Nudge: Improving Decisions About Health, Wealth and Happiness by Richard H Thaler and Cass R Sunstein

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Nudge: Improving Decisions About Health, Wealth and Happiness by Richard H Thaler and Cass R Sunstein

Category: Politics and Society
Rating: 4/5
Reviewer: Magda Healey
Reviewed by Magda Healey
Summary: Nudge shows how knowledge about the imperfections of human reasoning and decision making can be integrated with the orthodox economical model providing a readable introduction to behavioural economics. It also proposes and convincingly presents a 'third way' approach to policy intervention.
Buy? Yes Borrow? Yes
Pages: 320 Date: March 2009
Publisher: Penguin
ISBN: 978-0141040011

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Choices are inevitable: from the lunch sandwich to the credit card and internet provider, to the house and car and pension plan, modern humans, particularly those living in technologically developed democracies are blessed (or cursed) with the freedom (and necessity) to choose all the time.

Understanding of the decision process is crucial for the practitioners in marketing and advertising, politics (voting behaviour), social policy and many instances of design, from census forms to air plane controls.

I will be simplifying things enormously, but fundamentally, there exist two models of human decision making which result in two models of human decision makers. Thaler and Sunstein refer to those models as Human and Econ.

The first model emerges from the research done by psychologists and neuroscientists (and is strongly supported by common sense and observation of how people actually behave). It shows that although people are pretty good at making many choices, in other cases their decision making is imperfect: it's influenced by inherent human biases, often irrational and prone to errors of all kinds, and in particular is immensely influenced by the context in which the decision making takes place. We use heuristics, shortcuts and simplified rules to ease our way through the maze of choices. We are lazy, forgetful and often less rational than we would like to be. We succumb to temptation and aren't always very good at delaying gratification. We are, in a word, Human.

The other model has been created by economists (and is particularly beloved by the currently dominant neo-classical orthodoxy). It fits into complex mathematical equations beautifully and it is necessary element of all equilibrium models. Here, we are not Humans but Econs: rational utility-maximizers coldly weighing all pros and cons, being able to create an accurate matrix of costs and benefits, making a considered choice that will maximise the total future 'utility' for oneself.

The implications of the first model for the second one form the starting point of Thaler and Sunstein's book.

Nudge has been hailed as hugely influential and tremendously important by people as varied as fashionable economists, Nobel winning psychologists and CEOs of global companies.

However, factually, Nudge doesn't say anything new. Psychologists have been researching biases and shortcuts used in human reasoning for decades. Marketers have been using context for the benefit of sales and profits; the design of retail spaces is more a hard science than a speculative art. Many books and even more articles have been written about framing and wording questions for survey questionnaires, be it political opinion polling or marketing research.

What Nudge does – and hailing it as ground breaking is a sad indictment of the limited scope of current economic orthodoxy - is to apply all this knowledge Human behaviour to the areas currently dominated by the neo-classical economic model, and thus assumed to be populated by Econs: particularly social policy.

And it does it very well: Thaler and Sunstein are lucid, jargon free, well organised and relevant. They use many examples, both serious and humorous, explain the convoluted and illuminate the complex. Nudge makes its point in a very accessible way but rarely if ever talks down to its audience.

Nudge wouldn't be as popular as it is if all it did was to show how limited and unrealistic the Homo Economicus model was. It does much more than that: it shows a clear, consistent, workable solution which is both practical (and thus anchored in knowledge of human behaviour) but also based in a particular value system (and thus politically acceptable).

Having made a clear case for the need to acknowledge human propensity to be (often unduly) influenced by context, Thaler and Sunstein proceed to demonstrate that context is everywhere. It is virtually impossible, in most situations, not to provide a context for decision making, and thus not to influence the choices in some way. In other words, a lack of consciously designed nudge is often itself a nudge.

Anybody who has a hand in designing the context for decision making is deemed to be a choice architect and thus to face the dilemma of how best to frame the choices for the maximum benefit of the Humans who have to make the actual decision.

Nudge proposes a particular approach for all choice architects faced with such dilemmas: it's called libertarian paternalism and most of the book is devoted to presenting possible applications of this approach. Libertarian paternalism is defined as preserving the freedom of choice while using the choice architecture to help people make decisions that they themselves would be happy with. Thaler and Sunstein use the very successfully chosen term 'nudge' for such interventions.

Most of the book is devoted to several case studies, showing how the actual choice architecture influences people's behaviour and how it could be improved.

There is an extensive chapter on pension funds, using both examples of US system and a fairly new Swedish model. It demonstrates very clearly how the existence of auto-enrolment, choice of defaults and the number of existing options impact behaviour. On the UK ground, the approach to Child Trust Vouchers seemed to follow nudging principles: there was a choice, but for those who didn't exercise it, auto-enrolment was used and a default option.

Another chapter deals with insurance plans for prescription drugs in the US. This was very complicated and to this reviewer seemed to be making an extremely clear case for universal, NHS style provision; Thaler and Sunstein made a decent job of showing how it could have been done better even in the US system.

One of the most interesting (and universally applicable) issues was organ donation. Nudge demonstrated clearly how the default option influences the results, and convincingly argued for 'enforced choice' approach.

Nudge also showed how advertising and propaganda can be informed and made more effective by framing the issues – from energy efficiency to alcohol abuse to community participation. Among the most valuable suggestions were those for regulation of commercial practices and dealing with 'small print', especially in advertising and sales of complicated products.

In the final sections, Thaler and Sunstein address many criticisms that their approach may provoke, although – unsurprisingly - most of those were from the right side of the political divide.

Overall, Nudge proposes what is still, by European standards, a rather right-wing approach. Occasionally, it seemed like a contrived effort to blunt the worst edges of the free-market economics without questioning many of its basic assumptions. At other times, it provided genuinely useful suggestions for improving outcomes without turning into too much of a coercive nanny-state.

As I said before, there isn't much that's factually new in Nudge but it shows how insights from psychology and neuroscience can be integrated with the orthodox economical model and thus provides a very readable and accessible introduction to behavioural economics. It also proposes and convincingly presents a 'third way' approach to policy intervention. It is certainly worth picking up, particularly by those working in the social policy area or those running (or, more to the point, designing) smaller operations.

For a good account of human rationalities, look no further than Irrationality by Stuart Sutherland whilst The Romantic Economist by Richard Bronk challenges the orthodox economic models from the philosophical point of view.

Booklists.jpg Nudge: Improving Decisions About Health, Wealth and Happiness by Richard H Thaler and Cass R Sunstein is in the Top Ten Books For The Defenders Of Reason.
Buy Nudge: Improving Decisions About Health, Wealth and Happiness by Richard H Thaler and Cass R Sunstein at Amazon You can read more book reviews or buy Nudge: Improving Decisions About Health, Wealth and Happiness by Richard H Thaler and Cass R Sunstein at Amazon.co.uk.


Buy Nudge: Improving Decisions About Health, Wealth and Happiness by Richard H Thaler and Cass R Sunstein at Amazon You can read more book reviews or buy Nudge: Improving Decisions About Health, Wealth and Happiness by Richard H Thaler and Cass R Sunstein at Amazon.com.


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