Nudge: Improving Decisions about Health, Wealth, and Happiness
Nudge is co-authored by two professors, Richard Thaler and Cass Sunstein. Richard Thaler, is a professor of behavioral economics at the University of Chicago, where Sunstein also taught. Thaler has worked with Nobel prize laureate Daniel Kahneman, and both have worked on the two system theory of brain. One system is automatic and second is more rational. Thaler has written another excellent book Misbehaving about same concepts where he discussed why humans behave in particular ways. I have also used the concept of Nudge to discuss how simple nudge can change people behavior in the context of corona – like reducing vaccine hesitancy and increase appropriate behavior.
The book explains concepts of behavioral economics and why humans are humans (not economists) or Econs). The core concepts are described below.
Choice architecture
Simplify the hierarchy and complexities of making decision. Offer a default option. Nudge – poke – elbow – push a little.
Example: Certain countries/states have an organ donation ‘opt out’ tick box on their driving license application form. Most people do not bother to opt out so the availability of donor organs is significantly higher than in those countries where the box is an ‘opt in’ box (e.g. in US states, 42% ‘opt in’ vs. 82% ‘opt out’).
The path of least resistance
Easy Products/options are preferred over complex options. That’s why many of us just sign the documents without reading details and trust the sales person.
Example: Giving students a map of how to get to the health center increased tetanus inoculations by 28% (vs. just 3% when only given a lecture).
Heuristics
Humans rely on shortcuts (heuristics) to arrive at a decision. Tversky & Kahneman (1974) identified 3 heuristics that can lead to biases – anchoring, availability and representativeness.
Anchoring
The perceived value of something can be steered (or ‘anchored’) by an initial, sometimes irrelevant activity. Retailers use this tactic to show the high MRP and then cross-it and offer a lower price.
Example: Students were asked two questions in random order: ‘How happy are you?’ and ‘How often are you dating?’ When asked in this order the correlation between the two was low (0.11), but when reversed the correlation was much higher (0.62) i.e. the ordering anchored their assessment of happiness to the frequency of dating.
Availability – Decision or guess is based on the recency of Events.
Example: Stock market investing/Inflation in house prices was partly triggered by the relative impression of safety and guaranteed return stimulated by the multitude of conversations surrounding us all at the time.
Representativeness – We rely too much on stereotypes (based on past experience) and always try to create (false) meaning out of randomness. Remember those days, Sachin aaj pakka 100 marega!
Example: Streak shooting in basketball is a well known concept, when players have a ‘hot-hand’ and thus score more points if they have shot successfully the last time. However, statistical studies have shown that hot hand is a myth.
Prospect theory
Prospect theory is a behavioral model that shows how people decide between alternatives that involve risk and uncertainty (e.g. % likelihood of gains or losses). It demonstrates that people think in terms of expected utility relative to a reference point (e.g. current wealth) rather than absolute outcomes. Prospect theory was developed by framing risky choices and indicates that people are loss-averse; since individuals dislike losses more than equivalent gains, they are more willing to take risks to avoid a loss. Due to the biased weighting of probabilities (see certainty/possibility effects) and loss aversion, the theory leads to the following pattern in relation to risk (Kahneman & Tversky, 1979; Kahneman, 2011)
What would you do – winning $50 with certainty or taking a risky bet in which you can toss a coin and either win $100 or nothing.
Loss aversion – Humans do not like losses. ‘Losing something’ is valued at least twice as highly as ‘gaining something’.
Example: ‘If you do not use energy conservation methods you will lose $350 a year’ is more effective at driving uptake than on ‘saving $350’.
Framing – The contextualizing of an issue can dramatically influence decision-making (e.g. when linked to either an anchor or loss aversion).
Example: Doctor says, “Of 100 patients who have this operation, 90 are alive five years later” vs. “of 100 patients who have this operation, 10 are dead five years later”. Even though the odds are exactly the same, the numbers agreeing to the operation are radically different. Can you connect this to efficacy rates of corona vaccines?
In short nudges stands for
- iNcentives
- Understand mappings
- Defaults
- Get/give feedback
- Expect Error
- Structural complex choices
“First, never underestimate the power of inertia. Second, that power can be harnessed. If private companies or public officials think that one policy produces better outcomes, they can greatly influence the outcome by choosing it as the default.”
