Nudge: Improving Decisions about Health, Wealth, and Happiness

Nobody forced my neighbor to buy that expensive plasma TV. After reading Nudge now he knows why he spent so much more money than he intended. It seemed like such a bargain, standing right next to a much more expensive set in the store display. In Thaler and Sunstein's terms, the store nudged him to buy that TV. They organized the choice set in a way that gently moved him towards what they want him to do. They got him to buy a pricey TV by taking advantage of the principle of contrast. Such psychological biases have been exploited since the beginning of human commerce to sell us things we don't need. This book makes a compelling argument that the same psychological biases can be used to get us what we really want. After reading Nudge it is easy to understand how small things can make a big difference. For instance, most people I know would like to save more money; most of them don't. Nudge convincingly argues that people can, and should be helped to do that. Very few of us can commit to saving more money today, but most of us can commit today to save more money tomorrow. This human tendency can be used to help people save, and Nudge describes how several companies have already implemented such programs successfully by nudging employees to committing in advance to save part of a future salary increase. By relying on a large body of work in Psychology and Behavioral Economics, Thaler and Sunstein elegantly argue that people have predictable, systematic biases and that this knowledge can be put to work to help all of us. Their basic thesis is simple and brilliant: First, how options are presented matters. There is no neutral way to present options. If you present the salads first in a buffet, people will eat more healthy food than if you put salads at the end. Second, don't reduce choice, but organize the options so that people will be more likely to end up with what they themselves would prefer. This is as true for the salad bar as it is for health care. This amazing book is useful for individuals and policy makers. Policy makers should be interested because such "choice architecture" is strictly non-partisan. Individuals should be interested because this book will nudge them to improve their life their way.

Nudge's purpose is to use our understanding of Man As He Is to build better policies. Rather than assume a perfectly rational human who can parse long, complicated documents with his mighty, limitless brain, Man As He Is sometimes skims and can be deceived by cleverly worded contracts. Man As He Is is often aware of his own limitations: he'll flush his cigarettes down the toilet to prevent his future self from doing what his present self knows to be harmful; he'll promise to start exercising tomorrow; and he'll curse himself for procrastinating. Perfectly Rational Man -- whom Thaler and Sunstein call an "Econ," to be contrasted with a "Human" -- would never have these problems. Econs sit down with (notional) pencil and paper and calmly work out the costs and benefits of all available actions, then take the action that maximizes their present and future happiness subject to a discount rate (future happiness is worth less than the same quantity of present happiness). They don't have an internal procrastinator at war with a rational planner, nor do they ever regret on Sunday morning what they did on Saturday night. Nudge is for Humans, not Econs. Nudge realizes, for instance, that making 401(k)s opt-out rather than opt-in, and setting a reasonable default investment plan, will lead lots more people to save money for retirement. And now that they've been enrolled, very few people will opt out. This is what Thaler and Sunstein call "libertarian paternalism": giving people a gentle push in the direction of their own best interests (the "paternalism" part), but never taking away choices (the "libertarian" part). People can quit at any time; it's only the default that has changed. Your 401(k)'s default investment plan is part of what Thaler and Sunstein call "choice architecture." As a 401(k) administrator, I can guide your choices in any number of ways. I can choose opt-in or opt-out; if I choose opt-out, I have to choose a default plan, whereas if I choose opt-in, I have to decide how much prodding to give you. The point is that choice is inevitable. There's no way to avoid structuring the options available to people, so the right thing to do is to pick the best default. Given this realization, most of Nudge will be entirely uncontroversial. Thaler and Sunstein digest a mountain of psychological research and reassemble it into a convincing story about how to build policies that correct for human failings. Humans can be expected to make the right decision when faced with a routine, concrete problem -- buying food at the grocery store, say -- but all bets are off when we're asked to evaluate a complicated, large-scale problem like the impact of our air-conditioner usage on global climate change. Thaler and Sunstein want to give the market itself a nudge here. They wouldn't insist that we buy only low-power appliances. Instead, they want our appliances to give us simple, immediate feedback on our energy usage: thermometers that reveal moment-to-moment

"Buy on apples, sell on cheese" is an old proverb among wine merchants. Taking a bite of an apple before tasting wine makes it easier to detect flaws in the wine, and the buyer who does so will not as easily make the mistake of paying more than the wine is worth. Cheese, on the other hand, pairs well with wine and enhances its flavor, so a seller who offers cheese may command a higher price for the wine (and may even deserve it, if the wine is intended to be drunk with cheese). The proverb captures important psychological nuances of choice. The same product - a bottle of wine or a risky medical procedure - may be perceived differently depending on its context, and it is often possible to arrange the context to influence a choice while still maintaining the decision maker's autonomy. The practice of structuring choices is called "choice architecture" in a brilliant and important new book, Nudge, by University of Chicago Distinguished Professors Richard Thaler (Business) and Cass Sunstein (Law). Nudge lays out the groundwork for the science of choice architecture in investing, insurance, health care delivery, and other areas, and argues for a "libertarian paternalism" in which choices are structured to make it more likely that a decision maker will select what is considered the most beneficial option, without impairing the ability to decision makers to select other options. For example, making enrollment in 401(k) plans automatic for new employees, with a form for opting out, is likely to result in greater retirement savings than an opt-in system, without limiting anyone's freedom to choose. Thaler and Sunstein apply the principles of choice architecture to a few problems in health care (How could Medicare part D be improved? How can organ donation rates be increased? Why shouldn't patients be allowed to waive their right to sue for medical negligence in return for cheaper health care?) But the concepts in the book go beyond their specific examples and could prove very useful to practicing clinicians, who, they note, are often in the position of being choice architects for their patients. Their principles of choice architecture (paraphrased by me and focused on physicians helping patients make decisions) are: * Make sure incentives are aligned with desired outcomes * Help patients map outcomes of different alternatives into formats they can understand (a major focus of Medical Decision Making as well) * Arrange default options to favor better health. Pediatricians have done a good job of making vaccination a default option. * Provide timely and relevant feedback about choices and outcomes. A patient seeking to lose weight needs to experience feedback in the form of measurable progress soon enough that they are not discouraged. * Expect error and develop systems to prevent, detect, and minimize it. For example, pill cases and inhalers with dosage counters are simple and valuable ways to reduce the frequent errors people make

Richard H. Thaler and Cass R. Sunstein are both professors at the University of Chicago and where the Chicago school was once famous for the Milton Friedman doctrine of free markets (look where they've got us today!) Thaler and now his Law professor friend Cass Sunstein have swung the pendulum the other way. Here in Nudge, they argue that totally free markets can lead to disasters precisely because human individuals are not actually very good decision-makers. As Behavioural Economists (Kahneman & Tversky Judgment under Uncertainty: Heuristics and Biases- who credited Thaler as being a key inspiration - and Dan Ariely, whose Predictably Irrational: The Hidden Forces That Shape Our Decisions has become a best seller) argue, we are riddled with little psychological tics in our decision-making processes. We buy things, then suffer remorse. We get confused by choices and often make no choice at all. But where Ariely keeps his discourse in the world of the day to day, Thaler and Sunstein develop an argument that is political - and is bound to cause heated debate. What they argue is that, in the face of our decision-making weaknesses, Governments and Businesses can help "nudge" us in the right direction. The elephant in the room can be benign. They call their viewpoint `libertarian paternalism' and what they argue is that it would be a good thing for some gentle nudging of the citizenry in the right direction. As Thaler said recently in the New York Times: "In light of human limitations, Cass Sunstein and I argue for policies that we call libertarian paternalism. Although the phrase sounds like an oxymoron, we contend that it is often possible to design policies, in both the public and private sector, that make people better off -- as judged by themselves -- without coercion. We oppose bans; instead, we favor nudges." How does a Government do this without imposing laws and edicts. A primary argument is that defaults can be set that counter the tendency by humans to procrastinate or make no decision. One example is the Save More Tomorrow Plan which Thaler developed back in 1996 as an employer sponsored retirement plan for employees. Instead of presenting the details and asking employees to consciously sign-up to increase their savings each time they got a pay rise, the plan presented the details and asked employees to basically check the box if they wished in future to automatically increase their savings as their pay went up. To pre-commit. Such schemes have proved very successful, yet they offer the same free choice, though with a different default. As Thaler argues: "Since it is often impossible for private and public institutions to avoid picking some option as the default, why not pick one that is helpful?" Another form of nudge might be the act of disclosure. Thaler & Sunstein argue, for example that credit card companies should issue annual statements that tell us how much we've spent this year on late fees and interest. Again: we have