[Book Review: Nudge] Are you making rational economic choices?

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Nudge by Richard Thaler & Cass Sunstein

 

Have you ever persuaded someone to change his behavior? If you have, was it easy? I don’t really think it is. Well, the book, ‘Nudge’, may help you to become an influential and persuasive person without forcing someone. ‘Nudge’ means pushing someone lightly with your elbow to grab attention. In other words, it induces people to the right way while the freedom of choice still depends on the individuals. For example, just by asking people whether they would like to vote, the action of questioning contributes to increase the turnouts. The authors, who are behavioral economists as well, combined psychology with economy to help you select more rational choice.

 

The innovative idea that changes one’s way of thinking became extremely famous after Mr. Obama applied it to his policy. (Sunstein, one of the authors, has actually joined the Obama’s administration!) In the introduction, the authors mention ‘choice architects’ (this is the keyword in this book!). “A choice architect has responsibility for organizing the context in which people make decisions.” (p.3) Meaning that like a traditional architect, the choice architect has to plan and follow guidelines to “influence people’s behavior in order to make their lives longer, healthier, and better.” (p.5) This is a nudge.

 

 

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In the first chapter, Thaler and Sunstein talk about a curve in Chicago’s Lake Shore Drive that uses a nice visual illusion to nudge drivers to slow down. Road planners in Philadelphia have been experimenting with painted illusions of speed bumps on some roads to accomplish a similar effect.

 

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Nobody immediately warned drivers to slow down but by this nudge effect, the drivers will automatically slow down. So, how can we apply this effect to economy? I’ll give you an example.

 

Minnesota State did an interesting experiment on their taxpayers. The taxpayers were divided into 4 groups and received each different type of guidance.

 

  1. Your tax will be used to make our state better: education, defence and fire prevention.
  2. If you do not follow the tax policy, you will be punished under the law.
  3. Here is a guideline for you to fill in your tax bill.
  4. 90% of Minnesota residents have already followed the liability to pay taxes.

 

Which of these do you think was the most effective way to increase the payment of taxes? Lot of people predicted that the third one would be the most effective one but the answer was ‘4’. The phrase that creates anxiety leads to a successful self-assessment!

 

In Nudge, there are two comparative types of human: One is called ‘Econ’, short for ‘Homo Economicus’ and the other one is just human. Thaler and Sunstein tell us that, according to the traditional economics, humans are ‘Econs’ with profit-seeking motive who always act right and make rational choices. However, are we actually ‘Econs’? In reality, we are not. For instance, we all know that saving is the best way to become wealthy, but we often fail to make regular savings and spend our earnings to gratify our desires. This shows how the traditional economics fails to explain human desires. It illustrates that theory does not always match the reality! Tired of traditional economic theory which keeps talking about ‘rationality’ of our decisions? Why not read this book, ‘Nudge’, to learn something new about behavioural economics?

 

 

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