Written By: Mark Zeigler
This past summer I decided to take a chance to meet some other AFCs and candidates and read a highly-rated book at the same time by participating in the Nudge book study by Andi Wrenn. Having completed the book study, I want to highly recommend these book studies to all candidates and AFCs. Every week, you meet virtually and break into small groups to cover discussion topics with other members of the book study. The discussion questions are in-depth and are no joke. After the first week, I started highlighting the chapters as I read them so that I could find the portions as we were discussing them. Authors (Thaler and Sunstein) would be proud of the nudge provided by the discussion questions. The book itself centers around the idea of libertarian paternalism. Libertarian paternalists want to make it as easy as possible for you to have the freedom to make your own choices while at the same time, present choices in directions that will improve your life. A libertarian paternalist does that by using a nudge. A nudge is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.
Nudge can get into the weeds on some subjects, but the examples of different ways that a nudge has been used in society are fascinating. Our discussions at times turned to the ethical considerations that the nudge can lead to. Regardless of your feelings, we are being nudged in many different ways each day. The topics of the book give insight into ways the government is nudging citizens to save for retirement or even how cities are enticing citizens to pick up dog waste. Countries now are creating behavioral insight committees and devoting resources to this topic to help citizens make better choices. The following are brief chapter summaries for Nudge.
Chapter 1: Biases and Blunders
The first chapter discusses the way in which a person processes a situation (the automatic system vs the reflective system). In order for the automatic system to quickly process data, our body uses biases to simplify the decision-making process. Anchoring, framing, status quo bias, rules of thumb, and loss aversion are all discussed. The biases that the automatic system relies on can be used in ways to get a specific result.
Chapter 2: Resisting Temptation
Chapter 2 begins by looking at temptation. Temptation applies any time that we consume more of something when we are in an aroused (or hot) state. People use self-control strategies (lists, etc) to reduce the effect of temptation. Christmas clubs are another outside method to control a temptation (overspending during the holidays). Even though money is fungible, mental accounting is another method people use to give their money different jobs to complete.
Chapter 3: Following the Herd
Humans are easily nudged by other humans using peer pressure and social influence. People conform to the group even when they know that the group is wrong. People also conform with others in similar demographics (Democrat vs Republican, nationality, culture, region, ethnicity, religion, or even favorite sports team). “Don’t Mess With Texas!” was one example given using Dallas Cowboys fans in the state of Texas to reduce littering.
Chapter 4: When Do We Need A Nudge?
Always offer nudges that are most likely to help and least likely to cause harm. Humans tend to space out and forget. Infrequent events can benefit from reminders and feedback is key. It is easy to exploit a person’s lack of information by selling them the next snake oil. This is where a well-timed nudge can make a huge difference.
Chapter 5: Choice Architecture
If you want to encourage something, Make It Easy! For this reason, the path of least resistance (or default option) needs to provide a good result. Providing feedback for good and bad choices is also important. Structuring complex choices down into easily understandable blocks help humans map the choices they make to the outcomes they desire. Another form of choice architecture is aligning incentives to nudge toward a particular behavior (tax incentives, etc).
Chapter 6: But Wait, There’s More
There are two bonus methods of choice architecture discussed in this chapter. Curation is where choices are curated down to a recommended selection (music stores, bookstores, etc). The second method is to make it fun. Lotteries and reward systems are two methods of choice architecture to lead people to a predetermined behavior.
Chapter 7: Smart Disclosure
Smart Disclosure is how information is collected and made available to consumers. Standardized units of measure (MPG for cars and APR for borrowers) are important tools for consumers to compare offers. Disclosures (or fine print) can be long and detailed. All disclosures should be machine-readable and all personal user data should be made available to the user being tracked. The example of Netflix and how your viewing history is tracked and recommendations are made is provided. If you owned a set of that data you could see how and why certain recommendations are being made.
Chapter 8: #Sludge
Sludge is the opposite of the phrase Make It Easy. Sludge is used to make something more difficult or tedious so that a person will not complete the task. Examples of sludge are red tape and difficulty in canceling subscriptions. Rebates and less transparent pricing are other examples of sludge. The entire tax system in the United States is full of sludge. An entire industry exists to help you fill out the forms necessary to calculate and pay your taxes. Reduce sludge one step at a time!
Chapter 9: Save More Tomorrow
Saving for retirement is a very difficult activity for humans to take. The move to defined contribution plans has made the employee responsible for saving towards their retirement. The government has nudged people to enroll in the plans by making them tax deductible and the growth tax-deferred with matching contributions. There is still more to be done. Automatic enrollment in a strong default plan can be critical to get employees to participate. The Save More Tomorrow plan ties savings increases to pay increases to increase saving over time. Index funds and target date funds have made a strong default plan an easier option as well.
Chapter 10: Do Nudges Last Forever? Perhaps in Sweden
A case study is looked at on the Swedish Premium Pension Plan. The plan itself gave lots of choices to participants. Sweden heavily advertised the plan at the outset and drove active choice numbers up initially. However, the active plan choosers chose portfolios with higher fees, higher equity exposure, a local concentration (home bias), and less investment in index funds. They could have done a better job by picking an index fund. Active choice didn’t last long either. Once advertising ended, the active choosers tended to set it and forget it and not make further changes. The default option became better over time (a global index fund). The takeaways were to offer fewer choices and a better default investment option.
Chapter 11: Borrow More Today: Mortgages and Credit Cards
Mortgages and credit cards allow you to borrow from tomorrow. Mortgages tend to be surrounded by a lot of sludge. The sludge makes it more difficult than necessary to get the mortgage that is the best fit. Smart disclosure could be used to easily compare mortgages and credit cards. The average American has four credit cards and almost half do not pay off the balance in full each month. A person will spend more money when using a card, then when using cash. Credit cards also are not only an American problem. Residents of China now have more credit card debt than Americans.
Chapter 12: Insurance: Don’t Sweat the Small Stuff
The most important part of insurance is to get coverage for rare but significant mishaps that can lead to financial ruin. One of the largest mistakes people make is choosing a deductible that is too low. In general, choose the largest deductible available. In regards to warranties, you want to self-insure as much as possible and avoid purchasing warranties. In terms of health insurance, the “choose the higher deductible rule” would benefit people most of the time (even in high healthcare cost years)!
Chapter 13: Organ Donations: The Default Solution Illusion
Organ donation is studied in order to increase participation to save more lives in the face of sudden death. Explicit consent prompted choice, mandated choice, and incentives are all compared and contrasted. Examples from other countries are viewed and different methods to opt in (when renewing a driver’s license or when setting up a new iphone) are discussed.
Chapter 14: Saving the Planet
Saving the planet and climate change are a perfect storm of a situation where cooperation is very difficult. Present bias, salience, no specific villain, probabilistic harms, and loss aversion all play a factor. Trust is key to gaining any global change. The environmental situation is a tragedy of the commons. Each country has the incentive to pollute and take the least expensive choice, but if all countries do that, we will do irreparable harm to our planet. Green taxes and a cap and trade system can provide small gains. Sometimes better is a good step. Incentives and automatic green choices can also be used to drive change.
Chapter 15: Much Ado About Nudging
The final chapter discusses how choice architects can be malicious and choice architecture can be a slippery slope. Freedom to choose (or not) is one way to combat malicious intent. Transparency and strong default choices are also key. Taxes, mandates, and bans raise questions about the motives behind nudges and whether an informed choice is the best option for humans.
As you can see, Nudge covers many topics and provides numerous examples. A sobering fact hit particularly close to home as an AFC. Financial literacy was looked at in high school students. The longer the training period, the better the results. Effects are modest. All of the benefits disappear in a 2-year time frame. This shows that nudges are an important tool to use to drive beneficial choices and lasting change.