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Nudge: Improving Decisions About Health, Wealth, and Happiness Paperback – February 24, 2009
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Intuitively, this view appeals to me. One example: create online retirement forms with a default setting which generally benefit employees, rather than no setting at all. Most people don't really understand their retirement plans, if they even have one. So make their laziness work for them.
Of course, the “Libertarian Paternalism” proposed in this work is problematic. Who makes the choices that we get to choose from? Can’t "they" rig the system for their benefit and not ours?
Despite this, I think the author’s view of human nature is sound, and can lead to more intelligent discussions about what we, as a species and individuals in that species, can hope to accomplish.
The book is well written and the authors are methodical in both laying out their case and pointing out its potential flaws. It doesn’t compromise the book in any way, but I did find it a bit odd that they refer to themselves throughout the book in the third person. When I first came across it I had to recheck the cover to make sure they weren’t referring to someone else, but it’s a minor point of style.
I was enthused by the idea of mixing sciences; in this case psychology and economics. As the authors note, economists have historically worked with a proxy of the average person that is fully informed, completely rational, and lives in a vacuum. That’s not where the people who actually make, spend, and invest money actually live and that gap between what the authors term Econs and Humans has historically compromised a lot of otherwise sound economic theory.
The ideas in the book are built around what the authors call libertarian paternalism. Over-simplified, it’s paternalism with choice, in which the paternalism is achieved by nudging the choices in ways that are effective, but otherwise cheap in cost, modest in sacrifice, and easy to avoid. It’s a kind of win-win solution in which one win is slightly favored by human decency or universal standards of justice.
We are constantly nudged without always being conscious of the nudging. When you stand in front of a retail display deciding which shampoo to buy you may have no idea how deliberately that display has been constructed by the retailer and the manufacturers. Tremendous amounts of thought and research are behind it. It’s established fact that positioning drives sales, often more than the variations in products and prices themselves.
Most of the nudges that Professors Thaler and Sunstein introduce are less invasive and more transparent than the commercial nudges we are already subject to. How to get people to save more for retirement? How to get more organ donors? How to combat obesity and encourage people to live healthier life styles?
In all cases, there is ample evidence that this is what people themselves want. They are impeded in their efforts, however, by the realities of human psychology. Things like the “status quo bias”, “pluralistic ignorance”, and “loss aversion” are all existing nudges common to the human psyche. Fitting in, going along with the crowd, and irrational optimism are as natural as the sunrise.
Thaler and Sunstein just want to use these commonplace and natural biases to nudge people toward decisions that they probably want to make but frequently don’t, for reasons having little to do with the value of the intention. The idea makes a lot of sense and I found myself in general agreement most of the way.
I admit to having some difficulties with the context at times, however. For example, in their discussion relating to retirement savings, one chapter is titled, “Naïve Investing”, and the authors suggest ways in which savers could be enticed into more astute strategies by way of theoretically painless nudges. There is, however, an inevitable bias underlying the nudge itself. In this case it is the conventional wisdom that equities outperform fixed income investments over a long period of time. This is true in the aggregate and over a long period of time, of course, but not universally true when considering the investment needs and horizon of a single investor.
My point is not to argue that bias, however, which they, in fact, acknowledge. My point is merely that the nudge itself introduces its own contextual bias, creating, in effect, a multi-level bias that the “choice architects,” in the vernacular of nudging, must be cognizant of if the nudging is to realize the original objective of positive paternalistic influence.
The authors don’t ignore this incremental bias, mind you. On a related note, they cite the example of an Enron employee who lost his entire life savings in company stock, making a sound and appropriate argument in favor of further limiting 401k and defined benefit plan investments in company stock. They’re right, of course, although in this case I think an outright ban is ethically warranted.
The “nudge” is, more or less, an aggressive form of default planning that recognizes the weaknesses in human behavior, particularly our seemingly instinctive inability to understand probability theory. (As Peter Hollins points out, in a sample of 23 people the chances of two of them sharing a birthday is 50-50.)
In the closing chapters of the book the authors acknowledge the potential criticisms that will be leveled at libertarian paternalism from both the right and left extremes of the political spectrum. Their defense is a strong one but there is an implicit admission that said defense relies on the duality of paternalism and libertarianism. I agree with their assessment that the combined term is not an oxymoron, but one without the other will render the concept less defensible. And that’s where the execution, as they fully acknowledge, could compromise the intent. Or as the old adage goes, the only difference between theory and practice is the practice.
When all is said and done I think that what the authors are really advocating is simpler than it reads—moderation, compromise, and common sense. “With respect to government, we hope that the general approach might serve as a viable middle ground in our unnecessarily polarized society.” Nudge on.
It contains an interesting chapter on the various psychological factors that influence decision making. (I had, in fact, just read before this Prof Thaler's book on 'Misbehaving', which provides a more detailed study of the factors.)
Some of the subjects, e.g. saving for retirement, mortgage, organ donation, are covered in detail with insightful recommendations. Other subjects, e.g. credit cards and privatisation of social security, are touched upon only briefly and rather superficially.
In all, an interesting read.