Review: Nudge

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein
My rating: 4 of 5 stars

The book presents two major concepts – Choice Architecture and Libertarian Paternalism and highlights why people make bad choices, when nudging helps and how to do it.

Choice Architects – these are people who have the responsibility for organising the context in which people make decisions

Libertarian Paternalism – where people should be free to choose but it is legitimate for choice architects to try to influence people’s behaviour in order to make their lives longer, healthier, and better. The reason for this is the difference between Humans and Econs

Econs – understand everything clearly and can always make the right decisions, compared to Humans who struggle to make the right decisions in some cases. It is where the difference between Humans and Econs is significant that Nudges can help steed humans and with embracing libertarian Paternalism towards decisions which make their lives better.

Humans suffer from:

  • Anchoring – where people get drawn towards an answer, e.g. a charity asking you to donate $100 will get a larger donation than one asking for $1 even if no one ever gives them the $100.
  • Availability – people build up an unhealthy fear or lack of fear because something is in their mind, e.g. the risk of a boat sinking if a boat has recently sank.
  • Representativeness – humans try to identify patterns of how similar things are. e.g. people would not expect a short person to be a basketball player
  • Optimism and Overconfidence – people over estimate their own ability, e.g. more than 50% of people will say they are above average.
  • Gains and Losses – people hate loosing things, loosing something makes people twice as unhappy as if they gained it.
  • Status Quo Bias – people tend not to want to change things, even simple things like ticking a box
  • Framing – the wording of a question makes a big difference to the outcome
  • Temptation – people are easily tempted and have low will power
  • Repetition – people have a routine (small such as eating snacks or longer) which they stick to and don’t like to change
  • Doing What Others Do and Think What Others Think – people like to copy others (e.g. telling people that 90% of people have completed their tax return is a big motivator for people to do theirs) and think like others (e.g. a popular song becomes more popular because people think they should like it)
  • The Spotlight Effect – people think others are paying much more attention to them than people really are
  • Priming – by asking people about something it changes their action (e.g. are you going to vote tomorrow? increased voter turn out)

When is it good to nudge?

  • Benefits Now—Costs Later – things you enjoy now but will cause issues in the future e.g. drinking
  • Degree of Difficulty – somethings are just more difficult e.g. selecting a mortgage
    Frequency – infrequent decisions probably need the most help e.g. selecting a university
  • Feedback – where there is no instant feedback for a choice e.g. selecting a pension saving
  • Knowing What You Like – e.g menus which suggest “Top selling” items
  • Markets: A Mixed Verdict – Market forces are not perfect, e.g. extended warranty is a product that simply should not exist.

Ways to architect choice:

  • Defaults – most people will choose this
  • Expect Error – design the process so that errors don’t happen or can be resolved easily. e.g. accepting a credit card no matter which way round it is put into the machine
  • Give Feedback – Well-designed systems tell people when they are doing well and when they are making mistakes as quickly as possible e.g. digital cameras showing a preview of the photo
  • Understanding “Mappings”: From Choice to Welfare – e.g. translating numbers into things people understand like physical objects
  • Structure Complex Choices – e.g. buying a house, filtering options to produce a subset for consideration
  • Incentives – Who uses? Who chooses? Who pays? Who profits? e.g. how are payments etc structures? people tend to forget about the opportunity cost and just consider the incremental cost such as the gas for a car and not how factoring in the cost of the car into the calculation.

The book goes on to present some applications of the above on topics such as money management, the environment, organ donation, healthcare etc.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.