Nudge - Improving decisions about health, wealth and happiness.

Nudge – Improving decisions about health, wealth and happiness-

 by Richard Thaler and Cass Sunstein

   " Every wrong answer that you get in the MBA entrance exam, shifts your Honeymoon from Mauritius to Matheran"  is in a way a nudge given periodically by people like me to uplift the preparation level of the MBA aspirants, who aspire to get into a premier B school.

      Well ! Nudges are present in all walks of life, from the Rajasthani-Mithaiwala who asks us, "Aur kya?" after every purchase we make to the alluring displays beside the cashier in the supermarkets to boost the candy sales. What makes this choice-book different is its focus on environment design, rather than improving your inner strength, willpower, etc. to make better decisions.

      Richard  Thaler, a noble prize winner in economics in 2017 has shown micro insights on human behavior in different aspects of life. How do human traits govern individual economic decisions and what effect do they have on markets as a whole? Since the 1980s, Richard Thaler has analyzed economic decision-making with the aid of insights from psychology. He has paid special attention to three psychological factors: the tendency to not behave completely rationally, notions of fairness and reasonableness, and lack of self-control. His findings have had a profound influence on many areas of economic research and policy.

      In a large city school, where director of food services Carolyn was worried about the unhealthy eating habits. One fine day she hatched an interesting idea. Simply by rearranging the cafeteria, Carolyn was able to increase or decrease the consumption of many food items by as much as 25%. Her point was that like school children, adults can be greatly influenced by small changes in the context. Putting the fruit at eye level counts a nudge. Banning junk food does not.

      Richard Thaler call People like Carolyn, ‘Choice Architects’. Choice Architects have the responsibility for organizing the context in which people make decisions.

      Small and apparently insignificant details can have major impacts on people’s behavior. A good rule of thumb is to assume that everything matters. A wonderful example of this principle comes from, of all places, from men’s room at Schiphol airport in Amsterdam. There the authorities have etched the image of a black housefly into each urinal. It seems that men usually do not pay much attention to where they aim, which can create a bit of mess, but if they see a target, attention and therefore accuracy are increased. The example may be trivial but gets used by the corporate R & D people  to present a nudge to evoke the manly instincts.

      Individuals many a times make bad decisions. In many of these cases they would have not made bad decisions if they had paid full attention and possessed complete information, unlimited cognitive abilities and complete self-control. Now this is where a nudge can be helpful. The paternalistic aspect lies in the claim that it is legitimate for choice architects to try to influence people’s behavior in order to make their lives longer, healthier and better. Libertarian paternalism on the other hand is a relatively weak, soft and non-intrusive type of paternalism because choices are not blocked, fenced off or significantly burdened. If people want to smoke, eat candies, gamble libertarian paternalism will not force them to do otherwise.

      A nudge is any aspect of choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.

      To qualify as econs human beings are expected to make unbiased forecasts. Getting forecasts wrong is not a problem, the problem is in forecasting the future that we like. For example the ‘Planning fallacy’. The systematic tendency towards unrealistic optimism about the time it takes to complete a project. No wonder why everything takes longer than we think, even when we know about planning fallacy.

      The power of inertia:

      When we buy a new mobile phone, we spend good time exploring all the options. Right ring tone to screen saver. The manufacturer has picked one option as a default option for each of these choices. Research has shown that most of the people prefer keeping the default options, even when they aren’t happy with those. Two important lessons can be drawn from this research. First, never underestimate the power of Inertia and second, that power can be harnessed. A 'default' is a very powerful nudge, as it requires you to actively object it for it not to work. If private companies or public officials think that a certain policy produces better outcomes for them, they can greatly influence the outcome by choosing it as default. The effects of well-chosen default options provide just one illustration of the gentle power of nudge. The combination of loss aversion with the mindless choosing implies that if an option is designated as ‘default’ it will attract a large market share. At scale, companies can use this by automatically enrolling their employees in their matching-retirement plan programs, unless they explicitly object to participating. This helps a lot of lazy people save for retirement because they would never have enrolled if they’d had to actively do it themselves. Similar  to this psychology  is something called 'Status Quo bias.'

      Status Quo bias:

      Status quo bias is easily exploited. Many years ago American express wrote sunstein a cheerful letter telling him that he could receive, for free, three month subscription to five magazines of his choices. What he didn’t realize was that unless he took some action to cancel his subscription, he would continue to receive the magazines, paying for them at normal rate. For about a decade he has continued to subscribe magazines that he hardly reads.

      False assumptions and two misconceptions:

      Many people oppose paternalism, or they think they do, and they are skeptical about nudges. Their skepticism is based on a false assumption and two misconceptions.

      The false assumption is that almost all people, almost all of the time, make choices that are in their best interest or at the very least are better than the choices that would be made by someone else. It is claimed that this assumption is false – indeed, obviously false. In fact, we do not think that anyone believes it on reflection.

      The first misconception is that it is possible to avoid influencing people’s choices.

      The second misconception is that Paternalism always involves coercion.

      Optimism and overconfidence:

      About 94% of the professors at the large universities were found to believe that they are better than the average professors, and there is every reason to think that such overconfidence applies to professors in general. In general we see that people are unrealistically optimistic even when the stakes are high.

      At the time of marriage we feel that we will never get divorced, even when we know the fact that around 50% of the people in the world get divorced. A similar point applies to entrepreneurs starting new business, where the failure rate is at least 50%. Lotteries are successful because of such unrealistic optimism.

      When they overestimate their personal immunity from harm, people may fail to take sensible preventive steps. If people are running risks because of unrealistic optimism, they might benefit from a nudge. If people are reminded of a bad event, they may not continue to be so optimistic.

      Following the Herd

      Econs are pretty unsociable creatures. They communicate with others if they can gain something from the encounter, they care about their reputations, and they will learn from the others if actual information can be obtained, but econs are not followers of fashion. They don’t grow beard just because most others do that. Their hemlines won’t go up and down except for practical reasons, and Ties if they exist at all in the world of econs, will not grow narrower and wider simply as a matter of style.(By the way, Ties were original used as napkins; they actually had a function.) Humans on the other hand are constantly nudged by other humans. May be Parents should worry less about which college or school the kid goes and more about which roommate she/he gets.

      The bottom line is that humans are easily nudged by the other humans. Why? One reason is that we humans like to confirm.

      The spotlight effect:

      One reason why people expend so much effort conforming to social norms and fashions is that they think that others are closely paying attention to what they are doing. They aren’t really paying as much attention to you as you think.

      Smiles, Frowns and Saving Energy

      In an experiment about half of the households were given a small non-verbal signal that their energy consumption was socially approved or socially disapproved. The households that consumed more than the norm, received an unhappy emoticon whereas those who consumed less than the norm, received a happy emoticon. Unsurprisingly, but significantly the more energy consumers showed an even larger decrease when they received the unhappy emoticon. The most important finding was that when the below averages consumers received happy emoticon, they felt that they had some room to increase the consumption. But when the feedback was combined with an emotional nudge, they didn’t adjust their use upwards.

      Similarly if a person gets a 'All is well'  report after a reluctant medical checkup, ends up consuming more alcohol just because he has realized that there is some room for some more freedom to do the otherwise unwanted immoderate drinks.

      Priming

      A study of more than 40000 samples in which people were asked a simple question: Do you intend to buy a new car in the next six months? The very question increased the purchase rates by 35%. The nudge provided by asking the question can be accentuated by asking them when and how they plan to do it. Psychologists call this as ‘Channel factors’. Similarly, invite a person to seminar by sending him the message of the date and time. In the second case send a Google map of the seminar hall with the other details. Chances of the person coming in the second case is higher.

      The three social influences- information, Peer pressure and priming can easily be enlisted by private and public nudges.

     

      Expect Error

When it comes to errors – we can expect humans to err on nearly anything. Errors come in many fashions. It can be as simple as forgetting your keys or leaving the card in the ATM. These are actually part of a subcategory of error called post completion error. No matter how brilliant someone is, they will still make errors throughout their lives. Henry Ford made his first car which did not have the reverse gear. 

Here systems are generating nudges to improve our efficiency and save time. We often forget to attach the much needed file while sending an e-mail. Gmail, has come  up with nudge in the form of an update in which, before we send a mail, a pop p will ask us, "Do you want to send the e-mail without attachment?" Remember, people make mistakes and it is your company’s job to find a way to make it easier for them to use your product or service. You cannot expect your customer to do that for you. Customers are willing to pay for a solution to a problem that helps them avoid making an error.

In every walk of life, choices and decisions are inevitable. Understanding how choices work can help us to  make better decisions. But more so, it can help us to design choices such that people can make good decisions for themselves. They will thank us for it.

Disclaimer

The summary of this book, 'Nudge' by Richard Thaler is just an attempt to preserve good points made by him. In the process of doing this I have used my experience, discretion, forecasts to land on a point and make it convincing to me.