Nudge: Improving Decisions About Health, Wealth, and Happiness

Chapter 1, “Biases and Blunders,” is about errors in human judgment. The authors open with an optical illusion. They write, “Not only were you wrong; you probably thought you were right” (24). They emphasize that the mistake caused by the illusion happens to everyone, even those with the highest IQs.

Using the work of Daniel Kahneman and Amos Tversky, Thaler and Sunstein then discuss “rules of thumb,” which they claim are useful but also problematic since they may lead to “systematic biases” in decision-making (26). For example, “anchoring” occurs when trying to guess the right quantity of something. A person uses the information they already know and approximates from there. “The biases occur,” Thaler and Sunstein write, “because the adjustments (from the anchored quantity) are typically insufficient” (27). They show that changing the order of questions in a survey can significantly alter how well a person thinks their life is going. In such a case, the first question serves as the anchor. People also tip differently when there are pre-set tipping options because the given options serve as anchors.

The “availability heuristic” is another error-prone rule of thumb. This rule causes individuals to assess probability based on available examples. Since, for instance, homicides are reported more frequently in the news than suicides, most people think that more gun deaths are caused by homicide than suicide when, in truth, the reverse is the case (by a wide margin). The third of these three blunder-inducing rules of thumb is representativeness. It uses stereotypes to categorize objects by reference to their perceived similarities.

Thaler and Sunstein next discuss “Optimism and Overconfidence” in decision-making, which lead to other common errors in reasoning. Many people are overconfident about their abilities and underestimate the risks to their lives and health. They reveal that 90% of drivers claim to be better than the average driver, and 94% of professors believe they are superior to the average professor (33). People also underestimate risks. Thaler and Sunstein note that many smokers who are aware of the dangers involved nevertheless believe that will avoid them. Frequent participants in the lottery are also unrealistically optimistic.

Thaler and Sunstein also note that people are “loss averse” (35). They write, “the prospect of losing something makes you twice as miserable as the prospect of gaining the same thing makes you happy” (35). They discuss the relevance of loss aversion to policy-making and show how it leads to inertia. They also discuss “status-quo bias,” which, combined with loss aversion, leads to the power of the “default option,” an important type of nudge they will discuss throughout the book.

Framing is another factor in biases. People make different decisions based on how the choice is portrayed. Thaler and Sunstein write, “Even experts are subject to framing effects. When doctors are told that ‘ninety of one hundred are alive,’ they are more likely to recommend the operation than if told that ‘ten of one hundred are dead’” (39). Statistically, these two phrases mean the same thing, but frame the data differently, leading to different decisions. Borrowing from Kahneman’s book Thinking, Fast and Slow, Thaler and Sunstein divide the human brain into two thinking systems: the Automatic System and the Reflective System (41). The Automatic System is quick, effortless, and unconscious (among other things). The Reflective system is slower but more logical. They use language acquisition as an example: “People speak their native languages using their Automatic Systems and tend to struggle to speak another language using their Reflective Systems. Being truly bilingual means that you speak two languages using the Automatic System” (43).

Thaler and Sunstein reinforce the distinction between human beings and the “Econs” of economic modeling. While the latter always reflect on the decisions they make, human beings often only use their Automatic Systems. As a result, humans respond to nudges, not merely incentives. They conclude the chapter by summarizing their findings. The biases in their judgments make human beings “nudge-able” (46). The authors write that even the most serious decisions in a human’s life can be influenced by nudges.

Thaler and Sunstein begin their chapter on “resisting temptations” with an anecdote on the difficulty party-goers have resisting a bowl of nuts (even when they know dinner is imminent). They write, “the crucial fact about temptation is that people’s state of arousal varies over time” (51). Temptations can be eliminated (or reduced) by various “commitment strategies,” methods through which people commit to decisions that will remove the temptation (51). They include research from Loewenstein’s “hot-cold empathy gap” to show that people are often unaware of the dependence of their desires on context (52). They then develop the idea of two selves: a Planner and a Doer. These are loosely associated with the Reflective and Automatic systems of thought. The Planner is farsighted while the Doer is influenced by immediate gratification. They discuss several self-control strategies in which people use technology, bets, and games to change their behavior. Each of these is an example of a nudge. Daylight savings, cigarette taxes, and gimmicky alarm clocks are all examples of nudges meant to guide people toward the ideals of the Planner and away from the impulses of the Doer. They provide an account of the “Christmas Club,” savings account in which people put monthly savings for Christmas purchases. With better self-control, people would not need a Christmas account, and it would be a hindrance due to its inflexibility. Still, many people have found them useful.

Thaler and Sunstein turn their attention to “mental accounts,” which are internal methods of controlling behavior. “Mental accounting,” they write, “is the system (sometimes implicitly) that households use to evaluate, regulate, and process their home budget” (60). Households often earmark money for specific uses even though money is fungible (without labels). The purpose is to control spending. Thaler and Sunstein write that gamblers are more willing to gamble larger sums of money when that money has already been won at the casino. They point to the same phenomenon in the stock market. People will spend more money on riskier accounts and stocks when that money is considered “winnings,” that is, money already gained from the stock market. This is another example of the difference between the behavior of humans and Econs. Thaler and Sunstein end this brief chapter with a note on encouraging savings. If employers or governments (or households) hope to increase levels of savings, then it may be useful to treat money as nonfungible.

Chapter 3 concludes Part 1. Here Thaler and Sunstein strive to understand social influences. One of their first points is on the self-fulfilling prophecy. People are so unwilling to be “on the wrong side of history” that they are quickly swayed to act in accordance with something they perceive to be an important change in society (65). They write that the two basic categories of social influence are peer pressure and information. They then list several surprising ways that social influence changes behavior. For instance, Thaler and Sunstein mention that college freshmen have significantly different grades and prospects based on the random assignment of roommates during their first year. “The bottom line,” they write, “is that Humans are easily nudged by other Humans. Why? One reason is that we like to conform” (67).

They present psychological data from conformity experiments to prove this point. People are more likely to deny their sensations and perceptions when placed in a group setting with divergent viewpoints. Pressure to conform can even lead to literal differences in perception. They note that these “conformity effects” can explain the convergence in beliefs across large numbers of people from seemingly different communities (70). “The confidence heuristic,” another rule of thumb used to make quick decisions, causes many people to think that confident people are likely to be correct in their reasoning and conclusions. They also mention “collective conservatism,” which they define as “the tendency of groups to stick to established patterns even as new needs arise” (71). They discuss how traditions entrench themselves over time even if the original establishment of that tradition was arbitrary. To show just how thoroughly the pressure of conformity affects people, Thaler and Sunstein include the following experimental data:

People were asked to consider this statement: ‘Free speech being a privilege rather than a right, it is proper for a society to suspend free speech when it feels threatened.’ Asked this question individually, only 19 percent of the control group agreed, but confronted with the shared opinion of only four others, 58 percent of people agreed (72).

They then look at the development of cultural and political change due to the pressure to conform and briefly mention reputational and informational cascades. A reputational cascade causes conformity out of fear of reputational damage for failing to conform. Informational cascades occur “when people receive information from the choices of others,” as happens in popular music (74). They show cases in which Democrats and Republicans flip on policy matters when other people in their peer group have done so.

Thaler and Sunstein look at how people behave based on their sense of self, which they call “identity-based cognition” (79). They use the example of Texas’s anti-littering campaign, which played on Texans’ sense of identity. It was massively successful where previous attempts had failed. They then introduce the concept of “pluralistic ignorance,” which occurs when people are ignorant of other people’s opinions. This often leads to cases in which groups follow traditions even when most members do not find them defensible. Young Saudi men were asked if they objected to women in the labor force. Most of them had no objection to this but they believed that other men their age did. “Here’s the broader lesson,” Thaler and Sunstein write: “if people wrongly think that most people are committed to a long-standing social norm, a small nudge correcting that misperception can inaugurate large-scale change” (82).

They end this chapter, and the first part of the book, by discussing how nudges can be used to shift social norms (83). In Minnesota, tax compliance rates rose after citizens were told that 90% of their compatriots had already complied. This nudged changed behavior when other methods had failed. Thaler and Sunstein discuss the rapid shifts in attitudes to same-sex marriage in the Western world. They note that when they first wrote the book same-sex marriage was much more controversial and that they had proposed the idea of privatized marriage in response to that controversiality. Even President Obama, as late as 2008, believed that marriage should be legal only between members of the opposite sex. They believed that many small social nudges caused this cascading change. They conclude, “a norm or practice that is understood to be emerging, or to be increasingly supported, can operate as a powerful nudge, even if it is not yet supported by a majority” (88).