Authors: Richard Thaler, Cass Sunstein
Nudge: Improving Decisions About Health, Wealth, and Happiness Richard H. Thaler, Cass Sunstein 2008
Socialism or free market? What is there to discuss? (Nudge)
Authors: Richard Thaler, Cass Sunstein
Nudge: “Nudge. Choice architecture. How to Improve Our Decisions about Health, Wealth and Happiness” is a rethinking of the role of the state in the life of society in general and of each individual in particular. The authors try to avoid the concept of ” socialism” and note that they are “for free choice”, that is, a market economy. Therefore, they call the proposed algorithm for adjusting the architecture of choice (and state policy) “libertarian paternalism”, as if emphasizing that some decisions are made for us (paternalism), but in general, without imposing – freedom of choice remains with us . The personification of this is the word nudge in the name, which means “easy to push with your elbow”, “suggest”, and “encourage”.
An example of how choice architecture works: the order in which food is placed in a school cafeteria directly affects what children put on their plates. One sequence encourages them to eat healthier, the other, on the contrary, allows them to carelessly stuff their stomachs with sugar and fat. Libertarian paternalism is looking for cases where the design of the choice influences a person’s behavior and pushes him to such actions that actually correspond to his own interests.
Why is this topic so relevant? Recall that Richard Thaler received the Nobel Prize, and in the UK and the US, after the publication of the book, government centers 1 were created to analyze public policy and offer to improve its quality in accordance with the ideas of libertarian paternalism. Attention to the architecture of choice, that is, the adjustment of seemingly secondary issues, is due to the fact that other tools for improving the quality of public administration and, consequently, economic growth have been largely exhausted in developed countries.
Optimizing the choice architecture reduces transaction costs for economic actors and pushes them toward optimal behavior—both in terms of their own interests and society. (By the way, many of the techniques of libertarian paternalism are used by companies when they manipulate our behavior in stores, etc.) Of course, when discussing the architecture of choice, the topic of excessive paternalism that was in the socialist system pops up. After all, we are accustomed to perceiving economic policy in terms of two poles – socialism and the free market. But it seems that such a system of coordinates does not help to improve the quality of public administration in the 21st century.
The view of economics and economic policy proposed in the book is relevant not only to behavioral but also to institutional economics. The latter is emphasized by the tandem of authors: Richard Thaler is an economist, and Cass Sunstein is a lawyer. It was from jurisprudence in the first half of the 20th century that specialists moved into economics, laying the foundations of the institutional approach. They were well aware of the extent to which the rules imposed by law affect the behavior of economic entities.
What is the difference between a human being and a homo economicus?
The main argument in favor of libertarian paternalism, that is, a conscious adjustment of the architecture of choice is that an ordinary person is significantly different from the rational one described in the economic literature and always makes the most optimal choice of homo economicus. All behavioral economics is based on this discovery. Behavioral economics comes from the fact that a person has two systems of thought:
- the first 2 are fast, reactive, associative, and based on habits;
- the second 3 are slow, conscious, analytical, and take into account the rules.
In everyday life, we make many decisions by resorting to the first, reactive system. This saves time, but it also ends up being biased, biased, and making mistakes. Based on the first system of thinking, we misjudge dangers and risks (overestimate the likelihood of such rare but high-profile events as terrorist attacks, and underestimate such mundane things as problems with the cardiovascular system). We are overly optimistic (ask any driver how much better they are than the average… and you will realize that every first one is a super racer). We dislike losing to the extent that it prevents us from realistically assessing the situation and acting.We are also lazy and prefer to maintain the status quo (for example, we can pay monthly to Netflix even though we don’t remember the last time we watched House of Cards).
Another feature of a real person: it is difficult to resist temptation. This applies to everything from dieting to saving money for a rainy day. After all, system 2 plans to follow the diet, and system 1 cannot pass by every first dessert. Therefore, we sometimes come up with cunning tricks. One of them is “mental accounting” (as the phenomenon was called by economists who study behavioral economics). As part of mental accounting, we layout money in conditional envelopes – for transport, for mortgages, for food, for movies – and consider them non-fungible. If in the first week all the money was spent on the cinema, then in the remaining three we will not go to the cinema with the money that is for the mortgage.
Human beings are very social creatures: smiles are contagious, we care what our neighbor thinks, we easily agree to do what most people do, etc. If we have told someone about our intention to do something, the probability that we let’s do it rises. And it is this feature that the authors propose to use when developing the architecture of choice and influence the social behavior of the population.
In what situations are a well-thought-out architecture of choice and easy pushing a person to the optimal solution necessary? When it comes to decisions:
- which we rarely take (several times in a lifetime), but they have serious consequences;
- when the feedback from the decision is not instantaneous;
- when it is difficult to understand the issue and understand what is in our interests.
This group includes the purchase of real estate and saving money for old age, and the consumption of alcohol, cigarettes, etc.
There are several factors to keep in mind when designing a choice architecture.
- Behavioral motives. This includes answering the questions: Who is using the product/service? who chooses? who pays? who gets the profit?
When a doctor prescribes a medicine, the insurance company pays for his services, and the patient takes the medicine, there is a conflict of interest and the optimal choice is not always possible.Nudge
- The need for a mapping scheme (or any other visual infographic method of presenting information). To ensure the best choice, you need a clear map of what to choose from and how the different options are related to each other.
It is difficult to compare similar financial services of banks, but if you attach a simple and understandable table to them, the probability of error is reduced.Nudge
- Default option. Most users do not make any choice but use the default option. Therefore, it should correspond to the interests of users as much as possible.
- The need for feedback.
- Waiting for user error. Choice architecture should be lenient with user error and designed with it in mind.
- The need for a complex choice structure to make it easier to understand and make the right decision. A difficult choice should be structured to make it easier to make the right decision.
Postponing for old age is quite difficult – it always seems that you can start doing it tomorrow. Especially in countries with voluntary social contributions.
In the US, many people are not interested in this issue and do not sign even the most beneficial 401(k) retirement plan. It is quite simple to change this situation: the employer can actively offer employees (for example, when hiring) to sign this pension agreement, to conduct financial literacy training.Nudge
For Russia, this issue does not yet seem so relevant, but the ignorance by the broad masses of the instruments of “optional” pension insurance is also largely due to the forgetfulness and inconvenience of registering it.
Even if a person has started saving money and investing capital, he often does the latter very naively and suboptimally.
It is difficult to choose between stocks and bonds: split the available capital into 70% and 30%, respectively, or choose a different proportion? But how to choose between products that contain a mix of different stocks and / or bonds? It is difficult to make a decision, because a person behind the daily fluctuations in the value of securities does not see a trend for several decades. As a result, he abandons strongly “fluctuating” securities in favor of, as it seems to him, more reliable ones (and this is far from always the case). Often the herd instinct works: they invest in what is in trend (for example, technology companies were especially actively invested before the dot-com crisis of 2001). The instinct to diversify is also strong: because of it, people tend to use all available opportunities (if you can invest in two funds, then most will invest 50/50), but this is also not always the optimal solution. Another mistake is to invest too much in the shares of the company in which you work: if it goes bankrupt, you can lose both your job and your savings.Nudge
Therefore, in matters of investing and saving for a rainy day, the architecture of choice is very important: the financial instruments offered must be clear (for example, how much will be saved by 2030, 2040, or 2050), and default options are developed, and complex decisions are structured (solutions for those who do not want to understand the issue at all, solutions for those who want to think a little bit, and for those who want to make all decisions on their own). Credit is also an area that lacks a smart choice architecture.
Studies show that in the United States, mortgage loans for less educated segments of the population, all other things being equal, were more expensive, since it is the poorly educated people who are easily misled and it is difficult for them to understand a pile of papers, to compare lending conditions of different banks. A similar situation is observed in the case of student loans for education.Nudge
The authors propose not only to facilitate the selection and comparison of offers but also to simplify the processing of state aid for the poor and encourage parents to start saving for the education of their children in advance. The authors also propose to revise the architecture for credit cards, because a rare user understands how much bank services cost him.
In 2000, Sweden reformed the pension system: the population was asked to choose in which financial instruments they want to invest part of their deductions. Richard Thaler and Cass Sunstein believe that the architecture of this project was sub-optimal from a citizens’ point of view. They were asked to choose from 500 funds themselves, and the advertisements of some of them could be misleading (as a rule, advertisements for financial instruments do not tell the whole story). In addition, at the time of the launch of the program, technology companies were at the peak, in whose shares many preferred to invest (and lost money as a result). Also, a disproportionate amount of money was invested in Swedish companies. The analysis of the first years showed that those who chose the default option (and this was a third of the citizens) turned out to be right: the basket formed by the experts turned out to be more profitable, than the average of all other funds. It would be better if citizens were not actively pushed towards a completely independent choice, and also if more (several pieces) of options tested by experts were formed from which one could choose (rather than 500 funds).Nudge
Working on the architecture of medical choice can help save citizens’ health and money. Thaler and Sunstein give several examples: Medicare drug coverage (Part D), organ donation, and the issue of environmental protection.
Medicare Part D was introduced in 2006 as an integral and voluntary part of Medicare (Medicare is health insurance for people over age 65 in the United States). Anyone subscribed to mainstream Medicare could choose from dozens of drug insurance plans. According to the researchers, with the right choice, the savings could be up to $ 700 per year. For all but the most needy, participation was voluntary, while those in need – if they did not make their own choice – were automatically assigned randomly to one of the plans. Thaler and Sunstein criticize the model because it was difficult to choose (older people take a lot of drugs, and finding the best plan was not a trivial task), about 10% of those who could enrollNudge
Organ donation: countries are divided into those where the consent of a person is required for the use of his organs after death and those where, on the contrary, by default, all donors and a declaration of desire are required in order not to be a donor.
The United States falls into the first category, and although many people support organ donation, but only a small number indicate this in documents, the result is a shortage of donor organs. Thaler and Sunstein propose to simplify the consent process: for example, when obtaining a driver’s license, the requirement to check “yes” or “no” in front of the donation box should be mandatory.Nudge
On the issue of protecting the environment, that is, reducing emissions and energy consumption, Thaler and Sunstein offer several courses of action. They advocate trading certificates for firms (you can buy emissions). But in parallel, they also offer to influence behavior through feedback (for example, indicate the amount of consumption and money spent on heating regulators) or more actively inform the population and agitate for unpopular but effective measures, such as raising taxes on gasoline.
A good education is a guarantee of freedom in modern society, in choosing a profession, place of residence, etc. Therefore, in many countries, there is a desire to ensure equal access to education. The United States is no exception, but the algorithms for placing children in public schools in the United States are suboptimal.
Children from low-income families in the United States are more likely to end up in less than the best schools (usually the reason is banal: their parents cannot understand which of the available schools is better because the information is presented incomprehensibly). Also, even with the opportunity to change schools, parents are more likely to be persuaded by the administration not to do so; A complex bureaucracy also contributes to maintaining the status quo. Children from low-income families again refuse to go to college because they do not understand how significant the difference in future salaries can be, and because of the inability to obtain state support, take a student loan, etc. All these problems can be solved with the help of correct architecture of choice. Studies show that if low-income parents and children received all the necessary information in an understandable form, then a significant part of both changed schools to better ones,Nudge
Thaler and Sunstein believe that Americans, when they take out health insurance or simply pay for medical services, also buy the right to sue doctors for negligence and mistakes. This right cost them dearly. At the same time, for the majority, this is, in fact, buying a very expensive lottery ticket, because only a small part of patients sue for negligence and medical errors and win (the majority do not do this, they are satisfied with the doctor’s apology – studies show this). With this in mind, some states are already taking steps to limit litigation: the state of California has limited the amount that can be sued for non-pecuniary damage in the event of medical malpractice. So Thaler and Sunstein are proposing to enable people to buy the insurance and medical services with and without the right to sue.
Another area that needs to be reformed is the institution of marriage, or rather, that part of it that is before the state. The authors propose to leave the right to marry churches and other non-governmental organizations on conditions that correspond to their ideas about life and the mutual obligations of those who marry. The state, on the other hand, should take care of protecting the most vulnerable – children and women: in the event of a divorce, the behavior of both parties entering into a marriage should be thought out in advance. The authors propose to intervene in the architecture of choice upon dissolution of marriage. With a divorce rate of 50%, “standard” cases of separation of property and obligations can be prescribed. This will make the divorce process easier. This arrangement of marriages will equalize all forms of cohabitation,
Top 10 Ideas
1. State institutions are not neutral, they set the architecture of choice. Therefore, it is important to understand what the choice of an ordinary person will be, taking into account his distorted worldview (he is not homo economicus).
2. The state can set conditions for companies (banks, mobile operators, etc.) to reduce the likelihood of concluding contracts that are unfavorable for citizens due to the fact that they could not understand the bureaucratic intricacies.
3. Attention to the architecture of choice will improve the welfare of the poor.
4. Particular attention in the development of choice architecture should be given to the default option since it is often chosen (the average person is lazy, careless, and tends to postpone important decisions until tomorrow).
5. When creating a choice architecture, you need to remember the motives of the behavior of the subjects (who uses the product/service? who chooses? who pays? who makes a profit?).
6. In order for people to make the right choice, they need a map for orientation (options, how they differ, etc.).
7. The created architecture should contain feedback so that people can correct their actions, understanding what depended on what.
8. Choice architecture should be designed with the understanding that Users will make mistakes.
9. Complex choices should be structured to make it easier to understand and make the right decision.
10. The architecture of choice is especially important when it comes to decisions that are rarely made (education, marriage, real estate) and when getting feedback is difficult or time-consuming.
1 In the US, this center was closed with the advent of Donald Trump, while in the UK it operates as an independent consulting center
2 More details can be found in the summary of the book “The New Behavioral Economics. Why do people break the rules of the traditional economy?
3 You can read more about them in our summary of Daniel Kahneman’s book Think Slowly. Decide fast”.