Nudge by Thaler & Sunstein
Ref: Thaler & Sunstein (2008). Nudge: Improving Decisions about Health, Wealth, and Happiness. Yale University Press.
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Summary
In general, people should be free to do what they like— and to opt out of undesirable arrangements if they want to do so.
In many cases, individuals make pretty bad decisions—decisions they would not have made if they had paid full attention and possessed complete information, unlimited cognitive abilities, and complete self-control.
We argue for self-conscious efforts, by institutions in the private sector and also by government, to steer people’s choices in directions that will improve their lives. In our understanding, a policy is “paternalistic” if it tries to influence choices in a way that will make choosers better off, as judged by themselves.
Libertarian Paternalism: Self-conscious and transparent efforts, by institutions in the private sector and government, to steer people’s choices in directions that will improve their lives.
A policy is “paternalistic” if it tries to influence choices in a way that will make choosers better off, as judged by themselves.
Nudge: Any aspect of choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.
A good society makes trade-offs between protecting the unfortunate and encouraging initiative and self-help—between giving everyone a decent share of the pie and increasing the size of the pie. In our view, the optimal level of redistribution is not zero. But even those who hate redistribution more than we do should have little concern about our policies. Most of the time, nudging helps those who need help while imposing minimal costs on those who do not.
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Politics
Political Parties since FDRs New Deal
Democrats: Have shown a great deal of enthusiasm for rigid national requirements and for command-and-control regulation. Having identified serious problems in the private market, Democrats have often insisted on firm mandates, typically eliminating or at least reducing freedom of choice.
Republicans: Have responded to Democrats that such mandates are often uninformed or counterproductive—and that in light of the sheer diversity of Americans, one size cannot possibly fit all. Much of the time, they have argued on behalf of laissez-faire and against government intervention. At least with respect to the economy, freedom of choice has been their defining principle.
Moderates
Many sensible democrats are fully aware that mandates can be ineffective and even counterproductive, and that one size may not fit all. American society is simply too diverse, individuals are simply too creative, circumstances change too rapidly, and government is simply too fallible.
Many sensible Republicans know that even with free markets, government intervention cannot be avoided. Free markets depend on government, which must protect private property and ensure that contracts are enforced. In domains ranging from environmental protection to planning for retirement to assisting the needy, markets should certainly be enlisted. In fact, some of the best nudges use markets; good choice architecture includes close attention to incentives. But there is all the difference in the world between senseless opposition to all “government intervention” as such and the sensible claim that when governments intervene, they should usually do so in a way that promotes freedom of choice.
The sheer complexity of modern life, and the astounding pace of technological and global change, undermine arguments for rigid mandates or for dogmatic laissez-faire. Emerging developments should strengthen, at once, the principled commitment to freedom of choice and the case for the gentle nudge.
Asymmetric Paternalism: Policy design that helps the least sophisticated people in society while imposing the smallest possible costs on the most sophisticated.
Libertarian Paternalism: A form of asymmetric paternalism in which the costs imposed on the sophisticated are kept close to zero.
Libertarianism
Libertarians ask; If people want to take risks, shouldn’t they be allowed to do so?
Object to any forced exchanges. They don’t like to take anything from Peter to give to Paul, even if Peter is very rich and Paul is very poor.
Oppose progressive taxes. (Well, most taxes, actually.)
Disapprove of policies that explicitly benefit the weak, poor, uneducated, or unsophisticated. They would object to these policies not because they lack sympathy for these groups but because they think that any help for them should come voluntarily from the private sector, such as from charities, and that government policies would come at the expense of other groups (often the strong, rich, educated, and sophisticated). Dislike any government policy that takes resources from some in order to assist others.
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Psychology
Think about individuals as containing two semiautonomous selves, a far-sighted “Planner” and a myopic “Doer.” The Planner is trying to promote your long-term welfare but must cope with the feelings, mischief, and strong will of the Doer, who is exposed to the temptations that come with arousal.
Automatic (System 1): Intuitive and automatic; myopic “doing.”
Reflective (System 2): Reflective and rational; planning.
Unrealistic Optimism: A pervasive feature of human life; characterizes most people in most social categories.
Unrealistic optimism is at its most extreme in the context of marriage. In recent studies, people have been shown to have an accurate sense of the likelihood that other people will get divorced (~50%). But have an absurdly optimistic sense of the likelihood that they themselves will get divorced; that is, nearly 100% of people believe that they are certain or almost certain not to get divorced!
Loss Aversion: A cognitive nudge in which losing something makes us twice as miserable as gaining the same thing makes you happy. Loss aversion presses us not to make changes, even when changes are in our interests.
The combination of loss aversion with mindless choosing implies that if an option is designated as the “default,” it will attract a large market share. Default options thus act as powerful nudges.
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Choice Architecture & Framing
Framing works because people tend to be somewhat mindless, passive decision makers.
Research shows that people tend to stick with default choices; two important lessons can be drawn from this:
Never underestimate the power of inertia.
Power can be harnessed. If private companies or public officials think that one policy produces better outcomes, they can greatly influence the outcome by choosing it as the default.
Energy conservation is now receiving a lot of attention, so consider the following information campaigns: (a) If you use energy conservation methods, you will save $350 per year; (b) If you do not use energy conservation methods, you will lose $350 per year. It turns out that information campaign (b), framed in terms of losses, is far more effective than information campaign (a). If the government wants to encourage energy conservation, option (b) is a stronger nudge.
Economists Abadie and Gay (2004) find that, holding everything else constant, switching from explicit consent to presumed consent increases the donation rate in a country by roughly 16%.
If choice architects want to shift behavior with a nudge, they might simply inform people about what other people are doing.
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Nudge
Nudge: Any aspect of choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.
People are most likely to need nudges for decisions that are difficult, complex, and infrequent, and when they have poor feedback and few opportunities for learning.
Rare, difficult choices are good candidates for nudges.
Both investment goods and sinful goods are prime candidates for nudges.
Investment Goods: Those in which the costs are borne immediately, such as exercise, flossing, and dieting, but the benefits are delayed. For investment goods, most people err on the side of doing too little.
Sinful Goods: Those in which we receive the pleasure now and suffer the consequences later, such as smoking, alcohol, and jumbo chocolate doughnuts.
People may most need a good nudge for choices that have delayed effects; those that are difficult, infrequent, and offer poor feedback; and those for which the relation between choice and experience is ambiguous.
The best way to help Humans improve their performance is to provide feedback. Well-designed systems tell people when they are doing well and when they are making mistakes.
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Social Nudge
One of the most effective ways to nudge (for good or evil) is via social influence.
Social practices, and the laws that reflect them, often persist not because they are wise but because Humans, often suffering from self-control problems, are simply following other Humans. Inertia, procrastination, and imitation often drive our behavior. Once our traditions are brought down to earth, the arguments on their behalf seem stronger or weaker, depending on the context.
Sometimes a tradition can last for a long time, and receive support or at least acquiescence from large numbers of people, even though it was originally the product of a small nudge from a few people or perhaps even one. Consistent and unwavering people, in the private or public sector, can move groups and practices in their preferred direction.
Collective Conservatism: The tendency of groups to stick to established patterns even as new needs arise.
Mere-Measurement Effect: When people are asked what they intend to do, they become more likely to act in accordance with their answers.
A study of a nationally representative sample of more than 40K people asked a simple question: Do you intend to buy a new car in the next six months? The very question increased purchase rates by 35%. Or suppose that an official wants to encourage people to take steps to improve their own health. With respect to health-related behavior, significant changes have been produced by measuring people’s intentions. If people are asked how often they expect to floss their teeth in the next week, they floss more. If people are asked whether they intend to consume fatty foods in the next week, they consume less fatty foods.
Solutions
Information Transparency.
Peer Pressure.
Priming: Ask people what they intend to do and how they plan to do it.
Like any other business partnership, marriage (domestic partnership) should be completely privatized.
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Economic Nudge
Investing
~5M Americans have more than 60% of their retirement savings in company stock.
Individual investors tend to be trend followers, rather than good forecasters, in their asset-allocation decisions.
Investors have traditionally had trouble distinguishing between past returns and forecasts of future returns.
Roughly 30% of employees eligible to join a 401(k) plan fail to enroll.
In one plan studied in an early paper by Brigitte Madrian and Dennis Shea (2001), participation rates under the opt-in approach were barely 20% after three months of employment, gradually increasing to 65% after 36 months. But when automatic enrollment was adopted, enrollment of new employees jumped to 90% immediately and increased to more than 98% within 36 months.
2008 Housing Market Collapse
One key cause of the subprime mortgage disaster was that countless borrowers did not understand the terms of their loans.
A study by the economist Susan Woodward (2007) examined more than 7000 loans insured by the Federal Housing Administration (FHA), a government agency that insures smaller loans and allows low down payments. Woodward studied which kinds of borrowers got the best deals, and under what circumstances, after controlling for risk and other factors. Here are some of her key findings:
African-American borrowers pay an additional $425 for their loans.
Latino borrowers pay an additional $400.
The average fee for all borrowers was $3,133 on loans that averaged about $105,000.
Borrowers who live in neighborhoods where adults have only a high school education pay $1,160 more for their loans than borrowers who live in neighborhoods where adults have a college education.
Loans made by mortgage brokers are more expensive than those made by direct lenders by about $600.
There are two extreme views about subprime loans. Some, particularly those left of center or in the news media, label all such loans with the derogatory term predatory. This broad brush fails to recognize the obvious fact that higher-risk loans will have to have higher interest rates to compensate the people who lend the money. The fact that poor and risky borrowers pay higher interest rates does not make these loans “predatory.” In fact, the microfinance loans in developing countries that led to a well-deserved Nobel Peace Prize for Muhammad Yunus in 2006 often come with interest rates of 200% or more, yet the borrowers are made better off by these loans.
Solutions
Truth in Lending Act (aka Regulation Z): Requires lenders to report interest rates using APRs.
Automatic Enrollment in Company Savings Plans.
Save More Tomorrow Program.
Credit Card Reporting Transparency; Credit card companies should be required to send an annual statement, both hard copy and electronic, that lists and totals all the fees that have been incurred over the course of the year. This report would serve two purposes. First, credit card users could use the electronic version of the report to shop for better deals. By knowing their precise usage and fee payments, customers would get a better sense of what they are paying for.
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Health Nudges
Organ Donations: The primary sources of organs are patients who have been declared “brain dead,” meaning that they have suffered an irreversible loss of all brain function but are being maintained temporarily on ventilators.
Medical Insurance & Costs
It may seem strange to think that we “purchase” the right to sue. Of course, that right is not an itemized portion of the insurance bill—but it is clearly included in the price.
Both health care customers and taxpayers are now forced to help pay for the 85K medical malpractice lawsuits that are filed each year. These lawsuits cost a lot of money—estimates range from $11B to $29B per year. Exposure to medical malpractice liability has been estimated to account for 5-9% percent of hospital expenditures—which means that litigation costs are a contributor to the expense of the health care system.
Many doctors pay $100K or more in insurance bills every year. Your medical bill reflects those costs.
Defensive Medicine: A predominantly US practice in which Doctors order expensive nut unnecessary treatments for patients, or refusing to provide risky but beneficial treatments, simply in order to avoid liability.
Error reporting is discouraged among some physicians due to the high degree of medical lawsuits.
~50% of patients fail to correctly follow their doctors’ directions for prescriptions. They forget to take pills, take the wrong dosage levels, or skip a few days without thinking about it.
Solutions
Allow health insurance companies to offer plans with and without the right to sue for negligence.
Patients should be presumed to be permitted to sue only for intentional or reckless wrongdoing—and not for mere negligence.
Presumed Consent: Citizens are presumed to be consenting donors but have the opportunity to opt out.
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Political Nudges
One study finds that a candidate whose name is listed first gains about 3.5% points in the voting.
Solutions
Assess reforms empirically, not in the abstract.
Require govt officials to put all their votes, earmarks, and contributions from lobbyists on their Web sites.
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School Nudges
In the abstract, school choice is an excellent idea, because it increases freedom and offers real promise for improving education.
About 2/3 of 4y college students are in debt when they graduate.
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Environmental Nudges
Tragedy of the Commons: If you engage in environmentally costly behavior through your consumption choices, you will probably pay nothing for the environmental harms that you inflict.
Installing a solar-powered hot-water heater or a windmill at your place in the country is not going to erase the C footprint of maintaining and traveling to a second home. Recycling glass bottles and avoiding plastic bags at the grocery store will not offset your car’s emissions. Switching to a Prius will not undo the effects of frequent air travel. A couple of international trips can be worse for your C footprint than driving a Hummer for a year.
When externalities are present, markets alone do not achieve the best outcomes. Those who pollute (all of us) do not pay the full costs that we impose on the environment, and those of us who are harmed by pollution (all of us) usually lack any feasible way to negotiate with polluters to get them to clean up their acts. When people are not in a position to make voluntary agreements, the government might have to intervene.
A problem that contributes to excessive pollution is that people do not get feedback on the environmental consequences of their actions. If your use of energy produces air pollution, you are unlikely to know or appreciate that fact, certainly not on a continuing basis. Even if you know about the connection, it is probably not salient to your behavior.
If the problem of CC is to be seriously addressed, the ultimate strategy will be based on incentives, not on C2.
Solutions
Smart Meters & Energy Tracking with neighborhood comparisons.
Ensure that people see, each day, how much energy they have used.
DIY Kyoto: A design firm, DIY Kyoto (based on the Kyoto Protocol, the international effort to control GHG emissions), that sells the Wattson, a device that displays your energy use and allows you to transmit the data to a Web site, permitting comparisons with Wattson users elsewhere.
Web Metrics; allow drivers to compare their estimated fuel efficiency and trends in driving behavior.
Product C labels; showing C required for production and delivery.
Transparency; if you want to increase recycling, make it clear that other people are, in fact, recycling.
Disclosure; which may be able to produce significant emissions reductions alone.
Toxic Release Inventory (EPA): Requires firms and individuals to report the quantities of potentially hazardous chemicals that have been stored or released into the environment with information openly available on the EPA website. More than 23K facilities now disclose detailed information on more than 650 chemicals, covering more than 4.34B pounds of on-site and off-site disposal or other releases. Users of hazardous chemicals must also report to their local fire departments about the locations, types, and quantities of stored chemicals and any associated potential adverse health consequences.
Greenhouse Gas Inventory (GGI): A potential solution that requires disclosure by the most significant emitters. The GGI would permit people to see the various sources of GHGs in the US and to track changes over time.
Taxation; impose taxes or penalties on those who pollute- incentive based approaches that allow market forces to determine the response to the increased cost.
Carbon Tax: Tax GHG Emissions.
Raising the tax on gasoline, for example, would eventually induce drivers to buy more fuel-efficient cars, drive less, or both. And if gas taxes were increased, automobile manufacturers would have plenty of incentives to develop new technologies to meet the demand for more fuel-efficient cars.
Cap & Trade: Polluters are given (or sold) “rights” to pollute in certain amounts (the “cap”) that are traded in a market.
Create worldwide markets in GHG emissions rights, with a cap on global emissions.
In the pollution context, people who reduce their pollution below a specified level are allowed to trade their “emissions rights” for cash, creating market-based disincentives to pollute and market-based incentives for pollution control while rewarding rather than punishing technological innovation in pollution control, and doing so with the aid of private markets.
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Terminology
Choice Architect: A person with the responsibility for organizing the context in which people make decisions.
Negligence: The failure to meet the ‘ordinary standard of care,’ a vague concept.
Nudge: Any aspect of choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.
Stimulus Response Compatibility: The idea that you want the signal you receive (the stimulus) to be consistent with the desired action.
Transaction Cost: The cost of entering into a voluntary agreement.
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Misc Quotes
Sunlight is the best of disinfectants.-Louis Brandeis, US Supreme Court Justice.
It is not enough to make lots of choices available and then hope parents choose wisely.
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Chronology
2006: The USG passes the Pension Protection Act.-Nudge by Thaler.
2005: The personal savings rate for Americans is negative for the first time since 1932 and 1933—the Great Depression years.-Nudge by Thaler.
1998: Los Angeles County introduces hygiene quality grade cards that had to be displayed in restaurant windows.-Nudge by Thaler.
1992: The Energy Star Office program is implemented by the US EPA, setting out voluntary performance standards allowing participating firms to use the agency’s Energy Star logo.-Nudge by Thaler.
1986: The Emergency Planning and Community Right to Know Act is enacted in the aftermath of the Chernobyl nuclear reactor disaster in Ukraine.-Nudge by Thaler.
1975: The USG requires new automobiles to meet fuel economy standards and requires companies to post in large print the expected fuel economy buyers can expect from each car.-Nudge by Thaler.
1972: The USG enacts the National Environmental Policy Act requiring government to compile and disclose environmentally related information before it goes forward with any projects having a major effect on the environment.-Nudge by Thaler.
1962: The first successful kidney transplant from a deceased donor occurs.-Nudge by Thaler.
1954: The first successful organ transplant takes place when a man offers his twin brother a kidney.-Nudge by Thaler.
1889: German Chancellor Otto von Bismarck creates an early social security program.-Nudge by Thaler.
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