What are biases and blunders? - BulletPoints 1

• Thinking works by two different systems. The two systems are characterized by thinking intuitively and automatically opposed to thinking reflective and rational. These are called the Automatic System and the Reflective System. Both of them are also known as System 1 and System 2, but in this summary, we will use Automatic System and Reflective System.

• Rules of thumb are simple and quick rules to help us. On the one hand, they are useful, but on the other hand they can lead to systematic biases. The first three rules of thumb are anchoring, availability and representativeness and are also referred to as heuristics or biases. Rules of thumb emerge from both the Automatic and Reflective system working together.

• The status quo bias entails that people like to stick to their current situation instead of changing something. Think of a subscription to a magazine that is for free for the first month, but that you have to pay for after that free month. A lot of people procrastinate the cancellation of subscriptions or forget about it. An aspect is lack of attention. It is a kind of ‘yeah, whatever’ heuristic that makes people stay subscripted to these magazines, but also makes people stay at the same channel on television for the whole evening. The status quo bias is a combination of loss aversion and the ‘yeah, whatever’ heuristic. This works the same for default options. That is why default options are so powerful in consumerism.

How do we resist temptation? - BulletPoints 2

• Defining temptation is quite hard. A way of defining it is that arousal is high in a certain situation of making choices, in which one option produces more arousal than the other. It is like buying shoes with 70 percent off, which end up being not exactly the fit you would have preferred. This is a matter of self-control in the heat of the moment. The Reflective System is more of a ‘Planner’, which looks into the future. The Automatic System is the ‘Doer’, that only cares about instant gratification. The part involved with one of the systems can be stronger, which results in ‘doing’ or ‘planning’ the thing, or be balanced and conflict with each other in making a decision.

• Mindless choosing involves not paying attention. Eating is an example of mindless choosing. We mostly eat what is in front of us. For example, an experiment was done with eating soup, which resulted in people eating a great deal of soup. This happened, because the bowl of soup was refilled automatically, without the participants noticing. This made the participants eat more than they thought they had eaten.

• The Planner makes plans to resist temptation and overcome them. At the same time, the Doer foil the efforts of the Planner. It is a constant interaction between the Planner and the Doer. Aspects like money, gadgets, social support, or governmental bans (for example on drugs). Also, companies can help the Planner in certain aspects by providing a certain product. Companies can also help the Doer, which makes self-control harder (think about food advertisement and our lack of self-control in eating).

How can people be compared to a herd? - BulletPoints 3

• There are multiple reasons for being influenced by others. First, people learn from each other. This is also called social learning. Next to that, social influence is quite strong. For example, social influence was strong in Jonestown where leader Jim Jones commanded everyone to commit suicide, which actually resulted in a mass suicide. This social influence contains information given to people and peer pressure.

• The spotlight effect is an effect that makes people think they are in the center of attention in a certain situation. Most of the time, this is not the case. This effect happens when you feel like you stand out, for example by dressing formally when everyone is dressed informal. In this situation, people conform more to what they think others expect of them in that specific situation.

• Culture, politics, and unpredictability are influenced by social influence. People like to conform, and thus conform also in culture, politics, and assume unpredictability is rare. This conformity in the different areas comes from the need that people want to be similar to the group and assume that aspects, like a party leader, are built upon the fact that people have a positive opinion about them or have a preference.

• Social nudges can be used on different occasions. Some forms of social nudging are more effective than others. It is to choice architects who like to shift social behavior to pick the most effective way of social nudging. For example, it is effective to state what others do, frame it positively.

When do we need a nudge? - BulletPoints 4

• Nudges are ethical when they will most likely help and least likely to inflict any harm. This is the rule of libertarian paternalism. These can be decisions that are difficult or rare, in situations people will not get feedback, and when people have trouble translating cues into understandable terms.

• Self-control issues happen when choices and consequences are not at the same time. The consequence is way later. This can be investing, exercising, and eating healthy. There are immediate costs, but the positive consequences come later. When not stopping smoking for example, you will feel the pleasure when you smoke immediately, but you have the negative consequences of still smoking later, like diseases or decreased health. Both of the investment goods and sinful goods can benefit from nudges.

• Market competition is a good thing, but it also makes it interesting for companies to misuse people’s weaknesses and exploit those weaknesses. For example, insurance products use all fraught features discussed before. If consumers have less than fully rational belief, firms often have more incentive to cater that belief than to eradicate it. For example, the fear of flying can be exploited by companies offering flight insurances. There is an option for buying the insurance, but not for information on the insurance.

What is choice architecture? - BulletPoints 5

• Choice architecture exists of six different principles that are explained in this chapter. The six different principles form a playful acronym: nudges.

  • Incentives. The N of ‘iNcentives’ is used.
  • Understand mappings. The U of ‘Understand mappings’ is used.
  • Defaults. The D of ‘Defaults’ is used.
  • Give feedback. The G of ‘Give feedback’ is used.
  • Expect error. The E of ‘Expect error’ is used.
  • Structure complex choices. The S of ‘Structure complex choices’ is used.

• The path of the least resistance is the path that requires the least effort. For every choice, there is a default option. The option that happens when no action is taken. Defaults are quite powerful. They are unavoidable, because we encounter choices daily. For example, a computer has a lot of options, like background, type of screensaver, how long it takes until the screensaver appears, etc. It is most likely that you will have some of the default options because you had to take action to change this. Also, in organizations, the default option is widely used. There are automatic renewals for magazine subscriptions, and a default option is given when you download a program on your computer for example. Default options are not always ethical, but it needs time to find out if they are or not. There is also an option that people are forced into making their own choice. This is called the required choice or mandated choice. Default option comes with the problem that it is more suitable for yes-or-no decisions than for more complex ones.

• The strategies used for deciding on a choice depends on the difficulty and the availability of options. A strategy of choosing is using minimum cutoff scores. If you are looking for a room for example, a room might be eliminated from your options when it does not meet one of the cutoff scores. For example, the rent is way too high, but the rest of the room does meet your standards. Surprise and serendipity can change choices, which can be fun for people, but also good for them. It is good sometimes to learn about people unlike us instead of mostly people like us.

How do people save? - BulletPoints 6

• Enrolling in a savings plan looks like a good option, but a lot of people do not join the program. Younger, less-educated, and lower income employees are less likely to join. But this does not mean that all high paid workers sign up. Signing up might never happen, but it also happens that it is procrastinated. A nudge is needed to let those people join.

• Both automatic enrollment programs and forced choosing programs have a low default savings rate most of the time. Usually, 2 or 3 percent. They also have a conservative investment choice, like a money market account. This rate is too low when saving for a retirement. Employees also stay in the default investment fund, which can cause them to lose a lot of money. Most people do not spend (enough) time on these decisions. People are relying on shortcuts in this situation. People use the rule of thumb in stating round numbers when asked what percentage they want to save. Also, contributing the minimum amount allowed or necessary to sign up to the program is a rule of thumb. Companies can nudge people with this by giving higher percentages of savings as a default or given option.

• The Break-Even Age calculator is developed to help make the personal decision of when to start saving. The tool tells you the possible starting dates for receiving payments, and calculates how much years you have to live to break-even. Taxes, interest, and spouses are not taken into account. A designated choice architect would be better. More factors could be taken into account. This makes solving the problem more difficult and complex, but also more precise. Thus, people have a lot of difficulty saving for their retirement.

What is naïve investing? - BulletPoints 7

• Investing is a difficult decision. There can be too much risk in investing sometimes. Generally, the riskier the investing, the higher the rate of return than safer investments. A mix should be well mixed and appropriate. This is called the asset-allocation decision. The more a person makes, the more they can afford investing in riskier assets. But this has the risks of the investments returning lower of course. Deciding what is the best asset-allocation is difficult, because for everyone another option would be best.

• When a decision is difficult, even financial economists tend to spread their investments fifty-fifty. This follows the 1/n heuristic. When there are no options, the assets should be divided equally across all options. This starts already at a young age. For example, with trick or treating, children tend to pick one of each candy when they are allowed to pick two candies and there are two options. But when the same options are at the next house, where they are only allowed to pick one candy, they distribute their choices way less.

• A couple of nudges are important in this situation. Defaults, structuring complex choices, expect error, mapping and feedback, and incentives can all play a role in making investing easier and more efficient.

How do credit markets work? - BulletPoints 8

• In most situations, people are not able to do a good job in picking their loans. When the market becomes more complex, uninformed and unsophisticated shoppers will be disadvantaged and more likely to be given bad or self-interested advice by the people in a helpful and purely advisory function. Mortgage brokers are in that situation more interested in making money off those people than helping them. There are thus two extremes, which makes it the subprime market. Subprime lending is neither all good nor all bad, thus does lie in between the two extremes. Subprime lending gives people the opportunity to borrow who otherwise could not afford to borrow and makes it possible for those people to be homeowners. It is also a way to give someone a second chance. But subprime borrowers are most of the time unsophisticated and they might be exploited by brokers. The broker makes the borrower think they are doing them a favor and in a second meeting the broker suggests for the mortgages and the borrower can choose their interest rate, monthly payment, and number of points she wants to pay. Once they agree, a good-faith estimate is required to be presented, which states the costs of the loan. Then the loan is a big stack of papers which defeats the purpose of the estimate. In the state of having to sign those papers, with the terms and conditions on it, the borrower most of the time does not read the papers, or rethinks the decision, and just signs. When a loan is high-risk, the broker has to give the borrower extra warnings of this. One option is banning this, but another option is improving in choice architecture to help people decide better. When there are fewer options to choose from, borrowers have not such a hard time choosing more wisely.

• The cost of being a student is rising quite fast. Scholarships and jobs do not cover all the costs. Student loans are thus quite common. There are private loans and loans that are backed by the federal government, which are called Stafford loans. The Stafford loans are need-based. Students fall prey to misleading mail solicitations from private lenders. A federal loan is cheaper and thus most students opt for this. When a student wants to receive a federal loan, they have to fill out the free application for federal student aid, and they must complete the College Board’s financial aid profile on some occasions. Filling out these forms can take hours. The Department of Education determines on the basis of the information given how much the family should pay for the college and decides on how much the student can loan.

• Credit cards are widely used for a lot of things. Especially in the United States they are needed for checking into a hotel, renting a car, or renting golf clubs. Credit cards provide a mode of payment and can replace checks. Also, they provide a ready source of liquidity when you want to spend more money than you have on your bank account. Debit cards only can be used for a mode of payment.

How does privatizing social security work? - BulletPoints 9

• There could be a number of default options that could be chosen from:

  • No choice: the default fund is the only fund offered.
  • A default is picked: selection is discouraged.
  • A default is picked: selection is encouraged.
  • A default is picked: selection is neutral.
  • Required choosing: there is no default option. People have to make an active choice themselves.

• People were overall better off in choosing their own portfolio. It is impossible to state what the best option is, because everyone’s situation is different. The default option was overall also not a bad choice. It did not need a lot of maintenance, was a good division of funds, and also the costs were very low. the allocation to stocks is even higher in the portfolios actively chosen. Also, the active choosers invested around half of their money in the stocks of Swedish companies. This is called the home bias. It feels like people know what they buy, while you do not always know what is going on in the company where you work. A low percentage of the funds in the portfolio was indexed. The fees paid were thus much higher for the active choosers. Thus, people had a hard time identifying what was better than the default option and what was not. Investments of people are influenced by the returns they got previously.

• The government did not choose the best choice architecture in privatizing social security. They relied on the Just Maximize Choices mantra, that the more choices people have, the better choice they will make. However, this leads to availability bias and inertia. The default option in the Swedish plan was a good option and selected with care. It would have been efficient for the government to say that they should contact experts or choose the default option when they do not know how to ensemble their own portfolio. The Swedish government now thinks the same way.

What role do prescription drugs play? - BulletPoints 10

• The enrollees that are eligible for both the Medicare and Medicaid program, are the poorest and sickest participants. They are referred to as the dual eligible. Most of them fall in a minority group (African-Americans, Latinos, and females) and are more likely to have some kind of medical condition that requires prescribed drugs, like diabetes. This use of the beneficiaries is ten times more than the average of prescription drugs. Random assignment to a default plan for those people is thus quite risky. Sometimes they are enrolled in a plan that does not cover the prescribed drugs they need most. They are allowed to switch plans, but people are quite passive in making hard choices, so this did not happen most of the time. This default plan could even impair one’s health. For 10%, medication access was improved, but 22% stopped taking their medication temporarily or even permanent because of the new plan. Thus, it would be better to make the random assignment more intelligent. By the percentage of people who switch plans, we can see how passive people are in making this kind of complex decision. Only 6% actively switches plans. There goes a lot of time and energy into switching and most people see this as a burden and not worth all the effort. However, choosing the right plan for you can save both the participant and the government a lot of money.

• People have to spend hours and hours of scrolling through all the options. Most seniors get their information quite passively by mailings from insurers, the government, and groups like AARP. This does not contain personalized information. The Web site of Part D is the best source of information, but this is less passive. Also, not all seniors are modernized and need help from their children or grandchildren to seek out information from the website. But also, the Web site is not perfect. Misspelling drugs is something common, but the website does not correct for that. This makes finding the right plan or even the right prescribed drugs a nightmare. On top of that, you need to know your dosage and frequency. Otherwise, the plan might still be not the best plan for you. Also, the prices of the plans change regularly. Today’s plan might be a better deal than tomorrow’s plan.

• Nudges can help people make a better choice when there are a lot of options available. One option is intelligent assignment. This will replace the random default plan assignment. It might save the government, but also the person quite some money. The intelligent assignment system switched already 22% of the people into a better choice option.

How does one increase organ donations? - BulletPoints 11

• Increasing organ donations is needed because the demand is higher than the supply. This is why a lot of people are placed on a waiting list for organs, which is growing 12 percent each year. Choice architecture can be used to increase the rate of organ donations. The primary sources of organs are people that are declared brain dead. Each donor can only be used for three organs. The biggest problem in this is getting consent from family members of the brain-dead patient. Default rules can be used to increase the donation of organs.

• With presumed consent, the freedom of choice is still preserved. It is similar to explicit consent, but the default option is shifted towards being a donor. People need to take action to register for their unwillingness of donation. In changing the default from opting in to being a donor to opting out of being a donor, the percentage of donors rose from 43 percent to 82 percent.

• The problem with presumed consent is the opportunity for family to overrule the implied consent of the donor. A mandated choice would be best in this situation. This can be implemented when you want to renew your driver’s license. You would then be required to pick a box if you will be a donor or not and your other preferences. It is obligatory to give an answer before you can pick up your driver’s license and family members cannot overrule this choice.

How can we use nudges to save the planet? - BulletPoints 12

• Nudges can play a role in reducing greenhouse gases. The government, actually worldwide all governments, try to control harmful health effects of pollution way beyond nudging. Freedom of choice is not really a guiding principle in controlling the effects of pollution. Technologies are not specified, but there are deadlines and goals set, like that in ten years all new cars must produce 90 percent less carbon monoxide than they do now. The government might also set levels of air quality standards and that pollution levels might not exceed this level.

• When incentives are badly aligned, the incentives can be improved by aligning them better. Common incentives in the environmental area are penalties or taxes. There is a tax on greenhouse gas emission for example. Another approach is the cap-and-trade system. This system entails that people who pollute are given rights to pollute in certain amounts and these rights then are traded in a market. People want to avoid paying taxes and will strive to pollute less. Also, emission rights can be traded for cash. It is better to rely on incentives than to rely on command-and-control.

• If people can see how much energy they use in one day, it could encourage people to conserve more energy. This is a creative nudge that can be used for the sake of the environment. Giving the energy usage by text or email did not work efficiently. An Ambient Orb did work efficiently. The orb glows red when customers are using a lot of energy and green when someone is more modest in use. Users of the orb reduced their energy use up to 40 percent.

How to improve school choices? - BulletPoints 13

• Freedom of choice for students can increase the quality of schools because there is more competition between schools. Now there is competition between students to get a place in a liked school. The improvement is mostly in younger students, low-income students, and minority-group members. Most of the time private schools are offering a higher quality curriculum, but it is impossible to get into private school if you are not wealthy and on top of that are from a minority group. If schools would compete, then it would be also having to make a plan for parents on how to choose the perfect school for their kids.

• Matching could be a good option to see what school would fit best with students. It can continue integration by giving students a priority space at a nearby school or the school of a sibling, while also giving the option to enroll somewhere else. The algorithm attached to it tries to assign as many students as possible to their first-choice school, while giving neighborhood students priority. It makes it possible for parents to not make the best choice to spend time looking at options instead of making a guess off the level of competition. Also, administrators do not have to guess about parents’ preferences if they have the opportunity to find out what is best for them through matching.

• A simple nudge can be quite effective. This is shown in San Marcos, Texas, with the San Marcos High wanting to get students to apply for the nearby Austin Community College. In order to graduate from San Marcos High, you had to complete the application to Austin Community College. This nudge was simple, but effective. All it takes to get admitted to a community college is a high school degree and a record of a standardized test. They also gave out information about how college graduates have more opportunities to earn more money than high school graduates, explaining it in simple language. The standardized tests were made free of charge for the students, so applying to the college would not be a problem. Administrators also gave students information about financial aid and offered some time with tax consultants for parents. The nudges resulted in big results. Students from the San Marcos High applying to a college rose from 11 percent to 45 percent. Mort of Texas high schools now have similar plans to raise their number of people applying for colleges.

Should patients be forced to buy lottery tickets? - BulletPoints 14

• Health care in the United States is generally quite expensive. Health care can stay cheaper, by maintaining a healthy lifestyle, buying health care products and services only when we need them, and visiting a doctor only when necessary. Increase in freedom would help both the health care system and the patients. Buying health care comes with the right to sue. This makes it quite expensive to buy health care, because there is the chance that the doctor providing the health care gets sued. Both patients and health care providers might see it as a relief that suing would not be an option anymore and making health care more accessible for all. This is not yet available because courts have long held that waivers of medical malpractice liability are unenforceable as against public policy. The court does not allow a deal between patients and providers that lower cost treatment is possible. They block such a deal because they think that sensible patients would not waive their right to sue, and that the doctors will not treat patients without the threat of malpractice liability to frighten patients. But humans make sometimes not the right decision.

• There are some reasons to allow patient to give up the right of suing their doctor:

  • The deterrent effect of tort liability is overstated. Experience ratings are not common and thus a doctor sued multiple times for malpractice will pay the same premium as a doctor that has never been sued.
  • There is a poor fit between malpractice claims and injuries caused by medical negligence. Many patients who do sue their doctor do not deserve the money. Most people who do deserve it, will not sue the doctor for any compensation.
  • It has been found that this system will scare doctors against malpractice and medical negligence.
  • Jury awards for pain and suffering that may be associated with a medical malpractice claim are highly erratic.

How to privatize marriage? - BulletPoints 15

• The idea of marriage is quite outdated, especially seen where marriage comes from. It also comes with discrimination of people, for example couples of the same sex that want to get married. The authors suggest that the government and religion should not be intertwined. Thus, that marriage would not appear in any law, but only stays in the religion for the people themselves. Now, marriage refers to both a legal status and a religious status. Next to religion, there are also people that want to get married for other reasons than religion (for example, love). To keep marriage away from the government, a marriage could be organized by private organizations. The rules that apply to the weddings would be different then. For example, in the church, only members of that church can get married, but if you want to get married under water in a scuba diving club, they would only offer the ceremony to certified divers. Thus, couples could pick what suits their lives best. Choice architecture can be used to help design such an idea.

• Marriage is an official licensing scheme, which is needed for material and symbolic benefits for the couple. When there is a similar contract between people, but without a love relationship, it is allowed to have the benefits, but not to marry for it (just to sign a contract). Thus, it could be possible to make something similar for a partnership.

• Marriage is sometimes seen as a protection for children. This, however, could also be established in different ways, which are more direct. This would also protect the children with parents that are not married and makes it more inclusive. In this sense, it would make marriage not more beneficial than the law (if there would be a law about commitment to parenthood).

What nudges do exist? - BulletPoints 16

• Give More Tomorrow: people have a strong charitable impulse, but they might give less than they want to give. The nudge Give More Tomorrow would help people give more to charity. They will start off by giving a small amount to a charity and increase this every year.

• The Charity Debit Card and tax deductions: the Charity Debit Card would make it easier for people to deduct their charitable contributions. The donations are itemized at the end of each year and totaled to make it easier for your end-of-year statement. Another option is that this is all automatic and that the government can decide based on your donations what the right deduction is for everyone.

• The Automatic Tax Return: when one does not itemize deductions and has no income, it would not be reported to the IRS and the tax return would be already filled out for those people. This system would be new for the United States, but is already implemented in other countries.

• Stickk.com: people need help in achieving their goals and aspirations. Stickk offers help with making commitment, both financial and nonfinancial. There are certain verifications to agree on a set date. For example, a financial commitment and punishment, like weigh-ins at a doctor’s office if you want to lose weight. If the goal is reached, the person gets their money back, otherwise not. Nonfinancial commitment can be peer pressure and monitoring your progress on the goal on a group blog.

What are the objections to nudges? - BulletPoints 17

• Skeptics against nudges fear that once modest paternalism for savings or cafeteria lines or environmental protection are accepted, that highly intrusive interventions will follow. It might be like how cigarettes are advertised. It started from modest warning labels to more aggressive information campaigns, to cigarette taxes to eventually banning smoking in public spaces to banning smoking altogether. This slippery slope is unlikely, but there is the danger of overreaching.

• Choice architects might have their own agenda in offering ‘helpful’ nudges. It is unclear if this is something to worry about more about public choice architects or private choice architects. Freedom of choice is thus important, and it is important that it stays available in all situations. Freedom of choice can be corrected for these side agendas.

• People have the right to be wrong in a free society. It is helpful to make mistakes, because people learn from it. Opting in or opting out is thus quite important. It is important to help people into making the right choice when there is a lot at stake. When there is less on stake and the group could have known better, for example investment firms buying the wrong portfolios, they should take the risk on themselves.

What is the real Third Way? - BulletPoints 18

• The two major claims are that seemingly small features of social situations can have a massive effect on behavior and that libertarian paternalism is not an oxymoron. The third way was talked about in the twentieth century, but does not actually exist, yet. The authors hope a Third Way will be developed at some point, but it is not yet clear if this will happen.

What are the twenty more nudges discussed? - BulletPoints 19

• The iPed: this device shows you how big the carbon footprint is of the product. People can thus easily see how much pressure is on the environment with this product.

• Make-believe speed bumps: for making people slow down, 3-D triangles that look like speed bumps have been developed. This is more cost efficient, makes it better for emergency vehicles to remain at speed, and works in slowing drivers down. But the effect is temporary, because people get used to the fact that speed bumps are not real speed bumps.

• Clear airline seat pockets: if airline seat pockets are see through, it will be easier for people to see if they leave something behind.

• Social influences in recycling: there is a strong influence from the sense of responsibility and social pressure in taking part in recycling.

• Urinals around the world: the fly in the Amsterdam airport urinals helps men aim their pee. It reduced spillage by 80 percent. Now it has been expanding to bars, restaurants, schools, churches, especially in the United Kingdom. Urinals have also been used to nudge drunk people to take a taxi. In a Piss Screen, people play a video game and get feedback if they lack their quick reactions or not. If they do lack those quick reactions, they get offered a taxi services phone number.