Nudge: Improving Decisions About Health, Wealth, and Happiness

“The false assumption is that almost all people, almost all the time, make choices that are in their best interest or at the very least are better than the choices that would be made by someone else. We claim that this assumption is false—indeed, obviously false. In fact, we do not think that anyone actually believes it on reflection.”

Thaler and Sunstein thoroughly discount the idea of Homo economicus, the model of human behavior, typically accepted in classical economics, that humans are rational actors. The view is so intuitively preposterous, and at odds with experience, that Thaler and Sunstein dismiss it out of hand. The libertarian paternalist view that they expound is premised on the idea that humans are fallible creatures who do not always have access to the time, resources, or information to make the most rational decision.

“So, to be clear: this book is not a call for more bureaucracy, or even for an increased role of government. We just strive for better governance. In short, libertarian paternalism is neither left nor right. For all their differences, we hope that people with very different political convictions might be willing to converge in support of gentle nudges.”

The goal of Thaler and Sunstein’s work is not to propose a political theory. It is to propose a theory for more effective and efficient government practice, regardless of the political ideology. They believe that nudges are effective regardless of the direction in which the person is being nudged and that conservatives and liberals alike can make use of better choice architecture in the implementation of their agendas. The term “libertarian paternalist” may have been created, in part, to simultaneously appeal to individuals concerned with personal liberty and social welfare.

“However, even Albert Einstein, Bill Gates, and Steve Jobs would probably be fooled by those tables. That does not mean something is wrong with us as humans, but it does mean that our understanding of human behavior can be improved by appreciating how and when people systematically go wrong.”

One of Thaler and Sunstein’s central concerns is to elucidate common patterns of error in decision-making. These mistakes are not the result of stupidity or fundamental problems in human reasoning. However, they are useful to know so that they can be addressed and corrected.

“(There are about twice as many gun-inflicted suicides as homicides.) An important lesson can be found here: people often buy a gun thinking they want to protect their family, but it is much more likely that they will increase the chance that a family member successfully commits suicide.”

Thaler and Sunstein provide this as an example of bias caused by the availability heuristic. Since homicides are reported in the news media much more frequently than suicides, people are more aware of them and mistakenly believe they are more common. The authors imply that this leads to more gun ownership than the data would support is reasonable.

“Think about the Christmas club in economic terms. This is an account with no liquidity (you can’t take your money out until the end of the year), high transaction costs (you have to make deposits every week), and a near-zero rate of return. It is an easy homework exercise in an economics class to prove that such an institution cannot exist. Yet for many years Christmas clubs were widely used, with billions of dollars in investments, and they remain popular with smaller, local banks, and community-based credit unions.”

Thaler and Sunstein show that “Christmas accounts” are exemplary of “self-control strategies” used to resist the temptation to spend one’s money early. Even though these accounts are not useful at all from the perspective of Homo economicus, they are good for human beings who know themselves well enough to understand the temptation to spend available funds. Making their own money unavailable until Christmas ensures a better holiday season. It nudges them to the place they’d like to be but might not manage otherwise.

“A point worth remembering: Telling people that a new norm is emerging–say, in the domain of sustainability–can create a self-fulfilling prophecy. Many do not want to be on the wrong side of history, and if they learn that people are increasingly doing something, they might think that what seemed difficult or even impossible is achievable, maybe even inevitable.”

Thaler and Sunstein discuss a variety of ways individuals are susceptible to peer pressure and other forms of social influence. Informational and reputational cascades can result from the propagation of a new norm. In other words, new ways of acting or new standards of acceptable behavior and thought can quickly change social attitudes. Thaler and Sunstein suggest that this is how same-sex marriage went from being a very controversial liberal idea to a widely accepted social practice in a matter of a decade.

“It is almost as if people can be nudged into identifying a picture of a dog as a cat as long as other people before them have done so.”

Thaler and Sunstein provocatively make the point that social pressures can have an extreme influence on judgment. This concern with conformity does not merely extend to expressed behaviors but can also change the way that people think (as is reflected in brain-imaging scans). Basic perceptions of the world are strongly influenced by the expressed beliefs of others.

“There is a general lesson here. Much of the time, more money can be made by catering to human frailties than by helping people to avoid them. Bars make a lot more money than Alcoholics Anonymous. So, if humans have problems, they might benefit from well-chosen nudges.”

Nudges are useful in correcting behaviors that may be easily incentivized by external forces. For instance, “temptation goods,” which prompt people to choose options that bring short-term pleasures over long-term benefits, could be counteracted by nudges.

“Alas, many of life’s choices are like practicing putting without being able to see where the balls end up, and for one simple reason: The situation is not structured to provide good feedback.”

According to Thaler and Sunstein, many of the biggest decisions people make are not likely to be repeated often, if at all. There’s no chance to receive feedback on alternative choices. A golfer can putt golf balls thousands of times, and thereby try different techniques. A homebuyer, though, may only ever purchase one house. There’s no opportunity to receive feedback on mistakes. This may mean that good nudges are extremely important in the housing market, but not in golf.

“Our primary mantra is a simple one: if you want to encourage some action or activity, Make it Easy. This insight falls into the category of what the great psychologist Kurt Lewin called ‘channel factors,’ a term he used for small influences that could either facilitate or inhibit certain behaviors. Think about the channel as similar to the path a river takes after the spring snow melts. The path can be determined by seemingly tiny changes in the landscape.”

Thaler and Sunstein provide simple rules and guidelines for choice architecture. Their most central rule is to Make It Easy. In other words, nudges should make the best choices the easiest. Design, in any realm, should be structured to maximize ease of use. Small changes in the choice architecture can, in some cases, make things much simpler for the decider. This amounts to a practical ethical maxim for the choice architect.

“People work to counteract their own self-control problems, often by redesigning the architecture within which they make choices—for example, by making certain options harder or less fun, or by eliminating them together.”

Thaler and Sunstein create the term “snudge” to refer to a nudge in which a person arranges their choice environment to promote their long-term benefit. For instance, someone may obsessively check email. To stop this habit, she could create a snudge that blocks email for part of the day.

“Public-spirited choice architects—those who provide our various sources of news, for example—know it’s good to nudge people in directions that they might not have specifically chosen in advance. Structuring choice sometimes means helping people to learn, so they can later make better choices on their own.”

Thaler and Sunstein discuss the methods through which choices can be presented. In some instances, like television streaming, it is useful to show people options similar to the options they already enjoy. In other cases, when people need to broaden their horizons, choices can be structured so that people are prompted to make choices they may not otherwise have made.

"Some people have a simple philosophy: Just Maximize Choices. That’s not always a bad idea, but it can be problematic without sophisticated choice architecture tools. Instead, a well-curated small selection and/or a good default can produce quite satisfactory outcomes.”

Thaler and Sunstein make the point that good choice architecture cannot be boiled down to something so simple as “Just Maximize Choices” because in many instances this may not lead to the best outcomes for the decision-makers. Curated selections can, in many contexts, be better than maximizing choices.

“We are told by our friends at the Behavioural Insights Team in London that the terms and conditions for using PayPal have a total of 36,275 words. That is a bit more than one-third the length of this book. We have a strong hunch that there is no one in the world, including any of the employees at PayPal, who has read all these words. In what meaningful sense does such a document deserve to be called disclosure? Obfuscation would seem to be more appropriate.”

For Thaler and Sunstein, smart disclosure is not the same as thorough disclosure, which can be a method of obfuscation. They write that they have no wish to pick on PayPal since this practice is performed by many companies. The example calls for a commonsense approach based on expectations of human behavior. While a high-functioning machine could read all the data and be better informed for it, humans will not read it and those who may try are not in a position to retain and understand it.

“Suppose that a customer service agent (on the phone or via an online chat) asks customers why they want to unsubscribe. If the answer is, ‘It costs too much,’ they are armed with a ‘special deal we can offer to loyal customers.’ In fact, just the opposite is true. This is a special deal that is available only to disloyal customers who threaten to leave.”

Disloyalty offers are a form of sludge, a dark nudge that causes inertia or limits the freedom of consumers to change their behaviors. Some companies, including many public gyms, use disloyalty offers to retain customers and to price discriminate against loyal customers. It is one of many forms of sludge used to inhibit customers from terminating (or unsubscribing from) a service.

“Although the way defined-contribution plans are being run has improved a lot over the past decade, the biggest problem in the United States and many other countries is that many workers (perhaps half) do not have a retirement plan offered by their employer. This is a problem because the most effective way for people to save is to have the money withdrawn from their paycheck before they have a chance to spend it.”

Thaler and Sunstein are optimistic about the future of retirement savings plans but worried that so many people, particularly in the United States, will not receive them because of the high turnover rate for low-income jobs. Combined with the fact that many workers do not receive any retirement benefits from their employers, many people will save for their future.

“What does it mean to be neutral? If we notify people that the plan was designed by experts and has low fees (both true about the actual default chosen), does this constitute encouragement? We don’t mean to split hairs here. Our point is simply that designers have to make decisions about how to describe the default plan, and these decisions will help determine the market share it attracts.”

Thaler and Sunstein are aware that even slight changes in advertisements can nudge people in different directions. They know that there is no neutral, non-nudging position and that the choice architect is also always a chooser herself. Proper design means taking a moral position.

“It seems a good bet that nudges will have the longest life when people are on autopilot, in which case default rules are likely to be sticky. In outer space, an object that has been nudged will keep going in that direction until it is nudged again. Swedish retirement savers appear to resemble such objects.”

In their chapter on the Swedish retirement system, Thaler and Sunstein conclude that some nudges last indefinitely long. This is especially true when the default option is a good one, or when people do not have good reasons for paying attention to the option they have already selected. A choice architect should understand the responsibility this places on her.

“We are just stating the obvious fact that a market for advice does not guarantee that the advice will be good. Fortune-tellers remain in business. So, yes, there are honest and knowledgeable experts in most complex domains, but for unsophisticated buyers, the very opacity of a market that creates a demand for expertise makes it difficult to evaluate the value of the advice they offer.”

There are many markets, like in finance and real estate, that are so complex and opaque to consumers that there is a subsequent market for the use of experts in the subject. However, as Thaler and Sunstein note, this may just kick the can further downfield. The same customer who can’t grasp the details of the market may not be able to evaluate the advice or services of the supposed expert.

“Don’t insure the small stuff.”

Thaler and Sunstein warn people not to take out extended warranties on small purchases. Given the likelihood that the product will not break in the time frame of the warranty, taking out the warranty on many small purchases is likely to cost the consumer more than if the individual declined the warranties.

“Let this result sink in. The firm gave its employees total freedom of choice, and a well-functioning interface in which to compare options, but a majority of employees selected a plan that was unequivocally worse than at least one of the options they had rejected. Furthermore, these poor choices were costly. The employees who selected dominated plans ended up paying an average of 28 percent more for their health care than if they had switched to a better version of the plan they elected. The authors titled their paper, ‘Choose to Lose.’ The poor choices all had something in common: low deductibles!”

This case shows not only the proclivity of human beings to choose health care plans with low deductibles (even when these plans are not in their best interest) but also the potential flaws in plans that allow for more choice. When consumers are permitted to choose options that are not to their benefit relative to other plans, the principle of “the more choices the better” fails.

“A Potential Donor who has failed to opt out in a presumed consent country is treated differently than someone who has decided to register as an organ donor in a country where explicit authorization is the law of the land. That important distinction makes the analysis more complicated than it is sometimes portrayed. We favor the policy of prompted choice because there is no evidence that a viable alternative system would save more lives […] and because we think it does the best job of respecting the rights and interests of Potential Donors and Families.”

Due to serious questions about the first edition of Nudge, Thaler and Sunstein go to lengths to rearticulate their views on organ donation. In light of the social stigma attached to opting out of donation in a presumed consent country, as well as their basic concern with individual liberties, the authors believe that a prompted choice model is the best for organ donation. The prompted choice model is weaker than the paternalistic model that presumes consent but stronger than a model based solely on explicit consent. It reflects their dual concerns for freedom and social welfare.

“But objecting to nudges per se makes as much sense as objecting to air and water. You can’t avoid them. And one reason for nudging, as opposed to prohibiting, is precisely the fallibility of choice architects of all kinds.”

Thaler and Sunstein address critiques of their concept of a nudge in a closing chapter written for the final edition. Some have criticized the use of nudges based on the mistaken idea that it is possible for there to be situations without nudges. This, however, is impossible. Since nudges are embedded in all contexts, it is useful to take control of these nudges to move people to patterns of behavior more in concert with their best interests.