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Of course, this principle has an obvious corollary: if you want to discourage some behavior, make it harder by creating barriers.
Some choice architects intentionally impose sludge, inserting friction into a process in order to achieve goals of their own. Making it hard to cancel a membership or a subscription is an example. Making it hard for poor people to vote, qualify for job training, or get contraceptives is another.
Other types of sludge are the inevitable by-product of a well-intended administrative process, designed to ensure that people actually qualify for or are entitled to something they want.
The problem, as we see it, is not with the automatic renewals per se. Those can, in fact, reduce sludge.
The sludge comes in when the procedures for subscribing and unsubscribing significantly differ. Why can you subscribe just by entering your credit card but have to call long-distance to unsubscribe?
The way price discrimination usually works is that in order to get the lower price, the consumer has to do something, such as book early or take a flight at an inconvenient time.
In the case of rebates, the hurdle consists of the sludge involved in redeeming the coupon. The amount of sludge involved can be considerable.
In an experimental study, the authors found that people were unrealistically optimistic about the likelihood that they would jump through all the necessary hoops.
King C. Gillette, the founder of the razor company bearing his name, is said to have invented the marketing strategy of giving away the razor and making the money on the blades.
The headline price of the good understates the true cost to the user because the shrouded attributes, and their costs, are hard to discover.
There is a more general point linking the three examples—the subscription trap, rebates, and shrouded attributes—we have discussed here. All these strategies have at their core the goal of making pricing less transparent.
As customers, we prefer to deal with businesses that post their prices and don’t offer lower prices just to those who complain. That is also the way we would choose to run a business.
“Spend company money as if it were your own.” In practice this means book the flights and hotels that you think are reasonable, and if you are in doubt ask your manager.
Some expenses may increase with freedom. But the costs from overspending are not nearly as high as the gains that freedom provides. With expense freedom, employees will be able to make quick decisions to spend money in ways that help the business.
Hastings was trying to find a balance between “do anything you want” and “spend needless hours of your time and others’ asking and getting permission.” This balance is a type of cost-benefit analysis. Sludge should be included on the cost side of the ledger.
The evaluation of any rule must include all the costs and benefits that the rule creates, emphatically including time. Using technology to reduce or eliminate sludge can greatly expand the range of possible policy alternatives.
In many cases, sludge operates as a wall, and people cannot find a way to get over it. As a result, they are blocked from getting permits, licenses, money, health care, or some other kind of right or assistance.
One successful innovation to reduce the amount of waiting-time sludge has been the introduction of the government’s Global Entry and TSA PreCheck programs, which allow millions of regular airline passengers to go through the process more quickly.
The study also found that only 0.1 percent of users would freely consent to be tracked by third parties if websites offered them a genuine informed opt-in choice. This is sludge, not nudge. As we write this, the EU is considering reforms.
The factors economists emphasize most are: incentives (how taxes alter behavior), equity (how much each person should pay), incidence (who actually pays for a particular tax), and compliance (to what extent people pay what they legally owe). All of these are obviously important, but to that list we would like to add sludge: how much time and effort is spent either complying with or evading a given tax.
In Sweden, 80 percent of taxpayers file their tax returns in a matter of minutes, free of charge, using only their cell phones.
One of the problems is that whereas everyone is in favor of the principle of making the tax code simpler, groups organize to oppose getting rid of the particular tax breaks from which they benefit.
Wage income is reported to the IRS by employers, and investment income is reported by banks and investment firms. The agency already knows how to compute tax bills because when you file your taxes, its computer programs check to see that your calculations match theirs.
The jobs of toll booth collectors are reduced or eliminated, and their unions can be expected to oppose the change. Privacy advocates worry about those cameras. More generally, especially when compared to the private sector, governments are not well suited to disruption.
Only recently did the combination of rising life expectancy and geographical dispersion of families make it necessary for people to think about providing for their own retirement income rather than depending on their children.
Early private pension plans tended to be what are called “defined-benefit” plans, so named because the promises made to workers are about the payments, or benefits, they will receive when they retire.
From the perspective of choice architecture, defined-benefit plans have an important virtue: they are forgiving to even the most mindless of Humans.
a new type of employer-based retirement plan was created in 1980 (oddly called 401(k) plans after the section of the law that made them possible),
The term defined contribution comes from the fact that the plans stipulate only how much employers and their employees contribute (invest) into a tax-sheltered account in the employee’s name.
They are also customizable, giving employees the opportunity to adjust their savings and investment decisions to reflect their own financial situation and risk preferences. However, that ability to control one’s own destiny comes with the responsibility to make good choices.
We interpret the statement “I should be saving [or dieting, or exercising] more” to imply that people would be favorably disposed to strategies that offer to help them achieve these goals. In other words, they are open to being nudged. They might even be grateful.
The Save More Tomorrow plan invites participants to commit themselves, in advance, to a series of contribution increases timed to coincide with pay raises. By synchronizing pay raises and savings increases, participants never see their take-home amounts go down, so they don’t view their increased retirement contributions as losses.
the Save More Tomorrow program has been simplified and has become known as automatic escalation: savings rates are automatically increased annually, usually by 1 percent per year.
Throughout the history of defined-contribution retirement plans, investors have shown an uncanny ability to mistime their investment decisions. They end up seeming to be following a policy of buying high and selling low—not a good pattern.
Sweden has a very generous social safety net, and retirement savings are no exception. The social security tax rate is 16 percent of income. Participation is mandatory and it is mostly a defined-benefit plan. The reform we are discussing here was to carve out a portion of that tax to create individual defined-contribution accounts in what they called the Swedish Premium Pension Plan.
The Swedish experience illustrates the power of inertia at several levels. Citizens who were nudged by the government and advertisements to become their own portfolio managers steadfastly stuck with that approach, but then they became highly passive.
Just as you should regularly reboot your computer, we think it is healthy for investors to be encouraged occasionally (once every twenty years does not seem too often) just to start over. Ideally, they would do so without being reminded of what they currently own. (There are no taxes or transaction costs involved in switching.)
widespread access to consumer credit began in the 1920s, when it became common for merchants to offer consumers the opportunity to buy appliances, automobiles, and other big-ticket items on an installment plan.
The Great Depression of the 1930s came as a shock to those who lost their jobs and then had their appliances removed from their homes.
we make a distinction we find useful in thinking about consumer decision-making in general, namely whether the most important aspect of the consumer experience depends on the process of choosing or using.
With this distinction in mind, our discussion of mortgages will focus on how we can help people make better selections, whereas with credit cards we will concentrate on helping people become smarter users.
Once upon a time, shopping for a mortgage was pretty easy. Most mortgages had a fixed rate for the life of the loan, which in the United States was typically thirty years. Most borrowers provided at least a 20 percent down payment.
Mortgage shopping has now become much more complicated. Borrowers can choose from a variety of fixed-rate loans (for which the interest rate does not change over the life of the loan), as well as numerous variable-rate loans, in which the interest rate can vary according to a formula tied to specific bond markets.
competition does not assure that the best or cheapest products win the race for customers. In fact, providers might have a lot of freedom to exploit people’s limited attention, and those who play it straight may lose out to less-scrupulous competition.
One possible solution to the complexity problem is to have expert advisers provide help. Indeed, in many complex markets, careers emerge to provide specialized help such as that offered by financial planners and real estate brokers.
there are honest and knowledgeable experts in most complex domains, but for unsophisticated buyers, the very opacity of a market that creates a demand for expertise makes it difficult to evaluate the value of the advice they offer.
When markets get more complicated, unsophisticated and less-educated shoppers will be especially disadvantaged by the complexity. The unsophisticated shoppers are also more likely to be given bad or self-interested advice by people serving in roles that appear to be helpful and purely advisory.
In this setup, borrowers who are shopping for a loan and are willing to restrict their choices to EZ loans would just have to decide whether they wanted a fixed- or variable-rate mortgage, and whether they want a fifteen- or thirty-year term.
The solution is to make all the details available in a structured electronic format, continually updated in an online database we will call the Mortgage File.
One final advantage of the online shopping we are trying to encourage: it is especially likely to help women and minority groups.
