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

Nudge by Richard H. Thaler
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Apr 26, 09


Part of the flood of books on behavioral economics that have come out in the last few years, this book synthesizes a lot of excellent research in the field – including research by the authors themselves. The fathers of this whole field, based on research that first published in the 1970’s, are two Israeli-born academics, Amos Tversky and Daniel Kahneman. Kahneman won the Nobel prize in Economics in 2002 for this work (Tversky died in 1996). The authors of Nudge in fact co-authored a number of papers with Kahneman. The gist of their message is that human beings are not rational in their economic decision-making, but are irrational in some very predictable ways. Thaler and Sunstein take this knowledge about predictable errors, explain it further, and propose ways that people can be “nudged” into making better decisions. They call this approach “libertarian paternalism”. It’s libertarian because it allows choice. It’s paternalistic in that it structures those choices and/or presents those choices in a way that is judged to be “better” for the chooser.

Example: Left to their own devices about saving for retirement, most Americans mess it up. Unless they’re lucky enough to have an employer with a “defined benefit” pension plan, they are very likely to end up with not much more than Social Security when they retire. The reasons are that they:
• Save too little
• Invest in low return assets like money market funds
• Allocate their assets poorly so that, if they do stray into investing in higher return assets like equities, then they typically diversify too little (investing it all in their employer’s stock is a common mistake) and chase yesterday’s hot performer (which is probably next year’s dog)
• Run up big expenses and tax bills by trading too much or investing in mutual funds with high management expenses
• Fail to take advantage of retirement programs offered to them by their employers, such as 401K’s with a matching employer contribution

All of these errors are predictable, say Thaler and Sunstein. We save too little because saving involves pain today for gain tomorrow – in contrast with, say, eating ice cream, which is gain today for pain tomorrow. We make bad asset allocation decisions because it’s complicated as a result of having too many choices and a lot of uncertainty about what outcomes those choices will result in. We chase yesterday’s hot performer because we assume tomorrow will be just like yesterday and also because we want to run with the crowd. We fail to take advantage of employer-provided retirement matches because if the default choice in the program is choosing “no thanks”, then we stick with that choice because of our persistent inertia.

The above behaviors are well-studied by economists, psychologists and sundry other social scientists. The causes of these behaviors have names like the availability heuristic (choosing outcomes that are easy to visualize), the status quo bias (inertia), social contagion (acting like lemmings) and so on. The labels may not be familiar, but the behaviors themselves are all very easy to recognize because we all suffer from them. Or to be more precise, the behaviors are easy to recognize in others, even if we fail to recognize them in ourselves.

Fortunately, there are some easy ways of working around these problems – if we recognize that the underlying behaviors are baked into all of us, but can be “nudged” into new directions. Take retirement saving. Instead of serving up a plan with so many choices that employees don’t even bother signing up, the default choice in these plans should be that the employee is automatically enrolled in a standard plan based on the employee’s age, which provides for a reasonable asset allocation (say, between stocks and bonds) based on the employee’s likely age of retirement. This plan would also have low management fees and be tax-exempt. Of course, employees would still have the ability to over-ride these default choices, but the vast majority would be unlikely to do so – due once again to the inertia factor.

The authors provide scores of these kinds of examples, from prescription drug programs to organ donation campaigns to predicting the outcome of sports games. Some of these examples are targeted at individual consumers, some are more relevant for business executives, and still others are about public policy. It’s very well-written, well supported by research, and relevant to just about anyone who ever has to make a decision. All of which makes for a pretty good page-turner of a book.
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Comments (showing 1-4 of 4) (4 new)

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message 1: by Gabe (new)

Gabe Lend it to me this summer


Gordon Gabe wrote: "Lend it to me this summer"

Will do. The book has 3 chapters on health issues. Want me to just mail it to you now?


message 3: by Gabe (new)

Gabe you can mail the book?

G


Gordon Gabe wrote: "you can mail the book?

G"


Yup, I can mail you the book.


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