Book Review: Nudge by Richard H. Thaler and Cass R. Sunstein

Suppose that you were in charge of a school district and you were given the responsibility of making the students healthier.  Thus, you have a few options:

  1. Take away all of the candy and soda from the vending machines.
  2. Serve the desserts in the lunch line first instead of last.
  3. Make the students eat in the cafeteria instead of an off-campus period during lunch hour.
  4. Close the vending machines down during the lunch hour.
  5. Make a separate dessert line from the regular lunch line.

Now with these options, let’s say these have been the respective responses:

  1. From option 1, the students complain and no one is happy.
  2. From option 2, kids eat the dessert first, which went against your plan.
  3. From option 3, some students complain, but it may force others to prepare a lunch at home, which might upset some already busy parents and the already stressed students.
  4. From option 4, the students may complain because those are the peak hours of getting food.  Plus, the school might lose some money because no one is buying food from these vending machines.
  5. From option 5, there may be some inconvenience, but surprisingly, the kids get healthier.

Now this isn’t just some thought experiment.  You really do these five options in five different schools and collect the data and you discover that option 5 is the most practical choice without losing a huge benefit.  Thus, you “nudged” the kids into eating healthy.  But why the word “nudge”?  The authors claim that they are for a new term that goes with nudging: libertarian paternalism.  We often think that just maximizing choices is the best option.  However, the more choices one has, it just makes things more confusing and it could make things worse.  Thus, there should be a choice architecture where you’re nudged toward a certain route.http://abeonaforum.files.wordpress.com/2009/04/nudge.jpg

Notice that you’re not forcing the kids to not eat dessert in option 5.  The students can still eat dessert if they wish.  There is no separate cost, it still comes with the meal.  But perhaps the students don’t want to get into a second line for some reason.  And this makes the students healthier.  Thus, the choice is still open (hence the libertarian portion), but you have nudged them into not getting that dessert (hence the paternalism portion).  Basically, this is what the book is about.  It’s about building up a choice apparatus to nudge the people around you into the optimal choice even though there are other choices around.  You can think of it like putting candy at the cash register instead of fresh fruit.  By putting candy there, you have a choice of getting that candy or not, but the store is nudging you into getting that candy.

Now that we’ve got the concept: let’s apply this to finances, schools, health, and marriages.

Finances

When it comes to saving money for retirement, stocks, school loans, social security, etc. there are many options on what to do.  Unfortunately, most people just pick the default option (which is basically don’t do anything).  The authors recommend that the default option should be something else.  For example, when it comes to 401(k) plans, you have to fill out a form just to get that started.  But what if you automatically get the plan, and if you don’t want the plan, all you have to do is put a check mark next to the question “Check here if you don’t the company retirement plan” or something like that on your application form?  It gives advice on employers and businesses to nudge people to a certain choice.  It doesn’t really apply to me because I work in the public sector, but surely this advice would be beneficial to governmental jobs and the government should use this.

With stocks, never invest all of your paycheck into the company that you work for.  Enron is an example of that going wrong.  Don’t put all of your eggs in one basket in other words.  However, you should put the same amount of eggs into different baskets.

Health

At this point, I think you’re getting the idea: if you give people too many choices, they have no idea how to begin because there’s no guide on what to choose.  Thus, you must give them some nudges and design a choice architecture to make them have good choices.

The authors begin with Medicare.  President Bush proposed Plan D which literally gave seniors over 100 plans.  That’s a lot!  Even the experts in these fields were confused on the differing plans.  Thus, many seniors didn’t sign up and they got the default plan, which was basically one assigned at random.  The authors propose that the default shouldn’t be chosen at random, but an intellectual assessment so that the plan works best for each person.  They give other ideas too but I won’t go into details here.

With organ donations, they get into some controversy here.  The default has always been thus: You’re not an organ donor unless you specify that you want to be one.  The authors suggest to change the default: You are an organ donor unless you specify that you don’t want to be one.  They’ve done studies and organ donations increased about 80%.  This would save lives.

In terms of environmental concerns, they think the cap-and-trade is good in principle, but it goes against the idea of libertarian principles.  Thus, the bring up the whole idea of taxes.  For taxes, it’s an incentive to not do a certain activity.  They suggest to put a tax on gas.  This will create an incentive consumers not to use gas that much or else buy a hybrid.  At the same time, this will create an incentive to automobile makers to make more fuel-efficient cars.

They also suggest to create a Toxic Release Inventory which means that companies must report to the government what hazardous chemicals they are using.  This is released online.  With this, each company gets a grade but you still choose in buying those products.  For example, there are grades with meat: Grade A choice cut steak, or Grade A.  The former is better, but you can still choose to buy the latter if you want.  The same should be done with companies that produce pollution: give them grades.  With cars, the authors suggest putting a sticker on each car to show how economic the mpg that vehicle is.  Thus, you can see clearly how fuel efficient the car is, but you can still choose to buy a Hummer if you want.  There were other creative nudges as well that you should check out.

Freedom

We start off with education.  The authors are for vouchers, but with a revised stipulation.  They suggest that the parents puts their children on a list of the schools of their choice.  With this, it requires them to research the many schools around their area.  Also, the law could possibly be changed so that one cannot graduate from high school unless one submits an application to a college, even a community college.  An experiment was done in Texas.  The enrollment (and not just the application process) of a community college went up 45% in one year.  That’s pretty impressive.

With health care, they have a simple, yet interesting rule that I’m still thinking about: you should have the option to waive your right to sue.  The reason why health care is so expensive is because most of the premiums are going toward malpractice suits.  But if you waive your right to sue, then your insurance will be much cheaper.  Now this doesn’t have to be all-or-nothing deal.  If you’re going to get a major operation, you’d probably want to pay the full premium.  If you going to just get your cheek swabbed, you’d probably want to waive your right to sue.  Thus, insurance would be much cheaper.

When it comes to marriage, it should be privatized.  Thus, if you want to get married, you must follow the rules of the religion or institution.  If you want the legal benefits, then you must go to the courthouse and get that figured out.  It doesn’t matter if you’re gay or not.  Thus, marriage can be private, and the legal benefits are public.  On a side note, I have to say that this is a good solution.  Think about this: how would you feel about the government getting involved in your baptism, your temple recommend, your Catechism, or your Bar Mitzvah?  You don’t like it huh?  So why do you like the government getting involved in something as personal and private as a marriage?  That doesn’t make any sense.  Therefore, the government should get out of marriages altogether.  They shouldn’t be in the business of handing out marriage licenses.  Only private institutions should do that.

In the end, the authors conclude with some objections and their replies to them.  I thought the objections were very weak.

If anyone knows me, I can’t stand economics.  So if I like a book about economics, that’s really saying something.  This book was great.  It really trains your thinking into “we must change the default position for the better” perspective.  Overall, it won’t affect me.  However, I believe everyone in government and business should read this.  More than that, it should be required reading in political science, business, and economics classes in college.  I can’t recommend this enough.  It’s a great, and fast read.  Plus the authors provide some humorous anecdotes as well.  Hopefully, this will take on instead of holding onto the tired ideologies of liberalism or conservativism.

You can check out their website here and possibly offer some nudges of your own to the authors.  Their blog also offers updated nudges on how to improve society.  Behavioral economics is awesome!

UPDATE: In their paperback expanded edition, they add another chapter of nudges that could be implemented are have already been implemented.  I’ll add some that really captured my eye:

  • Limos for drunks.  Drunk driving is a problem.  That’s why a city in Michigan has a company where the drunk can rent a limo for $20.  It’s fairly cheaper than a taxi (sometimes) and it makes you look classy.  They tried this and drunk driving went down 34%.
  • Showing calories in Chain Restaurants.  New York made it a law where chain restaurants had to show how much calories their food items were on the menu.  Thus, you can still choose to eat the food, but you’re nudged into not eating it.
  • Recycling.  A company in CA has made people in a certain neighborhood aware of their recycling habits.  When you receive the bill, it shows how much you’re recycling compared to everyone else in the neighborhood.  It turns out that the reason you recycle is because everyone else does too.
  • Putting a sticker in a urinal.  Men usually don’t aim when they pee and so they make many messes, which causes more clean up, which means more usage of hazardous chemicals, etc.  By putting a sticker inside the urinal, the men have something to aim at and it makes the clean-up much easier.  They’ve tried this in a lot of countries and the results are amazing: the cleanup is less in ALL of those countries.

What can I say?  Nudging is awesome.  It has seriously influenced my way of thinking.

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About shaunmiller

I am a Ph. D student at Marquette University. The primary purpose of this blog is to get my ideas out there, and then have other people scrutinize, critique, build upon, and systematize beliefs. This blog will sometimes pertain to what I'm learning in my classes, but it will occasionally deal with non-classroom issues that I'm thinking about as well.
This entry was posted in Book Review, Economics, Education, Environment, Experts, Government, Health, Libertarianism, Politics, Same-Sex. Bookmark the permalink.

3 Responses to Book Review: Nudge by Richard H. Thaler and Cass R. Sunstein

  1. thekillerj says:

    I like the sticker in the urinal and limos for drunks options. The two go hand in hand. The sticker should be of the limo company. That way, impaired drunks have a target AND a limo company/contact information to call for a ride.

  2. Pingback: What I’ve Learned this Past Year — 2009 Edition « Shaun Miller’s Weblog

  3. Pingback: Particular Interests of Mine | Shaun Miller's Ideas

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