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Book Review: Nudge

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By Coco Krumme

Call it the Malcolm Gladwell effect. With its pristine cover design and one-word title, Nudge---an engaging jaunt through the field of behavioral economics--- seems at first glance to belong to a certain species of book. Gladwell’s ‘Tipping Point’ ushered in an era of white covers, crisp titles, and catchy anecdotes connected by a thesis: think Wikinomics, Blink, Go.

But Nudge has an interesting prospect beneath its slick white cover. Authored by two Univeristy of Chicago heavy-hitters, Economist Richard Thaler and Law Professor Cass Sunstein, the book explores the policy implications of behavioral economics, a field describing the irrationalities of human behavior. Taking findings from psychology (e.g. people procrastinate; they’re averse to losing money), Thaler and Sunstein propose policies to help us make the best decisions, in light of our irrational tendencies. In a classic example, they suggest we design 401k plans to require “opting-out” rather than “opting-in,” thus encouraging people to save by default.

The core idea of behavioral economics—that humans don’t behave like rational economic agents-- is several decades old, and the authors lean heavily on the work of Daniel Kahneman and Amos Tversky (and to some extent, Herbert Simon). But Nudge goes beyond psychological research to suggest concrete ways to improve public policy in light of experimental findings.

Humans are bad at long-term planning: but what if cars came with stickers tallying the monthly cost of gas over the next five years: sticker shock might lead buyers to a more efficient car? Or what if we “nudged” people to conserve energy by showing how their energy use stacks up with that of neighbors? Thaler and Sunstein cite an experiment in which residents of a Southern California town reduced their peak usage by 40% once they were incited to compete with households next door.

It’s not hard to imagine other psychological tricks to encourage energy (or financial) savings. What about a thermostat that displays the cost per hour of raising the heat by one degree, as Thaler proposes in a 2008 talk at Google?

The strength of Nudge lies in the insight that there exists a third way in designing social policies while preserving market forces and individual freedoms. We need not go whole hog in order to eke out efficiencies, whether in personal savings or recycling. While Energy Bill talks iterate endlessly through Congress and Kyoto stalls out at the starting line, city governments, technology innovators and homeowners are coming up with smart ways to use our irrational tendencies to our (and the planet’s) advantage.

But can the concept be generalized? Thaler and Sunstein suggest it can be (they tag their broader concept “liberal paternalism”). It’s true that the new wave of behavioral economists, like the experimental economists (a la Steven Leavitt) who preceded them, are the sort you’d like to have around at a cocktail party (especially if the alternative includes old-guard number-crunchers at the Fed). Down with equations –this new generation proclaims—experimentation is Economics’ new currency! Yet, for all of the joys of experimenting, poking holes in old theory doth not a new one make.

Kahneman and Tversky’s brilliance lay in the recognition of the classical model’s flaws, but there’s a certain risk in generalizing these—as Thaler himself dubbed them-- “anomalies”. Dust has been kicked in the face of the old guard: that may be success enough. But we can go further. New research about the brain holds promise, as do increasingly refined methods to tap meaning from large sets of human data. Behavioral economics has laid the groundwork for injecting observed human behavior into the old models. It will be exciting to see, when the dust settles, what new ones emerge.

Coco Krumme lives in San Francisco.

Photo credit: Yale University Press

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Comments

I don't know. So long as they're not arguing that ALL that is required is "personal virtue," that's fine. Still, a lot of these ideas smack of manipulation that caters to the worse tendencies of our species. Why should I be "competing" with my neighbors in any sense? Why do we need Madison Avenue-style tweaking to get us to Do The Right Thing?

It's one thing to shift LED displays to provide us with information that informs us as to the real costs of decisions. It's another to use "psychological tricks" to guide us to better decisions.

We need a cultural shift away from consumption, toward conservation and saving. We need to shift away from cowboy individualism and back to building communities. New readouts on our dashboard aren't good enough.


Posted by: Jay Andrew Allen on 24 Jun 08

Leavitt is hardly an experimental economist. He's a micro empirical economist with a tendency to do research outside the boundaries of established theory.


Posted by: jon on 26 Jun 08



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