Thursday, February 19, 2009

Review: NUDGE

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

This book essentially argues for a re-think of how the government and private companies design complex and important choices, such as the choice of a health care plan or a home mortgage. While the traditional free-market capitalist idea has simply been to maximize the number of options in any scenario, this design fails to recognize the limited knowledge and expertise and motivation that any given person is likely to have in the field of, say, investing for retirement.

The chief design feature for which Thaler and Sunstein argue is smarter default choices paired with the easy ability to opt out of that default and choose something else. A simple example might be the idea that employees should by default be opted-in to their company's 401k plan, with the option to opt out by filling out a very simple form. One example of a system with bad choice architecture and bad defaults was Bush's prescription drug plan, which randomly assigned non-respondents to one of several hundred plans, many of which wouldn't cover the non-respondents actual prescriptions!

Thaler and Sunstein call their choice architecture "libertarian paternalism", a cute oxymoron meant, I suspect, to confound ideological pigeon-holing. Some of their associates from U. Chicago are involved with the Obama administration, so it's possible that we may see some of these system design ideas put into practice.

I liked the book, because it's a very straight forward and quick-reading presentation of some general principles that could make the government more efficient and life better for a lot of people. It also acknowledges human beings as being essentially different from the economic textbook version of human beings, who have perfect knowledge and unlimited time in which to gain that knowledge before making any decision. Refreshing!