The effectiveness of a regulatory intervention may depend on how successful that intervention is in changing consumer behaviour. This paper explores two broad frameworks for considering consumer behaviour: rational choice theory and behavioural economics. The former assumes that choice is the process of maximising utility subject to budget constraints. The latter assumes that choice can be affected by a number of cognitive, social and emotional factors.
The application of behavioural economics to policy design has not been widespread. However, recently a mechanism for translating these findings to public policy has been developed through ‘nudge’. Nudge uses insights of behavioural economics to change choice architecture with a view to influencing behaviour. Research has found that, in some circumstances, small alterations to choice architecture can give effect to disproportionately large behavioural changes.
Under certain conditions, some evidence suggests that nudge interventions can be: cost-effective relative to more direct or traditional forms of government intervention; used alongside existing regulatory approaches; targeted in which decisions are influenced; and easy to implement.
However, it is important that some assessment is made about all of the costs, prices, preferences and constraints that consumers face in making a decision. In the absence of this information, governments may nudge consumers to make sub-optimal decisions which reduce the benefits to the community. Given the inherent difficulties governments face in obtaining this information (such as the decentralised nature of information), fully understanding if a nudge enhances benefits to the community can be difficult to assess.
Nonetheless, insofar as behavioural economics and its application through nudge can be harnessed to improve regulatory design, its advancement is encouraged to be explored.