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Do you need a nudge by bbw20691

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									Q6	2009	   Dialog	                                                         35
	




           Do you need
           a nudge?
           Richard Thaler outlines how principles
           from behavioral economics can help
           policymakers — and managers — achieve
           better outcomes.




           Richard H.Thaler
           Ralph and Dorothy Keller Distinguished Service Professor of
           Behavioral Science and Economics, University of Chicago Booth
           School of Business
           Interview conducted and edited by Ted O’Callahan
           Photograph by Matthew Gilson
36	       	        	        	        	         	        	        	         	                  	   Q6	2009	    Richard	H.	Thaler	      	                                                        37
                                                                                                  	           Do	you	need	a	nudge?



 Q: Could you explain some of the key          Q: Could you give some examples of                       Q: How is it that nudges haven’t been you want to repeal the inheritance tax,
 ideas in Nudge: nudges, choice archi-         where nudges have influence?                             the norm all along?                            it’s very smart to call it a death tax.
 tecture, and libertarian paternalism?         Probably the areas that have received the                They are the norm. We’ve been nudged for-
“Libertarian paternalism” suggests that        most attention so far are savings and                    ever. Eve and the serpent nudged Adam.         Q: How do defaults get set poorly in
 these two seemingly contradictory terms       investment. The simplest example of a                    Religions have been nudging us for thou-       the first place?
 can actually define a non-contradictory       successful nudge is the default option. A                sands of years. Marketers nudge us.            The status quo is typically the default.
 and attractive policy alternative. By         default option is simply what happens if                 Ads are nudges. We can be nudged for           And the choice architect typically doesn’t
“libertarian” we simply mean respect-          you do nothing. Normally, nothing hap-                   good or for evil. There is a company we        think very carefully about this. Let me
 ing people’s right to choose, whenever        pens, but sometimes even when you do                     talk about in the book that pipes the          give you an example. In most companies
 possible. And by “paternalism” we mean        nothing, something happens. So while                     sweet-smelling aroma of their extremely        now, there is a period of open enroll-
 caring about the outcomes for people,         I’m sitting here talking to you, if I do                 fattening cinnamon buns out into the           ment, typically in November, where you
 as judged by themselves. So we would          nothing on my computer long enough,                      hall, which acts a bit like the sirens in The  get to rethink your benefit package. And
 like to create environments where people      pretty soon the screen saver will come                   Odyssey in terms of drawing people in.         at least at the University of Chicago,
 are more likely to choose things that         on. How long it is until that happens was                    We don’t claim to have invented nudges. you’re required to do this online. Of
 they, themselves, think are good for them.    itself a default option that came with my                What we are suggesting is that in lots         course, some people are going to forget.
     Now, the person who is in charge of       computer that I never changed. What we                   of domains, people aren’t thinking about       And the choice architect has to decide
 that choice environment is somebody           know is that default options are extreme-                them as much as they should be. Mar-           what to do with the people who forget.
 we call a “choice architect.” There are       ly powerful. Many people just go with                    keters do think about them, but econo-         Now, typically there are two options to
 choice architects in virtually every en-      the flow and take whatever the default is.               mists are often in charge of many aspects      consider. I call them “same as last year”
 vironment. When a professor teaches a         That means that the choice architect has                 of public policy and they could think          and “back to zero.” For your healthcare
 course, he is the choice architect. When      immense power by choosing the default,                   about them more.                               plan, back to zero is pretty harsh. So
 somebody puts this magazine together,         sometimes knowingly and sometimes                            In the book we distinguish between         most places go with “same as last year.”
 they will decide in what order the articles   unknowingly.                                             two types of creatures: humans and Econs. But for flexible spending accounts, where
 appear and what illustrations and photos          A good example is in the area of pen-                Humans are the people we interact with         you lose that money if you don’t spend
 accompany them that may or may not            sion policy. In many 401(k) plans, the                   every day, and Econs are these strange         it, many places say, well, I don’t want to
 attract people’s attention. That’s a good     default option is not to join. If you are                creatures only found in economics text-        presume that people want to put money
 example, because people are free to throw     going to join, you have to fill out some pa-             books that are unemotional, really smart,      away since they would lose it if they
 the magazine away. They are free to read      perwork. Some companies have tried the                   and never have self-control problems. If       don’t spend it, so we’ll make that one
 whatever they want, but the magazine          opposite default, which is that you are                  you want to design policies that will         “back to zero.”
 designer will have some influence on          enrolled unless you fill out some paper-                 work, you want to design them for hu-              Now, at Chicago I had scheduled a
 which articles they read, and in which        work. We know that speeds enrollment                     mans unless you live in a world of Econs, meeting to talk to some of the top admin-
 order. And what we know is that all           greatly and doesn’t really cost anything.                which, if you do, you have my sympathy.        istrators at the university about chang-
 kinds of small things, like whether there     Shlomo Benartzi and I have added to                          A simple example of a nudge in the         ing the default on the supplemental
 is an illustration that accompanies an        that a policy called Save More Tomorrow,                 politics domain is the brilliant strategy of   savings account where you could put in
 article, will influence whether people        where people are invited to join a plan in               the Republicans to rename the inheri-          money on top of the usual pension. The
 read that article. And those small things     which they agree to increase their savings               tance tax the “death tax.” Polls show that     default was “back to zero,” and I was sug-
 are what we call “nudges.” So a nudge         contribution every time they get a raise.                a majority of Americans are opposed to         gesting changing it to “same as last year.”
 is any small feature of the environment       That’s another good example of libertar-                 the death tax and in favor of an inheri-       It turned out that that meeting occurred
 that attracts people’s attention and alters   ian paternalistic policy. No one is forced               tance tax. Econs would know that the           on, just by coincidence, the last day that
 their behavior but does so in a way that      to join it. People sign up of their own free             death tax and the inheritance tax are          people had to log on and re-enroll, and
 doesn’t compel.                               will, but in the first company where we did              the same thing. But humans might be in         none of the people at the meeting had
                                               this we more than tripled savings rates.                 favor of one and against the other. So if      yet done that. And that made my case
                                                                                                                                                       extremely easy.
                       Q6	2009	    Richard	H.	Thaler	      	                                                           39
                       	           Do	you	need	a	nudge?




“Government has              Q: In some cases, when there is an ef-
                             fort to switch the default, there’s resis-
                                                                           as minor. There is a nice example, I
                                                                           think, in some research that we mention


 to make decisions.
                             tance. What can cause that?                   in Nudge. If you tell people on their elec-
                             Most of the time, you change the default      tricity bill how much energy they are us-
                             and nobody notices. There can be some         ing compared to their neighbors — and
                             special circumstances in which people get     there’s a company called Positive Energy

 They have to nudge.         their backs up. Maybe a good example
                             of that is organ donation. In the U.S., the
                             default is that unless you do something,
                                                                           that has been doing this — you can
                                                                           reduce energy utilization by something
                                                                           between 2% and 6%. Now that sounds


 So why not do it
                             your organs will not be made available if     like not a very big deal. But if you think
                             you die in an automobile accident or some     about it, these messages cost nothing.
                             such. Some of the European countries have     You have to send out electricity bills any-


 effectively and
                             the opposite default — what they call pre-    way. If by changing the information you
                             sumed consent, so you are presumed to         put on the bill, you reduce energy use
                             give your consent unless you choose other-    by 2% to 6%, why in the world wouldn’t


 transparently?”
                             wise. There have been attempts to switch to   we do it? If we can come up with 100 of
                             that presumed consent in some countries,      those ideas, we can have a significant im-
                             most recently in the UK, and that was         pact on the climate.
                             met with resistance, in particular from the
                             Muslim community. Illinois has adopted        Q: People seem to have a hard time
                             my favorite solution to this problem, and     making decisions that don’t give feed-
                             it’s a neat little compromise which is        back for a long time. How do nudges
                             called mandated choice. When you go to re-    address these long-term issues?
                             new your driver’s license and get a new       The solution to all such problems is to re-
                             picture, which you have to do periodically,   ward short-term behavior. So going back
                             they simply ask, do you want to be a do-      to the previous example, it turns out that
                             nor or not? You must answer that question.    if they put a little smiley face on the bill if
                             They won’t hand you your license until        you’re using less power than your neigh-
                             you say yes or no. And about half the         bors, that helps. In some places, they
                             people say yes. And that, as near as I can    let owners of hybrids use the carpool
                             tell, has met with exactly zero resistance.   lanes on the highway. Maybe you’ll get
                                                                           somebody who doesn’t really care about
                             Q: And does that increase the number          the environment but cares about getting
                             of donors?                                    somewhere on time to switch from a gas-
                             Yes, because it is easy and people are re-    guzzler to a Prius. That’s going to help. I
                             minded that right now is a good time to       don’t care what motivations they have if
                             do this.                                      we can get the right outcome.

                             Q: Nudges can appear very small and           Q: Who decides what the best out-
                             straightforward, yet, played out on a         come is?
                             big scale, they become significant.           Well, there’s the question. Clearly it’s
                             I think that’s right. Because the manipula-   not Richard Thaler and Cass Sunstein.
                             tions can be small, people think of them      One criticism I frequently hear is that we
40	      	         	        	         	          	        	        	        	                   	   Q6	2009	    Richard	H.	Thaler	      	                                         41
                                                                                                    	           Do	you	need	a	nudge?



think we know what’s best for people             I think that can be a problem, and one                   own choices, and that’s the essence of lib-
and this is elitist thinking. I think in         possible solution is what we call struc-                 ertarian paternalism.
many situations, it is pretty easy for the       tured choice. Let’s go back to 401(k)
choice architect to have a good idea what        plans. When they first came in, they                     Q: Is there research behind this? Do
choices people would really prefer. I think if   only had about half a dozen options.                     we perform better if we have a sense
we go back to default options in the open        And choices were pretty easy. But then                   of freedom and choice?
enrollment period, do we think that              a subset of employees would lobby for                    I’m not sure we can give a satisfactory
people who forget to enroll are going to         the fund that invests in Slavic tech funds,              answer to that, but I think most of us
want no healthcare? Probably not. So it’s        and so on and so forth, and now plans                    would prefer to live in such a society. I
not that we think we know what’s best            have 100 options. And the research                       also think it’s pragmatic in the sense
for them. It’s that we have a pretty good        shows that with more options, people                     that maybe I want lots of wine options
idea of what they would want the default         are slower to join.                                      because I know something about wine,
to be if they were the choice architect.             So what’s the solution to that? One                  but I want somebody else to help me pick
Sure, there may be some tough cases,             would be to reduce the number of                         a computer. We don’t want a one-size-
but I think most of us would rather be           choices, which we don’t like. We prefer                  fits-all solution to any kind of problem.
healthier. We’d rather have our kids             to start out with a good default fund
be well educated. We would rather not            and say to somebody that’s joining the                   Q: What can managers take from
starve in retirement. We would rather not        plan, okay, there’s lots of choices here,                this work?
wake up some morning and have our mort-          but if you don’t want to make a decision,                Managers are choice architects. They
gage doubled because of some term that           here’s a default investment strategy that                need to structure environments to im-
was buried in the fine print. So I think         some experts think might work for you.                   prove behavior. It shouldn’t be surpris-
we can make a lot of progress without            It might be what they call a target date                 ing that many of the traders who took
much controversy. And there will be a few        fund, so the fund will change your asset                 down companies were doing what they
cases where it’s harder, and that’s what         allocation as you age. Would you like                    were doing, because they were getting
the politicians are elected to deal with.        that, or would you like to make a more                   paid lots of money while they were
                                                 active decision? If you say you’d like to                doing well, and then could walk away
Q: How do politicians sort out those             make a more active decision, then maybe                  when it blew up. There is a famous old
hard cases amid conflicting interests?           the second stage would be a choice be-                   paper in organizational behavior: “On
It’s difficult. I want to emphasize that we      tween aggressive or conservative target-                 the Folly of Rewarding A, While Hop-
don’t envision a larger role for govern-         date funds. Would you like to pick one of                ing for B.” If a manager understands be-
ment. Government has to make deci-               those? No? Okay, here are all 100 funds.                 havioral economics, she will not be able
sions. They have to nudge. So why not            Go for it. Have fun. I think that that’s the             to change her employees into Econs, but
do it effectively and transparently? And         way to handle this. We wouldn’t want                     she will be able to mitigate some of the
if we don’t like the way the government          the government to say there should                       biases through clever choice architecture.
is doing it, then throw the bums out and         only be three funds.
elect somebody who will do a better job.             I think the nudge philosophy is prag-
                                                                                                    Read more from Richard Thaler on the development of behavioral economics at
                                                 matic, and it says that in some sense we
                                                                                                    qn.som.yale.edu/thaler.
Q: Could you talk a bit about choice?            can get the best of all worlds. We can
Some research suggests too much                  make it easy for neophytes to get some-
choice can be problematic, but the               thing reasonable. At the same time we
libertarian aspect of nudging is all             can make it possible for sophisticated
about making choice available as                 investors — or those who wrongly think
often as possible.                               they’re sophisticated — to make their
Tokyo, Japan (photograph by Chris Steele-Perkins)

								
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