OCTOBER 3, 2008

“Nudging” Ourselves Toward Good Choices

In case it hasn’t been obvious in my previous posts, I like to write about innovations in public policy. The idea that small changes in rules and practices can produce big benefits for society is fascinating to me.

For awhile now, I’ve been meaning to pick up Cass Sunstein and Richard Thaler’s Nudge, a book about simple policy changes that can be made by governments and employers to encourage people to make better choices. The book is based on two papers authored by the pair in 2003 (sorry, you’ve got to pay for the second one!).

Backtracking a little bit: traditional economics - you know, the Adam Smith stuff - infers that people in general are “rational actors” - that we collectively make decisions based on our own personal interest. That makes sense in a lot of ways, and many think it’s the basis of how human beings act. For instance, I made a rational decision to come to work this morning because I know that: a) I won’t get paid otherwise; and b) I like what I do.

But in the past few decades, a new field has emerged called behavioral economics that investigates people’s irrational desires and actions, and how they affect the larger economy. Some examples of this can be seen in the poor understanding we human beings have of risk - a concept Kelly Stepno works on here at TMG - as well as the current economic crisis, which some believe was caused by an asset bubble driven by media hype rather than actual value.

The goal of Sunstein and Thaler’s work is to change people’s “choice architecture” by introducing policies that gently correct our tendencies toward irrational behavior. For instance, the authors identify savings rates as one area in which humans do not act rationally, and did a study of ways employers could help their employees save more money. They found that businesses who automatically enrolled their employees in 401(k) plans and offered an opt-out provision had dramatically higher savings rates than employers who had opt-in 401(k) plans. Thaler also experimented with a plan called “Save More Tomorrow” that allows employees to set aside parts of their pay raises toward their savings. The principle here is that people are irrationally loathe to give up any of their current income, but don’t have as much of a problem forgoing future gains. In this program, too, he saw the savings rates of participating employees more than triple.

The authors also discuss smaller policy changes, like removing key lime pie from a buffet line, that could help all sorts of pressing issues like obesity, indebtedness, and global warming. The basic theme is that changing people’s “choice architecture” is a way to deal with the irrational aspects of our behavior.

Like I said, I haven’t read the book yet, but I find a lot of the themes very intriguing. Of course, there are objections to this philosophy - who are you to tell me I shouldn’t have key lime pie? - but it’s refreshing to see people thinking outside left-right paradigms when it comes to public policy.