The “Nudge” Theory of Behavioral Economics and Air Transport

Taking on this theory to its logical extremity, Nobel Laureate Thaler and Cass Sunstein in their 2008 book “Nudge” say: “By knowing how people think, we can make it easier for them to choose what is best for them, their families and society.” 


by Ruwantissa Abeyratne

Suddenly all those gentle nudges empowered by new technology and relatively overzealous marketers have now turned into noodges ~ Joe Coughlin, Director of the Massachusetts Institute of Technology AgeLab

( October 18, 2017, Montreal, Sri Lanka Guardian) The 2017 Nobel Prize for Economics was awarded to Richard Thaler, the father of the “nudge” theory and distinguished behavioral economist of the University of Chicago. Simply put, people are not particles in an atom who function with predictability.  They are known to have cognitive biases which lead them to take wrong decisions, particularly if they are “nudged” to a direction.   A nudge is essentially meant to be a good influence on us, particularly from an economic perspective. Human rationality is at the core of this phenomenon, as explained by the founding father of behavioral economics and Nobel Laureate Daniel Kahneman. Amos Tversky and Daniel Kahneman, in their chapter The Framing of Decisions and the Psychology of Choice, say: “Explanations and predictions of people’s choices, in everyday life as well as in the social sciences, are often founded on the assumption of human rationality. The definition of rationality has been much debated, but there is general agreement that rational choices should satisfy some elementary requirements of consistency and coherence”.

Taking on this theory to its logical extremity, Nobel Laureate Thaler and Cass Sunstein in their 2008 book “Nudge” say: “By knowing how people think, we can make it easier for them to choose what is best for them, their families and society.” An example cited for the success of the nudge theory is the automatic enrollment system in  the United Kingdom pensions scheme, where workers were automatically enrolled in the pension scheme as a nudge which made them avoid taking complicated and burdensome decisions whether to enlist in the scheme or not.

Applying the “nudge” theory to air transport, the singular example that stands out is the computer reservations system (CRS) one encounters when purchasing air transport.  The CRS is expected to operate on how choices are presented to the consumer when deciding on which airline to fly and help steer the consumer to a selection that would be of the most benefit in terms of cost and expedition.  The consumer, when he/she punches in his travel itinerary in the electronic platform of his choice, is immediately presented with a drop-down list of choices.  This in itself is helpful, except for the fact that services on certain airlines pop up as “fist choices” nudging the customer toward the first available travel combination effectively precluding  his mind from scrolling down for all the choices.

From a legal standpoint, the “nudge’ practice could be abused by the monopoly of both airlines and service providers.  Section 2 of the Clayton Act of 1914 makes it unlawful for any commercial entity or other person to discriminate on pricing or fix prices that would put a competitor out of the market. There are well established anticompetitive policies, both in the United States and Europe, which are calculated to prevent and punish anticompetitive conduct. However, the measures taken against anticompetitive conduct in Europe differ from those of the United States in that while in Europe there is an administrative system for enforcement, where fines are imposed on the offenders, in the United States remedies lie in criminal law, with financial penalties as well as custodial measures imposed on those transgressing the law, where private compensation is offered to victims at rates disproportionate to the actual damage suffered. makes it unlawful for any commercial entity or other person to discriminate on pricing or fix prices that would put a competitor out of the market.

In Europe, The Paris Treaty of 1951, which provided inter alia that measures or practices which discriminate between producers, between purchasers or between consumers, especially in prices and delivery terms or transport rates and conditions, and measures or practices which interfere with the purchaser’s free choice of supplier were prohibited under the treaty and that subsidies or aids granted by States, or special charges imposed by States, in any form whatsoever were also prohibited. The Treaty of Rome of 1957 establishing the European Common Market has specific anticompetitive provisions. Article 85 of the treaty prohibits and deems null and void the application to parties to transactions of unequal terms in respect of equivalent supplies, thereby placing them at a competitive disadvantage; or the subjecting of the conclusion of a contract to the acceptance by a party of additional supplies which, either by their nature or according to commercial usage, have no connection with the subject of such contract.

Article 86 of the treaty considers inconsistent with the principles of the treaty, which lays down policy for the Common Market, action by one or more enterprises to take improper advantage of a dominant position within the Common Market or within a substantial part of it. Such action shall be deemed to be incompatible with the Common Market to the extent to which trade between any member States may be affected, and shall thereby be prohibited. Some practices that are deemed unacceptable by the prohibition in Article 86 are: (a) direct or indirect imposition of any inequitable purchase or selling prices or of any other inequitable trading conditions; (b) limitation of production, markets or technical development to the prejudice of consumers; (c) application to parties to transactions of unequal terms in respect of equivalent supplies, thereby placing them at a competitive disadvantage; or (d) subjecting the conclusion of a contract to the acceptance, by a party, of additional obligations which, either by their nature or according to commercial usage, have no connection with the subject of such contract.

To address the issue, The International Civil Aviation Organization (ICAO) – the specialized agency of the United Nations for matters of international civil aviation –  adopted in  a Code of Conduct on the Regulation and Operation of  Computer Reservation Systems (CRS) which states in limine that The Code is based on transparency, accessibility and non-discrimination, and aims at enhancing fair competition among airlines and among computer reservation systems (CRSs) and at affording international air transport users access to the widest possible choice of options in order to meet their needs.

To this end, the Code takes into account current market practices, the particular interests of developing countries, and the critical need for harmonization of the various national and regional CRS regulations.  The  ICAO Code inter alia urges member States to allow system vendors which comply with the Code to provide their CRS services in its territory on a non-discriminatory basis and consistent with any bilateral or multilateral agreements or arrangements to which the State is a party; treat all system vendors impartially regarding their CRS activities in its territory; and permit the free flow across and within its national borders of the information needed to meet the reservation and related requirements of air transport users.

Governments have used the nudge theory with some success.  An example is the 2010 Behavioral Insights Team (The Nudge Team) that developed policies for the government.  The dark side of nudges, as elaborated by Joe Coughlin who is cited at the beginning of this article, is that with the internet of things, which nudges us or directs us to the following according to Coughlin: “your phone buzzes to wake you up, your coffee maker dings to tell you it’s time to make coffee, your dishwasher sings a tone to tell you it needs to be unloaded, and when you’re driving, Waze may suggest you visit a coffee shop where you once stopped” which will make us lose the value of the nudge that guides us to the things that are good for us.


The author is an aviation consultant in Montreal. A former Senior Legal Officer at the International Civil Aviation Organization, he is currently Senior Associate, Air Law and Policy at Aviation Strategies International – a global consultancy firm headquartered in Montreal.  

Author: Sri Lanka Guardian

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