Nudge: The Final Edition

by Richard H. Thaler

In the language of this book, anchors serve as nudges. One example comes from tipping behavior in taxicabs. Taxi drivers were initially reluctant to adopt the technology to accept credit cards in their cabs, because the credit card companies take a cut of roughly 3 percent. But those who did install the technology were pleasantly surprised to learn that their tips increased! This was partly due to some anchoring. When customers elected to use their card to pay, they would often be confronted with tip options that looked something like this: 15% 20% 25% Choose your own amount. Notice this screen is nudging people toward higher tips by offering precalculated amounts that start at these percentages. (And when in doubt, people often choose the middle option—in this case 20 percent, which is higher than the 15 percent many customers previously chose without this intervention.) Also, the option to choose your own tip is a bit of an illusion. The screen appears only when the trip is over; the customer is ready to leave, others may be waiting to get into the cab, and entering one’s own

the best defaults would be from the perspective of the driver. This is shown in a careful study by behavioral economist Kareem Haggag. Haggag was able to compare the tips from two cab companies, one of which offered 15, 20, and 25 percent tip suggestions, whereas the other had defaults of 20, 25, and 30 percent. On balance, the screen with the relatively higher default tips significantly increased drivers’ earnings, because they increased the average tip. But interestingly, they also provoked an increase in the number of riders who offered no tip at all. Some people were evidently put off by the aggressive defaults, and they refused to give anything.3 This is connected with the behavioral phenomenon of reactance: when people feel ordered around, they might get mad and do the opposite of what is being ordered (or even suggested).

Before the start of Thaler’s class in managerial decision making, students fill out an anonymous survey on the course website. One of the questions is “In which decile do you expect to fall in the distribution of grades in this class?” Students can check the top 10 percent, the second 10 percent, and so forth. Since these are MBA students, they are presumably well aware that in any distribution, half the population will be in the top 50 percent and half in the bottom. And only 10 percent of the class can, in fact, end up in the top decile. Nevertheless, the results of this survey reveal a high degree of unrealistic optimism about performance in the class. Typically less than 5 percent of the class expects their performance to be below the median (the 50th percentile) and more than half the class expects to perform in one of the top two deciles. Invariably, the largest group of students put themselves in the second decile. We think this is most likely explained by modesty. They really think they will end up in the top decile but are too modest to say so.

when the stakes are high. In the United States, about 40 to 50 percent of marriages end in divorce, and this is a statistic most people have heard. (The precise number is hard to nail down.) But around the time of the ceremony, almost all couples have been found to believe that there is approximately a zero percent chance that their marriage will end in divorce—even those who have already been divorced!9

Roughly speaking, the prospect of losing something makes you twice as miserable as the prospect of gaining the same thing makes you happy. How do we know this?

Consider a simple experiment.12 Half the students in a class are given a coffee mug with the insignia of their home university embossed on it. The students who do not get a mug are asked to examine their neighbors’ mugs. Then mug owners are invited to sell their mugs and nonowners are invited to buy them. They do so by answering this question: “At each of the following prices, indicate whether you would be willing to (give up your mug/buy a mug).” The results show that those with mugs demand roughly twice as much to give them up as others are willing to pay to get one.

have been used in dozens of replications of this experiment, but the results are nearly always the same. Once you have a mug, you don’t want to give it up. But if you don’t have one, you don’t feel an urgent need to buy one. What this means is that people do not assign specifi...

To see how intuitive thinking works, try the following little test. For each of the three questions, begin by writing down the first answer that comes to your mind. Then pause to reflect. A bat and ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost? You are one of three runners in a race. At the end, you overtake the runner who was in second place. In what place did you finish? Mary’s mother had four children. The youngest three are named: Spring, Summer, and Autumn. What is the eldest child’s name?

At some point they called off their bet, but Karlan went on to help create a company called Stickk.com that facilitates similar friendly commitments. The

What Salganik and his coauthors found was an “informational cascade,” which occurs when

people receive information from the choices of others. Suppose that there is a group of eight people, deciding whom to hire for a new position in a small business. The three candidates are Adam, Barbara, and Charles. If the first speaker says that Adam is clearly best, the second might agree, not because she prefers Adam, but because she trusts the first speaker and it is not clear that he is wrong. Once the first two speakers have spoken in favor of Adam, they have created a strong nudge on his behalf, and the third speaker might simply go along. The fourth speaker, and those who follow, might agree too, at least if they do not feel strongly; they are in a cascade. The

guests to save the environment by reusing their towels wasn’t as effective as a message communicating a social norm: “Join your fellow guests in helping to save the environment. Almost 75 percent of guests … help by using their towels more than once.”

The Design of Everyday Things, illustrates.

All these forces imply that if, for a given choice, there is a default option—an option that will prevail if the chooser does nothing—then we can usually expect a large number of people to end up with that option, whether or not it is good for them.

Often, however, people are their own choice architects; they even nudge themselves. A self-nudge can be called a “snudge,” and for most of us, life can be improved via well-chosen snudges. People might limit the amount of food in their refrigerators; they put some money they don’t want to spend into a one-year certificate of deposit that has a penalty for early withdrawal; they might delete Facebook or Twitter from their smartphones; they might program their computer so that they cannot receive email during certain hours. People work

to counteract their own self-control problems, often by redesigning the architecture within which they make choices—for example, by making certain options harder or less fun, or by eliminating them together.

The moral here is simple. Make it fun. And if you don’t know what fun is, then you are not having enough of it.