Econs and Humans: Why Nudges Can Help

Econs and Humans: Why Nudges Can Help

Those who reject paternalism often claim that human beings do a terrific job of making choices, or if not terrific, certainly better than anyone else would do (especially if that someone else works for the government). Whether or not they have ever studied economics, many people seem at least implicitly committed to the idea of Homo economicus, or economic man—the notion that each of us thinks and chooses unfailingly well, and thus fits within the usual depiction of human beings that is offered by economists.

If you look at economics textbooks, you will learn that Homo economicus can think like Albert Einstein, store as much memory as Google does in the cloud, and exercise the willpower of Mahatma Gandhi. Really. But the folks we know are not like that. Real people have trouble with long division if they don’t have a calculator, sometimes forget their spouse’s birthday, and have a hangover on New Year’s Day. They are not Homo economicus; they are Homo sapiens. To keep our Latin usage to a minimum, we will hereafter refer to these imaginary and real species as Econs and Humans.

Consider the issue of obesity. Rates of adult obesity in the United States are over 40 percent, and more than 70 percent of American adults are considered either obese or overweight. Worldwide, there are some 1 billion overweight adults, 300 million of whom are obese. Rates of obesity range from below 6 percent in Japan, South Korea, and some African nations to more than 75 percent in American Samoa. According to the World Health Organization, obesity rates have risen threefold since 1980 in some areas of North America, the United Kingdom, Eastern Europe, the Middle East, the Pacific Islands, Australia, and China. There is overwhelming evidence that obesity increases the risk of heart disease and diabetes, frequently leading to premature death. It would be quite fantastic to suggest that everyone is choosing their best possible diet, or a diet that is preferable to what might be produced with a few nudges.

Of course, sensible people care about the taste of food, not simply about health, and eating is a source of pleasure in and of itself. We do not claim that everyone who is overweight is necessarily failing to act rationally, but we do reject the proposition that all or almost all people are choosing their diet optimally. What is true for diets is true for other risk-related behavior, including smoking and drinking, which produce hundreds of thousands of premature deaths each year in the United States alone. With respect to diet, smoking, and drinking, people’s current choices cannot always be said to be the best means of promoting their own well-being (to put it lightly). Indeed, many smokers, drinkers, and overeaters are willing to pay third parties to help them make better decisions.

These findings complement those of the emerging science of choice, consisting of an extensive body of research over the past half-century. Much of the initial research in this field was conducted with laboratory experiments, but a substantial and rapidly growing amount comes from studies of real-world behavior, including archival studies of choices made in natural settings and randomized controlled trials. This research has raised serious questions about the soundness and wisdom of many judgments and decisions that people make. To qualify as Econs, people are not required to make perfect forecasts (that would require omniscience), but they are required to make unbiased forecasts. That is, forecasts can be wrong, but they can’t repeatedly err in a predictable direction. Unlike Econs, Humans make predictable mistakes. Take, for example, the planning fallacy—the systematic tendency toward unrealistic optimism about the time it takes to complete projects. It will come as no surprise to anyone who has ever hired a contractor to learn that everything takes longer than you think, even if you know about the planning fallacy.

Thousands of studies confirm that human forecasts are flawed and biased. Human decision making is not so great either. Again, to take just one example, consider what is called the status quo bias, a fancy name for inertia. For a host of reasons, which we shall explore, people have a strong tendency to go along with the status quo or default option. When you get a new smartphone, for example, you have a series of choices to make, from the background on the screen to the ringtone to the number of times the phone rings before the caller is sent to voice mail. The manufacturer has picked one option as the default for each of these choices. Research shows that whatever the default choices are, many people stick with them, even when the stakes are much higher than choosing the sound your phone makes when it rings.

We provide many examples of the use of default options, and we will see that defaults are often quite powerful. If private companies or public officials favor one set of outcomes, they can greatly influence people by choosing it as the default. You can often increase participation rates by 25 percent, and sometimes by a lot more than that, simply by shifting from an opt-in to an opt-out design. As we will show, setting default options, and adopting other similar, seemingly trivial menu-changing strategies, can have huge effects on outcomes, from increasing savings to combating climate change to improving health care to reducing poverty. At the same time, we show that there are important situations in which people exercise their freedom and reject defaults. When they feel strongly about something, for example, they might overcome the strength of inertia and the power of suggestion (defaults are often perceived to be hints that they are the recommended option). Changing the default can be an effective nudge, but it is decidedly not the answer to every problem.

The usually large effects of well-chosen default options provide just one illustration of the gentle power of nudges. In accordance with our definition, nudges include interventions that significantly alter the behavior of Humans, even though they would be ignored by Econs. Econs respond primarily to incentives. If the government taxes candy, Econs will buy less candy, but they are not influenced by such “irrelevant” factors as the order in which options are displayed. Humans respond to incentives too, but they are also influenced by nudges. By properly deploying both incentives and nudges, we can improve our ability to improve people’s lives, and help solve many of society’s major problems. And we can do so while still insisting on everyone’s freedom to choose.