Category: Nudge – Sunstein and Thaler

Markets and Environmentalism - A Call for Better Incentives

Markets and Environmentalism – A Call for Better Incentives

Posted on by jabittan
Earlier I wrote that climate change and environmental concerns seemed to be too large of a problem to be left to nudges. Toward the end of Nudge, Cass Sunstein and Richard Thaler acknowledge the reality that nudges alone cannot tackle climate change, but they still encourage actions that follow the spirit of nudges, or at least learn from the psychology that makes nudges effective. Incentives play a huge role in behavior, and  need to be considered when governments approach businesses in an effort to redress the harms of climate change. Markets and environmentalism cannot be separated if we are to have a sustainable climate. Better incentives need to be implemented within markets to adjust for environmental needs.

 

The authors acknowledge market failures related to climate change by writing, “when the air or the water is too dirty, the standard analysis says that it is because polluters impose externalities (that is, harms) on those who breath or drink. Even libertarians tend to agree that when externalities are present, markets alone do not achieve the best outcome.” Pollutants are common externalities, as are traffic congestion and decimated wildlife populations. The cost of negative externalities is squarely on the shoulders of the individuals in the market, either the consumer or the producer. Governments are necessary to deal with these externalities and prevent them from harming innocent bystanders.

 

Additionally, regarding market failures and climate change, the authors continue, “When people are not in a position to make voluntary agreements, most libertarians tend to agree that government might have to intervene.” Most libertarians agree that labor contracts should be voluntary, with an employer reserving the right to hire anyone, and laborers reserving the right to walk away if their wages or working conditions are unfair. In reality, many people would starve if they walked away from a job, or at least face serious challenges, so voluntary agreements are not always possible. Within the climate change arena, many people cannot simply chose to travel to work by more fuel efficient methods, many people cannot afford the switch to solar power, and many other potential solutions are similarly unavailable, meaning people and businesses are often stuck, involuntarily, with polluting norms for travel, work, and heating or cooling their homes and offices. Markets alone don’t provide the impetus to change the status quo to reflect the reality of climate change.

 

The next post will dive deeper into the incentives and solutions to these problems, but it is clear that markets alone will not direct society toward a climate change solution. The danger of climate change is a long-term danger, where the costs are not experienced in the immediate moment but are instead experienced years and decades later. However, the costs of making adjustments to limit climate change are experienced up front. Upgrading infrastructure, investing in electric and solar technology, and living in more economically friendly ways present immediate costs that nudges cannot overcome. Nevertheless, we can consider the ways in which nudges work and build on those principles to begin to make changes. We can start to better align incentives to limit externalities, and we can preserve choice structures as we move forward with investments and innovation to help us meet the needs of the climate crisis. Government will play a big role and can learns a lot from the psychology of nudges to help address the challenges we face.
Can We Employ Simple Health Nudges?

Can We Employ Simple Health Nudges?

Posted on by jabittan
In their book Nudge, Cass Sunstein and Richard Thaler write, “Libertarian paternalists see countless opportunities for improving people’s health. Social influences could obviously be enlisted: if most people think that most people are starting to avoid unhealthy foods, or to exercise, more people will avoid unhealthy foods and will exercise.” The book was published in 2008, and while the authors imagined many ways in which nudges could make a big impact for the health of individuals and populations, few nudges seem to be making an impact in the US today. The lack of successful nudges, and the health challenges of the last few years raise the question, can we employ simple health nudges to solve our problems?

 

The COVID-19 pandemic has shown us how hard it is to adopt simple healthcare practices in the United States. Nudges, like signs, reminders, and commercials about preventing airborne transmission of the virus through the use of masks doesn’t seem to be as effective as we would like. It has often taken mask mandates and fines for business to compel people to actually wear masks. Nudges, in the case of encouraging mask wearing in the face of a deadly pandemic and highly transmissible disease seemed to be ineffective.

 

Before the COVID-19 pandemic, two public health ideas that were being tested were limiting the size of sodas that people could purchase at restaurants and convenience stores and taxing sugary drinks. I’m not sure if Sunstein and Thaler would consider bans on overly large soda cups or taxes on sugary beverages as nudges, but I think they count. No one was limiting the number of sodas an individual could buy, and the taxes on sugary drinks were very low. The idea behind each measure was to marginally reduce some sugary beverage consumption, hopefully helping people reduce their caloric intake and improve their dental health. But even these small measures were met with fierce backlash. Very few people would really be impacted by the limited sizes of large soda cups, and few people would meaningfully feel the price of the soda taxes, but both measures were attacked and only a few places were actually able to pass such measures. If such limited actions are met with such strong resistance, then it doesn’t seem like we can rely on nudges that will meaningfully move people toward more healthy lives.

 

Sunstein and Thaler also write about social influencers as being important in nudging people toward diets and exercise, but in the years since 2008, social influencers have been less successful at encouraging diets than they have been at getting people to take cool pictures wearing athleisure wear. Body positivity movements have possibly encouraged people to be more accepting of non-model/Avenger body shapes, rather than encouraging them to spend more time at the gym and eat more salads. I think it is a healthy movement, but the nudge of body positivity movements are not tied to the same health goals that are written about in the book. From my perspective, it seems that there are larger structural issues that shape and limit our exercising and influence our diets beyond what nudges can hope to influence.

 

While I wish we could employ simple health nudges to improve individual and population health, I don’t think it is possible. We have trouble communicating the effectiveness of masks and encouraging people to wear masks during a global pandemic, and people will fight against marginal measures to limit soda consumption. Encouraging more exercise and getting people to eat healthier requires action beyond what a nudge can do, and require real structural changes to the systems and incentives that create our current health problems. Beyond nudges, we need larger creative solutions that will truly change people’s behavior.
Too Many Options - Nudge by Cass Sunstein and Richard Thaler - Joe Abittan

Too Many Options

Posted on by jabittan
Writing specifically about new employee enrollment in retirement savings plans, Richard Thaler and Cass Sunstein in their book Nudge write, “One study finds that the more options in the plan, the lower the participation rates. This finding should not be surprising. With more options, the process becomes more confusing and difficult, and some people will refuse to chose at all.” The important lesson that Thaler and Sunstein present with this quote is that getting people to do things that they want to do and know is in their best interests is challenging, even when it shouldn’t be. Additionally, people have ideas of what they should be doing and have goals for where they want to be, but don’t often have a great sense of the best way to get there. When that is the case, such as saving enough for retirement, making the path simple is more important than ensuring that the path leads to the most optimal choice or maximizes the individual’s choices.

 

One size fits all approaches and solutions usually are not great. They typically get the job done, but usually don’t lead to the best outcomes for most people. This is true with health insurance plans, retirement savings accounts, and special event t-shirts. One size fits all health plans cover general health needs, but might not work well for someone who needs expensive asthma medicine. Generalized retirement savings accounts help people get started on the path to saving for retirement and ensure that people at least have something banked when they get to 65, but they often fall short and have minimal risk taking approaches that prevent losses, but limit growth. And unisex t-shirts fit everyone, but aren’t the most comfortable and certainly are not form fitting to match current fashion trends. However, despite their inadequacies, these examples are often good first steps in helping people make a decision and get started with a plan.

 

It would be great if every person could pick the perfect healthcare plan, could find the optimal investment strategy for retirement, and have perfectly tailored clothes for every special occasion, but it isn’t realistic everyone to make great choices in all of these situations. No one knows exactly what their healthcare demands will be for the upcoming year. Our risk tolerance and savings needs and abilities will change throughout our lifetime, and no one can mass produce special event t-shirts that are tailored to every participant. Information is lacking, preferences don’t stay the same, and resources are constrained.

 

Getting people (or products) started is the first step toward ensuring healthcare coverage, retirement savings, and having race-day t-shirts for a charity run. Given the constraints I mentioned above, the initial choices need to be simple. Presenting an individual with 20 healthcare plans is going to be confusing and frustrating. The same is true for retirement options, and people looking to coordinate clothing for a special event can’t spend the too much time arguing between thousands of combinatorial options for their shirts. Rather than making a selection, people risk dropping out if they face too many choices. When there are too many options, people become frustrated, and if they don’t walk away, might select the first option they see, making suboptimal choices.

 

A solution is to take a one size fits all approach that can be adjusted and customized at a later point. Getting people started with something simple and generalized can avoid the frustrating paralysis that presenting too many options can create. Helping people understand how to make changes and learn between selections will help people improve their decisions over time and better identify healthcare plans, retirement savings plans, and custom t-shirt options that match their needs, preferences, and constraints. It is possible to present people with a few options initially, and allow them to explore additional options later on if the initial options are not a good fit or if the individual wants to explore more nuanced and complex options.
Learning and Exploratory Nudges - Joe Abittan

Learning and Exploratory Nudges

Posted on by jabittan
So far, a lot of the nudges I have written about assume that there is a known best option for an individual and that a choice architect can help direct people toward that best option. In situations like retirements savings, healthcare benefits selection, and other complicated, structured, and somewhat formulaic choice scenarios, it is relatively easy to take a rational approach to use nudges to help people select an option that will be a good choice for them. But nudges don’t have to direct people toward an already known option. Nudges can be more exploratory in nature and directed toward learning.

 

In some situations, write Cass Sunstein and Richard Thaler in their book Nudge, “it’s good to nudge people in directions that they might not have specifically chosen in advance. Structuring choice sometimes means helping people to learn, so they can later make better choices on their own.”

 

Helping people learn can be better than always trying to give people the right answer. Libertarian paternalism accepts that choice architects don’t know everything about another person’s preferences or self-interest, but assumes someone can generally know the right direction to point other people in. Using nudges to provide more feedback, encourage people to consider appropriate information, and help people better sort through their options can help people understand how to think and approach similar choices. When the goal of a choice architect is to maintain a maximal choice level while providing people with valuable information and alternatives, nudges that encourage learning are incredibly useful.

 

Additionally, nudges that encourage more exploration are helpful for people when it comes to things like listening to music or dining out. Nudges can direct people back toward things they already like, but they can also direct people toward new things that similar people like. Many algorithms on Amazon, music streaming services, and clothing subscription services work in these ways. While they are ultimately designed to keep you engaged or convince you to buy something else, they do employ exploratory nudges to help people find new likes. A company could continue suggesting you buy the same pair of shoes, but they might be able to get you to buy another pair if they show you one that other people also like. Helping people explore new genres of music, new authors, and new styles of clothes can provide real value to the individual, beyond the value to the company in convincing someone to buy something new. The individual still learns if they get feedback from their exploratory choices and gain new insight into finding new alternatives.
Default Choices

More On Default Choices

Posted on by jabittan
In many decision situation there is a default choice. Many online forms already have a bubble selected as you scroll through, there are many opt-out clauses in hospital disclosures, and when you go to sign-up for a social media platform there are pre-set security and information sharing agreements and settings. These defaults can matter a lot, and sometimes they matter much more to someone other than the recipient of the default. As Richard Thaler and Cass Sunstein write in Nudge, “note that not all defaults are selected to make the chooser’s life easier or better.”

 

Default selections are nudges because they shape the easiest choice path, what Sunstein and Thaler refer to as the path of least resistance. When a default has already been selected, the chooser doesn’t have to make a decision. Their non-decision still results in a choice being selected. The default is often the most popular option, even if it isn’t the best choice for anyone, because there is some cost to switching away. The cost is usually only time and effort, and normally a minimal amount of time and effort, but still, it is a cost that people won’t pay.

 

“If, for a given choice,” write Sunstein and Thaler, “there is a default option – an option that will obtain if the chooser does nothing – then we can expect a large number of people to end up with that option, whether or not it is good for them.”

 

Most of us probably agree that it isn’t in our best interest to allow Facebook to gather massive amounts of information about us to be sold to advertisers and political campaigns. However, the default settings for Facebook require us to opt-out of having our data sold. The process for finding the settings and opting out of targeted advertisements and having our data sold is hard to find, and the exact spot in the settings menu changes periodically. We lose time trying to find the right spots to check to get out of the default, and we can become frustrated if we can’t find the settings we are looking for. As a result, many people never change away from the data sharing default.

 

The Facebook example is a fairly nefarious use of defaults, but using defaults as nudges can be positive for individuals and societies as well. In 2019 the state I live in, Nevada, approved a new law which allows people to register to vote when completing anything they need at the DMV. By default, individuals over 18 who are eligible to vote are asked if they would like to register or update their registration. People don’t have to ask to update their voter registration, they don’t have to track down a website to update voter information, and they don’t have to hope someone approaches them in a parking lot with voter registration forms, it is a default option while doing regular paperwork at the DMV. Many states have a similar process with becoming an organ donor, where registering as an organ donor is the default option when applying for a state issued identification, requiring people to opt out of organ donor programs rather than opt in. States and countries with such systems have far more organ donors than states that don’t include people by default.

 

The path of least resistance created by nudges is important to consider. It can be a helpful way to encourage people to make decisions that are good for them and for society. At the same time, defaults can take advantage of laziness or forgetfulness. When we are not directly informed of the defaults that are being applied to us, we can end up in situations like the Facebook data sharing example above. As a result, questions about the default choice are often contentious, especially when a company’s business model requires a default that is not in the best interest of most people, or when a selected default can have political or moral dimensions.
Stimulus Response Compatibility

Stimulus Response Compatibility

Posted on by jabittan
Have you ever had someone give you a list of words written in different colored ink and asked you to ignore the word as written and instead say the color of the ink that the word is written in? It isn’t too difficult when you see random words, but it becomes much different when you see the names of colors written in different colors, such as green written in red ink or the other way around. The difficulty with reading the color and not the word in those situations stems from poor stimulus response compatibility. The brain receives a signal in the writing of the word, and has to overcome that signal to say a different color.

 

Richard Thaler and Cass Sunstein use this as an example in their book Nudge. They also demonstrate stimulus response compatibility using an example of a door with round wooden handles in a classroom that Thaler once taught in. The handles sent a signal to student and anyone else exiting the room that indicated they were intended to be pulled in order for the door to be opened. However, the doors needed to be pushed open. Describing the confusing doors and the poor stimulus response compatibility, the authors write, “you want the signal you receive (the stimulus) to be consistent with the desired action. When there are inconsistencies, performance suffers and people blunder.”

 

Stimulus response compatibility is crucial in terms of website design, road construction, slide presentations, video games, and any other setting where cues are used to indicate a desired behavior. People need to understand where to click to add an item to a shopping cart, how to scroll through a website, and how to close out of any pop-ups. Drivers need explicit cues for when it is safe to drive through an intersection, and inexplicit cues can help drivers understand when they need to slow down. Visual, audio, and other stimuli can drive predictable responses in people, and they can be used as nudges to help encourage or discourage certain behaviors. Understanding the stimulus you are providing and whether it is compatible with the behaviors you want people to exhibit is crucial.

 

Most of us probably want to develop good stimulus response compatibility, but we should also note that it can be used to frustrate people and prevent certain behaviors or goal attainment. If you have ever tried to unsubscribe from an annoying email list or newsletter, you may have experienced the challenges of intentionally poor stimulus response compatibility. Instead of having a clear link at the end of the email to unsubscribe, the link might be a dull gray color. The link might take you to a page with unclear directions on what buttons you needed to select to unsubscribe from all future emails. You may have seen a green button prominently placed that re-subscribed you instead of unsubscribed you from the emails, thwarting your plan to declutter your inbox.

 

It isn’t quite the case that these nudges are methods of mind control, but they do influence our behavior and can shape how we behave, what we learn, and real outcomes in our lives. If we are choice architects, we should recognize what behaviors we are trying to encourage, and think about the subtle cues and stimuli we can present to encourage people to make decisions that are in the best interest of the individual making the choice – as measured and determined by them, not us. Nudges are powerful, especially when a good stimulus response compatibility is in place. Importantly, nudges are not the kinds of roadblocks and obstacles that I discussed in the example of trying to unsubscribe from an email list.
Irrational Market Cycles - Joe Abittan

Irrational Market Cycles

Posted on by jabittan
I think about markets a lot, often focusing more on market failures than on market successes. I think our country generally views markets as infallible, and that drives me (in a somewhat contrarian strain) to look at spaces where markets don’t work. I also started my career in healthcare and have some relatively expensive healthcare concerns of my own, which also drives me to look at market failures with more energy than market successes. While there are many positive aspects of markets (they certainly do create a good level of efficiency and innovation and may also be generally pacifying across the globe), I think it is important to continue to highlight irrational market cycles, tragedy of the commons type situations, and areas where a market simply can’t be established because goods are nonrivalrous and nonexcludable. This post will specifically highlight an irrational market cycle, by which I mean a cycle of irrationality supported by market forces.

 

One of the strongest points of markets is that they help to weed out poor performers and eliminate waste. Someone selling a product that doesn’t provide value shouldn’t be able to find any customers. They might dupe a few people into buying their product, but overtime, we expect the market to marginalize the seller and for his business to eventually go bust. But this market efficiency mechanism only works if people are rational, and irrationality can be manipulated and exploited in a market, creating irrational market cycles. Cass Sunstein and Richard Thaler use extended warranties (not the spam ones you get calls about for your car but real ones offered when you buy a fridge) in their book Nudge to describe irrational market cycles. They write:

 

“If consumers have a less than fully rational belief, firms often have more incentive to cater to that belief than to eradicate it.”

 

There are products that don’t make sense. Sometimes they pop up as a fad, sometimes they are deliberate scams, and sometimes they are a new gadget that is attached to a new technology as an additional aid, but are in reality effectively useless. People can get sucked into purchasing these items, and they can be marketed as effective and must-have items, only to be irrational junk. The people selling the junk don’t have an incentive to help us think clearly about the product, they have an incentive to hide the truth and make their product appear more attractive by playing into and reinforcing irrational behaviors.

 

Using the extended warranty example Sunstein and Thaler continue, “If Humans realized that they were paying twenty dollars for two dollars’ worth of insurance, they would not buy the insurance. But if they do not realize this, markets cannot and will not unravel the situation. Competition will not drive the price down.”

 

An irrational market cycle can arise when incentives exist to encourage people to participate in irrational markets. People’s fear, lack of information, and cognitive biases can be leveraged by market actors to further irrational spending. A market on its own cannot correct this issue as Sunstein and Thaler show. Nudges can be helpful in diverting people out of the market, but it is worth recognizing that there is a role for outside forces to shape markets that fall into these irrational cycles.
Missing Feedback

Missing Feedback

Posted on by jabittan
I generally think we are overconfident in our opinions. We should all be more skeptical that we are right, that we have made the best possible decisions, and that we truly understand how the world operates. Our worldviews can only be informed by our experiences and by the information we take in about events, phenomena, and stories in the world. We will always be limited because we can’t take in all the information the world has to offer. Additionally, beyond simply not being able to hold all the information possible, we are unable to get the appropriate feedback we need in all situations for comprehensive learning. Some feedback is hazy and some feedback is impossible to receive at all. This means that we cannot be sure that we have made the best choices in our lives, even if things are going well and we are making our best efforts to study the world.

 

In Nudge, Cass Sunstein and Richard Thaler write, “When feedback does not work, we may benefit from a nudge.” When we can’t get immediate feedback on our choices and decisions, or when we get feedback that is unclear, we can’t adjust appropriately for future decisions. We can’t learn, we can’t improve, and we can’t make the best choices when we return to a decision-situation. However, we can observe where situations of poor feedback exist, and we can help design those decision-spaces to provide subtle nudges to help people make better decisions in the absence of feedback. Visual aids showing how much money people need for retirement and how much they can expect to have based on current savings rates is a helpful nudge in a situation where we don’t get feedback for how well we are saving money. There are devices that glow red or green based on your home’s current energy usage and efficiency, providing a subtle nudge to remind people not to use appliances at peak demand times and giving people feedback on energy usage that they normally wouldn’t receive. Nudges such as these can provide feedback, or can provide helpful information in the absence of feedback.

 

Sunstein and Thaler also write, “many of life’s choices are like practicing putting without being able to see where the balls end up, and for one simple reason: the situation is not structured to provide good feedback. For example, we usually get feedback only on the options we select, not the ones we reject.” Missing feedback is an important consideration because the lack of feedback influences how we understand the world and how we make decisions. The fact that we cannot get feedback on options we never chose should be nearly paralyzing. We can’t say how the world works if we never experiment and try something different. We can settle into a decent rhythm and routine, but we may be missing out on better lifestyles, happier lives, or better societies if we made different choices. However, we can never receive feedback on these non-choices. I don’t know that this means we should necessarily try to constantly experiment at the cost of settling in with the feedback we can receive, but I do think it means we should discount our own confidence and accept that we don’t know all there is. I also think it means we should look to increase nudges, use more visual aids, and structure our choices and decisions in ways that help maximize useful feedback to improve learning for future decision-making.
A Limitation on Nudges

A Limitation on Nudges

Posted on by jabittan
“Rare, difficult choices are good candidates for nudges,” write Cass Sunstein and Richard Thaler. Throughout their book Nudge, Sunstein and Thaler try to encourage limitations on nudges. They acknowledge that anytime people are in a position to influence decision-making by determining how choices are designed and structured, they will be providing people with nudges, regardless as to whether their nudges are deliberate or inadvertent. However, the authors don’t encourage people to step beyond nudges and truly limit people’s choices or prevent them from making decisions, even if those decisions are ones the individual would deem bad for themselves.

 

Nudges are helpful in rare and difficult choices because we are likely to make mistakes in those areas. We don’t make large investment decisions on a regular basis, we only enroll in healthcare plans once a year (and usually we just let ourselves roll into the same plan as last year), and we hopefully never have to make major life altering medical decisions. When we don’t get immediate feedback on a decision, when we don’t have an opportunity to practice and improve decision making in certain contexts, then we are likely to make mistakes. We won’t use appropriate discount rates, we will be influenced by irrelevant factors, and we will not consider all of the necessary information when making our selection. Nudges can help overcome all of these factors.

 

But we don’t necessarily need direct nudges in every decision situation, and we don’t need people to go beyond nudges and actually limit choices in most of our decisions. Buffets can nudge us by placing salad at the front of the line, so that we load our empty plate with more salad and have less room to pile on the tri-tip at the end of the line. This can be a useful strategy for buffets to save money by encouraging people to eat cheap fillers and could be a useful strategy for school cafeterias to encourage more healthy eating. But placing tri-tip under a cover that requires that we press a lever with one hand and open the lid with a second hand is beyond a reasonable nudge. Sunstein and Thaler believe that nudges should be easy to avoid or bypass for those determined to make their own choices, even if it isn’t what is generally understood to be in their best interest. A limitation on nudges, in the authors view, is a good thing, and helps protect nudges for situations where they are truly helpful and meaningful.
The Time for Nudges

The Time for Nudges

Posted on by jabittan
One of the most common examples for why nudges should be used by governments, employers, parents, and grandparents is the example of using nudges to encourage financial savings, especially for retirement. People don’t save enough for retirement, and are often quick to spend their money before they even have it, leaving themselves financially vulnerable to job losses, car breakdowns, and severe weather events. Governments can offer tax breaks for savings, employers can default employees into retirement savings accounts at high levels, parents can teach children to save allowances, and grandparents can start long-term savings vehicles for young children and nudge them to use the money wisely at a reasonable age. What the retirement nudge examples all show, is the importance of thinking about time when considering nudges and behaviors.

 

In their book Nudge, Cass Sunstein and Richard Thaler write, “Self-control issues are most likely to arise when choices and their consequences are separated in time.” Nudges, the authors explain, are incredibly valuable when time is an important factor. When our behaviors and actions provide small immediate rewards at the cost of larger later returns, then nudges can play a huge role.

 

Teaching children self-control, and encouraging them to show restraint and save their weekly allowance for a larger purchase that will last longer than some gum or candy does the same thing as helping employees contribute more than 5% of their paycheck to a retirement account. In the present moment it would be nice to have a dopamine hit from a candy bar, but a new Gameboy game is going to provide hours of entertainment after the candy bar is gone. Similarly, a lease on a new sports car might be affordable, but an earlier retirement, sending a kid to college without saddling them with debt, and surviving a costly MRI during an unemployment spell in an economic downturn is much more important than impressing the neighbors.

 

Self-control is easier when there is a short time period between our action the consequences we will face. If I know that yelling at someone on the phone while I’m in the presence of my boss could cost me my job, I’ll probably be able to hold back. But many of our self-control requirements have much longer time spans for the benefits or costs to become apparent. While it doesn’t feel like we lose anything by scrolling through Twitter for a few minutes after lunch each day, those minutes add up, and could be the difference between a promotion a year from now and missing out on a big break for career advancement.

 

Nudges are helpful because they can help us better understand costs, use better discount rates for the future, and make the difficult decisions that payoff in the long run.  This is why the retirement examples are so common when discussing nudges, because they are the precise examples of where our brains make cognitive errors that could harm us in the future, and they are spaces where small actions can help us overcome poor decision-making, impulsive behaviors, and short-term thinking to behave in ways we would chose if we were acting more rationally.