Richard Thaler outlines how principles from behavioral economics can help policymakers — and managers — achieve better outcomes.
Q: Could you explain some of the key ideas in Nudge: nudges, choice architecture, and libertarian paternalism?
“Libertarian paternalism” suggests that these two seemingly contradictory terms can actually define a non-contradictory and attractive policy alternative. By “libertarian” we simply mean respecting people's right to choose, whenever possible. And by “paternalism” we mean caring about the outcomes for people, as judged by themselves. So we would like to create environments where people are more likely to choose things that they, themselves, think are good for them.
Now, the person who is in charge of that choice environment is somebody we call a “choice architect.” There are choice architects in virtually every environment. When a professor teaches a course, he is the choice architect. When somebody puts this magazine together, they will decide in what order the articles appear and what illustrations and photos accompany them that may or may not attract people's attention. That's a good example, because people are free to throw the magazine away. They are free to read whatever they want, but the magazine designer will have some influence on which articles they read, and in which order. And what we know is that all kinds of small things, like whether there is an illustration that accompanies an article, will influence whether people read that article. And those small things are what we call “nudges.” So a nudge is any small feature of the environment that attracts people's attention and alters their behavior but does so in a way that doesn't compel.
Q: Could you give some examples of where nudges have influence?
Probably the areas that have received the most attention so far are savings and investment. The simplest example of a successful nudge is the default option. A default option is simply what happens if you do nothing. Normally, nothing happens, but sometimes even when you do nothing, something happens. So while I'm sitting here talking to you, if I do nothing on my computer long enough, pretty soon the screen saver will come on. How long it is until that happens was itself a default option that came with my computer that I never changed. What we know is that default options are extremely powerful. Many people just go with the flow and take whatever the default is. That means that the choice architect has immense power by choosing the default, sometimes knowingly and sometimes unknowingly.
A good example is in the area of pension policy. In many 401(k) plans, the default option is not to join. If you are going to join, you have to fill out some paperwork. Some companies have tried the opposite default, which is that you are enrolled unless you fill out some paperwork. We know that speeds enrollment greatly and doesn't really cost anything. Shlomo Benartzi and I have added to that a policy called Save More Tomorrow, where people are invited to join a plan in which they agree to increase their savings contribution every time they get a raise. That's another good example of libertarian paternalistic policy. No one is forced to join it. People sign up of their own free will, but in the first company where we did this we more than tripled savings rates.