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A nudge away from corruption
Why do people dither when it comes to taking big decisions with huge repercussions? I wouldn't say people always hate taking decisions. If you go to a restaurant, you like to choose for yourself. In the US, people like choosing their spouses and more and more Indians do the same. We choose the names for our kids. But there can be situations where we are confused, like if you go to the doctor and he says something is wrong with you, most people don't want to decide. They say, you tell me what to do. There can be both a feeling of inadequacy and not wanting the responsibility. Or if your kid gets sick, you wouldn't want to choose the treatment because if it goes wrong, you don't want to be the one who decided it. There can be situations where you choose not to choose.
What is the best way to get "humans" to look at the bigger picture or, as you say, to save today for a better tomorrow?
In some ways we can think of this as an inner battle. At one level we know what we should do but it is hard to get ourselves to do that. Self-control problems are as old as humans are. Distant things are abstract and if it is a choice of having a piece of cake today and the cake looks good, if it is going to make me weigh an ounce more later that won't be noticeable, then it doesn't matter today.
How big is this problem for governments and public schemes?
People failing to make decisions is a big problem. The book is a bit US-centric, so we talked a lot about obesity and saving. India has a different set of problems but it is still the same case. A friend of mine ran an experiment in India on poor street vendors who borrow mon ? CORBIS day from a moneylender to buy their fruits. Let us say they borrowed $5 and sold the fruits at $8 and gave the moneylender a dollar back. So the moneylender took a third of the profit. So my friend started by giving $5 to the vendors so that they could avoid the lender and increase their income. But three months later, they went back to the lender. Somehow they found a way to spend that extra money. Self-control problems occur at every level. I have always wondered - don't know if it's true - whether treating cows as sacred is self-control. You don't want to slaughter a milk producer. Religions have rules that are intended as self-control devices.
In terms of India or developing countries, what are the most pressing problems that could be solved by "nudging" and in what way?
Obviously, corruption is a big problem. In all kinds of societies where this norm of corruption and bribes to government officials has emerged, it can be difficult to break the habit. One of the things I have been talking about is the use of technology to improve disclosure. India is this interesting example of a developing country at the cutting edge of technology. There could be lots of promising ways. What if we got rid of currency? Give everybody a cellphone and all transactions are on the phone, which can be tracked. If you think about it, in my everyday life in Chicago, I never use cash. It is just swipe, swipe, swipe. Now if you give the street vendor this ability, it is cheap in the grand scheme of things. You already have very strong cellphone penetration in part because of the government bureaucracy. Or take a country like Greece where people think if you pay taxes, you are an idiot. How do you change these norms? The French economist Esther Duflo has run experiments in India using technology.
What is the worse of the two - too many choices or no choice?
It depends. Having no choice is the worst thing in the world. But the best restaurants in the world or the ones that cost most money have no choices. You go and sit and they feed you. You will have the best meal of your life. Part of the reason is that it would never occur to you to ask for those things ever. How would you know? I went to a very famous restaurant in Copenhagen where you sit and they bring you food. But there was nothing I would even dream of ever ordering. In some healthcare situations, you would not want the doctor to ask you to pick the antibiotics. But there can also be very strong differences between people. My wife cares a lot about the details of home dêcor. When our house was being painted, there were six shades of taupe that all looked the same to me but she said I am an idiot if I think they are all the same. For me, I am happy to ask someone else to pick. On the other hand, I am very thrilled with those thick wine lists in restaurants whereas someone else would get a headache. So for some, the choice can be part of the pleasure.
The ideal set-up is structured choice. Like in the US retirement plans (US), they are moving just as they should. So the first decision is, do you want to have to choose at all or do you want us to choose? If you don't, okay, you are done. But again, you might want to be a bit involved. So there are three choices and you pick one. Then you get someone whose hobby it is to read The Wall Street Journal everyday. That is the best of all worlds because we don't want one-size-fits-all but if we can offer people no choice and other people lots of choice that is the ideal thing. And you will be surprised at how many people take the "no-choice" option. Like in the Swedish social security, they have hundreds and hundreds of mutual funds but now almost everyone takes the default one. In retrospect they could have done without the options at all. But in general, if you are the planner or the government, you want to give people choices but also the choice not to choose.
In the case where you talk about junk food in schools, we obviously know what the best choice is. Then why offer a choice at all?
We try to offer a middle course. And we get criticised from both sides. There will be people who will say why stop at nudging? If we know what is right, why don't we make them do it? Then others will say look, this nudging is manipulating and you should stay out of the way altogether, which is impossible. It is clear that we do ban many things in cafeterias, we don't serve alcohol. We have rules against fraud and we need tougher enforcement. We are not going to nudge people to stop killing or raping. We try to show how far you can go without mandates.
The book was well-timed and relevant considering the financial crisis. But have we learnt anything?
(Laughs) Yes, we were rooting for a financial crisis to sell more copies of the book. But sure the crisis demonstrated, in a very large way, what can go wrong. But when it is over, we will be back to the same situation somewhere else. Is there a real estate bubble going on in parts of New Delhi or Mumbai? Seems like it. Do we learn? We just move. We never learn. It is like teaching a group of slow learners. Let me put it this way. I don't expect to be driven out of business by a wave of rationality sweeping the world. Not in my lifetime or yours.
If we don't trust our own decisions, who are the choice architects we trust?
If we go back to the restaurant example, you trust the chef. Now that is a private situation. For the government, in a democracy, we are electing choice architects. I am going to talk to the Planning Commission tomorrow - they should be called the Department of Choice Architecture! By and large the civil servants I have met, the vast majority, are intelligent and well meaning. Well sure, some of them are crooks. But the point is we have to demand honesty and competence from our officials and then monitor that. One of Duflo's studies used very simple technology to ensure teachers showed up for classes. Everyday the teacher had to take a picture of herself standing in front of the class. That was crude technology, but it worked.
Why do we always fall for extended warranties, even though we know it probably isn't worth it?
A bunch of biases come into play. We remember the one time when we didn't buy it and the gadget broke. No one is keeping track of actual statistics. The way I see it - if they can make money selling me this insurance, then I don't want to buy it for something small. On a laptop, though, get it for three years, not more.
Wouldn't the world be a very boring place if we always took rational, predictable decisions?
Oh yes. When I was at Cornell, we had a rule of thumb, that if more than half the guests at a dinner party are economists, the conversation will turn bad.
What is new about nudging? Advertisers and marketers have used it for years.
You should ask my wife this - a former marketing professor. Marketing is all about nudging. When people ask me to sign the book, I always sign "nudge for good", which is my hope.
BEST WAY OUT
WHAT IS A NUDGE?
Most economists treat people as if they are smart and always clear about their own interest. Trouble is, they aren't and could do with a bit of help - what Thaler terms a "nudge" - to save more, eat more healthily and do all the other things that they know they should.
HOW DOES IT WORK?
Rather than leave people to their own devices, or give them dos and don'ts, Thaler and other behavioural economists want to highlight the best option, while still leaving all the bad ones open. They argue it's better for everyone to be automatically enrolled in a pension scheme (or more controversially for organ donation), but give them an opt-out. Thaler and 'Nudge' co-author Cass R Sunstein call the approach "libertarian paternalism" : It lets people "decide" what they want to do, while guiding them in the "right" direction.
In an Amsterdam airport, misdirected urine in the gents was reduced by 80 per cent by painting a housefly on the porcelain that users could aim at. Small intervention, big change.
WHAT ARE THE DRAWBACKS?
Many see little difference between guiding a person's choices and eliminating them. A nudge is like a shove, they argue, only more disreputable because it pretends otherwise. The real problem, though, is that Thaler and Sunstein's ideas presume good technocrats can use statistical and experimental results to guide people to make choices that serve their real interest.
Thaler is with the University of Chicago Booth School of Business
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