Nudge your way to success

60

By Manish Shah
There was a lot spillage inthe men’s urinals at the Amsterdam airport. An economist suggested an ingenious solution of etching urinals with the drawing of a house fly. The house fly provided  the men a target to aim for which resulted in less spillage. This is what economists Richard H. Taller and Cass R. Sunstein call a nudge, a small feature of the environment that captures attention and alters behavior.

Because human beings are irrational, if they have total freedom of choice, they often do not make the right decisions. We are plagued with behavioral tendencies such as following the herd and fearing losses more than appreciating gains. These tendencies act against our best interests. Hence Thaler and Sunstein believe that we can be nudged into beneficial direction using “choice architecture.” Choice architecture is a well-designed framework for making decisions that can lead to better choices.

An example of choice architecture is Sweden’s system of saving for retirement. It offers a choice of funds to invest in, but also includes a well-designed low-cost default option. This default option has been chosen by almost 90 persent  of all participants. We can apply the same choice architecture to our 401(k) retirement plans. Employees can be automatically enrolled in savings plans, with a right to opt out, instead of the current practice of using opt-ins.

There are several applications of nudge which would lead to better outcomes. For instance, if we want to increase the supply of transplant organs in the United States, we could make donation of organs a default with the right to opt-out, rather than treating non-donation as the default. A study done by Eric Johnson and Dan Goldstein has showed that “presumed consent” can save thousands of lives every year. If we want to respond to the recent problems in the mortgage market, we can design disclosure policies that ensure that consumers can see exactly what they are paying and give them the ability to make easy comparisons among the possible options.

Stickk.com, a Web site founded by Yale Professors uses public commitments and bets to nudge people to reach their self-improvement goals such as loosing weight or quitting smoking. To enforce its shaming policy, the Web site relies on the honor system, trusting that users will report their transgressions. For those, who feel they may need a little help, the site encourages users to assign a referee. It could be a friend or relative, who oversees the contract and reports any non-compliance.

A gentle nudge has the power to move us in a beneficial direction without restricting our freedom of choice. Therefore, a little intervention in the form of a nudge is better than a bucket full of cure.

- Advertisement -