Interview: Richard H Thaler, author of Nudge

And your idea gets caught up in the battle of ideas at the heart of the US election and the most pragmatic candidate for a generation becomes a torch bearer for your way of thinking.

And your man gets into office with a rallying cry of "change!" and your co-author is called into the heart of government to ensure that your idea becomes part of the framework of how the country conducts itself.

Meanwhile, you're over in Britain, spreading the word, seeing if you can capture the mood in a country also desperate for change.

And you're talking to another big fan - David Cameron of the Conservatives, the man most likely to be the next prime minister.

Your name is Richard H Thaler and your idea is the "nudge".

The thinking behind the nudge is that people can be prompted towards making better decisions if the "choice architecture" acknowledges that we are not rational creatures who pore over options and take informed decisions but, instead, irrational, sometimes lazy, mostly stressed humans who will opt for the simplest thing, or the thing best sold to us, or nothing at all if that's easiest.

Climate change

Like with computers. There are a myriad ways to set up a computer, but the majority stick with the default settings because they figure someone back at the factory on a high salary has worked out the optimum choices. If those default settings and those "choice architects" can help us set up our iMacs - what about our pension provision, our climate, our health care and, of course, our financial systems?

Your name is Richard H Thaler, professor of behavioural science and economics, and your co-author is Cass Sunstein, now head of Information and Regulatory Policy in President Barack Obama's administration.

Your name is Richard H Thaler, director of the Centre for Decision Research in Chicago and you're in a taxi crossing London, on the back of a breakfast meeting with David Cameron, and you're talking to The Wharf answering the obvious question. Was all this - all this - an ambition for your book?

"Ambition! Maybe wild dream! Certainly, we never could have dreamt that it would get the reception that it has in the UK. It's been gratifying to have David Cameron pick it up, and President Obama. I've referred to my co-author as the Nudger-in-Chief although in the press they refer to him as the regulation czar which shows, for better or for worse, they're taking it seriously.

"It's also your worst nightmare - I mean - come on. We're just a couple of professors."

Nudge is the catchy term for the philosophy. But there's another way to explain the concept - libertarian paternalism, although that concept sounds like the Victorian grandpappy of the upstart trend-setting Nudge.

The eureka moment came when Thaler was working on Save More Tomorrow - a rolling pension plan that would see people automatically build up an adequate provision without much forethought or intervention.

"One of my colleagues said, 'I have to ask you about this - isn't it a bit paternalistic?' I said, 'I guess so but there's no coercion here, people are free to join the programme if they want to. It's not the nanny state - we're not telling anybody what they have to do so I could guess you could call it libertarian paternalism.' And thus the phrase was coined.

"I remember the next time I had lunch with Cass, I said, 'you know I have this new phrase and there may be something to it.' So we wrote up a little article sketching out what the idea might be and as we talked more about it we thought, 'well this could be a unifying theme for a book'."

It has the ring of a political movement in its own right, I say.

"We set out to write a non-partisan work and it's gratifying that one leader from the left and one from the centre right has taken the idea seriously. The truth is that I don't think they are that far apart politically."

Ardent marketers will recognise what Sunstein and Thaler have done. They have taken the dark arts of salesmanship and applied them to social policy.

Thaler holds his hands up. "We don't claim to have invented the Nudge. People have been nudging you in bazaars for thousands of years. When you go to a supermarket the choice architect is the one who laid the store out and worked out what path you should be taking to make sure you wander past the things that are most likely to catch your fancy.

"What we're trying to do is get governments up to same level that businesses are in thinking about how people really make decisions."

I point out to Professor Thaler that the accepted premise of the book is that people are essentially inert, vulnerable and stupid. Isn't that a cynical view of humanity?

"I don't think of it as cynical, I think of it as realistic. The thing that unites the politicians that have been drawn to it is pragmatism. Certainly Barack Obama, if nothing else, is a pragmatist and not particularly an ideological pragmatist.

"He's interested in things that work - so if changing default options works, let's do it."

And what about the sorely-tested notion that the State has the best interests of its citizens at heart?

"We favour nudges over commands. Freedom to choose is the best safeguard. The risk of mistake and bias are real and sometimes serious but governments have to provide starting points."

Which brings me to my next point. I ask Prof Thaler whether libertarian paternalism is the right idea at the wrong time. The age of light-touch regulation, of benignly disposed choice architecture has been swept away and we are now in the territory of state control, heavy-handed interference and in-your-face regulation.

Prof Thaler says: "I spoke at an event with Mr Cameron and what I was saying was just the opposite. The lessons we should have learned from this episode is that things have gotten so complicated that the CEOs of major companies didn't fully understand what was going on in their companies.

"It is the height of folly to think that we could turn those companies over to bureaucrats and hope that they would succeed - it's just too hard. I gave a talk at the Treasury Department in Washington, to career Treasury executives, and I asked who in the room would be competent to run Citibank. I asked the same question of the Cabinet Office about RBS. In neither case did anyone raise their hands."

His response to the failure of the financial system is not greater regulation but greater transparency, greater democracy.

Making money

"If we can require companies to disclose more of what they're doing we turn every computer into a warning system that would inform the market - and it would also inform the CEOs. The president of Citicorp admitted to not knowing everything that was going on.

"The needle that we need to thread in regulation is to disclose enough that the market and regulators can see what they're doing but not so much that they can't make money.

"So we can't have hedge funds revealing all their trades or they're out of business. But we can ask hedge funds to reveal their leverage - and certainly we can ask Bernie Madoff where the money is.

"The idea that heavy-handed regulation is the solution to this mess is completely misguided. The most heavily regulated part of the economy was [US mortgage companies] Fannie May and Freddie Mac. They were quasi federal agencies and that didn't protect them from getting into trouble."

Prof Thaler has just passed Buckingham Palace in his taxi. He's close to his destination so we have to finish.

I tell him: "When I finished reading your book I immediately joined the company pension scheme."

He laughs and says: "You have been Nudged."

Your name is Richard H Thaler and your time has come.

- Nudge: Improving Decisions About Health, Wealth And Happiness by Richard H Thaler and Cass R Sunstein, £9.99, Penguin