Posted by Center for Decision Research on November 4, 2021
On Wednesday, November 3, 2021, the Center for Decision Research hosted Nobel Laureate Richard Thaler and CDR Faculty Director Nicholas Epley for a hybrid installment of the Think Better speaker series exploring Thaler's new book, Nudge: The Final Edition. More than 400 people attended in person at the University of Chicago Rubenstein Forum, with an additional 1,800 watching live via Zoom webinar.
Nudge: A Good Title, but…
Thaler began his talk with the story of how he and Cass Sunstein arrived at their book title, Nudge. Thaler recounted how he initially pitched the title of “Libertarian Paternalism is Not an Oxymoron,” which left publishers unconvinced. Ironically, it was one of the publishers who passed on the book who suggested the title “Nudge.”
While the term “nudge” is undeniably catchy, and has helped the ideas make their way into the broader culture, Thaler worries it has come to suggest that choice architecture is merely about small tweaks, when these interventions can actually have concrete, life-changing impacts.
What is choice architecture? Thaler defines a choice architect as “anyone who designs the environment in which people make choices.” People actively design menus, store layouts, and countless other environments in which people make decisions, and those design attributes nudge people’s decisions in certain directions.
Examples of choice architecture and nudges vary in scale and scope—from default options for personal retirement savings to the way a government form is designed. One example of an unglamorous but effective nudge that Thaler cites is the urinal design in the male restrooms at the Amsterdam airport: a fly was etched into the porcelain to improve “aim,” and the target reportedly reduced “spillage” by 80%.
Just as people can design environments that encourage actions that improve human wellbeing and happiness, choice architects can also design structures that frustrate and complicate our lives with unnecessary burdens. Thaler dove into this idea in his latest edition of Nudge, coining these bad nudges “sludge.” For example, a newspaper that allows you to subscribe with one click but requires you to call during limited hours to cancel is employing sludge. Sludge adds friction to prevent people from achieving their goals.
A Deep Dive on Defaults
Much of Thaler’s research involves defaults. In the early days of 401(k) plans, many workers failed to join, even with generous matching contributions from the employer. Early on, 401(k) plans required participants to fill in forms and choose a contribution rate along with a portfolio. The documents were full of technical financial terms that were not familiar to the majority of people. The process to sign up for a retirement investment account was sludgy, and people were failing to save for their retirement.
In 2004, Thaler co-authored a paper with Shlomo Benartzi, “Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving.” The paper outlined simple ways to improve the choice architecture for encouraging employees to choose a retirement savings plan—starting with the default option of being opted into an indexed fund unless the employee took the additional step of choosing something else. This simple change in choice architecture has profoundly impacted the retirement savings market, and has improved the retirement savings of millions of Americans.
Thaler also discussed the limits of defaults, and being alert to unintended consequences. At one company, for example, before automatic enrollment was introduced, employees who opted into retirement programs selected a 6% savings rate to maximize the employer match. Yet after the company started automatic enrollment with a default of 3% savings rate, more people began to invest at this lower base rate. One technique from “Save More Tomorrow” that addressed this problem was to add a default increase in savings beginning with the first paycheck after a raise—and to continue to do so until a preset maximum.
Free choice doesn’t necessarily lead to good decisions, according to Thaler, especially in cases with too many options. For example, in one large company’s health insurance package, employees were offered 48 possible plans, which led many to choose plans which were financially worse for them than the default plan.
Similarly, in Swedish pension plans, citizens were able to choose from 456 EU-approved funds or a default plan. Fund administrators vied for Swedes’ money in ad campaigns in a “battle of the nudges” – ads vs. defaults. While the ad campaigns proved effective the first year in convincing most Swedes to choose their own funds, the default plan grew in popularity each year thereafter, and now only a small percentage of Swedes choose their own funds a la carte. The takeaway? Nudges don’t always last forever!
A Q&A moderated by Nicholas Epley
Following the talk, Professors Epley and Thaler discussed questions submitted by audience members before the event. Two of these questions centered on the limits of nudging.
When asked about climate change, Thaler warned, “We’re not going to win this battle with nudging.” Instead, he called for pricing carbon: “if something is free, people consume too much of it—just go to a wedding with an open bar.”
The two also reflected on why nudges to encourage COVID-19 vaccination haven’t been as effective as hoped. Thaler noted it may take more time and assessment to determine how truly effective these nudges have been, but he also advocated for vaccine mandates to achieve herd immunity, comparing them to banning smoking in public.
Thaler closed the talk by teasing his future plans—working on a new edition of his book The Winner’s Curse with CDR faculty member Alex Imas.
THINK BETTER 2021-2022
The Think Better speaker series will return February 9, 2022 with Alexander Todorov, Leon Carroll Marshall Professor of Behavioral Science and Rosett Faculty Fellow at Chicago Booth. On April 6, 2022, Think Better will feature Alissa Fishbane, Managing Director of ideas42, a leading consulting firm for applied behavioral science.