Richard Thaler is Professor of Economics and Behavioral Science at the Graduate School of Business, University of Chicago, and Director of the GSB's Center for Decision Research. He is also Research Associate at the National Bureau of Economic Research where he co-directs the Behavioral Economics Project. Thaler is considered by many to be the inventor of the field of behavioral economics, which integrated psychological research with economic theory. The author of numerous academic articles, Thaler has written on a wide variety of subjects, from savings and investing to marketing, decision making, and financial markets. Recent papers have included an investigation of contestant behavior on the popular game show Deal or No Deal, and an analysis of the National Football League draft. He is also a principal in Fuller and Thaler Asset Management Inc., which puts the lessons of behavioral finance to work in equities markets. Richard Thaler is the coauthor with Cass Sunstein of Nudge: Improving Decisions about Health, Wealth, and Happiness.
[Bio adapted from his website, Nudges.org.]
tompeters.com asks ...
Richard, what's a nudge?
RT: A nudge is any small feature of the environment that captures our attention and, in so doing, alters our behavior. My favorite example of a nudge is in the Amsterdam Airport. A clever guy, an economist in fact, had the idea of etching the image of a housefly in the urinals, right near the drain. When guys are doing their business, they're not paying a lot of attention. But if you give them a target, they aim. [Laughter] By etching that image of the housefly in the urinal, he claims it has decreased spillage by 80 percent. That housefly has come to be my image of a nudge. It's something that in theory shouldn't matter, but it seems to matter.
Yet it hasn't caught on in a big way.
RT: Not yet, though we have seen those flies in other airports, from Moscow to Singapore. And if you go to our website, nudges.org, you'll see our five part series on urinals. There are other versions of this idea catching on. There's one in Europe with an image of a soccer goal.
Somebody once sent me an image of something called Tinkle Toy. It sits in the urinal and I think you could score by moving the arrow around.
RT: This is a very popular idea, apparently. I've had lots of people come up to me at my book talks asking where they can get one for their home. It's always the woman concerned about the aim of her husband. I think there's a market opportunity out there.
Absolutely. Someone, I'm guessing, has already jumped on that. We should have a brief discussion about noodge.
RT: Nudge, not noodge! The title of the book rhymes with judge. Unlike noodge, which has the oo sound of book. A noodge is somebody like your mother-in-law who is always pestering you to do something. And actually if you nudge too often, you might turn into a noodge. A nudge is a gentle poke in the ribs that says, "Hey, you're about to get hit by a car. Move over."
I'm glad we have that cleared up. Did somebody nudge you into writing this book?
RT: My coauthor, Cass Sunstein, who's a great friend of mine. He's one of the leading constitutional scholars of our generation. He likes writing books; I think he could write a book in a long weekend if he were pressed to do it.
We started thinking about this idea of libertarian paternalism, which we can turn to in a minute. We wrote a couple of articles about that and it seemed the idea was creating interest. So we thought, why not? Let's try a book.
Your topic is behavioral economics. You are an economist, but he's a lawyer.
RT: But he's really quite nice. [Laughter] Yes, I'm an economist. But Cass has been quite interested in behavioral economics. The first article we wrote together was an attempt to sketch out what a behavioral version of law and economics might be. The combination of law and economics has permeated law schools. It has really influenced the way people think. We asked, what would law and economics look like if you took a behavioral approach? That was the first thing we did. Later we got interested in these other ideas.
I think you've invented the term libertarian paternalism. Can you explain what that is, and why you had to invent the term?
RT: The term sounds like an oxymoron. In fact, we've written an article that's called "Libertarian Paternalism is Not an Oxymoron." Somebody predictably wrote an article that says, "Libertarian Paternalism is an Oxymoron." We were tempted to write a three word reply "No, it's not."
Both terms are pretty unpopular in the current American lexicon. So the idea of writing a book about two unpopular contradictory terms didn't seem like a real winner. But we think both terms are really quite loveable, at least in the way we use them.
By libertarian, what we mean is choice-preserving. Like the fly in the urinal, you don't have to pay attention to it, you can ignore it if you want to. It doesn't infringe on anything you're doing. All the policies we devise maintain freedom of choice. And that's the sense in which our policies are libertarian.
By paternalism, what we mean is caring about the outcomes. If a stranger comes up to you and asks you how to get to the closest Starbucks, and your inclination is to tell them the truth, then you count as a paternalist in our terminology. You care about the outcome they get; you're trying to help them. Libertarian paternalism is a mouthful, but all it really means is trying to help people, and help them make better choices.
Which raises the question, why do we make bad decisions?
RT: Well, we're humans, and we're busy. Life is complicated, and getting more complicated. We mentioned the term behavioral economics and people might wonder what that is. It's a field that only exists because regular economics is based on an idealized economic agent, sometimes called Homo Economicus. In the book we refer to such creatures as Econs. Econs are creatures that can calculate like a super computer, never get tempted by fatty or sweet foods, never get distracted, and probably aren't a whole lot of fun to be around. [Laughter]
In contrast, real people, who in the book we call humans, don't make any appearance in standard economics. Behavioral economics is economics about humans. Humans are busy, can't solve every problem instantaneously, and get tempted by luscious desserts. Sometimes they need some help.
Let's touch on some brain function. Could you explain our automatic system and our reflective system and some of the consequences that arise from their conflicts?
RT: Brain scientists and psychologists have discovered that the brain functions as if it had two systems. One is very fast and automatic. When somebody suddenly throws a ball at you and you instinctively duck or catch it, that's the automatic system at work. On the other hand, if you're trying to pick among mortgages, you are using the reflective system. Decisions are made by these two systems competing with one another. The automatic system is looking at the desert tray and saying "Yum," and the reflective system is saying you're already 15 pounds overweight, enough is enough.
What we try to do is devise policies that help the automatic system make better decisions, so the reflective system doesn't have to do so much work.
Another term you use is choice architects.
RT: Yes. Choice architects are the people in society who arrange the environments in which we choose. Choice architects are usefully compared to real architects. When an architect designs a building there are numerous decisions to make, such as where to put doors, elevators, and restrooms. All these seemingly small decisions will influence the way people use a building. In the building where I work at the University of Chicago Graduate School of Business, for example, I see all the people whose offices are located between me and the restroom more often than the people who are on the other side of the restroom. These small features matter.
The person who devises the menu at a restaurant is a choice architect. The order in which the items are arranged will alter what I eat, as will the names of the items. One of the big lessons from modern psychology is that, essentially, everything matters. Choice architects are either intentionally or unintentionally influencing the decisions we make by the way they structure the environment in which we choose.
Your thesis being that we're all choice architects at some point and that we should give it more thought. Some people are in positions of choice architecture more frequently, or with influence over more people than others. Your subtitle refers to making better decisions about health, wealth, and happiness. Who's a choice architect for health? What's an example of somebody giving a positive nudge in that realm?
RT: Let's go back to the real architecture metaphor. In the GSB building where I work, the faculty are on floors three, four, and five with open stairwells connecting those floors. I'm on the fourth floor. When I go to visit a colleague on five or three, I always walk. I always walk, in part, because I get to a stairwell before I get to the elevator. And I don't have to go into an enclosed stairwell—those are always off-putting. So, the architect has nudged me to walk when I go to five or three. Now, to get to two, I have to go into one of those less friendly stairwells, and I just find myself heading for the elevator. There are lots of examples like that where we can nudge people to walk a little bit more. And that's going to make them a little healthier.
Do you think the intent was for social reasons as well?
RT: It was mostly for social reasons. Of course, that's good too. I think of those colleagues on adjacent floors as neighbors in a way that I wouldn't with a different design. I can visually see them. There's a big skylight above, so I can easily see those floors and they really do feel close. They feel close in a way that they wouldn't if I had to go into an elevator or a stairwell to reach them. Once you go into an elevator, they could be ten floors away.
Or you could get trapped for 41 hours.
RT: Good point. Another example, and the one that we use to open the book, is the illustration of a cafeteria where the director discovers that the order in which the food is displayed influences what people eat. She then wonders in what order she should put the food.
In the cafeteria here, the first thing you see is the salad bar. You have to pass by the salad bar to get to the burgers and pizza. That's a good thing. I'm often nudged to stop at that salad bar. If you think it's a good idea to put the salad bar before the burgers, you're a libertarian paternalist.
The cafeteria architect in your book is a fictional person—
RT: Yes. The one who designed the cafeteria here is a real person.
Did they have some influence on your fictional person?
RT: No, we had that example before this building was built.
You say you can give us some help in making better decisions about money or wealth. There have been a number of articles recently about personal debt in this country. It's escalating wildly. What are some nudges in this area?
RT: Both Cass and I are great procrastinators. Our bills get paid on time only if we make them automatic. I think the best thing people can do is set up a system where their credit cards get paid off automatically, and in full.
Now, of course, that's not possible for people who have six month's income worth of credit card debt. I think those people have to get on a plan to stop using their credit cards. I would suggest for people who have a big credit card balance that they stop using them, start paying them off, and get a debit card. Get a debit card without a credit line. Turn the credit line down. Then you've got a self-control device.
I heard a story about a woman who had a credit card with a credit limit. She discovered that she had spent one thousand dollars over the limit, which she didn't think she could do. It turns out the credit card company was just being "accommodating." They said they didn't want to embarrass her by declining the card. Instead, they let her run up an extra thousand dollars, stuck her with a penalty, and raised her interest rate.
So in some cases, what we would like is for the credit card companies to enforce the limits. That's another thing you could do—call your credit card company and say, "I want you to enforce my limit. Don't let me spend any more than that."
Will they listen?
RT: I think that they will impose a limit if you want them to. We talk in the book about what we call default options, which are things that happen if you do nothing. For most credit cards, the default option is that they can raise your limit without asking your permission. They claim it's because that's the option most people want, which may be true. I have no reason to think it's not true. But, of course, it's also the option that makes them more money.
From a business point of view, isn't that what most defaults are?
RT: Many are. There's a market out there for paternalistic business practices. I think a credit card company that went about helping people reduce their credit card debt could build up a very loyal client base.
There's a chapter in your book about objections. If you're looking at this as a social scientist and you have nudges that affect social policy, then when does a nudge stop being a nudge and become a rule that's suddenly applied to everyone?
RT: We've had objections from, politically speaking, both the left and right. That's comforting, because it suggests we're getting it about right. [Laughter] We've had positive responses from both sides as well. As long as we're talking about objections, I think the principal objection from the right is a slippery slope argument. The argument is that if we start by making tax returns easier and automatically enrolling people into savings plans, that's fine. But there's a slippery slope here and the next thing you know, we're going to have bans and mandates such as Prohibition. I'm not too sympathetic to that critique. I think we should stop where it's appropriate to stop. We require that every policy we suggest has an easy opt-out provision. You can't make it like quitting some of these book clubs where you have to spend six hours on the phone to get out of the plan. If you can get out without cost, then we think that the possibilities for overstepping are not that great.
The criticism from the left is that we shouldn't stop at nudging. There are some behaviors that are bad enough that we should shove. We acknowledge that there may be such behaviors. However, our goal in writing this book was to show how far we can go by sticking with this rule of tying one hand behind our back and saying, "Can we devise policies that will improve choices and not make anybody do anything?"
Yes, I got the sense that that's your larger goal; that you really want to influence public policy. How do you imagine that happening beyond the existence of your book?
RT: Some politicians talk to us, some have read our book. We're getting interest from both sides of the aisle. Both Cass and I have informal relationships with the Obama campaign. Cass is an old friend of Barack's.
Does he play poker with him?
RT: He didn't play poker with him, but they both taught on the law school faculty here [at the University of Chicago]. I got to know Obama when he ran for the U.S. Senate. He's come a long way since then. Some of the ideas in Nudge are incorporated in the Obama campaign.
Interestingly, I appeared on the radio show of the governor of Minnesota, Tim Pawlenty, who's one of the leading candidates to be McCain's running mate. He had read the book and liked it. David Cameron, the head of the conservative party in the U.K., gave a speech about Nudge in June.
When we wrote the book, we had two goals: an ambitious goal, which was to show that the ideas of behavioral economics can be used to help people and a ridiculously ambitious goal, which was to create a new approach to thinking about policy that lies between our increasingly polarized political parties. There are some tiny hints that the ridiculously ambitious goal just might be possible.
Do you have a favorite nudge that you imagine happening in the world of social policy, something that you really hope happens in the next few years?
RT: Here's the idea that I'm currently pushing. It doesn't sound sexy, but I think that it's really important.
Well, you're an economist, we don't expect sexy.
RT: So I'm not going to disappoint you. [Laughter] This is going to be really boring. It's what we call electronic disclosure. Here's the way it would work. Take credit cards, for example. Once a year your credit card company, or companies—most Americans have six credit cards—would each have to send you two machine-readable electronic files. Both are like spreadsheets. One would be all the formulas that they use to charge you for things. So the woman I mentioned earlier who went over her limit would see that her limit had been raised and they'd charged her a penalty.
The second file would be a list of all the things you did in the past year that incurred charges. Now, it's not that we imagine that anybody, any human at least, would look at these spreadsheets. What we imagine is that third parties would open up websites that would act as translators. So, with one click you could take this report and get somebody to explain it to you. "You paid $1,100 last year for using your credit card, $700 of that was interest, $200 of that was late fees, and $50 of it was hidden, but it was fees for transferring currencies back into dollars." And so forth and so on. We just had an op-ed on this topic in the WSJ. ["Disclosure Is the Best Kind of Credit Regulation," 13 August 2008]
We think this idea of electronic disclosure has widespread application. For example, mortgages have gotten so complicated. I don't pretend to be able to understand all the details of a mortgage. Instead of the thirty pages of unintelligible, so-called plain English that you get when you apply for a mortgage, what we think you should get is an electronic file that you'd bring to some website. That website would explain the terms of the mortgage to you, and they'd help you look for a better one.
We think with this small, nearly costless change we could revolutionize the way we regulate credit markets. This would essentially deregulate credit markets because there would be much less need for rules and regulations. The Fed has now proposed a whole new list of do's and don'ts for credit cards. The problem with those, of course, is that as soon as you post that, they'll think of other ways to make money. Instead, we think by just making everything transparent and easy to understand, you'll make the market much more efficient. And the Fed can get out of the business of telling credit card issuers what to do and what not to do, because people will do that.
Yes, brilliant. But the Fed is a part of the government and they're certainly not looking for ways to do less.
RT: The Fed is not a traditional part of government. I know some of the governors, and I think this idea might appeal to them.
I look forward to seeing how this works its way out into society, and into our lives. Thank you very much.
RT: Nice talking to you.
Email: richard.thaler (at) – chicagogsb.edu