More on this book
Community
Kindle Notes & Highlights
Read between
January 26 - March 15, 2022
Carolyn is what we will be calling a choice architect. A choice architect has the responsibility for organizing the context in which people make decisions. Although Carolyn is a figment of our imagination, many real people turn out to be choice architects, most without realizing it. If you design the ballot voters use to choose candidates, you are a choice architect. If you are a doctor and must describe the alternative treatments available to a patient, you are a choice architect. If you design the form that new employees fill out to enroll in the company health care plan, you are a choice
...more
As we shall see, small and apparently insignificant details can have major impacts on people’s behavior. A good rule of thumb is to assume that “everything matters.” In many cases, the power of these small details comes from focusing the attention of users in a particular direction.
Libertarian paternalism is a relatively weak, soft, and nonintrusive type of paternalism because choices are not blocked, fenced off, or significantly burdened. If people want to smoke cigarettes, to eat a lot of candy, to choose an unsuitable health care plan, or to fail to save for retirement, libertarian paternalists will not force them to do otherwise—or even make things hard for them.
A nudge, as we will use the term, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.
Hundreds of studies confirm that human forecasts are flawed and biased. Human decision making is not so great either. Again to take just one example, consider what is called the “status quo bias,” a fancy name for inertia. For a host of reasons, which we shall explore, people have a strong tendency to go along with the status quo or default option.
By properly deploying both incentives and nudges, we can improve our ability to improve people’s lives, and help solve many of society’s major problems. And we can do so while still insisting on everyone’s freedom to choose.
They do less well in contexts in which they are inexperienced and poorly informed, and in which feedback is slow or infrequent—say, in choosing between fruit and ice cream (where the long-term effects are slow and feedback is poor) or in choosing among medical treatments or investment options.
The first misconception is that it is possible to avoid influencing people’s choices. In many situations, some organization or agent must make a choice that will affect the behavior of some other people. There is, in those situations, no way of avoiding nudging in some direction, and whether intended or not, these nudges will affect what people choose.
It is also true that private and public institutions can strive for one or another kind of neutrality—as, for example, by choosing randomly, or by trying to figure out what most people want. But unintentional nudges can have major effects, and in some contexts, these forms of neutrality are unattractive;
The second misconception is that paternalism always involves coercion.
And by insisting that choices remain unrestricted, we think that the risks of inept or even corrupt designs are reduced. Freedom to choose is the best safeguard against bad choice architecture.
Choice architects can make major improvements to the lives of others by designing user-friendly environments. Many of the most successful companies have helped people, or succeeded in the marketplace, for exactly that reason. Sometimes the choice architecture is highly visible, and consumers and employers are much pleased by it.
This example illustrates some basic principles of good choice architecture. Choosers are human, so designers should make life as easy as possible. Send reminders, and then try to minimize the costs imposed on those who, despite your (and their) best efforts, space out.
Libertarian paternalism, we think, is a promising foundation for bipartisanship. In many domains, including environmental protection, family law, and school choice, we will be arguing that better governance requires less in the way of government coercion and constraint, and more in the way of freedom to choose. If incentives and nudges replace requirements and bans, government will be both smaller and more modest. So, to be clear: we are not for bigger government, just for better governance.
One way to think about all this is that the Automatic System is your gut reaction and the Reflective System is your conscious thought. Gut feelings can be quite accurate, but we often make mistakes because we rely too much on our Automatic System.
Although rules of thumb can be very helpful, their use can also lead to systematic biases. This insight, first developed decades ago by two Israeli psychologists, Amos Tversky and Daniel Kahneman (1974), has changed the way psychologists (and eventually economists) think about thinking. Their original work identified three heuristics, or rules of thumb—anchoring, availability, and representativeness—and the biases that are associated with each. Their research program has come to be known as the “heuristics and biases” approach to the study of human judgment.
Anchor, availability and representativeness.
In the language of this book, anchors serve as nudges. We can influence the figure you will choose in a particular situation by ever-so-subtly suggesting a starting point for your thought process.
In answering questions of this kind, most people use what is called the availability heuristic. They assess the likelihood of risks by asking how readily examples come to mind. If people can easily think of relevant examples, they are far more likely to be frightened and concerned than if they cannot.
Biased assessments of risk can perversely influence how we prepare for and respond to crises, business choices, and the political process.
The pervasive problems are that easily remembered events may inflate people’s probability judgments, and that if no such events come to mind, their judgments of likelihoods might be distorted downward.
Many researchers have been so sure that the original Gilovich results were wrong that they set out to find the hot hand. To date, no one has found it.
The problem is that in a population of three hundred million, it is inevitable that certain neighborhoods will see unusually high cancer rates within any one-year period. The resulting “cancer clusters” may be products of random fluctuations.
MBA students are not the only ones overconfident about their abilities. The “above average” effect is pervasive.
People are unrealistically optimistic even when the stakes are high. About 50 percent of marriages end in divorce, and this is a statistic most people have heard. But around the time of the ceremony, almost all couples believe that there is approximately a zero percent chance that their marriage will end in divorce—even those who have already been divorced!
A similar point applies to entrepreneurs starting new businesses, where the failure rate is at least 50 percent.
Unrealistic optimism can explain a lot of individual risk taking, especially in the domain of risks to life and health.
People hate losses (and their Automatic Systems can get pretty emotional about them). Roughly speaking, losing something makes you twice as miserable as gaining the same thing makes you happy. In more technical language, people are “loss averse.”
Once I have a mug, I don’t want to give it up. But if I don’t have one, I don’t feel an urgent need to buy one. What this means is that people do not assign specific values to objects. When they have to give something up, they are hurt more than they are pleased if they acquire the very same thing.
Loss aversion helps produce inertia, meaning a strong desire to stick with your current holdings. If you are reluctant to give up what you have because you do not want to incur losses, then you will turn down trades you might have otherwise made.
As we will see, loss aversion operates as a kind of cognitive nudge, pressing us not to make changes, even when changes are very much in our interests.
Loss aversion is not the only reason for inertia. For lots of reasons, people have a more general tendency to stick with their current situation. This phenomenon, which William Samuelson and Richard Zeckhauser (1988) have dubbed the “status quo bias,” has been demonstrated in numerous situations.
The combination of loss aversion with mindless choosing implies that if an option is designated as the “default,” it will attract a large market share. Default options thus act as powerful nudges.
Even experts are subject to framing effects. When doctors are told that “ninety of one hundred are alive,” they are more likely to recommend the operation than if told that “ten of one hundred are dead.”
Framing works because people tend to be somewhat mindless, passive decision makers. Their Reflective System does not do the work that would be required to check and see whether reframing the questions would produce a different answer. One reason they don’t do this is that they wouldn’t know what to make of the contradiction. This implies that frames are powerful nudges, and must be selected with caution.
The bottom line, from our point of view, is that people are, shall we say, nudge-able. Their choices, even in life’s most important decisions, are influenced in ways that would not be anticipated in a standard economic framework.
In economics (and in ordinary life), a basic principle is that you can never be made worse off by having more options, because you can always turn them down. Before Thaler removed the nuts the group had the choice of whether to eat the nuts or not—now they didn’t. In the land of Econs, it is against the law to be happy about this!
In the language of economics, the group is said to display behavior that is dynamically inconsistent. Initially people prefer A to B, but they later choose B over A.
Two factors must be introduced in order to understand the cashew phenomenon: temptation and mindlessness.
For most of us, however, self-control issues arise because we underestimate the effect of arousal. This is something the behavioral economist George Loewenstein (1996) calls the “hot-cold empathy gap.” When in a cold state, we do not appreciate how much our desires and our behavior will be altered when we are “under the influence” of arousal. As a result, our behavior reflects a certain naïveté about the effects that context can have on choice.
Recent research in neuroeconomics (yes, there really is such a field) has found evidence consistent with this two-system conception of self-control. Some parts of the brain get tempted, and other parts are prepared to enable us to resist temptation by assessing how we should react to the temptation.
The cashew problem is not only one of temptation. It also involves the type of mindless behavior we discussed in the context of inertia. In many situations, people put themselves into an “automatic pilot” mode, in which they are not actively paying attention to the task at hand. (The Automatic System is very comfortable that way.)
The same is true of popcorn—even stale popcorn. A few years ago, Brian Wansink and his colleagues ran an experiment in a Chicago movie theater in which moviegoers found themselves with a free bucket of stale popcorn.2
Popcorn experiment
The same is true of soup. In another Wansink (2006) masterpiece, people sat down to a large bowl of Campbell’s tomato soup and were told to eat as much as they wanted.
Soup experiment
Large plates and large packages mean more eating; they are a form of choice architecture, and they work as major nudges. (Hint: if you would like to lose weight, get smaller plates, buy little packages of what you like, and don’t keep tempting food in the refrigerator.)
Since people are at least partly aware of their weaknesses, they take steps to engage outside help. We make lists to help us remember what to buy at the grocery store. We buy an alarm clock to help us get up in the morning. We ask friends to stop us from having dessert or to fortify our efforts to quit smoking.
More formal versions of these strategies are easy to imagine. In Chapter 16 we will encounter the Web site Stickk.com (of which Karlan is a cofounder), which gives people a method by which their Planners can constrain their Doers. In some situations, people may even want the government to help them deal with their self-control problems.
Understanding mental accounts would also improve public policy. As we will see, if we want to encourage savings, it will be important to direct the increased savings into a mental (or real) account where spending it will not be too big a temptation.
Humans, on the other hand, are frequently nudged by other Humans. Sometimes massive social changes, in markets and politics alike, start with a small social nudge. Humans are not exactly lemmings, but they are easily influenced by the statements and deeds of others.
For a quick glance at the power of social nudges, consider just a few research findings:
Examples of human conforming to peers.
The bottom line is that Humans are easily nudged by other Humans. Why? One reason is that we like to conform.
