Extract: Nudge by Richard H Thaler & Cass R Sunstein

Many years ago, Thaler was hosting dinner for some guests (other then-young economists) and put out a large bowl of cashew nuts to nibble on with the first bottle of wine. Within a few minutes it became clear that the bowl of nuts was going to be consumed in its entirety, and that the guests might lack sufficient appetite to enjoy all the food that was to follow. Leaping into action, Thaler grabbed the bowl of nuts, and (while sneaking a few more nuts for himself removed the bowl to the kitchen, where it was put out of sight.

When he returned, the guests thanked him for removing the nuts. The conversation immediately turned to the theoretical question of how they could possibly be happy about the fact that there was no longer a bowl of nuts in front of them. (You can now see the wisdom of the rule of thumb mentioned in Chapter 1 about a cap on the proportion of economists among attendees at a dinner party.) In economics (and in ordinary life), a basic principle is that you can never be made worse off by having more options, because you can always turn them down. Before Thaler removed the nuts the group had the choice of whether to eat the nuts or not – now they didn’t. In the land of Econs, it is against the law to be happy about this!

To help us understand this example, consider how the preferences of the group seemed to evolve over time. At 7:15, just before Thaler removed the nuts, the dinner guests had three options: eat a few nuts; eat all the nuts; and eat no more nuts. Their first choice would be to eat just a few more nuts, followed by eating no more nuts. The worst option was finishing the bowl, since that would ruin dinner. But by 7:30, had the nuts remained on the table, the group would have finished the bowl, thereby reaching their least favorite option. Why would the group change its mind in the space of just fifteen minutes? Or do we really want to say that the group has changed its mind?

In the language of economics, the group is said to display behavior that is dynamically inconsistent. Initially people prefer A to B, but they later choose B over A. We can see dynamic inconsistency in many places. On Saturday morning people might say that they prefer exercising to watching television, but once the afternoon comes, they are on the couch at home watching the football game. How can such behavior be understood?

Two factors must be introduced in order to understand the cashew phenomenon: temptation and mindlessness. Human beings have been aware of the concept of temptation at least since the time of Adam and Eve, but for purposes of understanding the value of nudges, that concept needs elaboration. What does it mean for something to be "tempting"?

The American Supreme Court Justice Potter Steward famously said that although he could not define pornography, "I know it when I see it." Similarly, temptation is easier to recognize than to define. Our preferred definition requires recognizing that people’s state of arousal varies over time. To simplify things we will consider just the two end points: hot and cold. When Sally is very hungry and appetizing aromas are emanating from the kitchen, we can say she is in a hot state. When Sally is thinking abstractly on Tuesday about the right number of cashews she should consume before dinner on Saturday, she is in a cold state. We will call something ‘tempting’ if we consume more of it when hot than when cold. None of this means that decisions made in a cold state are always better. For example, sometimes we have to be in a hot state to overcome our fears about trying new things. Sometimes dessert really is delicious, and we do best to go for it. Sometimes it is best to fall in love. But it is clear that when we are in a hot state, we can often get into a lot of trouble.

Most people realize that temptation exists, and they take steps to overcome it. The classic example is that of Ulysses, who faced the peril of the Sirens and their irresistible songs. While in a cold state, Ulysses instructed his crew to fill their ears with wax so that they would not be tempted by the music. He also asked the crew to tie him to the mast so that he could listen for himself but be restrained from submitting to the temptation to steer the ship closer when the music put him into a hot state.

Ulysses successfully solved his problem. For most of us, however, self-control issues arise because we underestimate the effect of arousal. This is something the behavioral economist George Loewenstein (1996) calls the "hot–cold empathy gap." When in a cold state, we do not appreciate how much our desires and our behavior will be altered when we are "under the influence" of arousal. As a result, our behavior reflects a certain naïveté about the effects that context can have on choice. Tom is on a diet and agrees to go out on a business dinner, thinking that he will be able to limit himself to one glass of wine and no dessert. But the host orders a second bottle of wine and the waiter brings by the dessert cart, and all bets are off. Marilyn thinks that she can go into a department store when they are having a big sale and just see whether they have something on sale that she really needs. She ends up with shoes that hurt (but were 70 percent off). Robert thinks he will engage only in safe sex, but then must make all the crucial decisions while aroused. Similar problems affect those who have problems with smoking, alcohol, a failure to exercise, excessive borrowing, and insufficient savings.

Self-control problems can be illuminated by thinking about an individual as containing two semiautonomous selves, a far-sighted "Planner" and a myopic "Doer." You can think of the Planner as speaking for your Reflective System, or the Mr Spock lurking within you, and the Doer as heavily influenced by the Automatic System, or everyone’s Homer Simpson. The Planner is trying to promote your long-term welfare but must cope with the feelings, mischief, and strong will of the Doer, who is exposed to the temptations that come with arousal. Recent research in neuroeconomics (yes, there really is such a field) has found evidence consistent with this two-system conception of self-control. Some parts of the brain get tempted, and other parts are prepared to enable us to resist temptation by assessing how we should react to the temptation.1 Sometimes the two parts of the brain can be in severe conflict – a kind of battle that one or the other is bound to lose.

Nudge

by Richard H Thaler and Cass R Sunstein.

Penguin. £9.99