Categories
Book Reviews

Nudge: Improving Decisions About Health, Wealth and Happiness

Life is made of decisions: whether about your career path, health insurance, marriage, the next brand of toothpaste you want to try or whatever else, you simply cannot avoid them. What professors Richard H. Thaler and Cass R. Sunstein address in Nudge is the possibility of improving people’s choices by acting on the design of the question. It is just as amazing as it sounds: small changes in the choice architecture can have a major impact on our final pick. Components of such architecture that can have a predictable influence on us are called nudges. 

THE NEED FOR NUDGES 

People always make rational decisions that are in their best interest, or at least this is what should happen according to theory. Despite people’s common sense, that is not always true, mainly due to the influence that the decision-environment has on us, the lack of a complete view of the problem, of effective feedbacks or previous experience. What is worse, people are not aware of the impact that the “outside world” has on them!  

That might not be that terrible in the toothpaste-related decision we mentioned before (unless you take toothpaste very seriously), but consequences can become more serious when stakes are higher, such as when we are required to make important decisions for our own (or our loved ones’) health, when we need to consider different kinds of investments and so on. 

The result is that when facing especially crucial decisions, individuals don’t start from completely neutral settings and are unconsciously brought to choices that they wouldn’t have made under other circumstances. 

Luckily enough, other people (or algorithms!) can sometimes help overcoming all these difficulties and lead us towards the making of our interests. Most importantly, they can even do so while conserving our freedom of choice. 

LIBERTARIAN PATERNALISM 

The strategy proposed by the two professors when dealing with choice architecture is to apply what they call “libertarian paternalism”, an equilibrate mix of two contrasting movements which grants people the freedom to make the right decision. The paternalistic component is the one that aims at suggesting through nudges the path towards what is considered to be the optimal choice that would make the chooser better off, while the libertarian one commits to preserving the individual’s liberty in the decision-making process. 

Despite what you might think, there exists no such thing as a perfectly neutral decision environment, especially because nudges are frequently involuntary or unavoidable. For instance, the imposition of a default option is itself a crucial nudge that is almost always troublesome and impractical to avoid. It has been proven that the right default setting in complex but fundamental decisions can drastically improve enrolment rate in important programs, at the benefit of the user. Think of pension schemes: in many states, incentives to apply to, say, a defined contribution plan (employer’s matching, tax deductions, tax deferrals, …) are often not enough to guarantee high levels of enrolment among the working population if the standard in employment contracts is to not enrol in any contribution plan. In a world where the ageing of the population is an increasingly preoccupying demographic trend, causing pensions to shrink, personal savings are more and more important but still, only a tiny fraction of the eligible employees eventually signs up to a contribution plan. When the default is changed from an opt-in to an opt-out plan, figures change from an initial situation of 20% within the first 3 months, gradually increasing to 65% after 36 months, to more than 96% within the first 36 months when the application is automatic.1  

The importance of choosing the right default comes from the fact that, as with the pension scheme study, if a default option is specified, it will probably be the most common among all the possible options available. This can be explained by various factors, the most important being the status quo bias (the tendency of not deviating from the status quo) and the fact that defaults are somehow seen as the most secure alternative, either because people perceive them as being endorsed by the issuing entity or because they see many other individuals enrolled in the same default plan and thus decide that if others choose it, why shouldn’t they? Since any deviation from the default in complex plans commonly requires a huge amount of comparisons, reasoning and risk, individuals will tend to stick with whatever they are given. Needless to say, the default plan is to be chosen with care, but even a bad plan is better than no plan at all! 

CHOICE ARCHITECTS  

Like any other thing that needs to be designed, choices need their own architect. Choice architects are the ones responsible for the organization of the context in which we are required to make a decision. Their role is fundamental and powerful, because being humans so susceptible to nudges and eventually not too good at making their own interests, due for example to imperfect information, it is often the case that an external and preferably more expert point of view can have better insights than choosers do. 

Since the role of the choice architects implies having a great influence on the pickers, one has to be aware that there may be conflicts of interests and different opinions on what is  to consider as the optimal choice that one could make. The best thing to do would be to promote transparency in the work of the architect and choose them carefully to guarantee the best interest of the choosers. In a nutshell, with great powers come great responsibilities! 

N.U.D.G.E.S. 

Given the importance of choice architecture, Thaler and Sunstein propose a six-ingredients recipe for the perfect design: 

  1. iNcentives 

Incentives are one of the most important elements in economics. Theory says, when given the right incentives, firms will produce what is right for the consumers and consumers will make the right choices for society. The problem is that most of the time conflicts of interest arise and setting incentives might become a double-edged sword. To avoid incentives going in the wrong direction, it is important to design them such that they are salient to the consumer, so that the interests of the incentive setter are clear to them. 

  1. Understand mappings from choice to welfare  

People are expected to know their tastes perfectly well, but is that always the case? How is someone supposed to know what they will enjoy the most when they are new to a product or don’t know it very well? This looks like a problem for the choice architects: making information about the offered products or services not simply available to the public but also easily understandable may improve the decisions of the consumers.  

  1. Defaults 

We have already discussed the importance of defaults, as people tend to solve most of their problems by choosing whatever brings them less effort. Moreover, not setting any defaults is almost impossible or impractical. Choice architects should exploit the moment of default setting as a way to nudge people towards the best alternative offered by choosing it as default. 

  1. Give feedback 

Lack of feedback is one of the factors that lead humans to non-optimal choices. This applies especially well for all those decisions that involve long term plans, for which the effectiveness will be observable only in the future. Feedbacks take many forms, from acoustic warning signals, to comparisons with other users of the same services, to visual indicators and many more. It is up to the choice architect to choose the best one for each situation. 

  1. Expect error 

Everyone makes error, it’s a matter of fact. Humans aren’t machines and choice architects need to keep this in mind. They cannot change human nature, but one thing they can do is to prevent those often-systematic errors that we humans tend to make. The fact the choice architects are humans as well can surely help them in identifying those errors before they occur. 

  1. Structure complex choices 

The more complex a choice problem is, the less eager (or able) to carefully ponder all alternatives the decision maker will be. When the options are too many, or they are too difficult to understand, people adopt shortcuts that allow them to save time and effort. Such strategies might seem good ideas at first, but most of the time they exclude many alternatives that would suit the decision maker best. Choice architects can help the choosers by providing structure in the choice setting, being aware that structure affects the final choice of the individual. Different structures on the same issue can lead to different outcomes, so the choice architect has the responsibility to structure the problem in a way that benefits the user. This doesn’t necessarily mean guiding them to choices they would make in advance, but rather, structuring can become an opportunity to make people learn so that they can make better choices on their own in the future. 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s