Nudge: Improving Decisions about Health, Wealth, and Happiness

1 Foundation research

Starting from 1974 when Amos Tversky and Daniel Kahneman published their path‐breaking study on human decision making (Tversky and Kahneman, 1974), there has been a large volume of interesting insights generated by behavioral economists and cognitive psychologists. In their 1974 study, Tversky and Kahneman presented decision makers with a series of gambling choices. They found that human decision making was not linear, as generally postulated. The study discovered that decision‐makers consistently under weigh outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. Further, decision‐makers generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms.

Based on these empirical results, Tversky and Kahneman developed The Prospect Theory (Kahneman and Tversky, 1979) as an alternative to expected utility theory. They showed that decision‐makers assigned values to gains and losses rather than to final assets, and that probabilities are replaced by decision weights. They showed that “framing” of issues (i.e. the context) had a large impact on our choices and decisions.

Subsequent to this portfolio of seminal work by Tversky and Kahneman, there has been a large volume of interesting research (e.g. Eric Johnson, Daniel Goldstein, Daniel Kahneman, Richard Thaler) in this domain. This research has produced many books including Blink: The Power of Thinking without Thinking (Gladwell, 2005), Judgment and Decision Making: Psychological Perspectives (Hardman, 2009), and Stumbling on Happiness (Gilbert, 2006). These books have been received well, and have enlightened us on the various elements of human decision‐making.

Prospect Theory has found wide applications including in marketing in estimating the effects of price increase and decrease (Kalyanaram and Little, 1994).

2 Goals of Nudge book

The Nudge book adds to this rich database on human thinking and decision making. Thaler and Sunstein explain to us why we make apparently unwise decisions and choices when the correct choices should be evident as daylight. Many biases shape many of our trivial and consequential choices and decisions. We make decisions on topics ranging from personal investments to schools for our children to the meals we eat to the causes we champion to decisions about war and peace. Each one of these decisions is subject to various biases, which make us susceptible to errors in judgment. Individually and collectively as a society, our errors in judgment can be very consequential.

Thaler and Sunstein build on the theories of framing, asymmetric comparisons, and relative assessments. They demonstrate that we can frame choices in a manner that makes it easier for people to choose what is best for themselves, their families, and their society. The authors illustrate how appropriate framing of the “choice architecture” can facilitate in nudging us to more beneficial decisions both in personal and public lives. In the context of public policy decisions (Sunstein is now a White House Presidential adviser), the book addresses how we can increase societal welfare through better framing of the choices. Of course, that leads to an important concern: are the authors advocating restrained choices? Are autonomy and freewill being subverted by the prescription of the authors? The emphatic answer is “No.”

The authors consider how the science of choice can gently “nudge” individuals toward making life‐improving decisions. A nudge is a motivator or an incentive or a frame, which elicits a certain desired behavior. As the authors illustrate, the most easy and efficacious “nudge” to elicit a desired behavior is to employ the default option in the choice set because human beings look for paths of least resistance and therefore, let default option become the choice. According to the authors, “defaults are ubiquitous and powerful”.

3 The five sections of Nudge book

The authors divide the text into five sections: “Humans and Econs,” “Money,” “Health,” “Freedom,” and “Extensions and Objections.” The text discusses theory and illustrates the insights through numerous examples.

The first part on “Humans and Econs” deals with general biases, temptation and herd mentality (conformity), and discusses the role of nudge and appropriate choice frames. For example, Thaler and Sustein show how we are consistently “over‐confident” about our abilities and the outcomes of events, and how this leads to imprudent risk‐taking. The “above average effect” is pervasive generating unrealistic optimism. The recent examples of “irrational exuberance” in the high‐tech industry or the housing market illustrate this nicely. Of course, in both the cases unrealistic optimism eventually led to pain and agony. On temptation and self‐control strategies, the authors show the values of “mental accounting” and budgeting. In the budgeting context, monies are not fungible (if the money dries up in one budget, and even if the monies are available in another budget line, rules do not normally permit use of monies from the second budget for items in the first budget).

In discussing conformity (i.e. following the herd mentality), the book argues that human beings conform because they do not want to stand out, i.e. be noticed as different from others. Human beings assume that the rest of the world is observing them carefully, that they are in “spotlight.” As evidence shows, this is not a correct assumption, i.e. the world is not as interested in us as we think. Accordingly, if we can “nudge” human beings away from the assumption of “spotlight effect” then their decisions and choices are less likely to be conforming and hence error‐prone. In addressing the “choice architecture,” the authors set out the commonsensical principle that stimulus i.e. the signal should be consistent with the desired action and/or behavior.

Having set forth the wrinkles in human cognition, behavior and choices, the authors discuss the consequences of these wrinkles in different domains of choices, and how we could overcome these biases which act as impediments to wholesome choices. The way to overcome these biases is simple “nudges.” First of the domain under the caption “Money” addresses personal financial decisions relating to individual savings and investing strategies, and management of credits and loans. Under this topic, the public policy issue of privatization of social security is also discussed. One simple insight from this section is that human beings save and invest best when they are nudged to “automatic” enrollment in a defined benefit savings plan, and in an investment plan.

The section on “Health” addresses large issues related to Prescription Drugs (Part D), Organ Donation, and Environment consciousness. In each case, the text recommends many possible “nudges.” For example, human beings are terribly bad in conservation of energy because energy is invisible. Accordingly, authors suggest visual cues such as a visible sign, which will illumine red if the person consumes too much energy and green if the person consumes prudent level of energy. This simple visual cue successfully nudges human beings to energy conservation.

“Freedom” section deals with choices in schools for educating one's kids, ways to reduce medical liability, and increasing the odds of success of marriage. This section is a mix of private and public issues. An interesting nudge to increase the odds of high school students attending colleges is to make application to a college a requirement for high‐school graduation. While this nudge is interesting and is employed in San Marcos, Texas, the large‐scale applicability of this nudge without running foul of law is doubtful. Similarly the text recommends other nudges, which while interesting, are not permitted by the current legal statutes. For example, the authors recommend that society should let patients sign a private contract releasing the doctors of liabilities but the courts do not like such arrangements.

The final section on Extensions and Objections is largely a discussion of some of the critique, and a listing of large numbers of nudges to elicit different kinds of behaviors and actions.

Overall, Nudge is a highly recommended read for practitioners and scholars. Easy in its style and presentation, but serious and substantial in its context, Nudge is an important contribution to understanding how human beings make decisions and how we can improve those decisions.