Thaler's Nudge Theory, also known as the libertarian paternalism theory, posits that individuals can be nudged towards making certain decisions that will ultimately benefit them without infringing on their freedom to choose. The theory has been used to explain a wide range of phenomena, from why people might save more money if their employer automatically enrolls them in a 401k plan, to why it is difficult to quit smoking.
The key idea behind nudge theory is that humans are not always rational decision-makers. We are often influenced by our emotions, our biases, and our past experiences. As a result, we don't always make the best choices for ourselves – even when those choices seem obvious in retrospect.
Nudge theory attempts to account for this by providing gentle nudges that guide people towards better decisions without taking away their freedom to choose. For example, employers might automatically enroll new employees in a 401k plan with a low default contribution rate. This nudges employees towards saving for retirement without forcing them to do so.
Critics of nudge theory argue that it relies on an overly simplistic view of human behavior. They also worry that nudges could be used to manipulate people into making choices that they would not otherwise make – such as voting for a particular candidate or buying a particular product.