Nudge, a Video Book Review

by on May 18, 2010 | posted in Marketing

Nudge: Improving Decisions about Health, Wealth, and Happiness, is a book by Richard Thaler and Cass Sunstein. The book offers insights into how we can apply the science of “choice architecture” to nudge others towards better decisions that will improve their way of living. Similarly, we can turn these same concepts back on our own lives and use them to improve our own thought processes as well, as we become cognizant of the various things that  change and mold our decision making.

Nudge is a great book, but, like most things of 300 pages, has its weaknesses. Even then, I recommend you pick it up and have the revolutionary concepts therein change your life, and more importantly, help change the lives of those important people you know and love.

I have included book notes below. Special thanks to Jenny Blake from LifeAfterCollege.org for giving me the mental “Nudge” to start highlighting books that I’m reading, and similarly, use those notes to improve my own retention abilities and help others. I bolded the parts I thought would be the most interesting and informative to you – but the rest is packed full of goodness as well.

Nudge Book Notes

Representiveness bias -> small abstractions in huge sample sizes are not anomalies even though people think they are.

Availability bias – recentness of events greatly exaggerates cognitive likelihood in the brain. E.G. if one earthquake happens, people will overpay for earthquake insurance even though the odds of it happening again are astronomically low.

Unrealistic optimism explains a lot of individual risk taking, i.e. 50% of marriages end in divorce, at ceremony all say 0% chance of divorce.

When we give up something we are hurt more than acquiring the same thing, i.e. if we get a $100 ticket it pains us greatly, but if we win $200 with a lottery ticket, the positive impact is far smaller.

Practicing – How often do we have a chance to practice certain large events in life, like home ownership? Most of the time, but once – this makes our decision making ability severely substandard

Feedback – we can’t get better if there is no feedback mechanism in place for our decisions.

We need a nudge when choices have delayed effects, those that are difficult, infrequent, and offer poor feedback, and those for which the relation between choice and experience is ambiguous. – pg. 79

What would a large red “GO” sign cause you to do? – Stimulus response capability

6 Principles of Good Choice Architecture – iNcentives, Understand mappings, Defaults, Give feedback, Expect error, Structure complex choices – pg. 102

We interpret the statement “I should be saving (or dieting, or exercising) more” to imply that people would be open to strategies that would help them achieve these goals. In other words, they are open to a nudge.” – pg. 109

Roughly 30 percent of employees eligible to join a 401(k) plan fail to enroll. – pg. 109

The default for retirement plans is nonenrollment. – pg. 110

One survey found that 58 percent of people spent less than one hour determining both their contribution rate and investment decisions. / Many people simply pick a “round number,”, typically 5, 10, or 15 percent of income. Of course, there is no sensible reason why the correct percentage of your income to save would be an exact multiple of 5. / Changing the employer match formula from 50 percent on the first 6 percent of pay to 30 percent on the first 10 eprcent of pay would probably increase contribution rates, because people generally contribute the minimum amount necessary to get the full employer match. – p. 113

Save More Tomorrow system, based on five psychological principles that underlie human behavior:

  • Many participants say they think they should be saving more, and plan to, but don’t.
  • Self control restrictions are easier to adopt if they take place some time in the future. (Many plan to go on diets soon, but not today).
  • Loss aversion: people hate to see their paychecks go down.
  • Money illusion: losses are felt in nominal dollars (not adjusted for inflation, a dollar in 1995 is seen as the same as a dollar in 2005)
  • Inertia plays a powerful role.

Save More Tomorrow system – by synchronizing pay raises and savings increases, participants never see their take-home amounts go down, and they don’t view their increased retirement contributions as losses. P.114-115

In an environment in which people have to make only one decision per lifetime, we should surely try harder to help them get it right. P. 119

When investing decisions are made, people think they can relax and look forward to a wonderful retirement. However, all these decisions should be revisited periodically. P. 121

Humans are loss averse. Roughly speaking, they hate losses about twice as much as they like gains. P. 122

Attitudes towards risk depend on the frequency with which investors monitor their portfolios. P. 123

When investing, people often use the “I/n” heuristic: “When faced with ‘n’ options, divide assets evenly across the options.” Put the same number of eggs in each basket, although this is not an “even” decision based on variable funds. P.125

5 million Americans have more than 60 percent of their retirement savings in company stock. P. 128

Plan participants tend to extrapolate past stock performance into the future, although past performance is no prediction of the future. P. 129

A dollar in company stock is worth less than half the value of a dollar in a mutual fund. P. 129

One study by Drazen Prelec and Duncan Simister found that people were willing to pay twice as much to bid on tickets to a Boston Celtics basketball game if they could pay with their credit card rather than cash. P. 145

Because interest on credit cards is not deductible, there is no particular reason for users to check how much they paid in interest last year on all their credit cards, and fees are likely to be buried and ignored altogether. / Similarly, credit card limits, which are nominally in place to limit spending, may serve as high anchors that actually encourage spending. P. 146

When choosing an investment portfolio, the timing of the launch of the program can have a strong impact on people’s choices. This effect can be long lasting, because only a tiny percentage of participants decide to alter their portfolios. – Status Quo Bias – P. 155

There is essentially no evidence that past performance predicts future performance. P. 156

As of January 2006, more than 90,000 Americans were on waiting lists for organs, mostly for kidneys. Many (possibly as many of 60 percent) will die while on the list, and the waiting list is growing at a rate of 12 percent per year. PG 177

Holding everything else constant, switching from explicit consent to presumed consent increases the organ donation rate in a country by roughly 16 percent. PG 181

If you engage in environmentally costly behavior next year, through your consumption choices, you will probably pay nothing for the environmental harms that you inflict. This is what is often called a “tragedy of the commons”. PG 187

The second problem that contributes to excessive pollution is that people do not get feedback on the environmental consequences of their actions. PG 187

The best approach to pollution problems is to impose a tax on the harmful behavior and to let market forces determine the response to the increased cost. PG. 188

All by themselves, business emission disclosure requirements might be able to produce significant emissions reductions. / A major reason for this is that environmentally concerned groups, and the media in general, tend to target the worst offenders, producing a kind of “environmental blacklist”. / The government should create a Greenhouse Gas Inventory (GGI), requiring disclosure by the most significant emitters. PG. 193

In fact, the EPA is revising its fuel economy label on cars at dealerships to highlight the estimated annual fuel cost, which should improve awareness over the standard MPG displays. PG. 194

The trick to people choosing a good school is to promote actual freedom – not just by giving people lots of choices (though that can help) but also by putting people in a good position to choose what would be best for their children. PG. 203

A nudge for HS students to enroll in college was this: in order to graduate from San Marcos High, a student would have to complete an application to nearby Austin Community College. / From 2004 to 2005 the percentage of San Marcos High students who went to Texas colleges rose 11 percentage points, to 45 percent. PG. 208

Customers of many businesses face higher prices simply because they retain the right to sue those businesses. PG. 210

Suppose that people had the right to sue their hairdressers if a haircut went badly wrong, and that the cost of this insurance raised the price of haircuts by $50 after someone who had received a particularly gruesome haircut won a $17 million judgement. PG 211

It is not clear that patients gain a lot from the right to sue. / Part of the current cost is passed onto patients, in the form of higher bills, and defensive medicine can be bad medicine for those who want good care./ PG 212

One study found that fewer than 2 percent of patients inured by negligence at a New York hospital over the course of a year filed a malpractice claim. PG 212

One factor that influences a patient’s decision to sue is whether the doctor apologized for the mishap and admitted fault. PG 213

Since it is impossible to buy medical treatment without implicitly buying the right to sue, sick people who can afford treatment but not the package of treatment plus suit option will drop out of the market. PG 213

When people marry, they receive not only material benefits but also a kind of official legitimacy, a stamp of approval, from the state. PG 220

Is there any good reason that a person in a same-sex relationship should not be able to make medical decisions on his partner’s behalf or bequeath some of his assets upon death without paying taxes? PG. 222

People have been shown to have an accurate sense of the likelihood that other people will get divorced (about 50 percent). But recall the fact that they have an absurdly optimistic sense of the likelihood that they themselves will get divorced. PG. 226

We believe that the relevant rules should nudge the outcome in a way that will help the weakest parties – usually women. Typically, a woman’s economic prospects fall after divorce, whereas the prospects of the man increase. PG 226

The stickiness of default rules can easily be enlisted to insulate the most vulnerable people from the worst outcomes. PG. 227

The stickiness of default rules can easily be enlisted to insulate the most vulnerable people from the worst outcomes. PG. 227

The self-serving bias means that in difficult or important negotiations, we tend to think that both the objectively “fair” outcome and the most likely outcome is the one that is skewed in our own favor. PG. 227

We have argued that states should abolish “marriage” as such and rely on civil unions instead. If religious institutions want to restrict “marriage” to heterosexual couples, they should certainly be permitted to do exactly that. If such institutions want to limit divorce (that is, ending a “marriage”), they could do that too.  PG. 228

Example of a nudge – Disulfiram – which is given to some alcoholics. Disulfiram causes alcohol drinkers to throw up and suffer a hangover as soon as they start to drink. PG. 237

One study finds that a candidate whose name is listed first gains about 3.5 percentage points in the voting process. PG. 249

Our basic conclusion is that the evaluation of nudges depends of their effects – on whether they hurt people or hurt them. PG. 250

When Nudgers have expertise, and when differences in individual preferences are either not important or can be easily estimated, then the potential for helpful nudging is high. PG. 251

“asymmetric paternalism” – guiding principle is that we should design policies that help the least sophisticated people in society while imposing the smallest possible costs on the most sophisticated. PG. 252

Asymmetric paternalists also endorse a class of regulations requiring “cooling off periods”. The rationale in the heat of the moment, consumers might make ill-considered or improvident decisions. PG. 253

Some states impose a mandatory waiting period before a couple may get divorced. PG. 253

In this book we have made two major claims. The first is that seemingly small features of social situations can have massive effects on people’s behavior. / The second claim is that libertarian paternalism is not an oxymoron. PG. 255

The Big Apple recently adopted a law that requires fast-food restaurants with at least fifteen outlets in the city to post, in prominent places, the calories of each of their food items so that customers can make informed choices. PG. 262

Procrastinators Clock – a downloadable program for your computer, that displays a digital clock that is guaranteed to be up to 15 minutes fast. How fast? Well that’s the nudge. You’re never exactly sure because the clock unpredictably speeds up and slows down. PG. 265

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  • http://www.heroicdestiny.com David Crandall

    Great post! Have never heard of this book but definitely want to check it out now. Your notes are great too; I actually pulled out paper and took my own notes from them.

    I especially like the quote: we can’t get better if there is no feedback mechanism in place for our decisions. I think this is so accurate. I think a correlation would be that people unwilling to receive feedback stop growing. Worked with a few of those. Ha!

    Good stuff!

    • Ross

      Thanks David, glad you enjoyed it. As always, your feedback is important. :)

  • http://www.tammycamp.com Tammy

    Very interesting reading. Do you plan to apply any of the knowledge in this book to your own life?

    Ironically, I think that part of the reason that books like this are successful is becasue, like self-control restrictions, the actual hard work takes place in the future. By buying the book, you are telling yourself that you are taking the first step to changing your life; you’re preparing for the hard work to begin, but I wonder how many people actually follow through with making any changes?

    If nothing else, this book has given you some great statistics to use in a Best Man’s speech if you’re ever called upon for such a role!

    • http://www.rosshudgens.com Ross Hudgens

      Thanks for the comment Tammy! I think that implementing the advice into our own lives really isn’t that difficult – because, with proper note taking and refreshers like this post, we can retain the ideas and truly starting using them.

      I think there’s true dilemma with that in regards to many blogs online – many people will never retain the information they write about. With the depth of a book, though, there’s enough of a “nudge” to truly start doing it.

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