We all hate it when someone tells us what to do, even if “it’s for our own good.” But what if it is for our own good? We’ve all experienced or seen “penny wise, pound foolish” thinking and behavior. It’s easy and satisfying to save 50 cents on a can of green beans at Safeway, but it takes more effort to make sure your will is up to date and that you have enough life insurance. Humans have a stubborn habit of focusing on easy, salient, and low-stakes decisions, while overlooking the more effortful but important high-stakes decisions (like end-of-life planning and shopping for insurance). I’m definitely guilty of this. When my retirement funds needed tweaking, I told myself “You’ll make money either way.” This is clearly pound foolish thinking.
In the book Nudge, written by Richard Thaler and Cass Sunstein (2008), the authors want people to do things for their own good by setting up “nudges” so that default decisions are the optimal ones. They argue that every decision is nestled in “choice architecture”–essentially, how the choice is framed. The choice architecture of each decision nudges the decider into a more likely decision outcome. One example they give is organ donation. In many countries, the default option for organ donation is to donate. In the US, the most common default is “no donation.” What if we were to change the choice architecture so that the default is “donation” and those who don’t want to donate have to opt out? Organ donations would skyrocket and many lives would be saved. This still gives us Americans our “precious” freedom but improves the outcome.
Nudges go to the heart of the “homo economicus” vs. behavioral economics models of economic decision making. Man as “homo economicus” rationally makes a choice in an effort to maximize utility. The more realistic behavioral economics model says humans often don’t maximize utility because their “rational” behavior is colored by cognitive biases and sub-optimal heuristics. In short, we humans often make bad decisions even when the facts are all available.
The British government has gotten into the nudging act. Here is a list of things they have done to nudge people into “better” decisions (from New York Times):
Since the government switched pension plans from opt-in to opt-out at large companies, the proportion of employees with a workplace pension has risen to 83 percent from 63 percent.
The most effective question to nudge people to join the organ-donor register is: “If you needed an organ transplant, would you take one?” Scaled up to the whole population of Britain, this could add 96,000 extra organ-donor registrations a year.
Sending a letter to people who haven’t paid court fines gets a compliance rate of only about 5 percent. A personalized text message raises the amount they pay by more than 40 percent.
Simply asking people whether they want to leave money to charity when they are drafting their wills doubles legacy giving. First telling them that many people do leave money to charity, and asking what causes they care about, triples it.
Most of us set up nudges to help us do want we need to do but may not want to. I set up my tax appointment with my accountant as early as I can to nudge me to do my taxes ASAP. At night I put out my workout clothes to nudge me to go to the gym when I wake up. I keep the healthy food out on the counter and stow away the candy and chocolate. These nudges don’t determine my behavior, but they do make it more likely I’ll make a better decision.
Nudges have the capacity to bring about positive changes at the personal, national and international levels.