March 29th, 2015
Nudge: Improving Decisions About Health, Wealth and Happiness is a 2008 book by Richard H. Thaler and Cass R. Sunstein. It looks at choice architecture (that is to say how you present people with choices) and advocates libertarian paternalism in public policy, and beyond.
Libertarian paternalism is the idea that we should let people do what they want, but nudge them in the right direction. The current phasing in of enrolment in private pension schemes is a great example of this. People can opt-out if they wish, but if they no nothing, then a sensible default course is chosen for them, in this case to have a pension.
Another good example of this is organ donation. Should you have an opt-in or opt-out system? Both are libertarian by nature in that they let people choose what they want to do. However, most people do not bother to choose, regardless of whether the default is to donate their organs or not. I’ve blogged about this before.
It begins with a revision lesson on Thinking, Fast and Slow. Anchoring is a real problem for example. You will tend to fill your plate at dinner time, so if you want to eat less and lose weight – use smaller plates.
The book notes that people are human, rather than “econs”. Econs being a term of perfectly rational beings. So there is often a struggle between the planner and the doer in you. Your planner will set the alarm for 7am, but when it comes down to it, you just hit the snooze button.
For this reason, Elina now has an app on her phone that donates to charity every time she hits snooze. As it happens she never hits snooze anyway, but if she did, studies have shown that this small financial incentive would be likely to have a powerful effect.
Once you accept people are not econs, things make a lot more sense. I love credit cards. There are loads of advantages to them. However, I pay the full balance of every month. If you know you do not have enough self control to do that, seemingly irrational actions like avoiding having one suddenly makes a lot more sense.
There is also the problem that the free market does not always function correctly. It works well for soft drinks. We all drink them regularly, so can tell what is a good product, easily compare them, and choose the best ones. But how about mortgage advisors? We may not see the effects for decades, and we only buy one or two throughout our lifetime so the opportunity for learning is not there. The same is true for healthcare decisions. Also, as we are not expects, that adds an extra layer of difficulty to making sensible decisions.
Because we are human, and have these struggles, the book suggests we should nudge people into doing the most sensible thing, while ultimately giving them the choice to change it if they so wish. Hence an opt-out system for organ donation. By default, people will donate the organs, and the overwhelming majority will leave it at this, while still allowing people to change this if they want to be a completely morally bankrupt dick.
Some of the nudges you can use are incredibly trivial and effective. One of the most amusing being that if you put a fake fly in a urinal, men will aim at it. In fact, they aim so well that it reduces inaccuracy by around 80%.
There are some related topics the book touches on. Stimulus response compatibility for example. People expect things to be certain way. For example, if you put a handle on a push door, people will pull it. Even if you write pull on it. You could argue it is still there fault, but the human brain is geared up to pull things with handles. Just design a better door.
There are a number of social factors that influence people’s actions too. Priming for example. If you ask people what to do before they do it, they are more likely to actually do it. Though as Matt Cutts notes, if you go out and tell people your goals, that actually makes you less likely to complete them.
People often tend to follow others too – if you tell people the percentage of people that are compliant with their tax returns (which is very high), people are more likely to be honest. This fits with what Michael Shermer argues in that people will only follow society’s rules if they see everyone else is following them too.
Company stock options for employees. These are a terrible idea. I invest in the stock market, but I try to diversify my risk as much as possible. Not only do I use index funds that invest in a broad range of companies, but I invest in a diverse range of these – UK, North America, Europe and the developing world. Yet with company stock options, you don’t just have all your savings in one market – you have them in one company! That is super risky, and if the company goes bust, you lose both your savings and your job. Of course many companies offer incentives to invest, but according to the book, these are only worth 50% of their share price when evaluated – so the incentive better be good or you would be better investing it in the wider stock market.
Thinking, Fast and Slow convinced me that taking our extended warranties and phone insurance was never worth it. I never did anyway, but I always wondered whether I should. Nudge points out this applies to a whole host of other things too: insurance when posting items, a smaller excess on your car insurance or damage waiver on your rental car. They offer these policies because they make money, so if you can stomach the short term loses, avoiding them brings long term gains.
The book concludes with some ideas for society to consider. One is the privatisation of marriage. They argue that the state could get out of the marriage business and leave it to churches, humanists, etc or even your local diving club to do marriages. They could then be as discriminatory or weird as they wanted. However, they would confer no recognition or benefits from the state. Similarly, the state could recognise civil unions, which were independent of marriage, but allow the state to recognise your relationship.
They also address concerns about the misuse of nudging. Of course this already happens – the supermarkets do not select which products are at eye level at random. However, the book suggests that a good guideline would be that all nudges should be made public. Auto-enrolment in pensions for example is no secret, and has an opt-out, so it is difficult to argue it is anything but beneficial. Employing such a strategy means that the least well informed people in society are protected while offering the most well informed as much choice as they would like.