Book Review

Nudge: Improving Decisions About Health, Wealth, and Happiness

Like it or not—as a consumer, you are being nudged. Someone is actively trying to influence your decisions. Some of the obvious examples are advertising, visual merchandising, and sales tactics.  In the book, Nudge, authors Richard H. Thaler and Cass R. Sunstein describe how choice architects can nudge consumers toward a path that leads to well-being. Specifically, as the subtitle states, “Improving Decisions About Health, Wealth, and Happiness.”  

The book’s introduction lays the framework for the behavioral economics concepts that follow and establishes several pivotal terms. The authors describe choice architects as having “responsibility for organizing the context in which people make decisions.”  Financial educators, counselors, and coaches guide consumers to follow recommended money management practices. Knowledge and skills haven’t proven to be enough to guide consumers to financial stability. 

Personal finance decisions are not always made with rational thought and a logical cost-benefit analysis. Feelings, motivation (or lack of motivation), and other aspects of the human condition can derail good decision-making. Thaler and Sunstein label these two types of decision makers as the Econ or economic man and the Human. Humans are not perfect and don’t always make rational decisions. Therefore, choice architects employ nudges to assist Humans in making better decisions. 

This gives rise to the question of fairness. Is it ethical to guide consumers in a direction they may not have chosen on their own? The authors propose the idea of Libertarian Paternalism. The term paternalism represents the idea of guiding Humans to make decisions that are ultimately in their best interests. The term libertarian signifies that decisions are not forced. Humans remain free to choose among alternatives. 

Nudges are defined by the authors as “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economics incentives.” A common example of a nudge would be the automatic opt-in for employee participation in a company retirement plan as opposed to an automatic opt-out. Employees are more likely to take the default mode, the path of least resistance. This nudge guides employees toward building a retirement savings fund while maintaining their freedom to choose not to contribute.

Nudgeis organized into five parts with a total of 20 chapters. Part I describes the conditions that lead to the need for nudges, when to use a nudge, and types of nudges.  The authors use examples and stories to bring nudges to life in Part II Money, Part III Health, Part IV Freedom, and Part V Extensions and Objections.  Examples are provided for six principles of good choice architecture. These principles are organized into the acrostic NUDGES: iNcentives, Understanding mappings, Defaults,Give feedback, Expect error, and Structure complex choices.

Incentives are the classic cost/benefit or loss/gain of choosing one thing over another.  The challenge for choice architects is to find the right incentives for the specific consumer situation. Thaler and Sunstein recommend asking: “Who uses? Who chooses? Who pays? Who profits?” Choice architects can then direct consumers’ attention to appropriate incentives. 

Choice architects need to understand mapping. Consumers typically select the option they see as providing the greatest benefit. Consumers map the path from choice to benefit. The corresponding increase in well-being received from making one choice over another impacts consumer decisions. 

Complications arise in more complex situations where results may be confusing or difficult to envision. As one example of choice architecture, the authors propose a system of government regulation they term RECAP—Record, Evaluate, and Compare Alternative Prices. An example of this is the Credit Card Act requirement that statements show total cost to pay off balance making only the minimum payment versus total amount paid and monthly payment to pay off the balance in three years.

 

According to the authors, “the best way to help humans improve their performance is to provide feedback.”  Assessments can be used by choice architects to guide consumers in adopting recommend practices.

To err is human. Econs may be perfect but Humans make mistakes. Does your car beep when you haven’t fastened your seatbelt?  Does your iron or other appliances have an automatic shut-off feature? Choice architects put controls in place to guide consumers in avoiding errors or mistakes. An automatic text from the bank may serve to prompt consumers to take action if needed.

Choice architects can structure complex choices. When there are few choices of well understood options, consumers examine all attributes then make trade-offs. Many choices and/or complex issues cause consumers to use other/alternative strategies in an effort to simplify the process. The selection process becomes more difficult with more options and/or complex products such as home mortgages, credit card offers, and insurance policies. Consumers may veer from rational decision making when faced with difficult decisions, overwhelming amounts of information, or complex products. Choice architects can help people learn so they can make better choices on their own.

In Nudge, the authors offer many examples of how nudges can be used by choice architects. As choice architects—educators, counselors, planners, and coaches—use these behavioral economics concepts to guide consumers toward financial security.  Thaler and Sunstein offer many interesting and helpful real-life examples of nudges in action.


Dr. Laura Hendrix serves as Associate Professor for Family and Consumer Economics and advisor for the Arkansas Extension Homemakers Council (AEHC) with the University of Arkansas Division of Agriculture Cooperative Extension Service. Dr. Hendrix is an Accredited Financial Counselor, Certified Volunteer Manager, and RYT200 yoga teacher. She has a Ph.D. in Public Policy, specializing in family economics policy. Dr. Hendrix has written numerous publications and has been a regular, featured guest on several Arkansas television stations.

The Standard

3rd Quarter 2018


Thank you to this issue's contributors:

Carrie L. Johnson, AFC®, Ph.D.

Laura Hendrix, AFC®,Ph.D.

Andrew Zumwalt, MS, CFP®,

Stephen Newland, AFC®

Cherie Stueve, MBA, CPA (inactive) AFC®

Jennifer Lear, AFC®

Jerry Buchko, AFC®

Rebecca Wiggins

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