Trevor's Reviews > Nudge: Improving Decisions About Health, Wealth, and Happiness

Nudge by Richard H. Thaler
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Mar 22, 2009

really liked it
bookshelves: behavioural-economics, economics, psychology, social-theory

This one took me longer to read that is reasonable for a book of its length or the clear style it is written in. I mean, such a simply written text of 250 pages ought to have finished in no time. The problem was that I don’t live in the US and so many of the examples made the book a struggle for me. All the same, there are ideas in this book that are important no matter where you live.

Don’t you just love the internet? I wanted to start this paragraph with that quote by Göring, “when I hear the word culture I reach for my luger”, but it turns out it is actually a quote from a play by Hanns Johst which is even better, “Whenever I hear of culture I release the safety on my Browning”. I have much the same reaction when I hear the word choice. There is a false equality set up between freedom and choice. It is as if the two terms are identical. Since I’ve had to read through dozens of American examples in this book of why this identity may not always apply, I would like to give an Australian example to explain some of the key concepts of this book.

A couple of decades ago Australian workers went without a national pay increase and rather had this money directed into superannuation. Superannuation is essentially forced saving for retirement. Over the years this required percentage of an employee’s wage dedicated to superannuation has increased so that today it stands at 9%. Everyone knows that if people are to retire on anything like their current salary they need to put aside around 15% of their lifetime earnings. The gap between 9% and 15% is one that will be, for most people, borne by reduced living standards at the end of their lives.

The previous Australian Government decided that it would be a good idea to introduce ‘choice’ into the superannuation system. So whereas previously most people were corralled into mostly industry superannuation funds that were ‘not for profit’ (meaning they had low fees and profits went back into the fund), the new system opened up the superannuation business to private operators. People would now be able to ‘choose’ which fund to invest their money in. (Where did I put that Luger?)

The industry funds obviously didn’t like this idea. But like choice, competition is always a good thing and can never be criticised, right? Well, it is not quite so easy. The problem is that the industry funds asked the previous government to structure the new system so that all funds would have to disclose all fees and charges associated with their products. This would clearly have favoured the industry funds – that often don’t charge fees at all. The government refused to include this disclosure of information as a proviso in the legislation.

Of course, this made ‘freedom of choice’ a bit of a joke. You can’t really have ‘freedom’ if your choice is also based on your being ‘free’ from vital information.

What made matters worse was that the ‘financial planning’ industry in Australia isn’t as well regulated as it might be. Financial planners generally receive commissions from the financial institutions whose products they sell (oh, sorry, encourage you to take up). So, rather than providing you with a plan that is unequivocally in your best interests, the financial planner you are seeing may have (actually, will have) a strong motivation to provide you with information that is in their best financial interests, rather than yours.

Economists would say that despite all of the obvious problems with this new system of choice it is still better as people ‘always act in their own best interests as rational economic agents’ and more choice (even if some of those choices might be biased against people) is always better.

The writers of this book define themselves as Libertarian Paternalists. Essentially, they also believe that choices are good things – however, they acknowledge that choice alone isn’t enough and that people aren’t always economically rational entities.

One of the ideas I found most useful in this book is the idea of ‘choice architecture’. They do not believe in taking choices away from people, but they recognise that being presented with a bewildering array of choices is often enough to stop people from making any choice at all. The book opens with a discussion of a school cafeteria and how you can affect the eating habits of kids simply by how you place the food on display. That is, putting healthier food at eye level, rather than fatty, sugary foods, will ‘nudge’ kids towards eating more healthy food. This is not a subtle change; this ‘nudge’ can drastically improve the eating choices made by the kids. The kids still have a choice to eat rubbish, but this simple change nudges them towards eating better.

The point is that you simply don’t have the option to display the food in a ‘non-nudge’ way. You have to make some choice about how you are going to display the food – so doesn’t it make sense to set up the display so that people are nudged towards eating well, rather than badly?

Choices don’t occur in a vacuum and one of the lessons of this book is that if we are going to provide ‘choices’ we need to think about the consequences of the choice architecture we put in place in which those ‘choices’ are going to be made.

Another of those pieces of ‘choice architecture’ is going to depend on what is the default choice. This is because, people being people, many of us are going to get bored early on in the decision making process and just go for the default. Therefore, the default should be the choice that is most likely to meet the needs of those required to make the choice. There is a very disturbing discussion of the ‘Part D’ prescription drug coverage process in the US in which people who do not make what is an incredibly difficult choice are ‘randomly’ assigned to a range of default plans that takes the principle of government non-intervention to absurd extremes.

The other idea that is very strongly pushed in this book is that people are very much ‘loss averse’. This is an idea that has been in virtually every book I’ve read lately, but this book does more than most to explain the consequences of this aversion. Going back to our superannuation example, one of the reasons why people don’t increase their superannuation contributions – despite knowing that it would be good for them in the long term – is that it involves them in a perceived loss now. The authors discuss a way of encouraging higher contributions which they call the ‘pay more later’ plan. Essentially people are encouraged to commit to increasing their contributions at the time of their next pay increase. This way the increase in contributions does not feel like a loss and the authors show that this way of increasing contributions leads to higher contributions than virtually any other method.

I particularly liked their solution to the ‘gay marriage’ issue that is producing so much heat and so little light in society lately. Their answer is for the government to get out of the marriage business altogether. That the government should enable people to have their relationships recognised on the basis of it being a ‘civil union’ and that this be open to all couples, irrespective of their sex or the sex of their partner. This civil union would be the legal and social recognition of a couple’s partnership. Marriage then would be left up to religious bodies to worry about. If a particular church refuses to marry you because you want to marry someone they don’t think you should – well, find yourself another church – or even better yet, avoid churches altogether.

The last part of this book is a defence of the idea of nudges against radical free market types; the sorts of people who, like our previous government, think that choice is always good and ill-informed choice is even better. The idea that people might be nudged towards donating their organs after they’ve finished with them, nudged to eat better food or to get better health care cover or to slow down when approaching a dangerous intersection all just seem obviously good to me, so this part of the book was preaching to the converted.

But then, like Hegel, I don’t equate freedom with choice, but with needs and how we understand those needs. I think freedom has less to do with getting to choose and more to do with getting adequate information on the consequences of that choice. This book doesn’t go as far as I might along this path – but at least it recognises that we are human and that we often need help in making decisions that are in our own best interests.

…If it was up to me there would not only be no freedom of choice in superannuation, but superannuation would be a tax and would be run by the Australian Tax Office. But don’t get me started…

This would be an even more interesting book if you live in America, given the nature of the examples, but either way, this is still worth a look.
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Comments (showing 1-5 of 5) (5 new)

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message 1: by [deleted user] (new)

The French government created civil unions 10 years ago for gay couples who wanted to legalize their relationships. The law authorizing these unions does not specify that they are only for gay couples. Last year about a third of heterosexual couples who might have opted for marriage chose civil unions instead. Seems like a nice alternative.

message 2: by Trevor (last edited Mar 22, 2009 01:50PM) (new) - rated it 4 stars

Trevor I had never thought of it, but it is a very clever solution to what seemed an intractable problem. But then, I suspect it will do little to solve the problem, as really the debate is as much about gay bashing as it is about the sanctity of marriage.

message 3: by [deleted user] (new)

I honestly don't know what the big fuss is about gay marriage. About 20 or so years ago a guy friend told me that he had met a wonderful man and that they had gone off (I forget where) to get married. I was so happy for them and assumed that gay people could get married, or at least didn't give it much thought. Then all hell broke loose as some US states legalized gay marriage. I still don't get why some people get all worked up about it.

Trevor In case I need to find this article again:

message 5: by Dor (new) - rated it 5 stars

Dor Kaba If we are to accept and provide legal shelter to any type of desire small groups have we would finish by legalizing anything... if YES to gay marriage why NO to plurigamy (not that i defend this)???

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