Thursday, December 4, 2008

Nudge by Cass Sunstein and Richard Thaler

I have been at odds with the formal study of economics for some time, especially when applied to individual human behavior. In my college microeconomics courses I was taught that human beings have fixed interests; they always maximize utility, respond to incentives properly, and make rational choices. I found microeconomic theories useful for explaining behavior in the abstract, but they didn’t help me make sense of reality as I experienced it. What about sacrifice? What about thoughtless actions, or irrationality? Why do so many people make choices that are not in their best interest, even when they are aware of the risks, costs, and alternatives?

Now, after a few years of disillusionment with the field, Richard Thaler and Cass Sunstein have gently re-humanized economics in their recently published book Nudge. Sunstein and Thaler offer a fresh perspective, informed by law, behavioral economics, psychology, and political science, about how private institutions and government can “nudge” people toward choices that will make them healthier, wealthier, and happier. This book is the Freakonomics of behavioral economics. Further, the authors include plenty of repartee and interesting factoids (like neck-ties were originally used as napkins!) alongside high-quality and compelling analysis.

Sunstein and Thaler spend the first part of the book breaking down the “economic man” model of understanding human behavior. They are constantly differentiating between how rational “econs” are expected to act versus how humans behave in reality. In making their point, they state:

"If you look at economics textbooks you will learn that the economic man can think like Albert Einstein, store as much memory as IBM’s Big Blue, and exercise the willpower of Mahatma Gandhi. Really. But the folks we know are not like that. Real people have trouble with long division, forget their spouse’s birthday, and have a hangover on New Year’s day (pp. 6)."

Thaler and Sunstein call themselves libertarian paternalists, or choice architects. They in no way seek to limit peoples’ choices, but instead hope to merely nudge people toward choices that are more in their best interest, as judged by themselves. The way choices are presented to people can drastically change their behavior, and by thinking creatively about choice architecture, libertarian paternalists can help people move in directions that will improve their lives.

A great example of what they call a nudge comes from a high school cafeteria. In this case, a school official realized that, by simply re-arranging the order of the food in the lunch line and which items were at eye level, she could drastically change the nutritional quality of kids’ meal choices. While these kids faced no less choice, the context in which they made their choices changed and thus so did their behavior. It is these types of nudges that Sunstein and Thaler find so promising, the minor shifts in social situations that have the power to greatly alter peoples’ behavior.

They offer several different types of nudges that can be employed by private and public institutions to help people make better choices, here are a few examples:

1) Utilize Defaults and Status Quo: Padding the Path of Least Resistance
They show that people, on average, avoid making difficult choices by consistently sticking with the default or status quo. Typically, if people do nothing, then nothing changes. However, by structuring default options differently, such as automatically enrolling employees in a sensible health insurance or 401(k) plan unless they opt-out, leaders can drastically change peoples’ well-being.

2) Provide Feedback
The best way to help people increase their performance is by giving them consistent feedback. One case of creative feedback comes from slightly changing the presentation of customers’ energy bills. In this case, people consuming above average amounts of energy received a frowny emoticon on their energy bill, whereas people using below average amounts were rewarded with a happy emoticon. Those who received negative visual feedback drastically cut their energy usage over the next three months, whereas low users maintained their rates. Even though economic or environmental incentives didn’t change for these consumers, a simple emoticon feedback tool affected their behavior and the environment at large.

3) Understand “Mappings”: From Choice to Welfare
Simply put, this means making information about various options more comprehensible. Sunstein and Thaler examine how this could impact education in America. They found that, when information about school performance was made more comprehensible and relevant to low-income parents, those parents overwhelmingly chose to put their children in better schools. School choice by itself is not enough, people must be nudged with well-mapped information for them to make optimal school choices.

There are many other forms of nudging that Sunstein and Thaler articulate, but the main point they make is this:

"The sheer complexity of modern life, and the astounding pace of technological and global change, undermine arguments for rigid government mandates or dogmatic laissez-faire. Emerging developments should strengthen, at once, the principled commitment to freedom of choice and the case for a gentle nudge (pp. 253)."

Nudge helps us move beyond the “economic man” model and realize that humans are fallible (and often predictable) creatures. By understanding and utilizing patterns of human behavior, governmental and private actors can help people make more optimal choices for themselves and the world around them.

1 comment:

Ali said...

What an enticing way to start an entry!