I have just read the Nudge by Richard Thaler and Cass Sunstein.
Behavioral economics, is a new area of research combining economics and psychology and has repeatedly documented how our apparently free choices are affected by the way options are presented to us.
The main insight from Nudge is that no decision is “neutral.” Whether it’s a restaurant laying out food or a business offering its employees a list of mutual funds in its pension plan or the government presenting different Medicare options, whoever presents choices must frame them in some way. The framing will affect the decisions. Even small and apparently insignificant details can have major impacts on behavior. Some ways of presenting the options may give a gentler “nudge” than others, and we may think some settings are neutral only because they are so familiar to us. But whoever is presenting the choices will inevitably bias decisions, in one direction or another.
Rational economic man carefully weighs up the pros and cons of the scheme and makes his decision. But a real person, afflicted by both a ‘status quo bias’ and what Thaler and Sunstein dub the ‘yeah, whatever’ heuristic, the differences are pronounced. Opt-in schemes have participation rates of around 60 per cent, while otherwise identical opt-out funds retain between 90 and 95 per cent of employees. It is no wonder that Adair Turner, in his report on pensions, urged legislation to push pension schemes to an opt-in default position and that policy is moving in this direction.
Irrational humans also tend to follow the crowd, which means that peer comparisons form an important part of the ‘choice architecture’. Showing people how much energy they are consuming compared with their neighbors can reduce energy use. It also helps to put a smiley face on the bills of those consuming less than the average and a sad face on those consuming more. There’s something slightly absurd and trivializing about such strategies, but Thaler and Sunstein have good data to support their claim that ‘everything matters’ when it comes to choice environments.
There are definitely ethical and political questions that need to be answered with some of the scenarios described and that for me was one of the most interesting aspects of this topic.
Adrian G Stewart
