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How much can you ‘nudge’ for good? Richard Thaler explores possibilities, limits
In revised book, Nobel laureate examines ‘sludge’—and when ‘nudges’ aren’t enough
Prof. Richard Thaler thinks it’s time to update and contextualize a term he helped coin.
A Nobel laureate and leading behavioral economist at the University of Chicago, Thaler is the author of Nudge: Improving Decisions About Health, Wealth and Happiness, co-authored with former UChicago law professor Cass Sunstein. In the 2008 book, they define “nudges” as small manipulations of the choices people are faced with in daily life: boxes checked by default on a form, or snacks for sale in the checkout aisle.
People often think of nudges as small tweaks, but their impact can still be significant, according to Thaler: Automatically enrolling employees in 401k plans, for example, can dramatically increase their career-long savings.
On Nov. 3, Chicago Booth’s Center for Decision Research (CDR) hosted Thaler and Prof. Nicholas Epley for a hybrid installment of the “Think Better” speaker series, in which Thaler discussed a new revision of the book, titled Nudge: The Final Edition. More than 400 people attended in person at the University of Chicago’s David Rubenstein Forum in accordance with COVID-19 safety guidelines, with an additional 1,800 watching live via Zoom webinar.
Thaler, the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the Booth School of Business, began his talk with the story of how he and Sunstein arrived at the term “nudge.” He recounted how he initially pitched the title of “Libertarian Paternalism is Not an Oxymoron,” which left publishers unconvinced. Ironically, a publisher who had passed on the book eventually suggested the title “Nudge.”
Effective “nudges” are the result of what Thaler calls “choice architectures”: Instances in which people actively design menus, store layouts and other environments in which other people make decisions, such that design attributes “nudge” users’ decisions in certain directions.
While Thaler argues that nudges should be used to design environments that encourage actions that improve human wellbeing and happiness—to slow traffic or encourage healthy eating, for example—choice architects can also design structures that frustrate and complicate our lives with unnecessary burdens.
Thaler and Sunstein dive into this idea in the latest edition of Nudge, describing these bad nudges as “sludge.” For example, a newspaper that allows you to subscribe with one click but requires you to call during limited hours to cancel is employing sludge. Sludge adds friction to prevent people from achieving their goals.
In the early days of 401(k) plans, Thaler noted, many workers failed to join—even with generous matching contributions from the employer—because the process was too complex, full of decisions and financial terminology. In effect, sludge.
In 2004, however, Thaler co-authored a paper with UCLA economist Shlomo Benartzi that outlined simple ways to improve the choice architecture for encouraging employees to choose a retirement savings plan—starting with the default option of being opted into an indexed fund unless the employee took the additional step of choosing something else. This simple change in choice architecture has profoundly impacted the retirement savings market.
Free choice doesn’t necessarily lead to good decisions, according to Thaler, especially in cases with too many options. For example, in one large company’s health insurance package, employees were offered 48 possible plans, which led many to choose plans which were financially worse for them than the default plan.
During the talk, Thaler presented a number of other examples of how to optimize choice architectures in different scenarios. He and Epley, faculty director for CDR, then discussed questions submitted by audience members before the event, some of which centered on the limits of nudging.
When asked about climate change, Thaler warned, “We’re not going to win this battle with nudging.” Instead, he called for pricing carbon: “If something is free, people consume too much of it—just go to a wedding with an open bar.”
He and Epley—the John Templeton Keller Professor of Behavioral Science at Chicago Booth—also reflected on why nudges to encourage COVID-19 vaccination haven’t been as effective as hoped. Thaler noted it may take more time and assessment to determine how truly effective these nudges have been, but he also advocated for vaccine mandates to achieve herd immunity, comparing such rules to bans on smoking in public.
Thaler closed the talk by teasing his future plans—working on a new edition of his book The Winner’s Curse with Asst. Prof. Alex Imas at the Chicago Booth School of Business.
The “Think Better” speaker series will return Feb. 9 with a talk by Alexander Todorov, the Leon Carroll Marshall Professor of Behavioral Science and Rosett Faculty Fellow at Chicago Booth. On April 6, “Think Better” will feature Alissa Fishbane, managing director of ideas42, a leading consulting firm for applied behavioral science.