Month: January 2021

Nudges Are Unavoidable - Joe Abittan

Nudges Are Unavoidable

Posted on by jabittan
American capitalism makes a mistake in assuming that people have all the information they need to make a rational choice. As anyone who has ever purchased a car knows, consumers do not always have all the valuable information they need to make a good decision in an exchange, and often, one party has far more information than another. We can become experts at selecting avocados pretty easily, but it is fairly unlikely that we will become experts at selecting the best used car. We become avocado experts because we can buy them weekly and get reliable and immediate feedback when we get home and cut into them. A used car, however, is not something we buy on a regular basis, and we might make it months or years before we have a catastrophic break down.

 

Because we are not experts in everything and because there are some decisions we have to make where we don’t get reliable and timely feedback and can’t practice enough to truly know what to look for, we are subject to forces large and small that influence our decision-making. Buying a used car because you like the sales person, because the price feels right, and because of brand loyalty are examples of cognitive errors or biases where subtle nudges by the dealership or brand can influence us. Whether a salesman intends it or not, there are many factors that nudge our behavior, and they can’t be eliminated.

 

In Nudge, Cass Sunstein and Richard Thaler write, “In many situations, some organization or agent must make a choice that will affect the behavior of some other people. There is, in those situations, no way of avoiding nudging in some direction, and whether intended or not, these nudges will affect what people chose.”

 

The car dealership example is a somewhat nefarious and depressing view of nudges. However, the reality of Sunstein and Thaler’s quote can also be a powerful force to help improve people’s lives and not just overcharge them for a lemon. Carfax is a company that helps nudge people in the right direction, by getting them to consider the vehicle’s collision history before making a decision based on how shiny the car looks. Other nudges can be helpful for people, and if we accept that nudges are unavoidable, then we can actively step in to help design decision situations in a way that will allow people to make good decisions. An example I can think of would be visual aids to help people understand how much they can afford for a monthly car payment, mortgage, or rent. Most housing agencies suggest that people shouldn’t spend more than 33% of their monthly income on rent/mortgage. A calculator tool with a green smiley face, and a red frown face could help nudge people away from mortgages or rents that they really can’t afford, helping people make difficult and more reasonable housing decisions. Small actions can help people better understand their decisions and can serve as guides that help people do what is actually in their best interest as they themselves would understand it.
Paternalistic Nudges - Joe Abittan

Paternalistic Nudges

Posted on by jabittan
In their book Nudge, Cass Sunstein and Richard Thaler argue in favor of libertarian paternalism. Their argument is that our world is complex and interconnected, and it is impossible for people to truly make decisions on their own. Not only is it impossible for people to simply make their own decisions, it is impossible for other people to avoid influencing the decisions of others. Whether we decide to influence a decision in a particular way, or whether we decide to try to avoid any influence on another’s decision, we still shape how decisions are presented, understood, and contextualized. Given this reality, the best alternative is to try to help people make consistently better decisions than they would without aid and assistance.

 

The authors describe libertarian paternalism by writing:

 

“The approach we recommend does count as paternalistic, because private and public choice architects are not merely trying to track or to implement people’s anticipated choices. Rather, they are self-consciously attempting to move people in directions that will make their lives better. They nudge.”

 

The nudge is the key aspect of libertarian paternalism. Forcing people into a single choice, forcing them to accept your advice and perspective, and aggressively trying to change people’s behaviors and opinions doesn’t fit within the libertarian paternalism framework advocated by Sunstein and Thaler. Instead, a more subtle form of guidance toward good decisions is employed. People retain maximal choices if desired, and their opinions, decisions, and behaviors are somewhat constrained but almost nothing is completely off the table.

 

“A nudge,” Sunstein and Thaler write, “as we will use the term, 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.”

 

Daniel Kahneman, in his book Thinking Fast and Slow demonstrated that people make predictable errors and have predictable biases. If we can understand these thinking errors and biases, then we can identify situations in which these biases and cognitive errors are likely to lead people to making suboptimal decisions. To go a step further, as Sunstein and Thaler would suggest, if we are a choice architect, we should design and structure choices in a way that leads people away from predictable cognitive biases and errors. We should design choices in a way that takes those thinking mistakes into consideration and improves the way people understand their choices and options.

 

As a real world example, if we are structuring a retirement savings plan, we can be relatively sure that people will anchor around a default contribution built into their retirement savings plan. If we want to encourage greater retirement savings (knowing that economic data indicate people rarely save enough), we can set the default to 8% or higher, knowing that people may reduce the default rate, but likely won’t eliminate contributions entirely. Setting a high default is a nudge toward better retirement saving. We could chose not to have a default rate at all, and it is likely that people wouldn’t be sure about what rate to select and might chose a low rate below inflation or simply chose not to enter a rate at all, completely failing to contribute anything to the plan. It is clear that there is a better outcome that we, as choice architects, could help people attain if we understand how their minds work and can apply a subtle nudge.
Do People Make the Best Choices?

Do People Make the Best Choices?

Posted on by jabittan
My wife works with families with children with disabilities and for several years I worked in the healthcare space. A common idea between our two worlds was that the people being assisted are the experts on their own lives, and they know what is best for them. Parents are the experts for their children and patients are the experts in their health. Even if parents to don’t know all the intervention strategies to help a child with disabilities, and even if patients don’t have an MD from Stanford, they are still the expert in their own lives and what they and their families need.

 

But is this really true? In recent years there has been a bit of a customer service pushback in the world of business, more of a recognition that the customer isn’t always right. Additionally, research from the field of cognitive psychology, like much of the research from Daniel Kahneman’s book Thinking Fast and Slow that I wrote about, demonstrates that people can have huge blind spots in their own lives. People cannot always think rationally, in part because their brains are limited in their capacity to handle lots of information and because their brains can be tempted to take easy shortcuts in decision-making that don’t always take into account the true nature of reality. Add to Kahneman’s research the ideas put forth by Robin Hanson and Kevin Simler in The Elephant in the Brain, where the authors argue that our minds intentionally hide information from ourselves for political and personal advantage, and we can see that individual’s can’t be trusted to always make the best decisions.

 

So while no one else may know a child as well as the child’s parents, and while no one knows your body and health as well as you do, your status as the expert of who you are doesn’t necessarily mean you are in the best position to always make choices and decisions that are in your own best interest. Biases, cognitive errors, and simple self-deception can lead you astray.

 

If you accept that you as an individual, and everyone else individually, cannot be trusted to always make the best choices, then it is reasonable to think that someone else can step in to help improve your decision-making in certain predictable instances where cognitive errors and biases can be anticipated. This is a key idea in the book Nudge by Cass Sunstein and Richard Thaler. In defending their ideas for libertarian paternalism, the authors write, “The false assumption is that almost all people, almost all of the time, make choices that are in their best interest or at the very least are better than the choices that would be made by someone else. We claim that this assumption is false – indeed, obviously false.”

 

In many ways, our country prefers to operate with markets shaping the main decisions and factors of our lives. We like to believe that we make the best choices for our lives, and that aggregating our choices into markets will allow us to minimize the costs of individual errors. The idea is that we will collectively make the right choices, driving society in the right direction and revealing the best option and decision for each individual without deliberate tinkering in the process. However, we have seen that markets don’t encourage us to save as much as we should and markets can be susceptible to the same cognitive errors and biases that we as individuals all share.  Markets, in other words, can be wrong just like us as individuals.

 

Libertarian paternalism helps overcome the errors of markets by providing nudges to help people make better decisions. Setting up systems and structures that make saving for retirement easier helps correct a market failure. Outsourcing investment strategies, rather than each of us individually making stock trades, helps ensure that shared biases and panics don’t overwhelm the entire stock exchange. The reality is that we as individuals are not rational, but we can develop systems and structures that provide us with nudges to help us act more rationally, overcoming the reality that we don’t always make the choices that are in our best interest.
The Power of Inertia - Joe Abittan

The Power of Inertia

Posted on by jabittan
For Richard Thaler and Cass Sunstein, inertia plays a critical role in the idea of using nudges to influence people toward making good decisions. Particularly in regard to default choices, inertia matters a lot. People accept defaults, and making any change, whether it is trivial, important, time consuming, or very simple, is stubbornly resisted by many people. Think about how likely you are to change your desktop background, to change your phone’s ringtone, to order something new at your usual Tuesday night restaurant, to fix the broken windshield visor in your car, or to change your weekend morning routine.

 

Once people develop a status quo, once a default has been set, the power of inertia sets in. Sunstein and Thaler in Nudge write, “First, never underestimate the power of inertia. Second, that power can be harnessed.”

 

Harnessing the power of inertia can be sinister, but for Sunstein and Thaler, that is not the point. When a company offers you a free three month trial if you use a credit card to sign-up, they are counting on making money off your inertia. However, when a state organ donation program auto-enrolls every who applies for a drivers license, they are counting on inertia to help save lives. Inertia can be leveraged not just to make money off lazy and forgetful people, but to help make life simpler, easier, and even longer for people. In our individual lives we can harness inertia to build a workout routine, to stop buying cookies at the store, and to eat an apple during our 15 minute break every morning. For public officials, inertia can be harnessed when public programs make it easy for people to register to vote, to automatically receive social services, and to pay taxes.

 

Companies who count of people forgetting to cancel a subscription after a free trial and companies who expect that people won’t spend time shopping for alternatives once they sign up for monthly services give the power of inertia a bad reputation. They make it hard for public agencies and elected officials to credibly discuss programs designed to take advantage of or at least acknowledge people’s inability to escape inertia. But this should be a serious discussion in public policy. It is important to think about whether people will make changes in their lives to adopt measures that will help them be more safe, live healthier, and cooperate better. When we see a clear preference in how we want people to interact, we should discuss ways to help people behave as we wish they would, if we can recognize a particular decision is what people would chose for themselves if they were to make the effort of choosing anything at all. We don’t have to eliminate choices or bar people from behave otherwise, but we can use nudges, defaults, and the power of inertia to help people make and stick with better choices.