Books for decision makers Vol 8- Nudge
Improving Decisions About Health, Wealth and Happiness.
Life is a series of endless choices. Some choices are better than others, just like some people are better at making the right choices than others. Human beings too often fall victim to their own personal errors in judgement for a variety of reasons. In their book, “Nudge,” Richard Thaler and Cass Sunstein examine the process of making choices, the biases that can influence them and how to improve one’s reasoning skills in order to make better decisions. What makes this book different from your typical self-help, focus on your inner-self guide, is that the investigation is placed on the design of the environment and how it impacts and influences the decisions.
People make choices all of the time. Just about everything humans do in life can be seen as a choice -what to wear or eat, who to vote for, how to invest, etc. Many people feel that they are free to choose or decide these things entirely on their own, but that is rarely the truth. Decisions are influenced by an overwhelming number of factors and pre-existing biases that everyone has, whether they want to admit it or not. The context in which people make a particular decision will always influence the choice they make.
At the forefront is “choice architecture,” or the way in which choices are organized and presented to impact the decision making process. “A nudge is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding options or significantly changing their economic incentives.” A subtle push to make a certain decision, without forcing you to do so. Many times, the nudge that influences people to act or do something in a particular way, isn’t even rational, or register in the mind of the person making the choice. “Small and apparently insignificant details can have major impacts on people’s behavior.”
To illustrate this, a study of men’s urinals at Amsterdam’s Schiphol Airport is conducted based on the observation that men using urinals often don’t aim well and make a mess. However, when given a target, in this case a black fly was painted inside the urinal, the choice to aim better increased dramatically. The study found that the amount of spilled urine decreased by 80%. This simple nudge of providing a black fly as a target influenced people to make a better decision, leading to a more sanitary and pleasant bathroom for everyone.
Every choice that people make is weighted. Therefore, every presentation of the choices can also be weighted. To get people to act better or more ethically, laws and punishments are put in place to deter them from acting poorly. Alternatively, small nudges can be applied to push them toward better decisions. Under both methods, people are still free to do as they wish, even in a destructive manner, but by providing a nudge, the odds are increased that they will choose to act sensibly. This approach that attempts to guide people to act a certain way, rather than regulating them, is referred to as “libertarian paternalism.”
The idea is to respect the freedom of choice, while also shaping behavior. The nudge can help, as even when people know how they are supposed to act, they don’t always act rationally. Thus, you can design the environment to nudge them towards making a beneficial decision. “Choice architects can make major improvements to the lives of others by designing user-friendly environments.” The best systems are designed with expectations for the user to err and made as forgiving as possible. Default settings are installed to make things easier.
Systems are in place to guide most of your decisions, whether created or innate. One’s decisions are influenced by a multitude of factors that often times they are unaware of. Sometimes these influences can lead us astray and cause bad or incorrect choices. The authors breakdown a few of them as follows:
Anchoring- when familiar acts influence your judgements.
Availability- weigh risks based on how easily information can be obtained.
Representativeness- judge choices based on how similar that situation seems to past experiences.
Biases- people tend to be overly optimistic and believe they are right and don’t stop to think, “what if I am wrong?” or attempt to see things from a different point of view.
Social Influences- most people are more likely to do something if they see others doing it, especially if done by people they trust or in their social circle. The desire to go along with the social climate can easily change one’s perception of reality.
Framing- people see things differently based on how the issue is presented, or framed.
The fact that so many people, even highly educated professionals, make so many bad decisions demonstrates how hard it really is to think clearly. People need help making decisions especially when a lot is on the line, or the decision is perceived as highly important. Take for instance choosing a health-care provider or buying a house. These decisions can be very complex and not something most people normally think about. People often make bad decisions when they believe bad data, don’t have all of the relevant information, or are misled by someone with alternative motives. It is important to seek advice from people you trust and obtain as many facts as possible from a plethora of sources if possible.
Decisions about money are obviously some of the most crucial and therefore difficult choices for many people to make. Most people know they should save for their future, but many are unaware of how much to save or where to invest. The process can seem daunting and even frightening at times. Even the most sophisticated investors sometimes make bad investments and end up losing a lot of money. With choice architecture employees, banks and investment firms can nudge people in the right direction. The more simple and transparently the information and choices are displayed, the easier it is for people to educate themselves and decide which option is best for them. Examples include employer sponsored retirement accounts, mutual funds and ETFs with risk/ reward ratings, and offering incentives to start a savings account among other things.
Decisions are all around us. Nudges can be used to promote or influence these decisions, whether good or bad. Whether you are the one making the decision or offering the decision, the architecture of the situation can have a profound impact on the final decision and ultimately the final outcome. In order to help people make better decisions, help them understand the implications of their choices by offering examples and providing as much transparent information as possible. Remember, the context in which one makes a decision always shapes their choices. The power of the nudge is very real and can be used for just as much harm as good. So next time you make a decision, no matter how small it might seem, take a step back and think about it for a second before you go all in.
Tyler Krebeck
Chief Content Manager
Florianópolis, Brazil.
November 7, 2019