In Nudge the authors show how a good choice architecture can nudge people toward making the best decision.
I liked Nudge as it not only offers theory but also shows with many examples and ideas how nudges are (or could be) used in practice. Some of the examples are US-centric and hence were a bit harder to follow as a non-US citizen not familiar with things like the US social security system.
A choice architect has the responsibility for organizing the context in which people make decisions.
Small and apparently insignificant details can have major impacts on people's behavior. A good rule of thumb is to assume that "everything matters". In many cases, the power of these small details comes from focusing the attention of users in a particular direction.
The libertarian aspect of our strategies lies in the straightforward insistence that, in general, people should be free to do what they like – and to opt out of undesirable arrangements if they want to do so. We strive to design policies that maintain or increase freedom of choice. When we use the term libertarian to modify the word paternalism, we simply mean liberty-preserving. And when we say liberty-preserving, we really mean it. Libertarian paternalists want to make it easy for people to go their own way; they do not want to burden those who want to exercise their freedom.
The paternalistic aspect lies in the claim that it is legitimate for choice architects to try to influence people's behavior in order to make their lives longer, healthier, and better. 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.
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. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates.
Humans and Econs
Biases and Blunders
How can people be simultaneously so smart and so dumb? Many psychologists and neuroscientists have been converging on a description of the brain's functioning that helps us make sense of these seeming contradictions. The approach involves a distinction between two kinds of thinking, one that is intuitive and automatic, and another that is reflective and rational. We will call the first the Automatic System and the second the Reflective System.
The Automatic System is rapid and is or feels instinctive, and it does not involve what we usually associate with the word thinking. When you duck because a ball is thrown at you unexpectedly, or get nervous when your airplane hits turbulence, or smile when you see a cute puppy, you are using your Automatic System.
The Reflective System is more deliberate and self-conscious. We use the Reflective System when we are asked, "How much is 411 times 37?" Most people are also likely to use the Reflective System when deciding which route to take for a trip and whether to go to law school or business school.
One way to think about all this is that the Automatic System is your gut reaction and the Reflective System is your conscious thought.
Econs never make an important decision without checking with their Reflective System (if they have time). But humans sometimes go with the answer the lizard inside is giving without pausing to think.
Most of us are busy, our lives are complicated, and we can't spend all our time thinking and analyzing everything. When we have to make judgments, we use simple rules of thumb to help us. We use rules of thumb because most of the time they are quick and useful.
Anchors serve as nudges. We can influence the figure you will choose in a particular situation by ever-so-subtly suggesting a starting point for your thought process.
How much should you worry about hurricanes, nuclear power, terrorism, mad cow disease, alligator attacks, or avian flu? And how much care should you take in avoiding risks associated with each? What, exactly, should you do to prevent the kinds of dangers that you face in ordinary life? In answering questions of this kind, most people use what is called the availability heuristic. They assess the likelihood of risks by asking how readily examples come to mind. If people can easily think of relevant examples, they are far more likely to be frightened and concerned than if they cannot. A risk that is familiar will be seen as more serious than a risk that is less familiar.
The availability heuristic helps to explain much risk-related behavior, including both public and private decisions to take precautions.
When "availability bias" is at work, both private and public decisions may be improved if judgments can be nudged back in the direction of true probabilities. A good way to increase people's fear of a bad outcome is to remind them of a related incident in which things went wrong; a good way to increase people's confidence is to remind them of a similar situation in which everything worked out for the best.
Use of the representativeness heuristic can cause serious misperceptions of patterns in everyday life. When events are determined by chance, such as a sequence of coin tosses, people expect the resulting string of heads and tails to be representative of what they think of as random. Unfortunately, people do not have accurate perceptions of what random sequences look like. When they see the outcomes of random processes, they often detect patterns that they think have great meaning but in fact are just due to chance.
Unrealistic optimism can explain a lot of individual risk taking, especially in the domain of risks to life and health. If people are running risks because of unrealistic optimism, they might be able to benefit from a nudge. One possibility: if people are reminded of a bad event, they may not continue to be so optimistic.
People hate losses. Roughly speaking, losing something makes you twice as miserable as gaining the same thing makes you happy. In more technical language, people are "loss averse".
Loss aversion operates as a kind of cognitive nudge, pressing us not to make changes, even when changes are very much 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. In many contexts defaults have some extra nudging power because consumers may feel, rightly or wrongly, that default options come with an implicit endorsement from the default setter.
The idea of "framing" is that choices depend, in part, on the way in which problems are stated.
People's choices, even in life's most important decisions, are influenced in ways that would not be anticipated in a standard economic framework.
In economics (and in ordinary life), a basic principle is that you can never be made worse off by having more options, because you can always turn them down.
Self-control problems can be illuminated by thinking about an individual as containing two semiautonomous selves, a far-sighted "Planner" and a myopic "Doer". You can think of the Planner as speaking for your Reflective System, and the Doer as heavily influenced by the Automatic System. 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.
In many situations, people put themselves into an "automatic pilot" mode, in which they are not actively paying attention to the task at hand.
Markets provide strong incentives for firms to cater to the demands of consumers, and firms will compete to meet those demands, whether or not those demands represent the wisest choices.
Following the Herd
Econs are pretty unsociable creatures. They communicate with others if they can gain something from the encounter, they care about their reputations, and they will learn from others if actual information can be obtained, but Econs are not followers of fashion. Humans, on the other hand, are frequently nudged by other Humans. Humans are not exactly lemmings, but they are easily influenced by the statements and deeds of others.
Most people learn from others. This is usually good, of course. Learning from others is how individuals and societies develop. But many of our biggest misconceptions also come from others. When social influences have caused people to have false or biased beliefs, then some nudging may help.
One of the most effective ways to nudge (for good or evil) is via social influence.
Social influences come in two basic categories. The first involves information. If many people do something or think something, their actions and their thoughts convey information about what might be best for you to do or think. The second involves peer pressure. If you care about what other people think about you (perhaps in the mistaken belief that they are paying some attention to what you are doing), then you might go along with the crowd to avoid their wrath or curry their favor.
Humans are easily nudged by other Humans. Why? One reason is that we like to conform.
People become more likely to conform when they know that other people will see what they have to say. Sometimes people will go along with the group even when they think, or know, that everyone else has blundered.
Seemingly similar groups, cities, and even nations can converge on very different beliefs and actions simply because of modest and even arbitrary variations in starting points.
Consistent and unwavering people, in the private or public sector, can move groups and practices in their preferred direction.
Once a practice has become established, it is likely to be perpetuated, even if there is no particular basis for it. 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. Of course, a group will shift if it can be shown that the practice is causing serious problems. But if there is uncertainty on that question, people might well continue doing what they have always done.
We may follow a practice or a tradition not because we like it, or even think it defensible, but merely because we think that most other people like it. Many social practices persist for this reason, and a small shock, or nudge, can dislodge them.
One reason why people expend so much effort conforming to social norms and fashions is that they think that others are closely paying attention to what they are doing.
Every day we are influenced by people who are not trying to influence us.
If choice architects want to shift behavior and to do so with a nudge, they might simply inform people about what other people are doing.
If you want to nudge people into socially desirable behavior, do not, by any means, let them know that their current actions are better than the social norm.
The "mere-measurement effect" refers to the finding that when people are asked what they intend to do, they become more likely to act in accordance with their answers.
Often we can do more to facilitate good behavior by removing some small obstacle than by trying to shove people in a certain direction.
When Do We Need a Nudge
The golden rule of libertarian paternalism: offer nudges that are most likely to help and least likely to inflict harm.
People will need nudges for decisions that are difficult and rare, for which they do not get prompt feedback, and when they have trouble translating aspects of the situation into terms that they can easily understand.
Markets often give companies a strong incentive to cater to (and profit from) human frailties, rather than to try to eradicate them or to minimize their effects.
Self-control issues are most likely to arise when choices and their consequences are separated in time.
Unfortunately, some of life's most important decisions do not come with many opportunities to practice. Generally, the higher the stakes, the less often we are able to practice.
Difficult choices are good candidates for nudges.
Even practice does not make perfect if people lack good opportunities for learning. Learning is most likely if people get immediate, clear feedback after each try.
We usually get feedback only on the options we select, not the ones we reject. Unless people go out of their way to experiment, they may never learn about alternatives to the familiar ones.
Long-term processes rarely provide good feedback.
When feedback does not work, we may benefit from a nudge.
When people have a hard time predicting how their choices will end up affecting their lives, they have less to gain by numerous options and perhaps even by choosing for themselves. A nudge might be welcomed.
If you indirectly influence the choices other people make, you are a choice architect. And since the choices you are influencing are going to be made by Humans, you will want your architecture to reflect a good understanding of how humans behave. In particular, you will want to ensure that the Automatic System doesn't get all confused.
Many people will take whatever option requires the least effort, or the path of least resistance. If, for a given choice, there is a default option – an option that will obtain if the chooser does nothing – then we can expect a large number of people to end up with that option, whether or not it is good for them. These behavioral tendencies toward doing nothing will be reinforced if the default option comes with some implicit or explicit suggestion that it represents the normal or even the recommended course of action.
Not all defaults are selected to make chooser's life easier or better.
Humans make mistakes. A well-designed system expects its users to err and is as forgiving as possible.
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.
An important type of feedback is a warning that things are going wrong, or, even more helpful, are about to go wrong. But warning systems have to avoid the problem of offering so many warnings that they are ignored.
A good system of choice architecture helps people to improve their ability to map and hence to select options that will make them better off. One way to do this is to make the information about various options more comprehensible.
As alternatives become more numerous and more complex, choice architects have more to think about and more work to do, and are much more likely to influence choices (for better or for worse).
Collaborative filtering is an effort to solve a problem of choice architecture. If you know what people like you tend to like, you might well be comfortable in selecting products you don't know, because people like you tend to like them. For many of us, collaborative filtering is making difficult choices easier.
Sometimes it's good to learn what people unlike us like – and to see whether we might even like that.
Structuring choice sometimes means helping people to learn, so they can later make better choices on their own.
Choice architects must think about incentives when they design a system. Sensible architects will put the right incentives on the right people.
Save More Tomorrow
The standard economic theory of saving for retirement is both elegant and simple. People are assumed to calculate how much they are going to earn over the rest of their lifetime, figure out how much they will need when they retire, and then save up just enough to enjoy a comfortable retirement without sacrificing too much while they are still working. As a guideline for how to think sensibly about saving, this theory is excellent, but as an approach to how people actually behave, the theory runs into two serious problems. First, it assumes that people are capable of solving a complicated mathematical problem in order to figure out how much to save. The second problem with the theory is that it assumes that people have enough willpower to implement the relevant plan.
We interpret the statement "I should be saving (or dieting, or exercising) more" to imply that people would be open to strategies that would help them achieve these goals. In other words, they are open to a nudge. They might even be grateful for one.
Save More Tomorrow is a choice-architecture system that was constructed with close reference to five psychological principles that underlie human behavior:
- Many participants say that they think they should be saving more, and plan to save more, but never follow through.
- Self-control restrictions are easier to adopt if they take place some time in the future.
- Loss aversion: people hate to see their paychecks go down.
- Money illusion: losses are felt in nominal dollars (that is, not adjusted for inflation).
- Inertia plays a powerful role.
Attitudes toward risk depend on the frequency with which investors monitor their portfolios.
When markets get more complicated, unsophisticated and uneducated shoppers will be especially disadvantaged by the complexity. The unsophisticated shoppers are also more likely to be given bad or self-interested advice by people serving in roles that appear to be helpful and purely advisory.
Privatizing Social Security: Smorgasbord Style
When it comes to investing, buying what you think you know does not necessarily make sense.
Investors have traditionally had trouble distinguishing between past returns and forecasts of future returns.
The more choices you give people, the more help you need to provide.
If most people think that most people are starting to avoid unhealthy foods, or to exercise, more people will avoid unhealthy foods and will exercise.
Prescription Drugs: Part D for Daunting
How to Increase Organ Donations
Presumed consent preserves freedom of choice, but it is different from explicit consent because it shifts the default rule. Under this policy, all citizens would be presumed to be consenting donors, but they would have the opportunity to register their unwillingness to donate, and they could do so easily. We want to underline the word easily, because the harder it is to register your unwillingness to participate, the less libertarian the policy becomes.
Although presumed consent is, in a sense, the opposite of explicit consent, there is a key similarity: under both regimes, those who don't hold the default preference will have to register in order to opt out.
If you give people the option to procrastinate about making a decision, they will often take that option.
Saving the Planet
It helps to think about the environment as the outcome of a global choice architecture system in which decisions are made by all kinds of actors, from consumers to large companies to governments. Markets are a big part of this system, and for all their virtues, they face two problems that contribute to environmental problems. First, incentives are not properly aligned. If you engage in environmentally costly behavior next year, through your consumption choices, you will probably pay nothing for the environmental harms that you inflict. This is what is often called a "tragedy of the commons". The second problem that contributes to excessive pollution is that people do not get feedback on the environmental consequences of their actions.
When incentives are badly aligned, it is appropriate for governments to try to fix the problem by realigning them. In the environmental area, two broad approaches have been proposed. The first is to impose taxes or penalties on those who pollute. The second approach is called a cap-and-trade system. In such systems those who pollute are given (or sold) "rights" to pollute in certain amounts (the "cap") and these rights are then traded in a market.
Liberty is much greater when people are told, "You can continue your behavior, so long as you pay for the social harm that it does" than when they are told, "You must act exactly as the government says".
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 price of the harm-producing good will go up, and consumption will decline.
Libertarian paternalists care about freedom; they are skeptical about approaches that prevent people from going their own way. Some nudges are bad or just unwelcome, and all of us benefit if some of us are permitted to experiment.
Improving School Choices
The case for choice was originally popularized by the great libertarian economist Milton Friedman. His argument is a simple one: the best way to improve our children's schools is to introduce competition.
When parents pick schools, status quo bias plays a big role. The neighborhood school that one knows, failing or not, may be preferable to the unknown school half an hour away.
Should Patients Be Forced to Buy Lottery Tickets?
To respect the liberty of religious groups while protecting individual freedom in general, we propose that marriage should be completely privatized. Under our proposal, the word marriage would no longer appear in any laws, and marriage licenses would no longer be offered or recognized by any level of government. The state would do its business, while religious organizations would do theirs. We would eliminate the ambiguity created by the fact that the word marriage now refers both to an official (legal) status and to a religious one.
Under our approach, the only legal status states would confer on couples would be a civil union, which would be a domestic partnership agreement between any two people. Marriages would be strictly private matters, performed by religious and other private organizations. Within broad limits, marriage-granting organizations would be free to choose whatever rules they like for a marriage conducted under their auspices.
Extensions and Objections
A Dozen Nudges
The Real Third Way