Nudge: The Gentle Power of Choice Architecture

Who decided that the “Popcorn” button on your microwave should set the appliance to run for 2 minutes? Come to think of it, who decided that your microwave should have a “Popcorn” button to begin with? Have you ever taken any time to think about how the button might affect your consumption of popcorn (both buttered and burnt)?

More importantly, do you think the person who designed the button considered these issues? In the new book Nudge: Improving Decisions About Health, Wealth, and Happiness, University of Chicago Graduate School of Business professor Richard H. Thaler and coauthor Cass R. Sunstein of the University of Chicago Law School suggest that microwave designers—indeed, anyone who determines how choices and options are presented to people—can help us lead more satisfying lives by considering how their presentations can move us toward different choices, and thus different experiences.

“When somebody designs a grocery store, they imagine that people will walk through the store in a certain way,” says Thaler. “Of course, people are free to walk however they want, but the entrance is at one place, cash registers at another, and store designers know that those locations will influence the route that most shoppers take.”

Thaler adds: “When you go to a cafeteria, if the first thing you see is the salad bar, that’s probably a good thing. If you had to get past the burgers and the fries to get to the salad bar, you might be more likely to sin.”

It is pretty clear that human beings could use a little help making the choices that bring us the outcomes we want. For just a few examples, consider the numerous Americans who struggle to eat healthy, fail to save enough for retirement, or choose health insurance plans that poorly serve their needs. There is no doubt that the human mind has many reliable and impressive capabilities, but despite humanity’s distinguished accomplishments in engineering, medicine, and other fields, few among us can claim never to have misplaced our house keys or left the car lights on.

Thankfully, behavioral science has produced remarkable insights into human fallibility, making it now possible to give people helpful “nudges” toward more satisfying and productive decisions. To do this, Thaler and Sunstein suggest that we turn to “choice architects”—anyone who helps shape the situations in which people encounter choices. Of course, some choice architects have long known how to structure situations to nudge people toward certain decisions.

“The person who designs the grocery store layout wants to make sure you walk by the aisles with the most profitable items and the items that are most likely to be impulsive purchases,” Thaler explains.

Nudge is about using this power of choice architecture on behalf of the choosers, to make the easiest choices the ones that people themselves will find to be the best.

Choice Architecture: Helping Us to Help Ourselves
The world is a complex place and it does a good job of keeping us busy. Most of us just do not have the time to think deeply about every choice we make. In Nudge, Thaler and Sunstein explain that people look for rules of thumb for decision making; these strategies often work so well for the small decisions in life, such as buying a television from a trusted brand name, that we are tempted to use similar shortcuts for more consequential choices as well, such as selecting a retirement plan because it is the one we have heard of before. If everyone had ready access to complete information, unlimited cognitive abilities, and complete self-control, we would likely deliberate much more about these choices, and demonstrate unerring wisdom.

Since that is not the case, we need some help to make the best choices. Nudge suggests that, by following simple principles, choice architects can provide it.

One of these key principles involves appropriately setting defaults. According to Thaler, “In any choice situation, the choice architect has to decide what happens in a system if the user does nothing; that’s what we call a default.”

Defaults have immense power in a world of busy people. Limits on time, information, energy, and ability will often mean that people end up with whatever default option is given to them, whether or not it is the best option.

“Past research suggests that most of the time, people will select the default option, either because they think that somebody made it the default because they thought it was good for them, or because they are lazy, or just spaced out and forgot to fill out the form,” explains Thaler. “The problem is that the people who designed the default may not have selected the default because they thought it was good for somebody—they may not have put enough thought into it.”

Thaler and Sunstein urge choice architects to realize that the choice of the default is extremely important, and to put it immediately into the repertoire of tools they can use to influence choices for the good.

The authors are interested in all the small factors that influence the choices people make—factors often under the control of the choice architect. Accordingly, the authors not only show how choice architects can use defaults to promote better choices, they also suggest that choice architects should do the following: anticipate common errors; understand how people predict their experiences based on different choices; make complex choice information more comprehensible; provide choosers with useful feedback; and align the incentives of all the people influencing choices.

Freedom through Flexibility and Feedback
According to Nudge, a good choice architect must be committed to freedom. The goal is to make it very easy for people to make choices to best serve themselves, while ensuring that alternatives are not blocked, fenced off, or even significantly burdened. Thaler and Sunstein herald this approach as the cornerstone of a new movement: “libertarian paternalism.” A new and coherent philosophy of economic policymaking, libertarian paternalism is an approach designed to improve choices while vigilantly preserving freedom of choice.

People often find the idea of libertarian paternalism to be selfcontradictory on first glance, to which Thaler replies: “What we’re trying to do is help people make better choices without restricting their freedom. It’s not only possible to do that; we’ve proven that we can do that.”

Part of the way in which libertarian paternalists preserve freedom is by protecting choice flexibility. If people find themselves wanting to switch from whatever choice they have in hand to an alternative, libertarian paternalists insist that the alternative should be a readily available option. In situations where life circumstances change unpredictably and often, libertarian paternalists strive to help people find opportunities to update their relevant choices in light of those changes.

In some cases, libertarian paternalists may even be able to expand the freedom of choice for decision makers. People often find it difficult to make the choices they want to make because it is hard to understand the options they have available and difficult to accurately predict the impact of those options on future experiences. In these situations, people cannot take best advantage of the freedom of choice.

In Nudge, Thaler and Sunstein lead libertarian paternalists to remove these obstacles with an approach called “RECAP,” which stands for Record, Evaluate, and Compare Alternative Prices. RECAP calls for service providers to give consumers a machinereadable statement of the costs associated with different hypothetical patterns of service usage. In addition, for those consumers who have already used a service, RECAP requires annual disclosure of all the fees associated with each consumer’s actual use. Consumers can then figure out whether their current choice of service provider serves them well by uploading their information into a website which would tell people how much different service providers would have charged them for that same year of use. This would all be possible with a few mouse-clicks.

“Some research suggests that the average senior could save as much as $700 a year by choosing the right Medicare plan for them rather than the one they are in,” notes Thaler. “Our RECAP plan would solve that problem, because once a year, seniors would get a list of all the drugs they use and the prices their provider charges. They (or their adult children) could easily input that information into a website that would compare their insurer to all the others in their state. The site could then suggest another insurer that would be cheaper.”

A New Path
In their book, Thaler and Sunstein show that it is both easy and inexpensive to nudge people toward better decisions and experiences. Moreover, they suggest that the choice architecture policies favored by libertarian paternalism can be embraced by both Republicans and Democrats, providing a new, collaborative path toward better living. “Old-line Democrats have an inclination to have the government control everything, while old-line Republicans have an inclination to just let the market do its wonders,” says Thaler. “What we’re trying to do is help create markets in which the government sets up a better set of ground rules and then gets out of the way, letting consumers make smart choices among competing suppliers.”

Better governance without bigger government—a truly compassionate conservatism?

To believe in libertarian paternalism, you have to understand one of the key points of the book: “You have to choose some choice architecture, just like you have to build a real building,” Thaler emphasizes. “All real buildings have real doors, and if you put in a door, that will influence the routes people take. Given that you have to pick some kind of choice architecture, why not pick a good one?”

Richard H.Thaler is the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics and Director of the Center for Decision Research at the University of Chicago Booth School of Business

Nudge: Improving Decisions About Health, Wealth, and Happiness. Richard H. Thaler and Cass R. Sunstein. Yale University Press, 2008. www.nudges.org

[This article has been reproduced with permission from Capital Ideas, the research journal of University of Chicago's Booth School of Business http://www.chicagobooth.edu/capideas/ ]