Nudge: Improving Decisions About Health, Wealth, and Happiness

by Richard H. Thaler

When markets get more complicated, unsophisticated and uneducated shoppers will be especially disadvantaged by the complexity.

A study of automobile shopping found that women and African-Americans pay about the same amount as white males when they buy a car online, but at the dealership they pay more, even after you account for other factors, such as income.

Car prices for womenn and black people.

Another possibility would be to help families avoid loans altogether, or at least reduce the need for such loans, by helping them start saving for college earlier via college savings accounts

We have covered a number of topics in this chapter, but the unifying message is simple. For mortgages, school loans, and credit cards, life is far more complicated than it needs to be, and people can be exploited. Often it’s best to ask people to take care of themselves, but when people borrow, standard human frailties can lead to serious hardship and even disaster. Here as elsewhere, government should respect freedom of choice; but with a few improvements in choice architecture, people would be far less likely to choose badly.

As we saw in Chapter 8, individual investors tend to be trend followers, rather than good forecasters, in their asset-allocation decisions.

The more choices you give people, the more help you need to provide.

Social influences could obviously be enlisted: if most people think that most people are starting to avoid unhealthy foods, or to exercise, more people will avoid unhealthy foods and will exercise.

Framing matters: people are more likely to engage in self-examinations for skin and breast cancer if they are told not about the reduced risk if they do so but about the increased risk if they fail to do so.

In complex situations, the Just Maximize Choices mantra is not enough to create good policy. The more choices there are, and the more complex the situation, the more important it is to have enlightened choice architecture. To produce a user-friendly design, the architect needs to understand how to help Humans. Software and building engineers live by a time-honored slogan: keep it simple.

The effect on consent rates is enormous. To get a sense of the power of the default rule, consider the difference in consent rates between two similar countries, Austria and Germany. In Germany, which uses an opt-in system, only 12 percent of the citizens gave their consent, whereas in Austria, nearly everyone (99 percent) did.

Recall that people like to do what most people think it is right to do; recall too that people like to do what most people actually do. The state is enlisting existing norms in the direction of lifesaving choices—and doing so without coercing anyone. Third, there are links to MySpace, where people can signal that they are concerned citizens. In the context of environmental protection, people often do what they believe is right in part because they know that other people will actually see them doing what they believe is right. The same might well be true for organ donations.

(that is, harms) on those who breathe or drink. Even libertarians tend to agree that when externalities are present, markets alone do not achieve the best outcomes.

If you engage in environmentally costly behavior next year, through your consumption choices, you will probably pay nothing for the environmental harms that you inflict. This is what is often called a “tragedy of the commons.”

The second problem that contributes to excessive pollution is that people do not get feedback on the environmental consequences of their actions.

When incentives are badly aligned, it is appropriate for government to try to fix the problem by realigning them.

The first is to impose taxes or penalties on those who pollute.

As Thompson notes, the underlying problem is that energy is invisible, so people do not know when they are using a lot of it. The genius of the Orb is that it makes energy use visible.

One of the EPA’s major goals has been to show that energy efficiency is not merely good for the environment; it produces significant savings as well. But from the standpoint of standard economic theory, no such savings should be predicted. Here’s why. If companies could actually save money while protecting the environment, they would already have done that. In a market economy, firms should not need the government’s help to cut their own costs. Competitive pressures should ensure that those that don’t cut costs soon find themselves losing money—and out of the market. In practice, however, things don’t always turn out this way. Managers in firms are busy and can’t pay attention to everything. To implement some change, someone

Whether or not governments choose some kind of incentive-based system, they can help to reduce energy use, and thus reduce greenhouse gas emissions, with a nudge. Public officials are often ignorant, to be sure, but sometimes they have useful information, and companies can literally profit from it. As a result, they can both do good and do well.

Milton Friedman. His argument is a simple one: the best way to improve our children’s schools is to introduce competition. If schools compete, kids win. And if schools compete, those who are the least advantaged have the most to gain. Wealthy families already have “school choice,” because they can send their children to private schools. If we give parents vouchers to send their children to any school they want, then we will put children from poor families more nearly on a par with their more privileged middle- and upper-class counterparts.

The evidence suggests that while choice programs are hardly a panacea, they can indeed improve student performance. Carolyn Hoxby, a leading economist who has analyzed both voucher and charter school programs, finds that when facing competition, public schools produce higher student achievement per dollar spent.

Even though the results suggest that school choice can and does help, we believe that the results could be significantly enhanced by helping parents make better choices on behalf of their children.

The trick is to promote actual freedom—not just by giving people lots of choices (though that can help) but also by putting people in a good position to choose what would be best for their children.

The major problem, and our principal concern here, is that what is true for investments and prescription drugs is true for education as well: it is not enough to make lots of choices available and then hope parents choose wisely. School systems need to put parents in a position to think through their choices, and to exercise their freedom rather than to rely on the default option. Both parents and children need the right incentives.

The full costs of litigation actually include much more than judgments that are paid to plaintiffs and the costs of litigation—the “direct costs.” There are indirect costs as well, and patients must bear those costs too. For example, many doctors practice “defensive medicine,” ordering expensive but unnecessary treatments for patients, or refusing to provide risky but beneficial treatments, simply in order to avoid liability. Another indirect cost of liability—and an especially bad one—is that error reporting in hospitals and among physicians is discouraged.

In short, most patients who are harmed by medical malpractice do not get any compensation, and many patients who do receive compensation were not harmed at all or were not treated negligently.

In sum: when people marry, they receive not only material benefits but also a kind of official legitimacy, a stamp of approval, from the state.

Now that marriage is not a legal precondition for having either sex or children, the state’s licensing role seems less important.

As a matter of history, a primary reason for the official institution of marriage has been not to limit entry but to police exit—to make it difficult for people to abandon their commitments to one another.

Marriage might be seen, in part, as a solution to a self-control problem, in which people take steps to increase the likelihood that their relationship will endure. If divorce is difficult, then marriages are more likely to be stable. Marital stability is usually good for children (though children can also benefit from the end of a bad marriage). Marital stability can also be good for spouses, who may benefit from protection against impulsive or destructive decisions that are detrimental both to their relationships and to their long-term welfare.

Typically, a woman’s economic prospects fall after divorce, whereas the prospects of the man increase.

Essentially, the self-serving bias means that in difficult or important negotiations, we tend to think that both the objectively “fair” outcome and the most likely outcome is the one that is skewed in our own favor.

With respect to marriage, there are powerful arguments for privatization—for allowing private institutions, religious and otherwise, to do as they wish, subject to default rules and criminal prohibitions. We have argued that states should abolish “marriage” as such and rely on civil unions instead. If religious institutions want to restrict “marriage” to heterosexual couples, they should certainly be permitted to do exactly that. If such institutions want to limit divorce (that is, ending a “marriage”), they could do that too. The beauty of this proposal is that it would allow a wide range of experiments—increasing freedom for individuals and religious organizations alike while at the same time reducing the unnecessary and sometimes ugly intensity of current public debates.

So let’s go on record as saying that choice architects in all walks of life have incentives to nudge people in directions that benefit the architects (or their employers) rather than the users.

Not all nudges are good for the user.

As for information and educational campaigns, one of the main lessons from psychology is that it is impossible for such programs to be “neutral,” regardless of how scrupulously designers try to achieve that goal. So to put it simply, forcing people to choose is not always wise, and remaining neutral is not always possible.

Choosing is not always good. Neutrality not always possible.

A general objection to libertarian paternalism, and to certain kinds of nudges, might be that they are insidious—that they empower government to maneuver people in its preferred directions, and at the same time provide officials with excellent tools by which to accomplish that task.

To approach these problems we once again rely on one of our guiding principles: transparency. In this context we endorse what the philosopher John Rawls (1971) called the publicity principle. In its simplest form, the publicity principle bans government from selecting a policy that it would not be able or willing to defend publicly to its own citizens.

We tend to think that it is not—that manipulation of this kind is objectionable precisely because it is invisible and thus impossible to monitor.

Subliminal ads by the government.

Our basic conclusion is that the evaluation of nudges depends on their effects—on whether they hurt people or help them. Skeptics might argue that in some domains, it is best to avoid nudges altogether. But how can firms do that? It is not possible to avoid choice architecture, and in that sense it is not possible to avoid influencing people. We agree that in some cases, forced choosing is best. But often it is not feasible, and sometimes it is more trouble than it is worth. True, some kinds of nudges are not inevitable.

As we have seen, people are most likely to need nudges for decisions that are difficult, complex, and infrequent, and when they have poor feedback and few opportunities for learning.

So to summarize, when choices are fraught, when Nudgers have expertise, and when differences in individual preferences are either not important or can be easily estimated, then the potential for helpful nudging is high.

“asymmetric paternalism.”5 Their guiding principle is that we should design policies that help the least sophisticated people in society while imposing the smallest possible costs on the most sophisticated.

Asymmetric paternalists also endorse a class of regulations requiring “cooling-off periods.” The rationale is that in the heat of the moment, consumers might make ill-considered or improvident decisions.

For certain fundamental decisions, often made on impulse, a similar strategy might well be best. Some states impose a mandatory waiting period before a couple may get divorced.

We could easily imagine similar restrictions on the decision to marry, and some states have moved in this direction as well.

Note in this regard that mandatory cooling-off periods make best sense, and tend to be imposed, when two conditions are met: (a) people make the relevant decisions infrequently and therefore lack a great deal of experience, and (b) emotions are likely to be running high. These are the circumstances in which people are especially prone to making choices that they will regret.

Cool-off periods.

Besides putting the enthusiasm of greens to practical use, this fashion statement might also inject some realism into the debate about global warming. Once you start keeping track of all the energy you use, you begin to see the difficulties of making drastic reductions—and the difference between effective actions and ritual displays. Installing a solar-powered hot-water heater or a windmill at your place in the country is not going to erase the carbon footprint of maintaining and traveling to a second home. Recycling glass bottles and avoiding plastic bags at the grocery store will not offset your car’s emissions. Switching to a Prius will not undo the effects of frequent air travel. A couple of international trips can be worse for your carbon footprint than driving a Hummer for a year.

The answer to such questions would deserve a book of its own. But three of the features of human behavior discussed earlier have played particularly important roles: bounded rationality, limited self-control, and social influences.

Bounded rationality.

Self-control.