RBI Dep. Governor proposes ‘nudge’ for better choices

Ms. Shyamala Gopinath, RBI’s Deputy Governor in her recent speech reviews the developments in India’s forex markets and how Indian policies have shaped up in the crisis. She also points to few lessons to be learnt from the crisis.  All these are pretty well known lessons but is a good reading for it has an Indian perspective.  For instance, she mentions how only now is the world waking up to the usefulness of setting up central counter-parties is key to promote efficiency and transparency and India always had a CCIL (I pointed this as well).

However, what took me by surprise is this:

Lastly, on the issue of selling of complex products, we have to collectively work towards a viable framework. What is the solution? In this context I would like to recount the application of a surprisingly simple idea to the realm of public policy that has received tremendous attention after being advocated by Richard Thaler and Cass Sunstein in their international bestseller “Nudge”.  The authors advocate the use of “choice architecture” by businesses or governments to influence choices in ways that encourage choosers to make decisions in their best interest. They call it “libertarian paternalism.” This involves utilizing “nudges” such as the wording of choices in ways that influence individual actions, designing default choices (in the absence of action) that do not penalize individuals, limiting choices to those that are more comprehensible, taxing detrimental choices, and providing full disclosure to better inform decision-makers.  Can we take a cue? 

I was really happy to read this. I have complained in numerous posts and papers (for instance see this) that behavioral economics is ignored by policymakers when it could benefit them the most. It was simply great to see this suggestion from India’s prominent policymaker. She even asks FEDAI (Foreign Exchange Dealers’ Association of India; she presented the speech to FEDAI) to conduct a special report on the same:

I will urge FEDAI to take it up as a special assignment and suggest a framework that is both practical and implementable while ensuring the best interests of all stakeholders.

I hope FEDAI really takes it up and puts the report on its website. Even RBI could provide its support for this exercise. Even taking some official help from Thaler/Sunstein would be a great idea. It would atleast provide some fresh breath of air from the usual financial sector reports.

PS. I am also not aware whether any other central banker/financial regulator has talked about Nudges in such a supportive manner. I follow Nudges Blog regularly and the blog has pointed the book being mentioned by policymakers/making to some library etc. In case readers are aware of any such suggestions, please let me or Nudges Blog know. It is useful to know if support is building in policymaking as well.

5 Responses to “RBI Dep. Governor proposes ‘nudge’ for better choices”

  1. RBI Dep. Governor proposes ‘nudge’ for better choices Says:

    […] the rest of this great post here Share and Enjoy: These icons link to social bookmarking sites where readers can share and […]

  2. Mark T. Market Says:

    I recently featured Taleb speaking out in frustration against the economic and banking establishment, also joined by his mentor: Benoit Mandelbrot. They blame the present belief in naive risk models for failing to anticipate the coming crisis.

    Their statements about rapid crashes have striking correspondence with Jared Diamond’s observations about societal collapse.

  3. Bernanke on financial innovation and is Fed nudging as well? « Mostly Economics Says:

    […] speech. It seems Fed is actually nudging albeit silently. Recently RBI’s Deputy Governor had suggested to apply Nudges for better consumer choices. India’s PFRDA is already applying defaults for […]

  4. Libertarian Paternalism happening in India and US « Mostly Economics Says:

    […] in India’s case the issues are completely different. Indian regulators seem to have taken a liking for findings of behevaioral economics (see this as well) (though am not sure whether SEBI has consciously nudged). I even pointed Fed […]

  5. Nudging India’s economic policy for inclusive growth « Mostly Economics Says:

    […] policymakers have been trying to use behavioral economics. RBI Dep Governor Shyamala Gopinath suggested using nudges to simplify financial products and our new pension system is based heavily on […]

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