Nudge by R. Thaler and C.R. Sunstein

Sunday, January 11, 2009

UPDATE: Sunstein has become the "legal czar" for the Obama administration.

Access to nearly endless choice is one of the defining elements of the capitalist world we live in, unless you are one of my North Korean or Cuban followers. Allow any firm the ability to offer their goods or services to the market. Those with the strongest offering will find success, while those not able sell their goods and make a profit will, in their own right, cease to exist. GM not included.

The premise of this book deals with how human beings make decisions in response to these choices and how they can be "nudged" into doing so as to better benefit themselves. For economists all decisions are rational while in reality we know this is not the case. Human instincts are very strong and are weighed down by various biases which prevent a rational decision making process.

A trip to the supermarket confirms that companies are well aware of this irrational decision making and they take all the steps to "nudge" you towards their product by paying more for eye-level shelf space, wafting the smell of baking bread throughout the store, and placing milk at the back of the store.

The gist of the book is built around the following - the placement of a certain, more expensive, yogurt may convince me to buy one I normally would not, but I have hundreds of future opportunities to correct this poorly made decision. However, certain decisions regarding investments, retirement plans, health care, and university are drastically limited. So much so that many of these decisions will be made perhaps only one time in your life. Better not screw it up, to say it mildly. Yet, just like the yogurts in the supermarket, the number of healthcare or pension plans has become endless. How do we nudge people to make the best decision regarding these important long term subjects?

One example of how to nudge effectively without restricting choice is by selecting, well-researched and balanced default options for people while always allowing them the choice to select a plan for themselves. With Medicare, this would mean by default that a selection of prescription medicine plans for the elderly would be made from one of the 60 available plans based on previous prescription records of the recipient. This seams logical enough. In reality, when the overhaul of Medicare took place in 2003, the default option for prescriptions medicine plans was in most cases "non-enrollment" or "random selection". To further complicate matters, the process for selecting the plan (from 60 of them!) was not very clear for various reasons explained in the book.

This is an entertaining and insightful read. It demonstrates how, namely, government and its associated bodies can direct the majority of its citizens, from school lunchrooms to organ donations, to mutually beneficial outcomes without imposing sweeping regulation.


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