Nudge - A Review


Nudge, by Richard H. Thaler and Cass R. Sunstein - Penguin Group 2008, 2009

I like this book, even if the ideas presented in it sometimes seem too much like "meddling" in our lives. As I recall, despite their ideas for "guiding" us, at some point in Nudge, the authors refer to themselves as "libertarian paternalists." Other's who choose the first half of that label might not think the second part is a non-sequitur, but Thaler and Sunstein carefully point out that they are not advocating forcing choices on anyone, but only suggesting that government and businesses "nudge" us in the right direction.

For example, why not pay people in a way that makes it easier for them to save money? Nudge points out that people save more money when they are paid biweekly by their employers versus monthly. When paid monthly the money is set used for monthly bills and whatever little excess there is gets spent easily. When paid every two weeks they plan on two checks covering the monthly bills, but twice every year they get three checks in a month and so have a large enough amount of "extra" money to set some aside in savings. Though the amount of pay in the year may be the same, and the employer did not intend this effect when deciding how to pay employees, nonetheless more money is saved.

Using example like that, Thaler and Sunstein introduce the concept of a "choice architect," and define it in this way: "A person who has the responsibility for organizing the context in which people make decisions." For example, those who run school lunchrooms organize how the food is displayed and in what order menu items are encountered, and how they do that can greatly affect the choices made by students. Put the carrots at eye level and early in line and more are likely to be eaten.

Other examples include those who design ballots for voting and employers who organize how retirement plans are presented to employees. In local elections having one's name first on a ballot is worth several percentage points more in votes, according to the research. In the workplace, the method by which retirement plan decisions are made can dramatically change the outcome (make it easier to do and more people put more money aside).

The authors favor allowing free choices but guiding people in their decisions with "nudges" that help them. They would be against forcing people to donate their organs upon death, for example, but favor having the default option on driver's licenses be organ donation, which could then be overturned by simply checking a box, thus allowing choice but encouraging more donation. More donors result in this case because when the default option is to not donate, people just don't get around to checking the box saying they wish to.

The book works with many of the concepts developed in the still-emerging field of behavioral economics. There is, for example, what economists call the "planning fallacy," which is the tendency for humans to underestimate the time and expense of a project. You can see this clearly with contractors. We are overly optimistic about predicting these things. We might benefit from "nudges" that help correct this problem.

People have a strong tendency to accept the way things are and go along, even when better options are readily available. This is referred to by behavioral economists as the "status quo bias." Thaler and Sunstein use the example of a new cell phone. You have many options as to the sound of the ring, the number of rings before voicemail answers and so on, but most people just leave it on the default setting for each of these. This is why the default options in life become so important they argue, and thus why we can do so much to affect the decisions people make just by changing the default choices they have.

How to Use This Information

In Nudge, Richard H. Thaler and Cass R. Sunstein report on what social scientists call the "mere measurement effect." Simply stated, when people are asked what they intend to do, they are more likely to do it. In other words, if you follow two groups of people to see how many lose weight, and ask the people in one group what they plan to do and what their goals are, the people in that group will lose more weight on average.

So why not tell your friends how you plan to make money, and ask them how they plan to do it? Or if you work in sales you might ask a customer, "what do you plan to buy today?" All in all, Nudge is an entertaining and useful book.

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