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Created 15.10.2021
Updated 7.4.2022

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"The previous customer chose not to take a fresh towel every morning and saved a lot of water, energy and chemicals. How about you?"

According to an experiment made in the U.S., this kind of nudging among hotel customers works better than for example constraining or inducing guilt when trying to reduce environmental load.

The example is from Richard H. Thaler, Nobel Prize-winning researcher of behavioral economics, who is the co-author (with Cass R. Sunstein) of the global best seller Nudge (2008), in which the concepts of behavioral economics are used to solve many of society's major problems.

"Hotel customers reacted to nudging, and the use of fresh towels decreased because of the psychological reasons – people are naturally drawn to act similarly to other people. We want to be accepted by other humans and society", explains Professor Luigi Mittone, based in the University of Trento, Italy, and a vising professor at the LUT School of Business and Management.

Like Thaler, Mittone specializes in behavioral economics, which combines elements of economics and psychology to understand how and why people behave the way they do.

While the desire not to stand out in the neighborhood makes us do environmental deeds, it also makes us reach for a high standard of living, even if it means living in debt and overconsumption.

"It's only natural that the idea of giving up is hard for us. We want to have a nice house and a fancy car and interesting hobbies. However, we need to drive humanity in a sustainable way. The psychological aspect offered by behavioral economics helps us to understand what happens in the local and global economy and how we all can make a change", Mittone says.


Living in debt has become the new normal

The opinion of many is that we live beyond our means.

The U.S. and the EU countries have taken on a historically high amount of new debt during the COVID-19 period. In Finland, at the end of July 2021, central government debt was EUR 129.53 billion. The latest budget will raise government debt to an estimated EUR 146 billion in 2022.

Getting into debt is a growing phenomenon also among consumers. The debt-to-equity ratio of Finnish households has continued to grow. The debt ratio of Finns was 134 percent in March 2021. The gearing ratio reflects how much debt a household has in relation to disposable income.

Living in debt has become the new normal.

"We are talking about a very interesting phenomenon. The whole thinking about debt has changed. While for Americans living in debt has for long been culturally accepted, in Europe this is somewhat different. We Italians used to be like Finnish people – we don't like to live in debt. In recent years we all have been forced to rethink this, in the public and in the private sector", says Mittone.

"We have to keep in mind though, that public debt is a completely different matter than private debt", Mittone emphasizes and continues:

"The euro as a currency is just a piece of paper. In the end it's all about common consent, which has been achieved regarding public debt too. Before, EU Member States were responsible for their own debts. With Germany, France and other big European states in the frontline, we have agreed to see the debts of the member states as a mutual debt."

Mittone describes Europe as a dream, a sort of Utopia, an attempt to create common agreement on politics and standards. He says that Europe is a series of massive reforms and far from ready or perfect. Mittone adds that Europe is needed to compete with superpowers like the USA and China. To gain such a position, EU member countries have to give up some of their sovereignty.

"But you Finns have such a beautiful country, and you have every right to defend your splendid natural environment and your culture."

LUT-kauppakorkeakoulun vieraileva professori Luigi Mittone
We need a stronger political view, which is not driven by self-interest or heavy ideological ideas – they are a nightmare.
Luigi Mittone
Professor, University of Trento

When somebody loses, somebody benefits

Finnish author and journalist Tuomas Niskakangas analyzed the global economy recently in Helsingin Sanomat. He writes that the survival mechanisms of the world economy and market during the COVID-19 pandemic struck him by surprise.

"Stock prices are setting new records, the housing market is boiling and there is a fear of labor shortages instead of unemployment… The recession has been avoided", he argues.

Mittone says the ways of the economy are never just good or bad. When somebody loses, somebody else benefits. During the pandemic new enterprises have been born for example into the field of medicine.

"While some companies have collapsed, others have been success stories due to the need for face masks, for example. And some have gained new customers as raw material suppliers", he adds.

Some economists even believe becoming indebted is not really a problem if the money is spent to improve the conditions for economic growth, such as increasing funding for research and education or providing jobs.

"The market can't solve everything, though. The real problem is the quality of politicians and their decisions. We need a stronger political view, which is not driven by self-interest or heavy ideological ideas – they are a nightmare."

Mittone goes back to sustainability. The population in Italy is over 60 million people and Mittone describes the figure as "just unbearable". He says we need to support the natural decline of birth and keep the elderly at work.

"I know that sounds horrible to those who eagerly wait for their retirement days. But a part-time job or working two days a week, for example, is a way to address the distorted age structure in Western countries. And to do this, we need political guidance and decisions."


The new frontier for the nudging technique

If the market can't solve everything, neither can the politicians. Individual acts are just as important, such as voting or increasing the amount of vegetarian food in your diet.

The new frontier for the nudging technique is to nest the nudges into the engineering of new policies. Despite the (libertarian) idea that a good nudge is something that leaves the decision maker free to choose also the "bad" alternatives – which means it cannot take the form of a forced rule of behavior – there is nothing wrong with using the economic behavioral approach to design better laws.

"The intuition is that we can design policies that induce citizens to spontaneously comply with the aims pursued by the policies themselves. A good law should induce the rise of good social conventions, which would then support the policy goals also without formal reinforcements such as fines and penalties."

Luigi Mittone

  • Professor at the University of Trento, Department of Economics and Management.
  • Started as an experimental economist 31 years ago, specialized later in behavioral economics.
  • Has four joint projects with LUT researchers and a fifth in the works.
  • The University of Trento is a partner university of the LUT School of Business and Management.

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