Don’t Nudge, Boost

Don’t Nudge, Boost

Some emphasize that in a free society, people have the right to be wrong. It can be helpful for us to make mistakes, since that is how we learn. On these points we heartily agree, which is why we generally favor opt-out rights, as long as people are not causing harm to others. If people really want to invest a chunk of their retirement portfolio in high-tech Romanian stocks, we are reluctant to prohibit it (so long as people are adequately informed). But for unsophisticated choosers, there is little harm in putting up some warning signs along the way. We approve of the signs at some ski areas warning novice and intermediate skiers: “Don’t even think about going down this trail if you are not an expert.”

Some critics have a strong preference for education instead of nudges. In their view, private and public institutions should be teaching people, or “boosting” their capacities, rather than enlisting choice architecture.7 The least lovely version of this claim comes from a psychologist from Germany: “The interest in nudging as opposed to education should be understood against the specific political background in which it emerged. In the US, the public education system is largely considered a failure, and the government tries hard to find ways to steer large sections of the public who can barely read and write. Yet this situation does not apply everywhere.” 8

We will refrain from reacting to the nationalistic name-calling and instead address the more substantive question of whether we should refrain from nudging in favor of education, or “boosting,” understood as an effort to target and improve competences. Our first reaction is to say: Why do we have to choose one over the other? The two of us can be accused of many things, but being anti-education is probably not one of them. We like boosting, and agree that in some cases, it can be effective. Both of us are teachers by profession. Many nudges do try to educate (and require literacy); disclosure of information, warnings, and reminders are designed to inform people. Nevertheless, we still appreciate being offered well-curated options from which to choose, and well-considered defaults that we can reject if we wish. By all means, let’s try to create a citizenry that has the skills and knowledge necessary to thrive in the world; it is valuable and important to increase people’s competence and to help them to exercise their own agency. Statistical literacy, emphasized by those who like boosting, is an especially good thing. But we also need to be realistic. We are pretty sure that even the best German high schools do not provide training that is equivalent to a Ph.D. in financial economics.

This criticism is based on a fundamental misunderstanding about our view of human nature. We do not think that people are dumb. Instead, we think that the world is hard! We know of few economists who are confident that they can choose the best mortgage from a list of those available or calculate with any precision how much they need to save for retirement. We know personally many who have made a poor choice of health care plan. Isn’t life easier if we live in a world with personalized defaults, easy-to-compare options, Smart Disclosure, and well-functioning choice engines? It should not be a choice between nudging and educating. Do both! Because nudges preserve freedom of choice, it’s especially valuable to help people to exercise their freedom in an informed way.

Many people are enthusiastic about training high school students to be more financially literate. We share that enthusiasm. If we were designing a high school curriculum, we would replace trigonometry with statistics and household finance. Surely, compound interest and net present value are more useful concepts than sine and cosine. Even more basic is to teach people how to manage a household budget and the perils of credit card debt. Education can help, sometimes a lot, but both common sense and empirical research suggest that we should not be overconfident about its beneficial effects. Your commonsense reaction should be based on how much you remember from your high school chemistry class. Or trigonometry, for that matter. Do we think an understanding of compound interest will be much stickier?

The empirical results support the intuition from that thought experiment. An important meta-analysis of the efficacy of financial literacy training provides three important results.9 First, the longer the training period, the bigger the results. A course that provides twenty-four hours of training yields larger effects than one lasting just twelve hours. Second, the effects are modest. You cannot create financial wizards quickly. Third, and most important, whatever beneficial effects created are found to vanish over time, and completely disappear after just two years. The authors of the study conclude that the most effective form of training would be delivered on a “just in time” basis—that is, in anticipation of a pending decision. Give high school juniors and seniors information about the returns to various forms of post–high school education, how to apply for available financial aid and student loans, how to deal with credit cards, and so forth. They will be able to put this training to use right away.

But don’t think that what you teach them about fixed versus variable rates will necessarily help them choose a better mortgage a decade later. When they are ready to buy a house, offer free classes on the potential pitfalls. (And maybe a few simple nudges.)