Nudge: Improving Decisions About Health, Wealth, and Happiness

In Chapter 5, Thaler and Sunstein go deeper into the nature of choice architecture. They open with an example from Thaler’s experience in the classroom. The doors of the classroom were poorly designed and caused students some trouble. According to Thaler and Sunstein, “Those doors are bad architecture because they violate a simple psychological principle with a fancy name: stimulus response compatibility” (104). In other words, the stimulus should agree with the action the stimulus is meant to provoke. The doors had handles on them, which generally prompts the students to pull. However, to open the door, a person needed to push. The poor design caused incompatibility between the stimulus and the desired response.

The authors write, “the spirit of this chapter is that good design is often no more expensive than bad design” (106). The hope is that choice architects will implement good design without having to increase labor or expenses. They cite Kurt Lewin’s concept of a “channel factor” (106). Small changes in the decision-making landscape can make big differences in behavior. Changes that increase ease of use are particularly important. Thaler and Sunstein write, “if you remember just one thing from this book, let it be this. If you want to encourage people to do something, Make It Easy” (107).

In many cases, an essential component of making things easy is the default option. Thaler and Sunstein discuss the relevance of default options with reference to several aspects of human behavior outlined in Part 1. Since people often accept the default option, knowing the best practice is crucial. As the authors note, default options are unavoidable. In the absence of an active choice, there is still a passive choice. Also, if the default option is terribly designed, then many people will actively decline or opt out. Thaler and Sunstein write, “the choice architect can force the choosers to make their own choice” (110). Required choice is still a default since the default is the mandate to choose for oneself.

In situations in which the choice is very important and details can easily be overlooked, active choosing is frequently built into the choice architecture. Required explicit consent, a form of required choice, “reflects an effort,” they write, “to protect people not only against their own inattention but also against manipulation” (111). They also discuss “prompted choice,” which is an option in choice architecture that does not require choice but actively requests it. This means fewer people will choose a default but also that a default is still in place should the chooser neglect the prompt. Thaler and Sunstein agree with some people that required choice is often a good option for choice architecture. However, they point out flaws it has in some contexts. In some situations, people merely find required consent a nuisance. Also, they note that it’s more useful in situations that only require affirmation or rejection—a simple “yes” or “no”—than in more complex choices.

The authors state that good choice architects should expect user error and plan accordingly. Architects should also make things as user-friendly as possible. The Paris subway system, for instance, exhibits good choice architecture by allowing its potential passengers to swipe their metro cards from either side. Prompts/reminders are also useful, like the warning light that appears on an automobile’s dashboard when the fuel is low.

One of the most serious human errors is the so-called “postcompletion error” (114). This happens when people forget to complete all the steps of a project or assignment because the main task has already been completed. Gmail, for example, asks its users if they forgot to include an attachment when the word “attachment’’ is used but there is none. The postcompletion error is the forgetting of the attachment. The nudge is the query. In a more serious example of postcompletion error, Thaler and Sunstein write that “In the United States, more than 125,000 people die annually because they do not take their prescribed medicines” (115). Correcting postcompletion errors may require nudges that attend to details like the regularity and frequency of the postcompletion task.

Good systems not only expect human error and set effective defaults, but they also provide useful feedback and account for the problem of “mapping.” Mapping is the act of understanding the relationship between a choice and the welfare of the individual making the choice. If someone understands the map, then they know how the choice will affect welfare. Thaler and Sunstein note that “good choice architects often winnow the choice set down to a manageable size” (121). This is an important aspect of structuring complex choices. Another is the proper organization of the choices. If the choices are not well-organized, especially when there are many options, then decision-making is more difficult. Thaler and Sunstein note that different methods of organization are required in different settings. Alphabetizing a dictionary is a good idea but not the paints in a hardware store. “Collaborative filtering” is a form of organizing that uses algorithms based on shared personal tastes (124). It is designed to present people first with options they are likely to enjoy. Streaming platforms often use this method of organization. In some cases, though, it is important to provide consumers and decision-makers with surprises and/or material that broadens their horizons.

They end this chapter with a discussion of prices and incentives, which, they acknowledge, most economists believe is the most important aspect of choice architecture. When building incentives into choice architecture, Thaler and Sunstein write, there are four central questions to answer:

Who chooses?

Who uses?

Who pays?

Who profits? (121)

Thaler and Sunstein write, “The most important modification that must be made to a standard analysis of incentives is salience” (126). Salience is the degree to which a person is aware of something and its ramifications. For Thaler and Sunstein, the role of salience is not properly appreciated in the wider economic community. The costs of using a car, for example, are less salient than the costs of taking taxis, since those costs are generally less frequently applied. At this point Thaler and Sunstein decide to end the chapter even though, thematically, they have more to say. They write that knowing when to take a break, like an intermission, can also be an important aspect of choice architecture, and therefore insert an intermission in the discussion of choice architecture.

Chapter 6 is a short addendum to Chapter 5 and has the function of completing the discussion of choice architecture. Thaler and Sunstein discuss the value of curation, which they use to explain the continued viability of small bookstores. In the face of major retailers, like Amazon, small stores cannot compete with the quantity of titles. However, they may be able to curate a pleasurable browsing experience through the arrangement of titles and a knowledgeable staff. They may provide “surprises, serendipity, and delight” in ways that are unavailable to retailers of scale (131). In short, “Small shops compete via curation, while online megastores use navigation tools to make finding and choosing among so many options easy” (131).

Thaler and Sunstein also highlight the importance of making selections enjoyable. They use a passage from Mark Twain’s Tom Sawyer to illustrate their point. Tom has to paint a fence and is able to trick his friends into painting it by acting as though it’s a joy and privilege. Because people find lotteries fun, both China and Taiwan have instituted lotteries designed to encourage good civic behavior. In China, the government put scratch-off lottery tickets on sales receipts at restaurants. This gave customers a good reason to request their receipts, which, in turn, makes the transactions at the restaurant reportable (thereby increasing tax revenue).

The authors note that positive reinforcement comes in many forms, not simply the lottery. Rewards programs offer “guilt-free pleasures” for frequent usage, like frequent flier programs or punch cards at coffee shops. Thaler and Sunstein note that guilt-free pleasure is often more effective than cash payment since it provides a rare gift. They write, “The moral here is simple. Make it fun. And if you don’t know what fun is, then you are not having enough of it” (136).

Smart disclosure is a vital aspect of choice architecture, according to Thaler and Sunstein. Smart disclosure is the process by which information is provided to potential decision-makers. Improving the way information is disclosed can, according to the authors, “make the market for goods and services much more transparent, competitive, and fair” (137). When Sunstein worked for the White House, his department released an official memorandum on the nature of smart disclosures. It reads as follows:

As used here, the term ‘smart disclosure’ refers to the timely release of complex information and data in standardized, machine readable formats in ways that enable consumers to make informed decisions. Smart Disclosure will typically take the form of providing individual consumers of goods and services with direct access to relevant information and data sets. Such information might involve, for example, the range of costs that might not otherwise be transparent. In some cases, agencies or third-party intermediaries may also create tools that use these data sets to provide services that simplify consumer decision-making. Such decision-making might be improved, for example, by informing consumers about the nature and effects of their own past decisions (including, for example, the costs and fees they have already incurred) (143).

Smart disclosure helps consumers make better decisions by providing them with the most important information at the right time. Among other things, it aims to overcome the problems of fine print.

One aspect of smart disclosure is standardized, comprehensible measurements. By using consistent standards of measurement and regulating these standards across fields, consumers can be better informed. Another aspect is usefulness. Useless forms of disclosure, like the terms and conditions at Apple, PayPal, and many other services can do more to obfuscate, Thaler and Sunstein write, than illuminate.

Thaler and Sunstein discuss the role of choice engines (companies that aggregate data from various sources to help consumers make decisions) in smart disclosure. One of the values of such engines, and choice engine aggregators, is that they help with hidden prices. Hotels, the authors write, sometimes use “fiendish” strategies like partitioned pricing and drip pricing to hide some of the true costs from their customers.

They move on to data ownership and note how streaming platforms like Netflix might remember the customer’s past behavior (in video streaming) better than the customers, giving them a strong marketplace advantage. They discuss the value of a database for product ingredients. Then they discuss the advance of the Smart Disclosure movement in the United Kingdom, wherein the financial sector has increased disclosure and the energy sector has improved options for customers. Not only are energy customers in the UK given choices, but they are also given the proper information about their usage in a format that can be read by choice engines. This method of smart disclosure gives individuals and households the ability to find the plan that is best for their needs.

Good choice architects, as Thaler and Sunstein often note, make things easy for the consumer. The goal is to increase convenience. However, they note that sometimes the architect will try to discourage consumers from undesirable behavior. In such a case, the architect may make things harder. This is the so-called “dark side of choice architecture” (152).

They introduce the term “sludge,” the central concept of the chapter, which they define as “any aspect of choice architecture consisting of friction that makes it harder for people to obtain an outcome that will make them better off (by their own light). If you cannot get financial aid without filling out a twenty-page form, you have been subjected to sludge” (153). Thaler and Sunstein note that sludge can also be produced by accident simply because of poor design. Governmental “red tape,” or in technical terms, “administrative burden,” can be another form of sludge, though the authors note their disagreement on this subject.

Thaler and Sunstein discuss forms of sludge in the private sector and focus on the asymmetry in subscription processes. If it is much easier to subscribe to a newspaper, magazine, etc. than to unsubscribe, then the unsubscription process is burdened by sludge with the intent of influencing people to remain customers. Then they discuss rebates, which are often more difficult to redeem than consumers are led to believe. Companies offer these rebates, Thaler and Sunstein write, in part because consumers are over-optimistic about the likelihood that they will redeem the rebate and work through the associated sludge. The best way to increase rebate redemption rates is to make the process easy.

They then discuss the concept of “shrouded attributes,” which are attributes included in the true cost of a product but difficult to find. For instance, new printers may be purchased cheaply online, but their ink cartridges may be much more expensive. Further, the cost of the printer might be advertised but the cost of the replacement cartridges hidden. Each of these strategies, Thaler and Sunstein write, is a method by which producers and sellers make prices opaque. They then note that certain institutions, like gyms, price discriminate by offering deals to those who threaten to quit.

Thaler and Sunstein discuss other sectors with sludge problems, including the college admissions process. They write, “there are currently more students from the top 1 percent of the income distribution attending top universities in the United States than from the bottom 50 percent!” (164-165). Research from the University of Michigan reveals that sludge in the financial aid and admissions processes can have serious impacts on enrollment.

They next turn to governmental sludge and note that governments have a role in both the creation and elimination of sludge. They write:

In recent years, the United States government has imposed a whopping eleven billion hours in annual paperwork burdens on the American people. This number includes burdens imposed on hospitals, doctors, and nurses, who have to spend a lot of time satisfying government requirements: on poor people seeking to get benefits to which they are legally entitled; on truckers, who have to fill out a lot of forms; on students, colleges, and universities; on people who are seeking visas to study or work in the United States. The cost of those eleven billion hours is not merely time. In many cases, sludge operates as a wall, and people cannot find a way to get over it (167-168).

For Thaler and Sunstein, much government sludge is the result of poor design, not malice. Still, the results can occasionally be disastrous. When the sludge “operates as a wall,” it can prevent people from receiving the services they need. The sludge in the American tax system is another serious issue. They note that the average American spends roughly 13 hours working on their taxes every year, whereas in some countries, like Sweden, taxes are completed in a few minutes. Thaler and Sunstein point to sludge in lobbying and legislation that makes the situation worse. They briefly discuss various forms of taxation and state that estate and inheritance taxes are better for taxing the ultrarich than income taxes.