Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective
07.29.2008
Nudge

photo figure credit: http://www.nudges.org/

Last month I finished reading a great book called Nudge: Improving Decisions about Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein.  In short, this book was fantastic and I highly recommend it.

The authors indicate early on that they wanted to subtitle the book Libertarian Paternalism but didn’t think anyone would read it if they did. “Libertarian Paternalism?”  you may be asking, “isn’t that an oxymoron?”  Well, it is and it isn’t.  The central point of the book is that we all make choices on a daily basis.  Some choices are easy: which breakfast cereal to buy or what to have for dinner.  Some choices are hard: Who to marry or what house to buy or how much to save for retirement.  The authors argue that more choices are always better than fewer (libertarianism), but that most of us don’t have the information, context, or practice in making some of the hardest choices and that it would be great if there was some way to “nudge” us in the right direction (paternalism).

A classic “nudge” exists thanks to recent laws regarding how employers can handle 401(k) and other retirement benefits plans.  Employers can now automatically enroll new employees in the company 401(k) plan when they start.  So a new employee would, from paycheck #1 on, see a 5% contribution to a moderate blended fund in the 401(k) plan of the company.  At any time, the employee can march down to the Human Resources office and change the contribution or allocation or discontinue it altogether.  However, research has shown that inertia is a powerful factor that works equally well in keeping people in the plan as it does keeping them out when no such automatic enrollment is used.

Another great “nudge” was a recent law in New York City that requires restaurants to post their board of health ratings in the front window.  No change was made to the board of health standards, but almost overnight the average restaurant health rating rose substantially.  After all, who wants to eat in a restaurant with a D- posted in the front window?  As a result, NYC emergency rooms have seen a marked decline in food borne illness cases.  NYC could have had the same outcome by instituting more stringent restaurant hygiene laws and consequently increasing the time and money it would take to enforce those laws, but this solution avoids additional government intervention AND achieves the same outcome.  Plus, restaurants still have the choice of whether to clean up or not, but the “nudge” comes from their lack of business rather than a government edict.

Let’s face it, modern life is complicated, and we don’t have to look far to see the results of ordinary people making poor choices on really important things like mortgages, health care, etc.  Nudge argues that we get better at making good choices the more we practice (just like anything else).  We get lots of practice making choices about things that have relatively low consequences.  If you choose the wrong cereal, you’re out $4 or a week of dissatisfaction for 10 minutes every morning.  But most of us only purchase a few houses in our lifetimes, and the consequences for choosing poorly can be disasterous.  Just look at the current bankruptcy and foreclosure crises to be sure.

So how do we start “nudging”?  It starts with any person or organization who has the responsibility of presenting a list of options to someone else.  The book provides proof that just by the way choices are arranged in a list that the “choice architect” influences the outcome of the choice (this ranges from lunchrooms to polls).  All “choice architects” are going to influence the outcome of the choice, so they have a social responsibility to structure the choices in such a way so that most people will make the best choice if they know nothing else.  If possible, even, a default option should be available so that if a person makes no choice something will automatically happen.

The book cites the recent change in the Medicare Prescription drug benefit program as an example of how not to nudge.  People eligible for this program who made no selection from among the 43 separate plans available were randomly assigned to a plan.  The authors argue that at the very least a patient’s prescription history could have been surveyed to come up with a plan close to what they need, but this was not done.  Additionally, the tools for figuring out which plan was ideal for any given person were severely lacking and often contradictory.  While libertarianism was observed here, paternalism was not, and there are currently many people on drug plans that cost them too much or don’t deliver enough or the proper benefits.

One of the final recommendations in the book is for the development of “asymetric paternalism” in choice architecture.  The authors argue that “sophisticated” choosers should be free to make a well informed decision that best suits them and that “unsophisticated” choosers should have as much paternalistic intervention as necessary.  I agree, however what’s not clear to me is how one defines and sorts out the sophisticated from the non.  I remember trying to argue my way out of a mandatory youth group ski class because I had been skiing once before (and was, therefore, an expert!).  After the instructor pointed out that my ski boots weren’t buckled even though I was clicked into my bindings, I shut my mouth and took the class.  (Today I enjoy taking advanced level classes…)  The point is that most of us think we are sophisticated when we are not, so the choice architect has to be very careful when he applies his nudge…

The book defines the Jekyll and Hyde nature of the choosers within all of us.  The “Human” is akin to the Homer Simpson in all of us who has absolutely no impulse control and makes choices without thinking.  The “Econ” is akin to Mr. Spock of Star Trek fame who was always absolutely logical in making decisions.  The planning Econ in all of us makes great decisions on paper (by making a shopping list) but the Human comes home with donuts anyway (Mmm… donuts…).  Nudge offers us a new set of “tricks” for making difficult decisions easier.  It’s a great read and probably available at your local library.

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One Response to “Book Review: Nudge”


  1. Michelle Says:

    Sounds great, I’m putting on my list!


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