At the end of a previous post, Stories from Strapped: Debt, I asked,
How do you make people do the right thing for themselves?
This new book Nudge, by University of Chicago professors Richard Thaler and Cass Sunstein, addresses exactly that question. Here’s a 8-minute video of the authors talking about this book.
I find several concepts introduced in the book very insightful.
1. Econs and Humans. Econs are what I studied in economics in school. These people have a multi-dimensional utility curve for everything. They enter all known variables into their utility function. They assign probability distributions for uncertainties. They choose a course of action which maximizes their expected utility. Humans are not Econs. They can’t do complex calculations. They are influenced by all kinds of biases. Their decisions are not optimal. People in real life are Humans, not Econs.
2. Choice Architecture. A choice architecture is a configuration for how the choices are presented, for example, which choice is presented as the default, or whether the long-term costs are disclosed in the same way as the short-term benefits. Econs are not influenced by the choice architecture because they are able to evaluate all known and unknown variables. Humans are heavily influenced by the choice architecture.
3. Nudge. A nudge is a carefully defined choice architecture which gently pushes people toward a decision that will benefit them while preserving the full choices for people who wish to go their own way. Humans usually make good decisions for themselves but they have difficulty evaluating the choices in some situations. A nudge will help them while it doesn’t take away anything from people who make up their own mind. The authors call this libertarian paternalism.
After presenting the case for nudging, the authors gave many examples for how it may be used in helping people save more for their retirement, select the right Medicare prescription coverage plan, sign up for organ donation, etc. etc. The examples make a lot of sense.
While I was reading this book, I realized how naive I am sometimes. I tend to over-analyze things and not take into account the Human factor. In a previous post I raised the possibility of people picking banks or credit unions by evaluating the different features and voting with their wallet. That’s pretty far from reality. The whole marketing and advertising industry works on human behavioral biases. If people were Econs and not Humans, we wouldn’t have this much marketing and advertising.
I think this is a good book. It makes you recognize some of your own biases and think about ways to nudge yourself into overcoming those biases.
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charter helicopters says
I know when it came to the bank I chose I was lucky to have had an account in a local credit union my whole life. Not only was I used to not paying any monthly fees they knew me and my family by name. When I opened a business I had to have a “big bank” to take care of some of the IRS withholdings and such but even then I shopped around and got a bank that charges me no fees. I call that the “Lucky Human” approach that later revaluated by “Econ”ing.
I also believe parents are to blame for not jump starting their kids into thinking about the long term. Heck, my 5 year old is already putting money away for his first car. I think it’s good to start with the end in mind.
Keep up the great posts.