What did I read? May Edition

I struggled a bit starting this month’s post. It’s been a heartbreaking and emotionally charged couple of weeks for the entire country. Against a backdrop of such pain, such frustration, so much fear, and such a monumental push for change, it almost feels petty to interrupt these important conversations with my inconsequential reflections.

Coincidentally, I continued down the rabbit hole of human behavior this month that I kicked off with Daniel Kahneman’s Thinking, Fast and Slow in May. Building on the basics of framing, anchoring, biases, and heuristics, I dove into two books by behavioral scientist and economist Richard H. Thaler, a collaborator of Kahneman’s and a champion of using these concepts to improve how people, industries, markets, and government agencies behave.

Thinking, Fast and Slow—while fascinating and inspirational—was a tough read for me, as it was essentially an anthology of research papers from psychology journals rewritten into book form. I found Thaler’s books to be much more enjoyable. Even while covering many of the same topics, he was clever, honest, fair, funny, even self-deprecating. It was really refreshing for a topic that can be taxing to my System 2.

As I mentioned when reflecting on Thinking, Fast and Slow, Kahneman referred to “Econs,” the fictional perfect beings that always make the best possible decisions in economics textbooks, versus “Humans,” who are more realistically prone to making questionable choices based on misinformation, mistakes, lack of control, or distraction. As it turns out, these are terms coined by Thaler, and they are referred to frequently across both books. Whereas System 1 and System 2 were the protagonists of Thinking, Fast and Slow, Econs and Humans steal the show this month.

In a world that feels like it’s at a boiling point, there are so many discussions about remarkable books that explore the questions of why are we this way?. Thaler’s work provides a glimpse into how to lead people to better decisions.

So what did I read in May 2020?

Nudge: Improving Decisions About Health, Wealth and Happiness by Richard H. Thaler and Cass R. Sunstein

Nudge started a quiet revolution when it was first released in 2008, where it started to be passed around among government offices and corporate leaders. Spoiler alert: the concepts outlined in the book led to Thaler being invited to lead one of the world’s first government task forces applying behavioral economics in the UK and later winning the Noble Prize in Economics, and Sunstein served in the Obama Administration in the White House Office of Information and Regulatory Affairs.

Right off the bat, Thaler and Sunstein introduce an overarching philosophy they dubbed libertarian paternalism. The idea is that everyone has the freedom to make their own choices (which is the libertarian part) but since humans often make choices that are irrational, inconsistent, and/or ill-informed, people can be pointed towards the choices that are most likely to improve their lives—as judged by themselves (the paternalistic part). These suggestions are referred to as “nudges.”

Nudges can be incredibly powerful in influencing both minor and major choices, consciously or subconsciously, simply or intricately, short-term and long-term. Some intentional nudges that you may have encountered include:

• Financial institutions getting you to improve your retirement savings by automatically enrolling you in your employer’s 401k plan, instead of opting in.
• The government keeping you covered by healthcare insurance by threatening to penalize you if you don’t get it.
• Interior designers encouraging you to eat healthier by placing the salad bar near the entrance to the cafeteria so you need to walk past it to get to the pizza.
• Friends helping you to lose weight or quit smoking by placing a small wager on your behavior.
• Industrial designers reducing awkward fumbling at doors by putting a flat metal pad on the push side and a handle on the pull side.
• Gentlemen: the little bee illustration that’s printed at the base of urinals? He’s nudging you to be a little cleaner.

These are very simple and subtle tweaks to decision-making frameworks that result in major differences in the outcomes. Chances are, you may never even think about them. But again, it's about libertarian paternalism. No one’s freedom of choice is impeded by these nudges: you still have every right to opt-out of saving for retirement, or go for the pizza, or smoke, or pee all over the place—but your life is generally better when you don’t.  

To design a nudge, Thaler and Sunstein consider the “choice architecture,” or how options are presented, in the context of the biases and heuristics that we know to be part of decision-making. One common misconception is the Just Maximize Choices fallacy: if a person is presented with a wealth of choices, they’ll be able to find the option that’s best for their unique circumstances. As we learned in Thinking Fast and Slow, the System 1 thinking that makes our gut decisions is prone to believing bad information, and our more considered System 2 thinking is pretty lazy. Therefore we’re often more likely to make the choice we feel best about, rather than the best choice overall.

Thaler and Sunstein explore a number of strategies for shaping choice architectures. The default option is one of the most prevalent, mainly because of Humans’ status quo bias and inertia. We tend to like things the way they are, even if they’re not ideal. If choice architects make the most beneficial choice the default, the majority of people will likely stick with it, like your 401k auto-enrollment. One of the most famous examples of the difference that a default can make is the organ donation system, which is crucial to giving hundreds of thousands of people around the world a second chance at life. Unlike the U.S. system, where individuals need to opt-in to consent to be an organ donor, many countries in Europe use a policy of presumed consent—being an organ donor is the default and the individual has the option to opt-out. At the time of Nudge’s publication, Thaler and Sunstein compared organ donation consent rates in two countries of similar size and culture: Germany and Austria. In Germany, which uses an opt-in system like the U.S., 12% of citizens consented to being donors. In Austria, which uses an opt-out system, the consent rate was 99%.

Another strategy is the power of social influence. In one case, Thaler and Sunstein described an initiative where energy consumption in a particular California neighborhood was successfully reduced simply by quantifying each household’s energy consumption compared to the neighborhood average and printing it on their utility bill. The households that were consuming more than the average made an effort to conserve. But interestingly, the households consuming less than the average “splurged” and their consumption went up. In a follow-up test, a subsegment of this sample received a bill that included their consumption as compared to their neighbors, but instead of a scale, they simply got a smiley face or a frowny face. In this segment, most households—regardless of above or below average consumption—reduced their energy consumption. Without comparable numbers serving as an anchor for how much they should be consuming, those with a frowny face were guilted into cutting back, while those with a smiley face continued to conserve because of positive emotional reinforcement.

Not all nudges are simple re-framing exercises. Thaler and Sunstein map out a number of proposals to tackle major problems with clever and transformative choice architectures related to controlling emissions, social security, and the cost of healthcare. That was one thing I appreciated about Nudge: the abundance of real-world examples and applications that demonstrate how actionable nudges can be. I’ve already begun thinking about choice architecture to improve outcomes for my advertising clients.

If you want to influence people towards a certain decision, Nudge provides inspirational ways to remove barriers around that option in a choice architecture. But as Thaler and Sunstein warn, to be a true libertarian paternalist, you must only use the powers of nudge for good.

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

Misbehaving was published seven years after Nudge but two years before Thaler would receive his Nobel Prize in economics. Part textbook and part memoir, Misbehaving is a tour of how Thaler and collaborators gradually created the practice of behavioral economics.

Each section of the book is a candid look at a different era in Thaler’s career, from scribbling economic anomalies on a chalkboard as a graduate student at the University of Rochester to establishing the Behavioural Insights Team in the British government’s cabinet more than 30 years later. He recounts in detail the research experiments, breakthroughs, setbacks, conferences, collaborations, and counterpoints from every milestone in his career that ultimately led to the acceptance of behavioral economics in the academic community (often begrudgingly). In what could’ve easily been a self-congratulatory exercise, I admired his surprising candidness, including critical arguments he lost with opponents of behavioral economics, assumptions that he feels haven’t been thoroughly validated yet, and tongue-in-cheek accounts of how lazy his peers find him.

It was interesting to read Misbehaving on the heels of Thinking, Fast and Slow because, as a frequent collaborator of Daniel Kahneman and Amos Tversky, Thaler refers to many of the same research experiments and psychological principles. In fact, there is a whole section of the book called “Working with Danny.” Thaler—who bills himself as an economist-behavioral scientist—interprets the experiments through a slightly different lens than Kahneman, who bills himself as a psychologist-economist. While Kahneman examined the intelligence, Thaler tended to examine the common sense.

I had a surreal moment in Chapter 7—“Bargains and Rip-Offs”—about transaction utility (the pleasure that consumers feel about a purchase). Thaler was exploring how consumers perceive deals at retailers, which included the passage:

“Along with providing genuinely low prices, Walmart also offers a variation on the old ploy of guaranteeing that they have the lowest prices available by allowing shoppers to scan their receipts into a ‘savings catcher’ app that promises to give a refund to anyone if there is a lower price available. Unless Macy’s and JC Penney wanted to give up all pretensions of offering an upscale shopping experience, they could not compete with these true low-cost providers in providing transaction utility to their customers.”

Almost a decade ago, I worked on the prototype for the Savings Catcher app with the inimitable Jake Perez and Travis Smith when we were at The Martin Agency, in partnership with our visionary Walmart client, Paul Hatch. We built the proof of concept (which initially compared receipts manually) to help sell the idea into Walmart's leadership, designed the UX for the app, and managed communications for the rollout to stores nationwide. I remember it causing quite a stir in the retail space at the time, but it never occurred to me that it would catch the attention of a Nobel-prize winning economist. It was a neat moment to see that long-gone project immortalized in a best-selling book.

Who knows what tomorrow is going to look like in America? And there’s still a lot to learn—and to ask of myself—how did we get here? What has my role been in creating this reality? What can I do? How can I be a champion for justice and equality? But looking back over these last two months of reading, maybe having a little bit of a better understanding of biases, of framing, of how decisions are made and where they break down, of how to nudge people to make better choices—well maybe that can help me be a bigger part of the solution.

72.4% of people that read this far will leave a reaction in the comments below. (I made that up. But it’s an example of a social influence nudge.)