On the Deep Implications of Nudging in Circular Economy

The link between firms and circular economy is evident. If we think of circular economy as a set of propositions to integrate economic activities and environmental sustainability, we can easily understand how close one is to the other. There are several mechanisms linking environmental responsibility to economic outcomes. In this article, we focus on how our own behavior is key for this integration. Particularly, we examine the concept of nudging and its implications in the circular economy. For those who are new to this topic, “nudge” was defined by Thaler and Sunstein (2008) as the idea of altering people’s behavior without restricting their freedom of choice. In other words, it is a way to induce people to take “the right actions” without forcing them to do so.

Nudging takes advantage of the flaws of the human decision-making process. This theory assumes flaws in our capacity to make the right decisions and defies traditional economic theory. This phenomenon was to a great extent introduced in economics by Kahneman and Tversky. Their theories, grouped in the field of Behavioral Economics, refused the axioms of traditional economic theory, especially, the assumption that individuals are rational. They highlighted how our decision-making process is led by biases and heuristics rather than by completely rational choice.

One of the most important innovations of behavioural economics for the circular economy is the assumption that individuals have different preferences in the short and long-run and that the future is discounted more heavily than the present. There is a discordance between intentions and actions and even individuals who are willing to do something may fail to actually engage in it.

This is key to understand the failures of environmental initiatives and policies. The findings by Kahneman and Tversky can help understand the low incorporation of pro-environmental habits to people’s lifestyles, in spite of the increasing environmental conscious. In 2014, a report released by the European Union stated that the majority of Europeans were conscious of the environmental issues linked to our consumption system and the importance of the effective use of resources. However, figures unveil that our actions are not in accordance with our beliefs. Baldé et al. (2017) quantified for this gap. Their analysis reveals several worrying results. For example, they find that while 77% of Europeans claim to make an effort to repair broken items, 45% do not seek information on repairability when buying products. In addition, they find that whereas 25% of Europeans say that they would rent e-products, only 1% have ever rented any. What this means is that, although people are aware of the deep importance of a transition to an ecological economic paradigm, they lack either the motivation of the willingness to engage in pro-social behaviours.

But how is nudging important for the circular economy?

The circular economy demands a collective effort of business, governments and consumers. Actors’ behaviour is critical in determining the long-term success of initiatives for sustainable development. If we think of the phases in a product’s life-cycle, consumers are directly involved in the purchase, use and disposal. During these stages, their attitudes towards the products are key for the shift towards a more sustainable mode of consumption. Their choices determine the sustainability of the particular item. During the purchase phase, they can decide to invest in durable products. During the use phase, they can opt to repair broken products instead of throwing them away and buying new ones. Finally, when the product is obsolete, they can select the proper means for its disposal. Very small decisions in consumers’ behaviour determine, on the aggregate, the extent of the impact of sustainable initiatives. Pro-environmental behaviour is essential for society to integrate a circular framework.

Transition towards a circular economy will only be possible if there is a fundamental change in consumer behaviors. And it comes without saying that businesses need to also join this transition adapting their strategies. Nudging can help with this. Information campaigns, economic incentives and strict regulations can push consumers towards the right pro-social behaviors. Here, it is important to emphasize the privileged position of firms to nudge consumers. The combination of market power and the “close” relation they have with consumers turns brands into almost authorities. Nowadays, firms exercise a very deep influence on consumers and this advantage should be exploited. Brands could promote sustainable attitudes through communication campaigns, advertisement and also at the point of sale. Additionally, brands can also use packages to convey messages for the correct disposal of their products. A salient example is the strategy of Coca-Cola, which writes “recycle me” on the top of their bottles.

By nudging, firms can contribute to public policy goals with very little effort. In addition, firms do not need to incur in high expenses to nudge. On the contrary, other methods to discourage anti-environmental behaviors impose high costs either on consumers or firms (taxes, bans, ceilings, etc.). The power of nudging by brands relies of the fact that they can make it desirable for consumers to change their behavior, and even their habits, to adopt healthier and more sustainable choices. The essence of nudging relies on the orientation of agents towards the right social action, without disturbing their capability to make their own choices. By following this philosophy, it incurs in the lowest costs and disturbs market outcomes the least.

In a nutshell, nudging has deep implications for the circular economy. It has a true potential to make consumers engage in the actions that are least damaging for the environment. Due to the great impact of consumer choices on the life-cycle of products, orienting their behavior towards more sustainable decisions is elementary for society. This was a brief introduction to the topic of nudging and there are, of course, many other strategies to tackle consumers’ attitudes. However, we can claim that nudging will be key in determining the shape of future policies for circular economy and, due to its cost-effective nature, the implementation of strategies that involve some type of nudging will grow more and more in future years. What is evident is that more inclusive models that take into account the behavioral tendencies of economic agents will be determinant for the success of further interventions in future years.