(Richard Thaler, the 2017 winner of the Nobel Prize in economics. Image courtesy of Wikimedia Commons.)
If you’ve ever taken a course in economics you may have heard that humans are rational. The newest winner of the Nobel Peace Prize in Economics says otherwise. US economist Richard Thaler built his award-winning theories and proposals on people being irrational, but often in predictable ways.
Many economic models assume people are rational and work from that point, but Thaler has found success in theory and practice by refusing to assume rationality, focusing on the patterns of irrationality instead.
One pattern Thaler found was the endowment effect. It boils down to people putting higher value on things they already have. In one experiment, Thaler gave his students mugs to value as they saw fit and found that people who already owned mugs valued them higher.
Another interesting thing Thaler found was that money doesn’t always have the same value in people’s minds. Thaler found that when gas prices fall people just use the savings from the price cut to buy more gas. A study in Morocco found that giving money to fathers and telling them it was specifically for schooling resulted in them using it for schooling. The idea behind both is that we put money into certain categories in our mind –- this slice of my budget is for school, this slice is for transportation, and so forth, rather than seeing all money as equal and free for any kind of use.
Perhaps most importantly, Thaler’s focus on irrationality led him to the idea of the nudge. Thaler and other academics (such as Cass Sunstein, Daniel Kahneman, Jack Knetsch) found that since people are irrational in predictable ways, governments and businesses can nudge them to pick smarter routes. Nudging can be simple or complex.
Here is a somewhat complex version: in one system as described by Dylan Matthews at Vox.com Thaler proposes that employees agree to increase regular savings (add more to a 401k account) when their pay increases. Thaler and co-author Shlomo Benartzi argue that their nudge works better than giving an employee a flat pay raise to create responsible savings. When the employee agrees to put a pay increase into savings, they do not see the savings as taking money out of their wallet. Because we are irrational, even though we want to save and be responsible, we are much less likely to use our raise money responsibly without a nudge.
Thaler’s work appeals so widely and earned the Nobel Prize in part because it applies widely. Policy and business circles have quietly started using nudging. UK Prime Minister Theresa May used nudging by making organ donation something you opt out of rather than opt into. The UK has a whole unit devoted to designing public health policies around nudging. President Obama created a similar team as well. We could easily see more nudging in the future as it often takes minimal resources and effort to effectively nudge someone. According to an article in Slate, in Thaler and Sunstein’s book, “Nudge: Improving Decisions About Health, Wealth, and Happiness,” Thaler points out that nudging people to eat healthier only takes putting healthier foods in better spots on the shelves.
However, Thaler is not without criticism. Glen Whitman wrote a rebuttal for CATO, challenging Thaler’s ideas. First Whitman argues that perceived irrationality is just evaluating some states and desires as higher than others. Whitman notes that even if Thaler, Ariely and other researchers have proved people will irrationally act against their own preferences, this can still be the result of putting some preferences and states of minds above others (for example, putting the long-term desire to be healthy over the short-term desire to eat certain foods).
Whitman also takes issue with the policy proposals Thaler and others push, thinking of them as a new, quieter brand of paternalism ultimately as controlling as a heavy-handed state apparatus. Whitman believes Thaler assumes paternalistic behavior in society and does not look into truly libertarian responses, even though Thaler claims to be promoting a “libertarian paternalism.”
An article written by Tamsin Shaw for NYBooks.com presents a different criticism of Thaler and other behavioral scientists by pointing out that anyone can nudge and more and more politicians, governments, and businesses are. The article describes how Donald Trump used a data-based behavioral science approach towards winning votes as well as how some Silicon Valley businesses exploit their users with nudging.
Shaw concludes and sums the criticism up well by saying that, “the pressures to exploit irrationalities rather than eliminate them are great and the chaos caused by competition to exploit them is perhaps already too intractable for us to rein in.”
Thaler knows this himself and has written about it. One example of nudging is how subscription based business, like newspapers and magazines,offer a reduced fee or free first month and then auto-enroll the person into a full paid subscription. Thaler believes this process nudges for bad purposes — purely a profit. In an article he lays out three golden rules for nudging: “1. All nudging should be transparent. 2. It should be as easy as possible to opt out of the nudge, preferably with as little as one mouse click. 3. There should be good reason to believe that the behavior being encouraged will improve the welfare of those being nudged.”
Under those golden rules, nudging answers most of the criticism it receives. Even if nudging values one preference set over another, as Whitman argues it does, the person being nudged can easily opt out.
Thaler’s work is certainly influential and clever. The criticism and discussion around his work shows how powerful it is and why we should seek to understand it. Thaler’s nudging is not just lofty theory, but a tool that may manifest in our own lives, for good or ill.