Improving Decisions About Health, Wealth and Happiness
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First published in the United States of America by Yale University Press 2008
First published in Great Britain in a revised edition in Penguin Books 2009
Copyright © Richard H. Thaler and Cass R. Sunstein, 2008, 2009
All rights reserved
The moral right of the authors has been asserted
ISBN: 978-0-14-197610-5
Introduction
PART I
Humans and Econs
1. Biases and Blunders
2. Resisting Temptation
3. Following the Herd
4. When Do We Need a Nudge?
5. Choice Architecture
PART II
Money
6. Save More Tomorrow
7. Naïve Investing
8. Credit Markets
9. Privatizing Social Security: Smorgasbord Style
PART III
Society
10. Prescription Drugs: Part D for Daunting
11. How to Increase Organ Donations
12. Saving the Planet
13. Privatizing Marriage
PART IV
Extensions and Objections
14. A Dozen Nudges
15. Objections
16. The Real Third Way
Postscript: The Financial Crisis of 2008
Notes
Bibliography
Acknowledgments
PENGUIN BOOKS
Richard H. Thaler is Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics, and Director of the Center for Decision Research, Graduate School of Business, University of Chicago. He is also research associate at the National Bureau of Economic Research.
Cass R. Sunstein is Karl N. Llewellyn Distinguished Service Professor of Jurisprudence, University of Chicago Law School and Department of Political Science.
Visit Cass Sunstein’s (http://home.uchicago.edu/~csunstei/) and Richard Thaler’s (http://faculty.chicagogsb.edu/richard.thaler/research/) homepages.
For France, who makes everything in
life better, even this book.
RHT
For Samantha, who makes
every day a joy.
CRS
The research for this book has been made possible by funds from the University of Chicago Graduate School of Business and the Law and Economics Program at the University of Chicago Law School. We have also received generous support from the John Templeton Foundation through a grant to the Center for Decision Research.
Many people have helped us with this book. Sydelle Kramer, our agent, provided wonderful advice throughout. Michael O’Malley, our editor, made valuable suggestions on the manuscript. Special thanks to our fun and stellar team of research assistants, extending over two summers; they include Jonathan Balz (who gets double thanks for putting up with us for two summers), Rachael Dizard, Casey Fronk, Heidi Liu, Matthew Johnson, Brett Reynolds, Matthew Tokson, and Adam Wells. Kim Bartko was invaluable in helping us with the art work in the book. At the last stage, Dan Heaton did an excellent and meticulous copyedit.
Many colleagues made the book a lot better. For insights, hints, and even a few nudges beyond the call of both friendship and duty, we single out Shlomo Benartzi, Elizabeth Emens, Nick Epley, Dan Gilbert, Tom Gilovich, Jonathan Guryan, Justine Hastings, Eric Johnson, Christine Jolls, Daniel Kahneman, Emir Kamenica, Dean Karlan, David Leonhardt, Michael Lewis, Brigitte Madrian, Cade Massey, Phil Maymin, Sendhil Mullainathan, Don Norman, Eric Posner, Richard Posner, Raghu Rajan, Dennis Regan, Tom Russell, Eldar Shafir, Jesse Shapiro, Edna Ullmann-Margalit, Adrian Vermeule, Eric Wanner, Elke Weber, Roman Weil, Susan Woodward, and Marion Wrobel. Our toughest and wisest advice came from France Leclerc and Martha Nussbaum; special thanks to both France and Martha for helping to produce countless improvements. Vicki Drozd helped out with everything, as she always does, and made sure that all the research assistants got paid, which they appreciated. Thanks too to Ellyn Ruddick-Sunstein, for helpful discussion, patience, both sense and amusement about behavioral economics, and good cheer.
We also owe a special thanks to all the staff at Noodles restaurant on 57th Street. They have fed us and listened to us planning and discussing this book, among other things, for several years now. We’ll be back next week.
For the International Edition, we wish to thank once again the indispensable John Batz, who is our book architect. Thanks also to Chris Hsee, Dan Muldoon, Chiara Monticone, and Adair Turner.
A friend of yours, Carolyn, is the director of food services for a large city school system. She is in charge of hundreds of schools, and hundreds of thousands of kids eat in her cafeterias every day. Carolyn has formal training in nutrition (a master’s degree from the state university), and she is a creative type who likes to think about things in nontraditional ways.
One evening, over a good bottle of wine, she and her friend Adam, a statistically oriented management consultant who has worked with supermarket chains, hatched an interesting idea. Without changing any menus, they would run some experiments in her schools to determine whether the way the food is displayed and arranged might influence the choices kids make. Carolyn gave the directors of dozens of school cafeterias specific instructions on how to display the food choices. In some schools the desserts were placed first, in others last, in still others in a separate line. The location of various food items was varied from one school to another. In some schools the French fries, but in others the carrot sticks, were at eye level.
From his experience in designing supermarket floor plans, Adam suspected that the results would be dramatic. He was right. Simply by rearranging the cafeteria, Carolyn was able to increase or decrease the consumption of many food items by as much as 25 percent. Carolyn learned a big lesson: school children, like adults, can be greatly influenced by small changes in the context. The influence can be exercised for better or for worse. For example, Carolyn knows that she can increase consumption of healthy foods and decrease consumption of unhealthy ones.
With hundreds of schools to work with, and a team of graduate student volunteers recruited to collect and analyze the data, Carolyn believes that she now has considerable power to influence what kids eat. Carolyn is pondering what to do with her newfound power. Here are some suggestions she has received from her usually sincere but occasionally mischievous friends and coworkers:
1. Arrange the food to make the students best off, all things considered.
2. Choose the food order at random.
3. Try to arrange the food to get the kids to pick the same foods they would choose on their own.
4. Maximize the sales of the items from the suppliers that are willing to offer the largest bribes.
5. Maximize profits, period.
Option 1 has obvious appeal, yet it does seem a bit intrusive, even paternalistic. But the alternatives are worse! Option 2, arranging the food at random, could be considered fair-minded and principled, and it is in one sense neutral. But if the orders are randomized across schools, then the children at some schools will have less healthy diets than those at other schools. Is this desirable? Should Carolyn choose that kind of neutrality, if she can easily make most students better off, in part by improving their health?
Option 3 might seem to be an honorable attempt to avoid intrusion: try to mimic what the children would choose for themselves. Maybe that is really the neutral choice, and maybe Carolyn should neutrally follow people’s wishes (at least where she is dealing with older students). But a little thought reveals that this is a difficult option to implement. Adam’s experiment proves that what kids choose depends on the order in which the items are displayed. What, then, are the true preferences of the children? What does it mean to say that Carolyn should try to figure out what the students would choose ‘on their own’? In a cafeteria, it is impossible to avoid some way of organizing food.
Option 4 might appeal to a corrupt person in Carolyn’s job, and manipulating the order of the food items would put yet another weapon in the arsenal of available methods to exploit power. But Carolyn is honorable and honest, so she does not give this option any thought. Like Options 2 and 3, Option 5 has some appeal, especially if Carolyn thinks that the best cafeteria is the one that makes the most money. But should Carolyn really try to maximize profits if the result is to make children less healthy, especially since she works for the school district?
Carolyn is what we will be calling a choice architect. A choice architect has the responsibility for organizing the context in which people make decisions. Although Carolyn is a figment of our imagination, many real people turn out to be choice architects, most without realizing it. If you design the ballot voters use to choose candidates, you are a choice architect. If you are a doctor and must describe the alternative treatments available to a patient, you are a choice architect. If you design the form that new employees fill out to enroll in the company health care plan, you are a choice architect. If you are a parent, describing possible educational options to your son or daughter, you are a choice architect. If you are a salesperson, you are a choice architect (but you already knew that).
There are many parallels between choice architecture and more traditional forms of architecture. A crucial parallel is that there is no such thing as a ‘neutral’ design. Consider the job of designing a new academic building. The architect is given some requirements. There must be room for 120 offices, 8 classrooms, 12 student meeting rooms, and so forth. The building must sit on a specified site. Hundreds of other constraints will be imposed – some legal, some aesthetic, some practical. In the end, the architect must come up with an actual building with doors, stairs, windows, and hallways. As good architects know, seemingly arbitrary decisions, such as where to locate the bathrooms, will have subtle influences on how the people who use the building interact. Every trip to the bathroom creates an opportunity to run into colleagues (for better or for worse). A good building is not merely attractive; it also ‘works.’
As we shall see, small and apparently insignificant details can have major impacts on people’s behavior. A good rule of thumb is to assume that ‘everything matters.’ In many cases, the power of these small details comes from focusing the attention of users in a particular direction. A wonderful example of this principle comes from, of all places, the men’s rooms at Schiphol Airport in Amsterdam. There the authorities have etched the image of a black housefly into each urinal. It seems that men usually do not pay much attention to where they aim, which can create a bit of a mess, but if they see a target, attention and therefore accuracy are much increased. According to the man who came up with the idea, it works wonders.
‘It improves the aim,’ says Aad Kieboom. ‘If a man sees a fly, he aims at it.’ Kieboom, an economist, directs Schiphol’s building expansion. His staff conducted fly-in-urinal trials and found that etchings reduce spillage by 80 percent.1
The insight that ‘everything matters’ can be both paralyzing and empowering. Good architects realize that although they can’t build the perfect building, they can make some design choices that will have beneficial effects. Open stairwells, for example, may produce more workplace interaction and more walking, and both of these are probably desirable. And just as a building architect must eventually build some particular building, a choice architect like Carolyn must choose a particular arrangement of the food options at lunch, and by so doing she can influence what people eat. She can nudge.*
If, all things considered, you think that Carolyn should take the opportunity to nudge the kids toward food that is better for them, Option 1, then we welcome you to our new movement: libertarian paternalism. We are keenly aware that this term is not one that readers will find immediately endearing. Both words are somewhat off-putting, weighted down by stereotypes from popular culture and politics that make them unappealing to many. Even worse, the concepts seem to be contradictory. Why combine two reviled and contradictory concepts? We argue that if the terms are properly understood, both concepts reflect common sense – and they are far more attractive together than alone. The problem with the terms is that they have been captured by dogmatists.
The libertarian aspect of our strategies lies in the straightforward insistence that, in general, people should be free to do what they like – and to opt out of undesirable arrangements if they want to do so. To borrow a phrase from the late Milton Friedman, libertarian paternalists urge that people should be ‘free to choose.’2 We strive to design policies that maintain or increase freedom of choice. When we use the term libertarian to modify the word paternalism, we simply mean liberty-preserving. And when we say liberty-preserving, we really mean it. Libertarian paternalists want to make it easy for people to go their own way; they do not want to burden those who want to exercise their freedom.
The paternalistic aspect lies in the claim that it is legitimate for choice architects to try to influence people’s behavior in order to make their lives longer, healthier, and better. In other words, we argue for self-conscious efforts, by institutions in the private sector and also by government, to steer people’s choices in directions that will improve their lives. In our understanding, a policy is ‘paternalistic’ if it tries to influence choices in a way that will make choosers better off, as judged by themselves.3 Drawing on some well-established findings in social science, we show that in many cases, individuals make pretty bad decisions – decisions they would not have made if they had paid full attention and possessed complete information, unlimited cognitive abilities, and complete self-control.
Libertarian paternalism is a relatively weak, soft, and nonintrusive type of paternalism because choices are not blocked, fenced off, or significantly burdened. If people want to smoke cigarettes, to eat a lot of candy, to choose an unsuitable health care plan, or to fail to save for retirement, libertarian paternalists will not force them to do otherwise – or even make things hard for them. Still, the approach we recommend does count as paternalistic, because private and public choice architects are not merely trying to track or to implement people’s anticipated choices. Rather, they are self-consciously attempting to move people in directions that will make their lives better. They nudge.
A nudge, as we will use the term, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.
Many of the policies we recommend can and have been implemented by the private sector (with or without a nudge from the government). Employers, for example, are important choice architects in many of the examples we discuss in this book. In areas involving health care and retirement plans, we think that employers can give employees some helpful nudges. Private companies that want to make money, and to do good, can even benefit from environmental nudges, helping to reduce air pollution (and the emission of green-house gases). But as we shall show, the same points that justify libertarian paternalism on the part of private institutions apply to government as well.
Those who reject paternalism often claim that human beings do a terrific job of making choices, and if not terrific, certainly better than anyone else would do (especially if that someone else works for the government). Whether or not they have ever studied economics, many people seem at least implicitly committed to the idea of homo economicus, or economic man – the notion that each of us thinks and chooses unfailingly well, and thus fits within the textbook picture of human beings offered by economists.
If you look at economics textbooks, you will learn that homo economicus can think like Albert Einstein, store as much memory as IBM’s Big Blue, and exercise the willpower of Mahatma Gandhi. Really. But the folks that we know are not like that. Real people have trouble with long division if they don’t have a calculator, sometimes forget their spouse’s birthday, and have a hangover on New Year’s Day. They are not homo economicus; they are homo sapiens. To keep our Latin usage to a minimum we will hereafter refer to these imaginary and real species as Econs and Humans.
Consider the issue of obesity. Rates of obesity in the United States are now approaching 20 percent, and more than 60 percent of Americans are considered either obese or overweight. Worldwide, there are some 1 billion overweight adults, 300 million of whom are obese. Rates of obesity range from below 5 percent in Japan, China, and some African nations to more than 75 percent in urban areas of Samoa. Obesity rates have risen 3-fold since 1980 in some areas of North America, the United Kingdom, Eastern Europe, the Middle East, the Pacific Islands, Australia, and China, according to the World Health Organization. There is overwhelming evidence that obesity increases risks of heart disease and diabetes, frequently leading to premature death. It would be quite fantastic to suggest that everyone is choosing the right diet, or a diet that is preferable to what might be produced with a few nudges.
Of course, sensible people care about the taste of food, not simply about health, and eating is a source of pleasure in and of itself. We do not claim that everyone who is overweight is necessarily failing to act rationally, but we do reject the claim that all or almost all Americans are choosing their diet optimally. What is true for diets is true for other risk-related behavior, including smoking and drinking, which produce more than five hundred thousand premature deaths each year in the US. With respect to diet, smoking, and drinking, people’s current choices cannot reasonably be claimed to be the best means of promoting their well-being. Indeed, many smokers, drinkers, and overeaters are willing to pay third parties to help them make better decisions.
But our basic source of information here is the emerging science of choice, consisting of careful research by social scientists over the past four decades. That research has raised serious questions about the rationality of many judgments and decisions that people make. To qualify as Econs, people are not required to make perfect forecasts (that would require omniscience), but they are required to make unbiased forecasts. That is, the forecasts can be wrong, but they can’t be systematically wrong in a predictable direction. Unlike Econs, Humans predictably err. Take, for example, the ‘planning fallacy’ –the systematic tendency toward unrealistic optimism about the time it takes to complete projects. It will come as no surprise to anyone who has ever hired a contractor to learn that everything takes longer than you think, even if you know about the planning fallacy.
Hundreds of studies confirm that human forecasts are flawed and biased. Human decision making is not so great either. Again to take just one example, consider what is called the ‘status quo bias,’ a fancy name for inertia. For a host of reasons, which we shall explore, people have a strong tendency to go along with the status quo or default option.
When you get a new cell phone, for example, you have a series of choices to make. The fancier the phone, the more of these choices you face, from the background to the ring sound to the number of times the phone rings before the caller is sent to voice mail. The manufacturer has picked one option as the default for each of these choices. Research shows that whatever the default choices are, many people stick with them, even when the stakes are much higher than choosing the noise your phone makes when it rings.
Two important lessons can be drawn from this research. 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. As we will show, setting default options, and other similar seemingly trivial menu-changing strategies, can have huge effects on outcomes, from increasing savings to improving health care to providing organs for lifesaving transplant operations.
The effects of well-chosen default options provide just one illustration of the gentle power of nudges. In accordance with our definition, a nudge is any factor that significantly alters the behavior of Humans, even though it would be ignored by Econs. Econs respond primarily to incentives. If the government taxes candy, they will buy less candy, but they are not influenced by such ‘irrelevant’ factors as the order in which options are displayed. Humans respond to incentives too, but they are also influenced by nudges. By properly deploying both incentives and nudges, we can improve our ability to improve people’s lives, and help solve many of society’s major problems. And we can do so while still insisting on everyone’s freedom to choose.
Many people who favor freedom of choice reject any kind of paternalism. They want the government to let citizens choose for themselves. The standard policy advice that stems from this way of thinking is to give people as many choices as possible, and then let them choose the one they like best (with as little government intervention or nudging as possible). The beauty of this way of thinking is that it offers a simple solution to many complex problems: Just Maximize (the number and variety) of Choices – full stop! The policy has been pushed in many domains, from education to prescription drug insurance plans. In some circles, Just Maximize Choices has become a policy mantra. Sometimes the only alternative to this mantra is thought to be a government mandate which is derided as ‘One Size Fits All.’ Those who favor Just Maximize Choices don’t realize there is plenty of room between their policy and a single mandate. They oppose paternalism, or think they do, and they are skeptical about nudges. We believe that their skepticism is based on a false assumption and two misconceptions.
The false assumption is that almost all people, almost all of the time, make choices that are in their best interest or at the very least are better than the choices that would be made by someone else. We claim that this assumption is false – indeed, obviously false. In fact, we do not think that anyone believes it on reflection.
Suppose that a chess novice were to play against an experienced player. Predictably, the novice would lose precisely because he made inferior choices – choices that could easily be improved by some helpful hints. In many areas, ordinary consumers are novices, interacting in a world inhabited by experienced professionals trying to sell them things. More generally, how well people choose is an empirical question, one whose answer is likely to vary across domains. It seems reasonable to say that people make good choices in contexts in which they have experience, good information, and prompt feedback – say, choosing among ice cream flavors. People know whether they like chocolate, vanilla, coffee, licorice, or something else. They do less well in contexts in which they are inexperienced and poorly informed, and in which feedback is slow or infrequent – say, in choosing between fruit and ice cream (where the long-term effects are slow and feedback is poor) or in choosing among medical treatments or investment options. If you are given fifty prescription drug plans, with multiple and varying features, you might benefit from a little help. So long as people are not choosing perfectly, some changes in the choice architecture could make their lives go better (as judged by their own preferences, not those of some bureaucrat). As we will try to show, it is not only possible to design choice architecture to make people better off; in many cases it is easy to do so.
The first misconception is that it is possible to avoid influencing people’s choices. In many situations, some organization or agent must make a choice that will affect the behavior of some other people. There is, in those situations, no way of avoiding nudging in some direction, and whether intended or not, these nudges will affect what people choose. As illustrated by the example of Carolyn’s cafeterias, people’s choices are pervasively influenced by the design elements selected by choice architects. It is true, of course, that some nudges are unintentional; employers may decide (say) whether to pay employees monthly or biweekly without intending to create any kind of nudge, but they might be surprised to discover that people save more if they get paid biweekly because twice a year they get three pay checks in one month. It is also true that private and public institutions can strive for one or another kind of neutrality – as, for example, by choosing randomly, or by trying to figure out what most people want. But unintentional nudges can have major effects, and in some contexts, these forms of neutrality are unattractive; we shall encounter many examples.
Some people will happily accept this point for private institutions but strenuously object to government efforts to influence choice with the goal of improving people’s lives. They worry that governments cannot be trusted to be competent or benign. They fear that elected officials and bureaucrats will place their own interests first, or pay attention to the narrow goals of self-interested private groups. We share these concerns. In particular, we emphatically agree that for government, the risks of mistake, bias, and overreaching are real and sometimes serious. We favor nudges over commands, requirements, and prohibitions in part for that reason. But governments, no less than cafeterias (which governments frequently run), have to provide starting points of one or another kind. This is not avoidable. As we shall emphasize, they do so every day through the rules they set, in ways that inevitably affect some choices and outcomes. In this respect, the antinudge position is unhelpful – a literal non-starter.
The second misconception is that paternalism always involves coercion. In the cafeteria example, the choice of the order in which to present food items does not force a particular diet on anyone, yet Carolyn, and others in her position, might select some arrangement of food on grounds that are paternalistic in the sense that we use the term. Would anyone object to putting the fruit and salad before the desserts at an elementary school cafeteria if the result were to induce kids to eat more apples and fewer Twinkies? Is this question fundamentally different if the customers are teenagers, or even adults? Since no coercion is involved, we think that some types of paternalism should be acceptable even to those who most embrace freedom of choice.
In domains as varied as savings, organ donations, marriage, and health care, we will offer specific suggestions in keeping with our general approach. And by insisting that choices remain unrestricted, we think that the risks of inept or even corrupt designs are reduced. Freedom to choose is the best safeguard against bad choice architecture.
Choice architects can make major improvements to the lives of others by designing user-friendly environments. Many of the most successful companies have helped people, or succeeded in the marketplace, for exactly that reason. Sometimes the choice architecture is highly visible, and consumers and employers are much pleased by it. (The iPod and the iPhone are good examples because not only are they elegantly styled, but it is also easy for the user to get the devices to do what they want.) Sometimes the architecture is taken for granted and could benefit from some careful attention.
Consider an illustration from our own employer, the University of Chicago. The university, like many large employers, has an ‘open enrollment’ period every November, when employees are allowed to revise the selections they have made about such benefits as health insurance and retirement savings. Employees are required to make their choices online. (Public computers are available for those who would otherwise not have Internet access.) Employees receive, by mail, a package of materials explaining the choices they have and instructions on how to log on to make these choices. Employees also receive both paper and email reminders.
Because employees are human, some neglect to log on, so it is crucial to decide what the default options are for these busy and absent-minded employees. To simplify, suppose there are two alternatives to consider: those who make no active choice can be given the same choice they made the previous year, or their choice can be set back to ‘zero.’ Suppose that last year an employee, Janet, contributed one thousand dollars to her retirement plan. If Janet makes no active choice for the new year, one alternative would be to default her to a one-thousand-dollar contribution; another would be to default her to zero contribution. Call these the ‘status quo’ and ‘back to zero’ options. How should the choice architect choose between these defaults?
Libertarian paternalists would like to set the default by asking what reflective employees in Janet’s position would actually want. Although this principle may not always lead to a clear choice, it is certainly better than choosing the default at random, or making either ‘status quo’ or ‘back to zero’ the default for everything. For example, it is a good guess that most employees would not want to cancel their heavily subsidized health insurance. So for health insurance the status quo default (same plan as last year) seems strongly preferred to the back to zero default (which would mean going without health insurance).
Compare this to the employee’s ‘flexible spending account,’ in which an employee sets aside money each month that can be used to pay for certain expenditures (such as uninsured medical or child care expenses). Money put into this account has to be spent each year or it is lost, and the predicted expenditures might vary greatly from one year to the next (for example, child care expenses go down when a child enters school). In this case, the zero default probably makes more sense than the status quo.
This problem is not merely hypothetical. We once had a meeting with three of the top administrative officers of the university to discuss similar issues, and the meeting happened to take place on the final day of the employees’ open enrollment period. We mentioned this and asked whether the administrators had remembered to meet the deadline. One said that he was planning on doing it later that day and was glad for the reminder. Another admitted to having forgotten, and the third said that he was hoping that his wife had remembered to do it! The group then turned to the question of what the default should be for a supplementary salary reduction program (a tax-sheltered savings program). To that point, the default had been the ‘back to zero’ option. But since contributions to this program could be stopped at any time, the group unanimously agreed that it would be better to switch to the status quo ‘same as last year’ default. We are confident that many absent-minded professors will have more comfortable retirements as a result.
This example illustrates some basic principles of good choice architecture. Choosers are human, so designers should make life as easy as possible. Send reminders, and then try to minimize the costs imposed on those who, despite your (and their) best efforts, space out. As we will see, these principles (and many more) can be applied in both the private and public sectors, and there is much room for going beyond what is now being done.
We shall have a great deal to say about private nudges. But many of the most important applications of libertarian paternalism are for government, and we will offer a number of recommendations for public policy and law. Our hope is that those recommendations might appeal to both sides of the political divide. Indeed, we believe that the policies suggested by libertarian paternalism can be embraced by conservatives and liberals alike. Already some of these policies have been embraced by David Cameron, leader of the Conservative Party in Britain, and Barack Obama. A central reason is that many of those policies cost little or nothing; they impose no burden on taxpayers at all.
Many Republicans are now seeking to go beyond simple opposition to government action. As the experience with Hurricane Katrina showed, government is often required to act, for it is the only means by which the necessary resources can be mustered, organized, and deployed. Republicans want to make people’s lives better; they are simply skeptical, and legitimately so, about eliminating people’s options.
For their part, many Democrats are willing to abandon their enthusiasm for aggressive government planning. Sensible Democrats certainly hope that public institutions can improve people’s lives. But in many domains, Democrats have come to agree that freedom of choice is a good and even indispensable foundation for public policy. There is a real basis here for crossing partisan divides.
Libertarian paternalism, we think, is a promising foundation for bipartisanship. In many domains, including environmental protection, family law, and school choice, we will be arguing that better governance requires less in the way of government coercion and constraint, and more in the way of freedom to choose. If incentives and nudges replace requirements and bans, government will be both smaller and more modest. So, to be clear: we are not for bigger government, just for better governance.
Actually we have evidence that our optimism (which we admit may be a bias) is more than just rosy thinking. Libertarian paternalism with respect to savings, discussed in Chapter 6, has received enthusiastic and widespread bipartisan support in Congress, including from current and former conservative Republican senators such as Robert Bennett (Utah) and Rick Santorum (Pa.) and liberal Democrats such as Rahm Emanuel of Illinois. In 2006 some of the key ideas were quietly enacted into law. The new law will help many Americans have more comfortable retirements but costs essentially nothing in taxpayer dollars.
In short, libertarian paternalism is neither left nor right, neither Democratic nor Republican. In many areas, the most thoughtful Democrats are going beyond their enthusiasm for choice-eliminating programs. In many areas, the most thoughtful Republicans are abandoning their knee-jerk opposition to constructive governmental initiatives. For all their differences, we hope that both sides might be willing to converge in support of some gentle nudges.
Have a look, if you will, at these two tables:
Figure 1.1. Two tables (Adapted from Shepard [1990])
Suppose that you are thinking about which one would work better as a coffee table in your living room. What would you say are the dimensions of the two tables? Take a guess at the ratio of the length to the width of each. Just eyeball it.
If you are like most people, you think that the table on the left is much longer and narrower than the one on the right. Typical guesses are that the ratio of the length to the width is 3:1 for the left table and 1.5:1 for the right table. Now take out a ruler and measure each table. You will find that the two table tops are identical. Measure them until you are convinced, because this is a case where seeing is not believing. (When Thaler showed this example to Sunstein at their usual lunch haunt, Sunstein grabbed his chopstick to check.) What should we conclude from this example? If you see the left table as longer and thinner than the right one, you are certifiably human. There is nothing wrong with you (well, at least not that we can detect from this test). Still, your judgment in this task was biased, and predictably so. No one thinks that the right table is thinner! Not only were you wrong; you were probably confident that you were right. If you like, you can put this visual to good use when you encounter others who are equally human and who are disposed to gamble away their money, say, at a bar.
Now consider Figure 1.2. Do these two shapes look the same or different? Again, if you are human, and have decent vision, you probably see these shapes as being identical, as they are. But these two shapes are just the table tops from Figure 1.1, removed from their legs and reoriented. Both the legs and the orientation facilitate the illusion that the table tops are different in Figure 1.1, so removing these distracters restores the visual system to its usual amazingly accurate state.*
Figure 1.2. Tabletops (Adapted from Shepard [1990])
These two figures capture the key insight that behavioral economists have borrowed from psychologists. Normally the human mind works remarkably well. We can recognize people we have not seen in years, understand the complexities of our native language, and run down a flight of stairs without falling. Some of us can speak twelve languages, improve the fanciest computers, and/or create the theory of relativity. However, even Einstein would probably be fooled by those tables. That does not mean something is wrong with us as humans, but it does mean that our understanding of human behavior can be improved by appreciating how people systematically go wrong.
To obtain that understanding, we need to explore some aspects of human thinking. Knowing something about the visual system allowed Roger Shepard (1990), a psychologist and artist, to draw those deceptive tables. He knew what to draw to lead our mind astray. Knowing something about the cognitive system has allowed others to discover systematic biases in the way we think.
The workings of the human brain are more than a bit befuddling. How can we be so ingenious at some tasks and so clueless at others? Beethoven wrote his incredible ninth symphony while he was deaf, but we would not be at all surprised if we learned that he often misplaced his house keys. How can people be simultaneously so smart and so dumb? Many psychologists and neuroscientists have been converging on a description of the brain’s functioning that helps us make sense of these seeming contradictions. The approach involves a distinction between two kinds of thinking, one that is intuitive and automatic, and another that is reflective and rational.1 We will call the first the Automatic System and the second the Reflective System. (In the psychology literature, these two systems are sometimes referred to as System 1 and System 2, respectively.) The key features of each system are shown in Table 1.1.
The Automatic System is rapid and is or feels instinctive, and it does not involve what we usually associate with the word thinking. When you duck because a ball is thrown at you unexpectedly, or get nervous when your airplane hits turbulence, or smile when you see a cute puppy, you are using your Automatic System. Brain scientists are able to say that the activities of the Automatic System are associated with the oldest parts of the brain, the parts we share with lizards (as well as puppies).2
Table 1.1 Two cognitive systems
| Automatic System | Reflective System |
| Uncontrolled | Controlled |
| Effortless | Effortful |
| Associative | Deductive |
| Fast | Slow |
| Unconscious | Self-aware |
| Skilled | Rule-following |
The Reflective System is more deliberate and self-conscious. We use the Reflective System when we are asked, ‘How much is 411 times 37?’ Most people are also likely to use the Reflective System when deciding which route to take for a trip and whether to go to law school or business school. When we are writing this book we are (mostly) using our Reflective Systems, but sometimes ideas pop into our heads when we are in the shower or taking a walk and not thinking at all about the book, and these probably are coming from our Automatic Systems. (Voters, by the way, seem to rely primarily on their Automatic System.3 A candidate who makes a bad first impression, or who tries to win votes by complex arguments and statistical demonstrations, may well run into trouble.)*
Most of the world has an Automatic System reaction to a temperature given in Celsius but has to use their Reflective System to process a temperature given in Fahrenheit; for Americans, the opposite is true. People speak their native languages using their Automatic Systems and tend to struggle to speak another language using their Reflective Systems. Being truly bilingual means that you speak two languages using the Automatic System. Accomplished chess players and professional athletes have pretty fancy intuitions; their Automatic Systems allow them to size up complex situations rapidly and to respond with both amazing accuracy and exceptional speed.
One way to think about all this is that the Automatic System is your gut reaction and the Reflective System is your conscious thought. Gut feelings can be quite accurate, but we often make mistakes because we rely too much on our Automatic System. The Automatic System says, ‘The airplane is shaking, I’m going to die,’ while the Reflective System responds, ‘Planes are very safe!’ The Automatic System says, ‘That big dog is going to hurt me,’ and the Reflective System replies, ‘Most pets are quite sweet.’ (In both cases, the Automatic System is squawking all the time.) The Automatic System starts out with no idea how to play golf or tennis. Note, however, that countless hours of practice enable an accomplished golfer to avoid reflection and to rely on her Automatic System – so much so that good golfers, like other good athletes, know the hazards of ‘thinking too much’ and might well do better to ‘trust the gut,’ or ‘just do it.’ The Automatic System can be trained with lots of repetition – but such training takes a lot of time and effort. One reason why teenagers are such risky drivers is that their Automatic Systems have not had much practice, and using the Reflective System is much slower.
To see how intuitive thinking works, try the following little test. For each of the three questions, begin by writing down the first answer that comes to your mind. Then pause to reflect.
1. A bat and ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost? ____ cents
2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? ____ minutes
3. In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake? ____ days
What were your initial answers? Most people say 10 cents, 100 minutes, and 24 days. But all these answers are wrong. If you think for a minute, you will see why. If the ball costs 10 cents and the bat costs one dollar more than the ball, meaning $1.10, then together they cost $1.20, not $1.10. No one who bothers to check whether his initial answer of 10 cents could possibly be right would give that as an answer, but research by Shane Frederick (2005) (who calls this series of questions the cognitive reflection test) finds that these are the most popular answers even among bright college students.
The correct answers are 5 cents, 5 minutes, and 47 days, but you knew that, or at least your Reflective System did if you bothered to consult it. Econs never make an important decision without checking with their Reflective Systems (if they have time). But Humans sometimes go with the answer the lizard inside is giving without pausing to think. If you are a television fan, think of Mr Spock of Star Trek fame as someone whose Reflective System is always in control. (Captain Kirk: ‘You’d make a splendid computer, Mr Spock.’ Mr Spock: ‘That is very kind of you, Captain!’) In contrast, Homer Simpson seems to have forgotten where he put his Reflective System. (In a commentary on gun control, Homer once replied to a gun store clerk who informed him of a mandatory five-day waiting period before buying a weapon, ‘Five days? But I’m mad now!’)
One of our major goals in this book is to see how the world might be made easier, or safer, for the Homers among us (and the Homer lurking somewhere in each of us). If people can rely on their Automatic Systems without getting into terrible trouble, their lives should be easier, better, and longer.
Most of us are busy, our lives are complicated, and we can’t spend all our time thinking and analyzing everything. When we have to make judgments, such as guessing Angelina Jolie’s age or the distance between Cleveland and Philadelphia, we use simple rules of thumb to help us. We use rules of thumb because most of the time they are quick and useful.
In fact, there is a great collection edited by Tom Parker titled Rules of Thumb. Parker wrote the book by asking friends to send him good rules of thumb. For example, ‘One ostrich egg will serve 24 people for brunch.’ ‘Ten people will raise the temperature of an average size room by one degree per hour.’ And one to which we will return: ‘No more than 25 percent of the guests at a university dinner party can come from the economics department without spoiling the conversation.’
Although rules of thumb can be very helpful, their use can also lead to systematic biases. This insight, first developed decades ago by two Israeli psychologists, Amos Tversky and Daniel Kahneman (1974), has changed the way psychologists (and eventually economists) think about thinking. Their original work identified three heuristics, or rules of thumb – anchoring, availability, and representativeness – and the biases that are associated with each. Their research program has come to be known as the ‘heuristics and biases’ approach to the study of human judgment. More recently, psychologists have come to understand that these heuristics and biases emerge from the interplay between the Automatic System and the Reflective System. Let’s see how.
Suppose we are asked to guess the population of Milwaukee, a city about two hours north of Chicago, where we live. Neither of us knows much about Milwaukee, but we think that it is the biggest city in Wisconsin. How should we go about guessing? Well, one thing we could do is start with something we do know, which is the population of Chicago, roughly three million. So we might think, Milwaukee is a major city, but clearly not as big as Chicago, so, hmmm, maybe it is one-third the size, say one million. Now consider someone from Green Bay, Wisconsin, who is asked the same question. She also doesn’t know the answer, but she does know that Green Bay has about one hundred thousand people and knows that Milwaukee is larger, so guesses, say, three times larger – three hundred thousand. This process is called ‘anchoring and adjustment.’ You start with some anchor, the number you know, and adjust in the direction you think is appropriate. So far, so good. The bias occurs because the adjustments are typically insufficient. Experiments repeatedly show that, in problems similar to our example, people from Chicago are likely to make a high guess (based on their high anchor) while those from Green Bay guess low (based on their low anchor). As it happens, Milwaukee has about 580,000 people.4