Nudge by Richard H. Thaler and Cass R. Sunstein – Book Summary

Nudge is an excellent book written by Richard H Thaler (Winner of Nobel Prize in Economics) and Cass R Sunstein (WInner of The Holberg Prize). I found this book fascinating and decided to document my learnings or notes chapter by chapter. 

Introduction:

A Choice Architect is someone who is tasked with providing choices and where to place the choices.  The Choice Architect has the responsibility of organizing the context in which people make decisions. (e.g. where to place fruits in a store).  Libertarian Paternalism is about giving people the freedom to choose. (People should be free to choose). If people eat a lot of candy and smoke a lot, Libertarian Paternalists will not let them choose otherwise. Nudges help here. Putting the fruit at eye level (for people to choose) is a nudge, however, banning junk food does not count as a nudge. Nudges also help in Public Policy.

Part 1 of this book talks about Humans and Econs:

Chapter 1: Biases and Blunders:

Anchoring: The authors give great examples of how to guess things. E.g. If we are asked to guess the population of Milwaukee which is 2 hour drive north of Chicago. We can use the population of Chicago to guess the population of Milwaukee. The population of Chicago is roughly three million(if we know). We can guess that Milwaukee is one of the biggest cities in Wisconsin, not as big as Chicago, maybe 1/3rd the size – so the population can be 1 million and Green Bay in WI – 1/3rd the size of Milwaukee and the population can be around 300,000. This process is called Anchoring and Adjustment.   Anchors can serve as nudges.

People do not like to be ordered. When they are ordered, they just do the opposite of what is being ordered of them or suggested. Instead, Nudges help.  The tipping of drivers or restaurants, 5%, 10%, 15% is a nudge.  However, if the nudge says 40% you may not get a tip (If you get greedy, you may end up with nothing) – the 5% or 10% act as nudges. Setting good defaults is important. 

Even when technology stocks have done very well, people may well buy technology stocks even if it becomes a bad investment. A good way to nudge people to take precautions is to remind them of a related incident Loss Aversion. It has a lot of relevance when it comes to public policy. E.g if you want people not to use plastic bags, we have two choices. Should we give people money for bringing their own plastic bags or charge them extra for a bag? The former has no effect, however, people do not want to lose money even if it is a small amount, and the latter works. 

Beethoven wrote his incredible ninth symphony after he became deaf, however he also had the habit of misplacing his house keys. This is a common occurrence. A candidate who tries to win votes through complex arguments and statistical demonstrations may well run into trouble. 

Small and insignificant changes can have a big impact on users’ behavior.  Schiphol Airport in Amsterdam where an image of a black housefly was added to each urinal. (Men do not pay attention to where they aim 🙂 and adding this black housefly reduced urinal spillage by 80%.

Chapter 2: Resisting Temptation

The authors write about Resisting Temptation. They call this book ‘The Final Edition of this Book’ This is resisting temptation so they do not come up with any more revised editions. In some situations, people may want their government to help them with some of their self-control problems (e.g. use of drugs, heroin, and more). Smokers may benefit from Cigarette taxes. A child’s piggy bank is designed in such a way that it is easier for a child to put money in than take it out (Sometimes you just have to break it to take the money out and you do not want to do it). Mental Accounting can help in Savings – A pay-check 1/3rd mentally accounted for savings, 1/3rd for expenses, and so on. 

Chapter 3: Following the Herd

When people do things they usually follow the Herd. Why do they do this? Because they do not want to be seen as opposing. How can you break this trend? When one starts openly talking about choices. The author writes about music that gets listened to and downloaded. There needs to be an initial nudge and the initial push will cause more people to listen to it. The songs that are most downloaded or listened to usually top the chart and the ones that do not get listened to stay at the bottom. The success or failure of the songs depended on the initial popularity. 

Massive Social changes can also happen with a small nudge. People buckling seat belts, saving for retirement, and driving under the speed limit are also because of social influences. COVID-19 mask-wearing is discussed in the book. In some states in the US, people wore masks (social influence) and in other states, they refused to wear masks (social influence). Humans are easily nudged by other humans. 

Traditions can last for a long time. E.g. Wearing a tie. Some of these traditions are originally the product of a small nudge from a few people or even one person.  It is not that the success of musicians, actors, authors, or politicians is inevitable in light of his or her skills. Small interventions can produce large variations in the outcome.

Don’t Mess with Texas: In Texas, people were littering on highways and it caused a lot of problems for the State. They spent a lot of money and could not get rid of this problem. They created a nudge with a campaign ‘Don’t Mess with Texas’ where Dallas Cowboys football players participated in television ads in which they collected litter, smashed beer cans in their bare hands, and growled ‘Don’t Mess with Texas’. This was a nudge that changed littering behavior in Texas. Now Don’t Mess with Texas is hugely popular. It created an Identity for Texas. 

People who want to socially influence and change things should ignore what other people think and look at ways to create nudges. When people talk about their opinions nudge is created. E.g When a child says out loud the ‘Emperor is naked’ other people may also be influenced to say so. 

Messaging: How the marketing messages are written makes a difference. People like to conform to behaviors. Celebrities and influencers may believe that they may be best suited to exert change. However, people respond to the best norms. E.g a 2008 Study determined that the best way to nudge hotel goers to reuse their towels was with a message like this -’ Join your fellow guests,,,75% of them reuse their towels’…and people confirm this behavior. 

Same-Sex Marriages. Inter Racial Marriages were illegal in some states of the US, however, in 1967 such laws were declared unconstitutional. The same could not be done for same-sex marriages. However now, all states in the US allow same-sex marriage and it is recognized by over 30 countries now. The big reason for this is more people openly talk about it, lesbians and gays came out of the closet. The same could be said about the recent MeToo, Black Lives Matter movements. Even if one or two people talk about it, social or marketing change can be created.

Part 2 of this book talks about ‘The Tools of a Choice Architect’

Chapter 4: When do you need a Nudge?

The Golden Rule of Libertarian Paternalism – ‘Offer Nudges that are most likely to help and least likely to inflict harm’. A reminder of upcoming appointments with a doctor, or restaurant or a reminder that pops up in a calendar invite is a nudge. The fuel indicator in your car or bike, and the sound that nudges you when you do not wear your seat-blet are great examples of Nudges.  Atul Gawande’s The Checklist Manifesto book is referenced. The consequences of binge-watching are deadlines missed because we were procrastinating. The authors write about Libertarian Paternalism. Difficult and rare choices are good candidates for Nudges. Funny Stories of Snake Oil campaigns (which claim to cure all diseases) are discussed and we should always be suspicious about miracles. The authors ask us not to choose extended warranties. If Humans have problems, they may benefit from a well-chosen nudge. 

Chapter 5: Choice Architecture:

One thing that the authors like us to remember from reading the book is ‘Make it easy’ for people to choose things. Don Normam’s ‘The Design of Everyday Things’ is also quoted. Oftentimes, things are not easy to choose and it is very complicated. We have to question some of this and simplify it. When we are setting up a phone, we usually tend to go for default options. However, people will reject default choices if it makes them very uncomfortable. When you send an email via Gmail to someone on Gmail and you write ‘Please see attached’ and you forget the attachment, it means Google is giving you a nudge – You forgot to attach, do you still want to send it? If you send an email to someone and have not followed up- Google says – 6 days ago, Follow-up? Google also practices Libertarian Paternalism. If you do not want these default nudges, you can turn them off.  

Our laptops warn us that the charge is running low and plug in your charger is also a Nudge. A self-nudge can be called Snudge. (e.g. Limiting the amount of food in the refrigerator, removing Twitter, and Instagram as apps from your phone) essentially making it difficult for you to access them. In a movie, the timing of the break is also a choice of architecture in a way.

Chapter 6: But Wait- There’s More

This is a short chapter and it talks about Curation and making things Fun. One good way for traditional bookstores to compete with the likes of Amazon is by Curation. You curate what is needed for the book readers or users. Curate the good books. Some passages from Mark Twain’s Tom Sawyer novel are shared. Tom is being punished by Aunt Polly for misbehavior and he is being tasked with whitewashing Polly’s fence as a punishment. 

Tom converts this work to fun and he treats it as a privilege. Soon other kids around the block, walking, see Tom doing this and the kids exchange apples and other stuff for their turn to paint the fence. The painting on the fence is completed by all the kids. When you make the work you do fun, you will notice that people are willing to take it up and also pay for it. Lotteries and free giveaways can also be fun. E.g, if you are speaking at a conference, you can give something away and people enjoy these kinds of things. If someone wins, (a simple game), they get something. The idea is to play on people’s feelings of regret. 

Chapter 7 – Smart Disclosure: 

Until 1968, in the US lenders had a lot of flexibility in terms of how interest rates were quoted and Congress enacted the ‘Truth of Lending Act’ – Annual Percentage Rate (APR) was introduced and in a way, a standard way to calculate interest rates was introduced. 

When you sign up or buy a product or service, we are given Terms and Conditions and it runs several hundred pages. Hardly do we read it. The authors write that the Terms and Conditions for using ‘Paypal’ is a total of 36,275 words. How many people read this? Hardly any. We can simplify some of these things. 

Travel companies like Expedia, and Booking.com are choice engines (Choice Architecture). Airlines post the data as the government requires them to do so and it is also good for them. Travel companies like Expedia, and Booking.com are able to leverage this data, operate, and make travel agents irrelevant. The authors also write about how difficult it is to find the ingredients of a food. A much-needed thing these days because you do not know what you eat. We need to be owning the data of everything we use (Netflix, Food, and more). This will empower us to make better decisions. All of these (ingredients of a food) can be categorized as Smart Disclosures.

Chapter 8- Sludge:

If you do not want people to do certain things, then create a barrier. E.g If you do not want people to vote, keep fewer polling booths, and increase the wait times and the waiting line for people to vote. If you do not want people to migrate to a country, keep the forms long, and not easy to understand. The dark side of the choice architecture is Sludge. (When we use the nudge to get desired results that may not be good for people). It becomes harder for people to attain an outcome. This could also mean red tape in the government. One great example of this is that you subscribe to a news outlet and it is extremely hard to unsubscribe. You may get the first month of subscription free, however to opt-out, you have to mail (not email) in forms and hope that the physical mail reaches them or you need to talk to customer support. Rebates (yes, the mail-in rebate program) is also a great example of sludge – where you pay more money to buy a product, and the refund is sent to you after filling in paperwork, and money is sent as a check by mail. We may even forget to cash the check. (I have also filled in rebate forms). 

King. C Gillete invented a marketing strategy where they keep the cost of razors minimal and make money on the blades. (or) another example is selling the printer cheaply and making money on the cartridges. Resort Fee is another great example (where you pay resort fee) at hotels in Las Vegas. These could be called Shrouded Attributes.  

The authors write that travel reimbursement at companies can be a sludge. However, Netflix (Reed Hastings) in his book No Rules Rules suggests that you should do business travel as you normally would. (Spend company money as your own money). 

Sludges in Government are also discussed. Cost of laying roads, there is also a cost to collect tolls. E.g. – people’s cost, the time people wait in line with their cars (opportunity cost), and more. TSA (Transportation Security Administration) introduced on November 19, 2001, causes sludge for people to travel, however, eased a bit with Global Entry and TSA Pre-Check programs. 

Filing Taxes could be a huge sludge. IRS (Internal Revenue Service) US Tax Agency could send us pre-filled returns and make the filing process automated. However, this could also be opposed by a lobby (CPAs) or people who help to file returns. The standard deductions and a pre-filled return can be automated and sent. All we need to do is review, file, and get the refund.  In Sweden, 80% of the taxpayers file their returns in a matter of minutes free of charge usually using their cell phones. The way to get rid of Sludge in government is something similar to fighting and winning wars. Capitalism defeated Communism. Even in rare cases when new parties emerge (Emmanual Macron’s En Marche in France), they inherit the entire government bureaucracy. Reducing Sludge in Government can be incremental. Governments could create both Nudge and Sludge. 

Part III of the book talks about Money:

Chapter 9: Save More for Tomorrow: 

The habit of saving and how nudges will help with saving is discussed in the book. How much money one needs for retirement is a debatable question. The authors write that you could err on the side of having more than you need. The more you save for retirement the better and you cannot go wrong with that. In the past life expectancy was not high and even if one did not save enough, they had the support of the family  (the younger generation). However, now the culture is changing where people save. Life expectancy has improved and saving for retirement is the key. Otto von Bismarck’s early social security program was leading the way in 1889. 401(K) in the US is a relatively new phenomenon (started in 1980). The problem arises when small businesses or individual businesses do not have a 401k plan in their companies. This hurts people working there. The UK’s National Employment Savings Trust (NEST) Savings program works well (Not: This is similar to the Provident Fund in India). Vanguard offers Automatic enrollment Target Date Funds. The authors write that people save with a gentle nudge. Automatic Enrollments do help. 

Sweden’s Retirement System: 

There is a chapter dedicated to Sweden’s Retirement System (Swedish Premium Pension Plan) which was launched in 2000. Participation in this retirement is mandatory. There are default funds offered and there are also a lot of custom funds people can choose from. The companies are allowed to market the custom funds plans as long as they meet the guidelines. The authors write that the system works very well (mandatory enrollment). The Swedish funds invest globally. (Sweden is a small country and it does not make sense to invest all the money in Sweden). In 2010, the Swedish government also approved permitting the default fund to employ financial leverage (borrow and invest).  Not sure if this is such a great idea though.

Chapter 11: Credit Cards, Mortgages 

Chapter 11 talks about Credit cards and mortgages, Healthcare, and Insurance. It also offers advice on using a credit card (pay in full). A lot of households maintain a lot of debt. The authors write that it is easier to compare fuel prices than mortgage costs. The poor are affected more because of the mortgage as the mortgage brokers may often look at a quick sale. When it comes to wealthy clients, mortgage brokers have a greater incentive to serve them well in view of long-term business. In terms of credit cards, the authors share some stats. In the US, 43% of the balances are not paid in full, total credit card debt was $1.1 Trillion as of February 2020. Setting up auto-pay is a good way to manage things (However you have to keep a tab at it).

Chapter 12: Insurance: 

When it comes to Insurance you are better off going for a higher deductible and not signing up for extended warranties. Insure for Flood (Do not insure the small stuff) – Billionaires do not need any sort of Insurance. When it comes to health insurance, the authors also recommend taking a higher deductible. Requiring patients to share the cost of medical expenses may drive down costs in the short run, however, it is an open question if it is a good idea in the long run. Certainly, patients will think twice about going to a doctor or filling a prescription if they have to pay. The authors also write Don’t Sweat the Small Stuff

Part 4 of this book talks about the Society 

Chapter 13: Organ Donation

Accidental deaths such as those on a highway are a frequent source of young, healthy organs.

The first successful organ transplant took place in 1954 when a man offered his twin brother his kidney. The first transplant from a deceased donor happened 8 years later and now since 1988, more than 819,000 organs have been transplanted in the US. 

The authors have dedicated an entire chapter to Organ donation and they explore and write on ways to improve organ donation. Usually, when you get a driver’s license, you are asked a question to opt in or someone asks you if you are willing to donate your organs. You say yes and you are marked as an organ donor. However, next time you go to renew your driver’s license, the authors write that it is not a great idea to ask them the same question again. 

The authors cite examples of some countries (Israel) where people who donate organs are given preference when they are in need of organs. The family of people who donate organs are given second preference. All this will encourage more people to donate organs which also means more lives saved. Giving permission or letting the family of the deceased decide may put the family members in an awkward situation while they cope with the loss of a loved one. One useful fact – we as individuals are about three times more likely to be a patient than to be an organ donor. 

Many people who want to donate organs do not take the next step. Nudges, on how questions are being asked, Opt In, Opt Out can all make a big difference when it comes to organ donation. 

Societies like Iran pay living donors to donate organs (which may not be a good idea).

In Iran, there is a legal market for kidneys. However, this is not a great idea.

In Israel, people were prompted to become organ donors when they cast their ballots. Making this an option when you file your tax returns could also be a good idea. The Co-Founder of Apple, Steve Jobs was a recipient of a Liver transplant. When Americans buy a new iPhone they are prompted to register for organ donation via the Donate Life Registry. This has resulted in over six million registrations so far.  

Some experts in this area of organ donation include Alexandra Glazier & Eric Johnson.

Chapter 14 – Saving the Planet

In this chapter, the authors write about Climate Change. Violent Storms and Gigantic Fires do not spare anyone and are becoming increasingly common. The problem we have is that we can’t attribute any particular event to Climate change. 

Paul Samuelson, a giant in economics wrote about “public goods” in a three-page essay published in 1954. Fresh Mountain Air is a good example of Public goods. No matter how many deep breaths you take at the top of a hill, there will be plenty of air left for everyone else. The Paris Agreement of 2015 could be called the Public Goods Game. One can contribute to the public goods pot. 

Utility and Automotive manufacturers are responsible for a large portion of the carbon emissions. Nudges and also economic sanctions can be provided on companies that emit a lot or contribute to the climate change problem. Beef Eating and raising of beef contributes a lot to the Climate Change problem and this land can be used for something else. 

Modern Inventions such as electricity, transportation, factories, heating, cooling, and more produce a lot of emissions. The United States has contributed 1/3rd of the global total since 1751.

Nobel Laureate William Nordhaus, a climate expert, suggests that we form what he calls Climate Clubs.  Similar to Tennis Clubs, members would enjoy benefits (get access to tennis courts), but they would also need to agree to club rules. Monetary incentives are also a good way to work on the Climate Change problem. We also need to impose taxes and penalties on those who pollute. Carbon Tax will create a lot of incentives to innovate (e.g producing cheaper sources of energy that produce little or no carbon emissions)

Starting with a low carbon tax and increasing over a period of time is also followed by countries (e.g. Germany). The basic idea of committing to a policy today but delaying the consequences is routinely used by politicians (e.g Increasing the retirement age so as not to lose voters). The same could also be said of the Women’s Reservation Bill in India where the actual implementation is delayed, however, a commitment is made. 

Mandatory visible labels with respect to energy savings, and regulatory changes are important to tackle climate change.  Companies should also disclose Greenhouse Gas Emissions. Governments should create a Greenhouse Gas Inventory (CGI) requiring disclosure by all significant emitters. The Paris Agreement requires parties to provide a national CGI. 

If the goal is to make the environment greener, it should be made the easy option and should also be the automatic option. The authors believe that the world will and should be more automatically green so we can prevent a lot of tragedy. 

Part 5 – The Complaints Department

Chapter 15 – Much Ado About Nudging

The last chapter of this book has author notes. The authors write that they have learned a lot from their critics. They also think that their book can be used by people to create nudges by people to work in their favor (sometimes they could also be negative nudges). 

When women were allowed to vote one opponent predicted that all our political leaders would be women and as we know this prediction did not come true. Automatic Enrollment – e.g. Enrollment in a Savings plan seems like a middle ground right now, however, the Save More Tomorrow Policy will become a middle ground tomorrow. The Middle Ground keeps changing.  To save paper, you can set printers to double-sided printing by default without banning people from single-sided printing. 

The authors write that if they were designing a high school curriculum they would replace trigonometry with statistics and household finance. It is also important to teach people how to use credit cards. 

Some people argue that Nudges can be sneaky. They also think that they are manipulative and affect people without their knowledge. The authors think otherwise.

In terms of marketing nudges, ‘Drink More Water’ is bound to have positive effects compared to ‘You Sweat in Heat: You Lose Water’. Signs can serve as good nudges. In the right situation, Nudges can achieve a lot at a very low cost. 

My Take on the book: 

Thanks to Richard H Thaler and Cass R Sunstein for this excellent book.  As the authors wrote in the epilogue it is no accident that some of the giant companies (Microsoft, Apple, Google) are big because of the choice of architecture or how they nudge us to do things. As much as this book may help in public policy I do think this book can also be a great reference for marketers. How can they Nudge people to buy their product, use their product, and more (in a good way)? We have been nudged all our lives (a lot of times without noticing it) and next time we are nudged we will most likely know because of this book. If we want to create nudges, this is a great book to reference. This is a great book for anyone to read (especially) if you work in Public Policy, Marketing, and likes. Thanks for the great book.