April 14, 2008
DUMB OR THOUGHTLESS?:
Rash or Rational?: Dueling economists take to the pen to debate an age-old question: Are we dumb or smart? (Roger Lowenstein May 2008, Forbes)
For Thaler and Sunstein, authors of Nudge: Improving Decisions About Health, Wealth, and Happiness, it is obvious that people, if they’re not dumb, are at least poorly wired for making some of life’s most important decisions.Most folks do a good job of picking out an ice cream flavor because, after all, everyone knows what chocolate tastes like—and if you don’t want chocolate, you can always order a different flavor. Plus, feedback is prompt; you’ll know immediately whether you like your choice or not. But choosing how (or whether) to treat prostate cancer is different, because the consequences of what you decide are both unfamiliar and uncertain, and the feedback is long delayed. When possible, people will simply avoid weighing the choices and do whatever the doctor tells them.
This is why default options govern our fates. How much money do you set aside for your 401(k) plan, and what do you invest it in? Most likely, you apportion funds at whatever rate and asset blend your company started you with. Call it a quirk, but people are hardwired to favor the status quo. Here is another quirk: Most folks are predisposed to favor immediate gains, such as eating ice cream, over deferred ones.
Thaler and Sunstein argue for little “nudges” to provoke people into overcoming their faulty human wiring. The little beep you hear when you fail to buckle a seat belt is a good example. Similarly, when A.T.M.'s remind us to take our cards, they are giving us a nudge without which we are maddeningly likely to leave our cards behind. Humans, the authors observe, are susceptible to “postcompletion” errors. Once we finish a primary task, we are apt to forget the subsidiary one, a fact that’s self-evident to anyone who has driven away from a gas station without replacing the gas cap.
The authors recommend improving the “choice architecture” for a wide variety of everyday situations so that we are nudged in the right direction: smaller plates in cafeterias; plain-English descriptions of mortgage options; stoves with the knobs in two rows of two rather than a single row of four, so that the human eye can automatically infer which knob corresponds to which burner. Sunstein and Thaler don’t want to force us—only to nudge us. But the premise of their so-called libertarian paternalism is that left to our own rather hapless devices, we would often make the wrong choice.
It's a particularly important idea as we move forward with the Third Way--HSAs, 401k's, Privatized SS, etc.--since you need to default people into maximal savings options, secure in the knowledge they'll stay there.