Nudge - Book Summary

NudgeImproving Decisions about Health,

Wealth and HappinessRichard H Thaler and Cass R Sunstein

Rearranging a cafeteria seat plan can increase or decrease consumption of food.

This can be used to increase consumption of healthy food and reduce consumption of unhealthy food.

The concept of a choice architect. A choice architect is one who has the responsibility for organizing the context in which people make decisions.

There are many parallels between choice architecture and more traditional forms of architecture. A crucial parallel is that there is no such thing as a ‘neutral’ design.

As good architects know, seemingly arbitrary decisions, such as where to locate the bathrooms will have subtle influence of how people who use the building interact.

As we shall see, small and apparently insignificant details can have major impact on people’s behavior. A good rule of thumb is to assume that ‘ everything matters”

We welcome you to our new movement libertarian paternalism.The libertarian aspect of our strategies lies in the principle that people should be free to do what they like. As Milton Friedman put it – free to choose.

In our opinion, a policy is paternalistic if it tries to influence the choices in a way that will make choosers better off , as judged by themselves.

Libertarian paternalism is a relatively weak, soft and non intrusive type of paternalism because choices are not blocked, fenced off or significantly burdened.

A nudge, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.

Whether people have studied economics or not, we always think like homo economicus, a notion that each of us thinks and chooses well, fitting the description offered by economists of human beings.

60 % of Americans are either considered obese or overweight. Not everyone is choosing the right diet. Sensible people care about the taste of food, not simply health and eating is a source of pleasure in itself.

People and society have a status quo bias , a fancy word for inertia. Never underestimate the power of inertia. A nudge is any factor that alters the behavior of econs( economic minded people)

Humans respond to incentives too, by properly deploying both nudges and incentives, we can improve people’s lives., while insisting on their right to choose.

There is a false assumption that people always choose in their best interest, or at the very least make choices better than what others can make for them.

We favor nudges over commands, requirements and prohibitions.

Paternalism does not involve coercion.

Choosers are human, so designers should make life as easy as possible. Send reminders and minimize the costs for those who space out.

If nudges and incentives replace requirements and bans, government will be both smaller and more modest.

The human brain is befuddling. How can we be some ingenious at some tasks and so clueless at others?

Two cognitive systems

Automatic system• Uncontrolled• Effortless• Associative• Fast• Unconscious• Skilled

Reflective system• Controlled• Effortful• Deductive• Slow• Self aware• Rule following

The automatic system is a gut reaction system and the reflective system is your conscious thought.

We use rules of thumb , because they are quick and useful. However, they come with systematic biases.

Next is anchoring and adjustment. In our view, anchoring can alter behavior. When charities ask for donations, people give more when the options are $100,500 and 1000 as opposed to 50,75 and 150

In many domains, evidence shows within reason that, the more you ask, the more you tend to get.

MBA students are not the only ones overconfident about their abilities. The ‘ above average ‘ effect is pervasive.

About 50 % of marriages end in divorce in the US. However, almost all couples believe that their marriage will not end in divorce when they are getting married, even people getting married a second time. Samuel Johnson once quipped “ second marriage is the triumph oh hope over experience’

People hate losses, losing something makes you twice as miserable as gaining something. In technical language people are ‘loss averse’

Loss aversion helps produce inertia, meaning a strong desire t stick with the current.

Loss aversion operates as a cognitive nudge, stopping us from making changes , even when they are needed.

Choice depends in part on the way problems are stated. This matters a lot for public policy.

Eating turns out to be the most mindless activity we do. We simply eat what’s put in front of us.

Large plates, large packages, trays mean more eating and also more wastage.

Most people learn from other. This is usually good. Learning from others is how individuals and societies develop.

Many groups fall prey to ‘ collective conservatism’ the tendency of groups to stick to established patterns even as new needs arise.

A reason people expend so much energy conforming to social norms is that they think others are watching them. That’s mostly not true.

Advertisers are influenced by the power of social influence. That’s why they claim, ‘most people use this’,’ the choice of the country’ etc. etc.

The three social influences we have –information, peer pressure and priming can easily be enlisted by private and public nudgers.

Self control issues are likely when choices and consequences are separated in time, like exercise, flossing and dieting.

Life’s most important choices don’t come with many opportunities to practice. The higher the stakes, the less often we are able to practice.

Learning is most likely if people get immediate, clear feedback. We usually get feedback on options we select, not options we reject.

Humans make mistakes. A well designed system expects its users to err and is as forgiving as possible.E.g. leaving gas caps of cars and the ATM card behind

The best way to help humans improve their performance is through feedback. Digital cameras do that better than film cameras.

Credit card plans, mortgages, cell phone plans are confusing. We propose RECAP in such industries – Record, evaluate and Compare alternative prices, a mild form of government regulation.

One way to think about incentives is to ask four questions – who uses, who chooses, who pays and who profits?

In 2005, the personal savings rate for Americans was negative for the first time since 1932 and 1933 – the great depression years.

Most people spend more time picking a tennis racquet than picking a financial plan.

Saving for retirement is something human beings find difficult to handle. This needs immense willpower over time to execute.

In investing, the first question we need to ask is how much risk are we willing to take. Stocks are riskier compared to government bonds. How much to save is related in complex ways to the risk one is willing to bear.

In the eighty year period between 1925 and 2005, a dollar invested in treasury bills would be worth $ 18, longer term bonds would have made it $ 71, ,mutual funds would have made it $2658.Stocks have always been most attractive.

Attitude to investment risks depend on how often the portfolio is monitored.When in doubt about investments, diversify!

Amazing but true, five million Americans have more than 60 % of their retirement savings in company stock!This is risky on two counts-single stock and the examples of Enron and WorldCom.

Most employees have difficulty understanding how numbers like savings rate, retirement benefits, volatility and changes in lifestyle affect the, Offering translations into a few good concepts will help.

The cost of going to college in America has been rising almost as fast as the cost of healthcare and rare baseball cards. Today it costs a student more than 50,000$ in tuition, room and board. About two thirds of four year college students are in debt when they graduate.

The credit card is a ubiquitous feature of modern life. It is nearly impossible to function without one. In 2004 USA, there were 1.4 billion credit cards for 164 million card holders-an average of 8.5 cards per cardholder and a little above 4 for total population!!Average credit card debt is $12,000,with an interest payment of $2000 per annum

For mortgages, school loans and credit cards, life is far more complicated than it needs to be and people can be exploited.

The more choices you give people, the more help you need to provide to help them resolve things.

What is it like to pick a prescription plan in the US? How hard? The short answer – really hard!!

The first successful organ transplant took place in 1954,when a man offered his twin brother a kidney. The first transplant from a deceased donor occurred in 1962. The rest is history.

In the US , consumers want to donate their organs, most states use what is called an explicit consent rule. Many willing to donate do not take the necessary paper steps to close it. They need a different nudge.

The best choice for organ donation is mandated choice. Imagine tying it up with driving license renewal et al.

In addressing climate control issues, freedom of choice has been the guiding principle. Regulators choose some kind of command and control regulation.They do not specify technologies as much as require an across the board reductions in emissions.

In environmental issues , gentle nudges will have no results, more like catching a lion with a mousetrap!

Much of the time, the best approach to pollution problems is to impose a tax on the harmful behavior and to let market forces determine the response to the increased cost.

The acid deposition program in the US has been a great success. Because pollution reduction can be turned into cash, strong incentives are created for environmentally beneficial behavior.

A toxic release inventory report listing the offending companies is an example of social nudge. No one wants to be in the list and every company wants to be seen as a good citizen. It has huge impact.

One reason why a Toyota Prius is successful compared to other hybrid cars is that it is sold as one, while the Camry is sold as a mix of conventional and hybrid.

Past attempts to notify people about energy use with e mails, text messages hasn’t worked. Imagine if we gave them a light orb that signals red or green based on their usage!!Something that can be at home or a desk.

Libertarian paternalists care about freedom. Some nudges are bad or unwelcome. We would like to create freedom where it does not now exist.

When parents pick schools, status quo plays a big role. The neighborhood school wins always versus a school thirty minutes away.

If two students applied to a school with one open seat, Seattle and Louisville broke the tie on the basis of race, a practice the US Supreme court ruled unconstitutional in 2007.

To get students to go to college, a san Marcos Texas school showed kids two concepts a kia and a Mercedes, implying that a college grad had a Mercedes and dropping out forced a kia choice. This worked brilliantly. Percentage of college students went up from 11 to 45 %!!

Every healthcare consumer in the US is forced to buy an option to sue the doctor. Patients and doctors should be free to make their own arrangements about that right. It is strange that we ‘purchase 'the right to sue. It is not an itemized bill but clearly included in the price.

Imagine if students could sue teachers!We would be in a mess.

The more insurance you buy, the more you pay and the right to sue is a form of insurance.

We now turn to marriage and explore recent issues including same sex marriage.

There is ambiguity about marriage because it is both a legal status and a religious choice.The official institution of marriage is essential as a way of promoting stability of relationships.

As a matter of law, marriage is no less than an official status created by the state and accompanied by government entitlements and mandates. State laws vary but benefits are similar.

The most vulnerable people in a marriage are children and kids. We recommend protecting them with the right nudges.

We argue that states should abolish marriage as such and rely on civil unions instead.

Some workable nudges : Give more tomorrow, credit card deductions, self bans, destiny health plans, the civility check.

Who can oppose nudges? Hard line anti paternalists maybe.Often life turns up problems people did not anticipate. We need rules to see how we handle them.

The invisible hand works best when people buy products frequently and they are simple products.Skeptics might argue that we must give people the right to be wrong and not nudge them, in some cases we learn through mistakes.

Although nudges are unavoidable, we agree that we should provide information and education as a balance.

We have stressed that governments cannot be purely neutral but a form of neutrality is sometime both feasible and important. Take the case of how to list candidates on a ballot. There is evidence to show that the first listed has an advantage. Any method will not remove this bias.

Other nudges – smart meters, energy use and neighborhood comparisons, carbon labels on packaging, make believe speed bumps, calories count in NY city,trayless cafetarias.procastinator’s clock, stop blabbers in a meeting, clear transparent airline pockets like Lufthansa.

We wrote this book in 2007 and 2008. the economic crisis happened after that. Alan Greenspan found himself in a state of ‘shocked disbelief’.Would we have been better understanding human behavior and how nudges could have helped?

Three of the human behaviors listed earlier have played important roles in the crisis- Bounded rationality, self control and social influences.