Nudge

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11 Interesting paragraphs from the book “Nudge” written by “Richard H. Thaler & Cass R. Sunstein”. A very informative book about everyday life.

1) These two figures capture the key insight that behavioral economists have borrowed from psychologists. Normally the human mind work remarkably well. We can recognize people we have not seen in years, understand the complexities of our native language, and run down a flight of stairs without failing. Some of us can speak twelve languages, improve the fanciest computers, and create the theory of relativity. However, even Einstein would probably be fooled by those tables. That does not mean something of human behavior can be improve by appreciating how people systematically go wrong.

2) MBA students are not the only ones overconfident about their abilities, the ‘above average’ effect is pervasive. Ninety percent of all drivers think they are above average behind the wheel, even if they don’t live in lake Wobegon. And nearly everyone (including some who are rarely seen smiling) thinks he has an above-average sense of humor. (That is because they know what is funny!) This applies to professors, too. About 94 percent of professors’ at large university were found to believe that they are better than the average professor, and there is every reason to think that such overconfidence applies to professors in general. (Yes, we admit to this particular failings).

3) Self-control problems can be illuminated by thinking about an individual as containing two semiautonomous selves, a far-sighted ‘Planner’ and a myopic ‘Doer’. You can think of the planner as speaking for your reflective system, or the Mr Spack lurking within you, and the doer as heavily influenced by the Automatic system, or everyone’s Homer Simpson. The planner is trying to promote your long-term welfare but must cope with the feelings, mischief, and strong will of the Doer, who is exposed to the temptations that come with arousal. Recent research in neuroeconomics (yes, there really is such a field) has found evident consists with this two-system conception of self-control. Some parts of the brain get tempted, and other parts are prepared to enable us to resist temptation by assessing how we should react to the temptation. Sometimes the two parts of the brain can be in severe conflict – a kind of battle that one or the other is bound to win.

4) In this chapter, we try to understand how and why social influence work. An understanding of those influences is important in our context for two reasons. First, most people learn from others. This is usually good, of course. Learning from others is how individuals and society develop. But many of our biggest misconceptions also come from others. When social influences have caused people to have false or biased beliefs, then some nudging may help. The second reason why this topic is important for our purpose is that one of the most effective ways to nudge (for good or evil) is via social influence. In Jonestown, that influence was so strong that an entire population committed suicide. But social influences also created miracles, large and small. In many cities, including ours, dog’s owners now carry plastic bags when they walk their dogs, and strolling through the park has become much more pleasant as a result. This has happened even though the risk of being fined for unclean dog walking is essentially zero. Choice architects need to know how to encourage other social beneficial behavior, and also how to discourage events like the one that occurred in Jonestown.

5) We do not take a strong position on this debate, but consider a few points. If seems clear that the costs of saving too little are greater than the costs of saving too much. There are many ways to cope with having saved too much. From retiring earlier than expected, to taking up golf, to traveling to Europe, to spoiling the grandchildren. Coping in the opposite direction is less pleasant. Second, we can say for sure that some people, in our society are definitely saving too little-namely, those employees who are not participating at all in their retirement plan, or are saving a low percentage of their income after having reached their forties (or older). These folks could clearly use a nudge.

6) The result provide a dramatic illustration of the potential power of choice architecture. Compare the behavior of three groups of employees. The first group consists of those who chose not to meet with the consultant. This group was saving about 6 % of their income when the program started, and that percentage did not budge over the next three years. The second group contains the employees who accepted the advice to increase their saving rates by 5 percentage points. Their average saving rates jumped from just over 4 percent to just over 9 percent after the first raise occurred. This rate was then essentially constant over the next few years. The third group includes those who joined the save more tomorrow plan. That group started with the lowest saving rate of the three groups, around 3.5 percent of income. Under the program, however, their saving rates steadily rose, and three and a half years and four pay raises later, their savings rate had almost quadrupled, to 13.6 percent – considerably higher than the 9 percent savings rate for those who accepted the consultant’s initial recommendation to raise savings by 5 percentage points.

7) How would Econs decide how much of their portfolio to invest in stocks? An Econ would make a trade-off between risks and return that would be based on his preferences about retirement income. That is, he would decide whether the possibility of being, say, 25 percent richer is worth the risk of being 15 percent poorer. Needless to say, even if it occurred to Humans to think about the problem this way, they would not know how to make the necessary calculation. The decisions they do make will differ from those of Econs in two ways. First, they will be unduly influenced by short-term fluctuations, and second their decisions are likely to be based on rules of thumb.

8) Although nearly all states in the United States use a version of explicit consent, many countries in Europe have adopted presumed consent laws (though the cost of opting out varies, and always involves more than a click). Johnson and Goldstein have analyzed the effects of such laws by comparing countries with presumed consent to those with explicit consent. The effect on consent rates is enormous. To get a sense of the power of the default rule, consider the difference in consent rates between two similar countries, Austria and Germany. In Germany, which uses an opt-in system, only 12 percent of the citizens gave their consent, whereas in Austria nearly everyone (99 Percent) did.

9) It helps to think about the environment as the outcome of a global choice architecture system in which decisions are made by all kinds of actors, from consumers to large companies to governments. Markets are a big part of this system, and for all their virtues, they face two problems that contribute to environmental problems. First, incentives are not properly aligned. If you engage in environmentally costly behavior next year, through year consumption choices, you will probably pay nothing for the environmental harm that you inflict. This is what often called a ‘tragedy of the commons.’ Each dairy farmer has an incentive to add more cows to his herd, because he obtains the benefits of the additional cows while suffering only fraction of the costs; but collectively the cows ruins the pasture. Dairy farmers need to find some ways to avert this tragedy, perhaps through an agreement to limit the number of cows that each will be permitted to add. Similar problems plague the fishing industry and they help to explain air pollution and the problem of climate change.

10) The alternative cap-and-trade system is similar in spirit and approach. In the pollution context, people who reduces their pollution below a specified level are allowed to trade their ‘emissions rights’ for cash. In one stroke, such a system creates market-based disincentives to pollute and market-based incentives for pollution control. Such a system always rather than punishes technological innovation in pollution control, and does so with the aid of private markets. Trading systems, based on market principles, are proving increasingly popular at the international level. The Kyoto Protocol, designed to control greenhouse gases, contains a trading mechanism specifically designed to decrease the costs of emissions reductions.

11) Quit smoking without a Patch: Organizations already exist to help people make commitments and achieve goals. CARES (Committed Action to Reduce and End Smoking) is a savings program offered by the Green Bank of Caraga in Mindanao, Philippines. A would-be non-smoker opens an account with a minimum balance of one dollar. For six months, she deposits the amount of money she would otherwise spend on cigarettes into the account. (In some cases, a representative of the bank visits every week to collect the deposits.) After six months, the client takes a urine test to confirm that she has not smoked recently. If she passes the test. She gets her money back. If she fails the test, the account is closed and the money is donated to a charity.

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