarize, Sunstein and Thaler’s philosophy rests on three assumptions: that people often lack stable and well-formed preferences, that individuals do not always make decisions that maximize their own welfare, and that some form of paternalism is unavoidable in certain situations.

On the basis of these three assumptions, Sunstein and Thaler suggest that, in those situations where paternalism is unavoidable, the state should use the malleability of its citizens’ preferences to correct for the fact that individuals often do not make welfare maximizing decisions (Thaler & Sunstein, 2003; Sunstein & Thaler, 2003). This is the libertarian paternalistic political philosophy. It is “paternalistic” because it uses the fact that people often lack stable and well-formed preferences to “nudge” individuals into making the choice that maximizes their own well-being. For example, a libertarian paternalist cafeteria director would place the healthy food items at the front of the line in an effort to “nudge” consumers to eat healthier. But it is also, according to Sunstein and Thaler, “libertarian” in that it does not restrict the ability of the individual to choose the alternative which she most prefers. In the cafeteria example, the consumer is able to choose whichever food items she most desires, despite the fact that the director has placed the healthiest foods at the front of the line.           

In sum, the libertarian paternalist philosophy rests on three assumptions: that people often lack stable and well-formed preferences, that individuals do not always make decisions that maximize their own welfare, and that some form of paternalism is unavoidable in certain situations. On the basis of these three assumptions, libertarian paternalism suggests that, in those situations where paternalism is unavoidable, the state should use research from behavioral economics to correct for the fact that individuals often do not make welfare maximizing decisions. This may be done, libertarian paternalism suggests, without restricting an individual that may have true preferences in that domain from being able to make the choice that she desires to.

Real-World Applications

            Save More Tomorrow

Since the mid-1970s, the U.S. has observed a sharp decline in personal savings as a percentage of after-tax personal income in the United States, peaking at 15.3% in the second quarter of 1975 and hitting 7.9% in the third quarter of 2019.

There are at least three reasons why this may be cause for concern (Marquis, 2002). First, if individuals were to suddenly reverse this trend in response to unexpected economic volatility, it would cause a sharp reduction in consumer spending, and thus, a sharp reduction in aggregate demand. Second, if the level of savings in the U.S. becomes too low, it may be insufficient to sustain the level of investment necessary for economic growth. In this case investment, and thus the U.S. economy, would become overly dependent on foreign capital. Third, these levels of saving may be less than what is required to ensure that individuals reach retirement with adequate savings.

In light of these concerns, Thaler and Benartzi (2004) propose a libertarian paternalist savings plan, based on research in behavioral economics, which they believe will increase personal savings as a percentage of disposable income among U.S. employees.         

Thaler and Benartzi (2004) argue that there are four reasons why households may save less than the optimal amount. First, determining the optimal level of saving is difficult. Second, even if one were able to calculate the optimal level of saving, one may lack the self-control required to achieve that level of saving. Third, individuals are prone to procrastination: we tend to postpone unpleasant tasks. This tendency to procrastinate leads to what behavioral economists call a status quo bias: a tendency to maintain one’s previous decisions (Samuelson & Zeckhauser, 1988). Thus, employees may postpone determining their optimal levels of saving and adjusting to them. Fourth, research by behavioral economists (Kahneman & Tversky, 1979) has suggested that individuals are loss averse: they weigh losses more heavily than equivalent gains. This loss aversion may limit how much people save because, once they get used to spending a particular amount of their income, any reduction in their spending (owing to the increased saving) may be viewed as a loss.         

Thaler and Benartzi (2004) therefore propose the Save More Tomorrow (SMarT) plan as a means of increasing the U.S. personal savings rate. The SMarT plan asks individuals to make a commitment today to increase their savings rate when they receive their next pay raise. Having employees increase their savings rate using their pay raises means they will not suffer a reduction in spending from current levels. Thus, this feature of the SMarT plan reduces loss aversion as an obstacle to increased saving. Another feature of the SMarT plan is that employees continue increasing their savings rates with each pay raise, until the savings rate reaches a preset maximum. This feature uses the same status quo bias that prevents individuals from optimizing their savings rates to keep employees in the plan and “nudges” them ever closer to a satisfactory savings rate with every pay raise. Importantly, the employee is free to opt out of the program whenever she wishes. Thus, there is no coercion involved in this plan.

Thaler and Benartzi (2004) report three cases in which the SMarT plan successfully increased the personal savings rates of employees at three different firms.

The case for which they have the most data is the implementation of the SMarT plan at an (anonymous) mid-size manufacturing company in 1998. In an effort to convince employees to save more of their income, this firm hired an investment consultant. The consultant was made available to all employees eligible for the firm’s retirement savings plan.

Of the eligible employees, 286 chose to meet with the consultant. Only 79 of these 286 employees (20%) were willing to accept his advice.  

For the 80% who were unwilling to accept his advice, the consultant suggested a version of the SMarT plan as an alternative. This version of the SMarT plan required employees to increase their savings rate by 3% every time they received a pay raise (hourly employees received pay raises of 3.25% and salaried employees received pay raises of 3.5%). The next pay raise was scheduled to occur approximately 3 months after the SMarT plan was recommended. The program was extremely popular: of the 207 employees who were unwilling to accept the consultant’s advice, 162 of them (78%) agreed to join the SMarT plan. Moreover, the retention rate of the SMarT plan was high: 80% of the employees who enrolled in the SMarT plan remained in it after four subsequent pay raises.

Prior to the company’s hiring of the consultant, the average savings rate of employees at the firm was 4.4%. The employees who were unwilling to talk to the consultant were saving higher than the company-wide average, 6.6%. The employees who were willing to accept the consultant’s advice were saving at the company-wide average, 4.4%. After accepting the consultant’s advice, they were saving 8.8% of their salary. Those who were unwilling to accept the consultant’s advice and enrolled in the SMarT plan had been saving 3.5%, which was below the companywide average. After being enrolled in the SMarT plan for four subsequent raises, this group of employees was saving 13.6% of their salary. This is more than both those who were unwilling to meet with the consultant and those who met with the consultant and accepted his initial advice.

On the basis of the success of the SMarT plan at this firm, and at two other firms on which they report, Thaler and Benartzi (2004) conclude that the widespread adoption of the SMarT plan may increase the personal savings rate in the United States. They also conclude that the program would be most effective if all eligible employees are automatically enrolled in the program and given the choice of opting-out (Thaler & Benartzi, 2004). This conclusion is based on research which has shown that, when presented with choice situations they do not commonly face, the alternative individuals choose will depend on how the choices are presented to them (Tversky & Kahneman, 1981). Thus, because employees are not often faced with a choice of whether or not to enroll in an employee savings plan, they are likely to stick with the default option. This idea is supported by research which showed that the adoption of automatic enrolment increased 401(k) participation among newly hired employees by 48% at one (anonymous) large U.S. corporation (Madrian and Shea, 2001). On these grounds, Thaler & Benartzi (2004) recommend the widespread adoption of the libertarian paternalist SMarT plan with an opt-out default (OutSMarT).

Organ Donations  

Johnson & Goldstein (2003) find that changing the default position of whether citizens are registered as organ donors actually increases the number of people who ultimately become organ donors.  

When the default position is opt-in, individuals must affirmatively choose to become organ donors: unless they explicitly express their desire to be organ donors, they will not be. The alternative scenario is that the default position is opt-out. In this arrangement, if the individual does not decide whether or not to be an organ donor, they are automatically registered as an organ donor. That is, someone wishing not to be an organ donor must expressly state this intention.

What Johnson & Goldstein find is that the rate of individuals who become organ donors is dramatically higher in the opt-out default than in the opt-in default. They find that European countries with opt-out defaults have dramatically higher rates of organ donations that European countries with opt-in defaults. They also conduct experiments which suggest that changing the default in the U.S., currently an opt-in country, to opt-out would result in an increase in donors.

A conscience decision to set opt-out defaults on the part of policy-makers in order to increase organ donations would be an application of the libertarian paternalist philosophy and behavioral economics research. In this scenario, individuals do not have well-formed preferences over whether to be an organ donor or not: the rate of organ donations changes depending on whether the default is opt-in or opt-out. If people did have well-formed preferences, this figure should stay the same, regardless of the default. A decision by policymakers to use this information and set an opt-out default is, a libertarian paternalist would argue, libertarian because it does not restrict individuals from deciding whether to be organ donors, whilst also being paternalistic because it nudges people into becoming organ donors, which is socially beneficial.

(It should be noted that Johnson & Goldstein do not explicitly state that opt-in defaults should be adopted, only that their research suggests the effects of defaults should be considered by policymakers. Moreover, they do not explicitly allude to “libertarian paternalism” in their article.)

Critiques

            Libertarian Paternalism Assumes Well-Informed Choice Architects

Libertarian paternalist choice architects seek to exploit human cognitive limitations to nudge citizens into taking decisions that result in superior personal or societal outcomes. However, Gigerenzer (2015) has suggested that there is a contradiction inherent in this philosophy: the technocrats and behavioral scientists altering citizens’ choice architecture are also human and can therefore be subject to the same cognitive biases.

Moreover, Gigerenzer (2015) raises the possibility that lack of a scientific understanding and conflicts of interest may push choice architects to nudge patients in directions which are detrimental to their well-being. 

He points to, among other cases, the example of using behavioral insights to encourage women to perform monthly breast self-examinations. Gigerenzer then points to randomized trail data suggesting that, not only did self-examinations not reduce the risk of death from breast cancer, but they can actually cause harm in the form of an increased number of biopsies.

And he argues that health organizations have been nudging women into breast cancer screenings – by sending them appointment letters with preset times and locations - without informing the women that studies do not provide evidence that the benefits outweigh the risks. In this case, Gigerenzer argues, the nudging serves the interests of the mammography industry, does not allow the women to make informed decisions at their own health, and can actually do more harm than good to patients. 

In A Democratic Society, Government Policy Should Be Overt

Several writers have argued that nudge policies are simply incompatible with a democratic form of government.

Farrell & Shalizi (2011) argue that libertarian paternalism assumes that technocrats know best what the citizenry want and suggest that there is no reason to accept this assumption. They point out that there is no way for ordinary people to provide feedback to the technocrats employing covert nudges: the citizenry is not even aware that such nudging is taking place. They also argue that libertarian paternalism treats individuals more like consumers than citizens in a democratic society. In a 2017 article, Farrell further argues that nudging is anti-democratic.

Mettler (2011, pg. 52) has also argued that deploying nudges does not foster democratic participation and citizens’ awareness of government policies.

Hausman & Welch (2010, pg. 134) have suggested that government nudging in situations where nudging is avoidable may be “inconsistent with the respect toward citizens that a representative government ought to show. If a government is supposed to treat its citizens as agents who, within the limits that derive from the rights and interests of others, determine the direction of their own lives, then it should be reluctant to use means to influence them other than rational persuasion.” 

Hausman & Welch (2010, pg. 135) have also suggested that it may be easier for citizens in a democratic society to monitor openly coercive policies (i.e. regulations) than covert nudges.  

Oliver (2013, pg. 14) argues that, in a democratic society, government policy should be made explicit and suggests that “nudges do not fulfil the requirement that government policy should be overt” and that “overt policy seems to go somewhat against the original nudge spirit of appealing to people’s unconscious system 1 thinking.”

It should be noted that, in contrast to the argument that government policy should be completely overt, Luc Bovens has suggested that a government intervention would be ethically acceptable and sufficiently transparent if a discerning individual could figure out that such an intervention was taken; the intervention need not be explicitly publicized for it to be acceptably transparent. (See section 2.14 [pg. 13-14] & appendix 6 [pg. 108-109] of the 2011 House of Lords Report on Behaviour Change.) In this view, the state setting an opt-out default for organ donation would be acceptable because a perceptive citizen could realize that the government has done so.

It’s Better to Educate

 While not opposing nudging per se, Gigerenzer (2015) opposes what he deems as Thaler & Sunstein justifying libertarian paternalist policies by blaming societal problems “exclusively on the individual mind” (that is, on the cognitive limitations observed by behavioral scientists). He argues that such an approach ignores what he believes to be the more sustainable solution of educating people.

As part of his case he points to the use of nudge techniques to get women over 40 to attend cancer screenings. He argues that it would be better to educate women about the risks and causes of cancer because roughly half of cancers are due to deleterious personal behaviors such as smoking, obesity, lack of exercise, and alcohol and because nudging women into cancer screenings may save few or no lives and can even be harmful when they lead to unnecessary biopsies or surgeries. He calls for childhood school programs that aim to reduce the occurrence of cancer.

Moreover, Gigerenzer provides a counterpoint to Thaler & Sustein’s suggestion that there is no alternative to liberation paternalism (i.e. that there are many situations in which some form of organizational paternalism is unavoidable). He asks, “what if nudging stops when a different political party with other interests comes into power? What if the tobacco and fast-food industry counteracts by investing billions into nudging people into the opposite direction?” And he concludes that the only long-term sustainable solution is to educate people.  

            Nudge Policies May Be Substituted for Necessary Regulations

Oliver (2013, pgs. 12 & 14) argues that “the most effective way of preventing people or organisations harming others is to regulate their activities” and he writes that “[t]here is a danger that an ideological preference for non-regulatory interventions will encourage (and has encouraged) officials to exclude consideration of potentially more important and effective regulatory measures when thinking about behaviour change.”

A 2011 Report on Behaviour Change (pg. 5, 32-36) by the U.K.’s House of Lords supports Oliver’s concern. It concluded that “non-regulatory measures used in isolation, including “nudges”, are less likely to be effective.” And it criticized the government of Prime Minister David Cameron for focusing excessively on nudges, as opposed to regulation, as a means of encouraging behavior change, writing “the evidence we received indicated that the Government’s preference for non-regulatory interventions has encouraged officials to exclude consideration of regulatory measures when thinking about behaviour change.”

            Libertarian Paternalism is Just a Form of Paternalism

Hausman & Welch (2010, pg. 128) have suggested that Thaler & Sunstein have not found a way to reconcile state paternalism with respect for individual liberty, as libertarian paternalism claims to do. They argue that individual liberty is not merely about not closing off choices (i.e. leaving the choice set unchanged) but also about autonomy and control over the decisions an individual makes. They write, “[i]f one is concerned with autonomy as well as freedom, narrowly conceived, then there does seem to be something paternalistic, not merely beneficent, in designing policies so as to take advantage of people’s psychological foibles for their own benefit. …. The reason why nudges such as setting defaults seem …. to be paternalist, is that in addition to or apart from rational persuasion, they may “push” individuals to make one choice rather than another. Their freedom, in the sense of what alternatives can be chosen, is virtually unaffected, but when this “pushing” does not take the form of rational persuasion, their autonomy—the extent to which they have control over their own evaluations and deliberation—is diminished. Their actions reflect the tactics of the choice architect rather than exclusively their own evaluation of alternatives.”

Nudges May Be Subject to Abuse

Hausman & Welch (2010, pgs. 131 & 135) have suggested that nudges may be subject to abuse by malevolent actors.

Libertarian Paternalism is Not Actually Libertarian

Mitchell (2005) has argued, from a libertarian perspective, that libertarian paternalist policies may cause a redistribution of wealth from rational individuals to irrational individuals. To substantiate this claim, he offers the following example. Consider a libertarian paternalist policy which results in irrational individuals who would not normally sign up to an employee pension plan actually doing so. Suppose that this is a pension plan in which employer contributions are tied to employee contributions. Now employers will somehow need to accommodate for the increased enrolment in the pension plan. It may choose to reduce match amounts and redistribute funds away from the rational individuals to the irrational individuals. Or it may keep the match amounts the same but cut back on other employee benefits. Or, it may choose to pass the additional costs on to consumers. Regardless of which option the employer chooses, the implementation of the libertarian paternalist policy has caused an increase in enrolment, which in turn has caused a redistribution of wealth from rational individuals to irrational individuals. Thus, Mitchell claims that libertarian paternalism is unacceptable to libertarians who prohibit “state-based takings for any purpose other than remedying involuntary exchanges” (Mitchell, 2005; pg 1248). In other words, Mitchell (2005) claims that libertarian paternalism is unacceptable to libertarians because libertarians oppose state redistribution of wealth, except in the case where wealth is being taken from an individual and given to another to reconcile a wrong the former individual has inflicted on the latter.

Libertarian Paternalists Haven’t Told Us How To Find The True Preferences Towards Which To Direct Citizens

 

Robert Sugden argues that libertarian paternalists haven’t told us how choice architects can identify the true preferences towards which citizens should be directed.

Adoption by Governments

            The U.K.’s “Nudge Unit”

In 2010, the Conservative Prime Minister of the United Kingdom, David Cameron, setup the Behavioural Insights Team to apply behavioral science research to a broad range of public policy issues which ranged from reducing tax fraud and errors, to increasing organ donation, to bolstering charitable giving.

The team, nicknamed the “nudge unit,” was spun out of the government in 2014.

The decision to spin it out of government was criticized for putting the unit’s operations beyond the reach of freedom of information requests which, it was argued, would mean that decisions that subconsciously influence the public would not be subject to proper scrutiny.

As of November 2018, the Nudge Unit had offices in London, New York, Singapore, Manchester, Sydney, and Wellington. Its operations spanned the globe and included work on everything from promoting retirement planning in Ontario, Canada to increasing early payment of taxes in Indonesia. 

Interview: Nicholas Chater Discusses The “Nudge Unit”

Behavioral scientist and member of the “Nudge Unit” advisory board, Nicholas Chater, discusses using behavioral economics to inform public policy.

America’s Social and Behavioral Science Team

In September of 2015, U.S. President Barack Obama signed into force Executive Order 13707. The order made permanent the Social and Behavioral Science Team – essentially America’s equivalent of the “nudge unit” – which was originally launched by the Obama Administration in 2014.

The executive order also directed federal agencies to incorporate insights from behavioral science into their programs.

The Executive Order, titled “Using Behavioral Science Insights to Better Serve the American People,” read “A growing body of evidence demonstrates that behavioral science insights -- research findings from fields such as behavioral economics and psychology about how people make decisions and act on them -- can be used to design government policies to better serve the American people.” 

(You can learn how executive orders work here.)

In its first year, the team worked on public policy issues ranging from increasing on time repayment of debts to promoting flu vaccinations.

The formation of nudge units in both the United States & United Kingdom means that the libertarian paternalist philosophy has thus made it into the upper echelons of policy-making.  

            Other Governments & International Institutions

The possibility of using nudges to achieve desirable social outcomes has also been considered by other governments around the world. In 2011 the Center for Strategic Analysis for the Prime Minister of France (Centre d'analyse stratégique) published a report titled Green Nudges, which proposed nudging French citizens into more ecologically sustainable behaviors. The World Bank has created a Mind, Behavior, and Development Unit tasked with using behavioral economics to bolster the institution’s projects. And the United Nations has been using behavioral science to design its policies.

            Are They Actually Nudging?

However, it’s worth noting, as this article does, that much of what these teams have been doing is more about overt prodding then subconsciously nudging by changing the choice architecture. For example, the Social & Behavioral Science Team’s experiment in sending reminder emails to student loan borrowers who had missed their first repayment increased subsequent repayment. But the sending of reminder emails is an overt provision of information that encourages receivers to consciously take a certain action, not an alteration of the choice architecture in a manner that subconsciously changes an outcome.

Oliver (2013, pg. 9) makes a similar point about many of the U.K. Behavioral Insights Team’s policies not actually being nudges.

 

Written By: Aiden Singh Published: December 9, 2019 Last Updated: December 19, 2021

 

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