Summary of Nudge: Improving Decisions About Health, Wealth, and Happiness by Thaler and Sunstein - 1st edition

What are biases and blunders? - Chapter 1

How do we think?

Thinking works with two different systems. The two systems are characterized by intuitive thinking and the opposite, reflective and rational thinking. 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.

The brain helps us make sense of seeming contradictions by thinking intuitively and automatic or reflective and rational. The first is called the Automatic System and the latter is called the Reflective System.

The Automatic System is fast and is instinctive. It does not involve the stereotypical ‘thinking’. This thinking is mostly associated with the oldest parts of the brain. Also, ideas that pop into our mind are caused by the Automatic System. The Automatic System can be trained. This training can entail speaking a language, playing sports, but a lot of different activities.

The Reflective System is deliberate and conscious. It is how we consciously have to think about certain things.

What are the rules of thumb?

Rules of thumb are simple and quick rules to help us. On the one hand, they are useful, 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.

Anchoring, also called anchoring and adjustment, is when people make an estimation based on the earliest available information. or example, when you have to answer the question how many citizens Milwaukee has in the state Wisconsin. You might know that Chicago has around three million citizins and that Chicago lies close to Milwaukee. Also, you know that it is not as big as Chicago, so you guess that it should be at least lower than three million, maybe one million. But the population lies much lower than that. That is, because most anchors used in reasoning are irrelevant to the question, even though they might seem relevant. Even when the anchor has nothing to do with the question itself, it might be used as a starting point but it actually sets people completely off track. This form of anchoring also happens in questionnaires because of the order of the questions.

The availability heuristic is when you estimate the likelihood of something by how easily the event comes to mind. This has to do with the accessibility and salience of information people get. Mostly the Automatic System is aware of risks and likelihoods, but does not take statistics or facts into account. The availability heuristic is used in psychology to explain risk-related behavior.

The representativeness heuristic occurs when we estimate the probability of an event based on how similar it is to a known situation. A description of a woman who is "outspoken, bright, majored in philosophy who is concerned with discrimination issues and social justice and attended demonstrations before" is very detailed. Yet people think that the person is a bank teller and feminist, rather than just estimating the person is a bank teller, because it is similar to a known situation. The categorization of bank teller and feminist is less likely than the categorization of only a bank teller.

What are optimism and overconfidence?

Optimism and overconfidence are nudges that make people feel like they are above average in positive situations and have less chance of risk in dangerous situations.

People also have the tendency to be optimistic and overconfident, known as the above average effect. For example, 90 percent of drivers think they are above average drivers, but that is statistically impossible. Even when the stakes are high, people think unrealistically optimistic about their own situation. This unrealistic optimism can explain risk taking, especially concerning health and life. People underestimate the likelihood they will get fired, develop a drinking problem, have a heart attack or get a disease. This comes with the danger that people might fail to take preventive steps. But unrealistic optimism also has a good side: people stay optimistic, even after bad events happen.

What is loss aversion?

Loss aversion makes people dislike losses, even though some losses can turn into gains in the end.

Loss aversion means that people dislike losses and wants to prevent losses. It maintains the desire to stick to current possessions, because giving up your possessions would mean loss. It is a nudge that tells us not to make changes, even when change would be interesting and positive.

What is the status quo bias?

The status quo bias entails that people like to stick to their current situation instead of changing something. Think of a free trial of a magazine, for which you have to pay after the first 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 subscribed 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.

What is framing?

Framing is the way statements are stated. This can be done in a positive or negative way, or so to say, a loss or a gain perspective.

How do we resist temptation? - Chapter 2

Temptation can be resisted by maintaining self-control. This is a conflict that happens between the Reflective and Automatic System of the brain.

What is temptation?

Describing temptation is difficult, but one way to describe it is when arousal is high in a particular situation where one choice is causing more arousal than the other choice. For example, buying shoes with a 70 percent discount that don't actually fit well. 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 in one of the systems can be stronger, which results in ‘doing’ or ‘planning’.

What is mindless choosing?

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 soup that resulted in people eating a big amount of it. This happened because the bowl of soup was refilled automatically, without the participants noticing. This made the participants eat more than realized.

What kind of self-control strategies exist?

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).

What is mental accounting?

Mental accounting is an internal control system. This means that not by buying a certain product, but using a means mentally. For example, when you put money aside to pay your rent, you will not use it to buy groceries. This is not something that a company should design a product for to help you with it, but something you take into account mentally. It is a way of self-controlling.

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

Humans can be compared to a herd; they are easily influenced by others. They can be influenced by deeds or statements. Behavior is contagious, think of smiling or yawning. It is a fact that humans like to conform.

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.

Why do we do things that others do?

The experiment done by Solomon Asch in the 1950s demonstrates that we like to conform with others on predictions. This is a universal trait in humans and thus does not differ across countries. But this conformity lowers when people can give answers anonymously. Thus, people will conform with others in the group when they know the group knows what they think is true. Smaller groups provide more conformity in groups. Also, consistent people can influence the whole group. Groups have the tendency to stick to a certain pattern, even when things change. This is called collective conservatism. A part of this problem is pluralistic ignorance. This means that people are ignorant to the thoughts of other people. For example, carrying on with a tradition because you think everyone else in the group likes it.

What is the spotlight effect?

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.

What role does culture change, political change, and unpredictability in conformity play?

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.

People are likely to think that an outcome is predictable. But different aspects and coincidences can play a great role in the outcome. People conform to each other and this makes it that people are a social influence to each other. However, this is not intentional. For example, companies use nudges to socially influence consumers by saying that most people use a certain product or that a great deal of people switch to using that particular product. Consumers are likely to conform to this behavior. This has various effects on the economy. Not only for companies, but also in terms of investment decisions. People like to follow the choices that their family and friends do for their investments. In politics, people also tend to follow the preferred choice of others. This is why a lot of people tend to vote for a party leader. This candidate is mostly presented as the most preferred by others. It is also true that in social contagion a view is seen as correct because it seems like everyone else accepts the view.

How do social nudges work as choice architecture?

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 in a positive way.

Choice architects can use nudges to shift social behavior. This can already done by stating the behavior of other people. For example, tax compliance can be influenced by indicating the risks of noncompliance, information about what the tax is used for, information about how to handle doing your taxes, or stating that already 90 percent of the people had done their taxes. All of these are social nudges to help people comply with the behavior. Most of the time stating what others have done has the biggest effect on people’s behavior. Especially stating a percentage is effective in influencing people.

According to Cialdini, positive, injunctive norms are more effective than negative, informational ones. Thus, it would be better to state ‘please do not remove the petrified wood from the park, in order to preserve the natural state of the Petrified Forest’ in case of preserving the Petrified Forest National Park in Arizona to indicate an injunctive norm that has positive effects when you comply to it. The less helpful statement would be ‘many visitors have removed the petrified wood from the park, in order to preserve the natural state of the Petrified Forest’, which is more negative.

Complying to ‘what most people do’ works in both ways. In an experiment where individuals were informed about both their own and the neighborhood energy use, tried to comply with the energy usage of the neighborhood. So, individuals that were using above average decreased their energy use, but people who were below average increased their energy use. This latter is called the boomerang effect. This means that not all people who are socially nudged into social behavior, will improve their behavior. It just changes the behavior towards the nudged information. A similar experiment was done by giving individuals an unhappy or happy emoticon. The people who received an unhappy emoticon, and thus were the bigger users, showed even a larger decrease in energy use than by stating they are above average users. Also, in this experiment the boomerang effect disappeared. Below average users did not comply with the given average of the neighborhood, but used the same amount of energy as before.

What is priming?

Priming means unconscious activation of the Automatic System. It is influenced in a subtle way which can influence behavior and thoughts. People primarily think that they have a reason for their behavior, even though they are usually influenced unconsciously by factors they are not aware of.

The mere-measurement effect means that people act more in accordance with their answer on the question why they do certain stuff when asked. People are influenced by factors they are not aware of. These are called channel factors. These simple and small cues can prime people in showing certain behavior.

When do we need a nudge? - Chapter 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.

What are fraught choices?

Fraught choices are choices that choice architects make, for example about the context of the nudge, what nudge to offer and how subtle the nudge should be.

Self-control issues occur when the consequences to a decision follows later. Think about investing, exercising and eating healthy for example. There are immediate costs but the positive consequences come later. With smoking for example, you will feel the pleasure immediately and the negative consequences like diseases or decreased health will follow later. Both of the investment goods and sinful goods can benefit from nudges.

Also, we need more help in difficult situations. It is quite hard to know what the healthiest options in the supermarket are. It depends on how often the situation is encountered. When a problem is not encountered a lot, it is hard to have self-control. However, behavior becomes easier with practice. Exercising every day will be hard the first month, but after six months it is already easier. Also, when people get immediate feedback it is easier to learn. Of course, it is necessary that the feedback is useful. When people know what they like, choices are easy. This is not always the case. When people do not know what is the best option is, they often guess. They don't always guess the best options. A nudge can help to make a better decision in this kind of situations.

How do markets need 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? - Chapter 5

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

1. Incentives. The N of ‘iNcentives’ is used.
2. Understand mappings.
3. Defaults.
4. Give feedback.
5. Expect error.
6. Structure complex choices.

Stimulus response compatibility means that you assume that the signal you receive is consistent with the desired action. When they do not match, people often blunder. For example, when a door looks like it should be pulled open even though it needs to be pushed open, most people will try to pull the door open. This is because the cue that the door gives states ‘pull’, even though this is not true. Another example is the Stroop test. People have a hard time identifying a word or color when the word and color seem to be connected, but in reality they are not. It is quite hard to see the color green when the word states ‘yellow’. This is because the Automatic System is faster in reading the word than in deciding a color.

What are defaults that give least resistance?

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 is chosen automatically 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. 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 takes 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 options come with the problem that it is more suitable for yes-or-no decisions than for more complex ones.

What is expect error?

Expected errors are human errors that are likely to be made. Well-designed systems expect human errors and fix these. One of these things is for example sending an email through Gmail which states the word ‘attachment’. When Gmail notices that the word ‘attachment’ is mentioned but there is no attachment in the mail, a pop-up will notify you about this.

How does feedback work?

Feedback is useful for humans to improve performance. There are feedback systems that help people improve in certain aspects. An example are warning pop-ups on a laptop when the battery is low.

How do we understand ‘mappings’?

Mappings can be improved by getting more information. This is especially needed when information is not already known or unclear. This can be done by getting more information or by the RECAP method.

When there are several unfamiliar options we need to choose from, the problem can be fixed by offering more information. The problem that consists of a lack of information about the options is called a mapping problem. A good system of choice architecture helps improve the ability to map and to select options that will turn out the better option for people. This can be done by making the information of the options more comprehensible, transforming numerical information into units that relates more to actual use for example. But things are not always made easy for us. Having a credit card costs money, however the monthly costs are unclear. You have to pay an annual fee for using the card, an interest rate for borrowing money, a fee for making a late payment, interest on purchases made during a month when the payment is late, a charge for paying in other currencies. This is a complex sum that can differ every year or even every month. This makes it hard for the user to see what the costs are, and thus it is not really transparent or comprehensible to consumers. For these kinds of complex, non-transparent and not comprehensible products a method is developed called RECAP. RECAP means to Record, Evaluate and Compare Alternative Prices. The goal of the government is then to inform consumers about the fees that exist.

How to structure complex choices?

The strategies used for deciding on a choice depends on the difficulty and the availability of options. A strategy of choosing is using minimum cut-off scores. If you are looking for a room for example, an option might be eliminated because it does not meet one of the cut-off scores, like high rent. Surprise and serendipity can change choices, which can be fun for people but also good for them. It is good to also learn about people that are different from us, and not only to learn about similar people.

What are incentives?

Choice architects must think about incentives when designing a system. That is because if the price of a product goes up, suppliers will usually produce more of it and consumers will usually want less of it. Not always are incentives noticed, thus salience is important. Choosers notice them most of the time in free markets, but in important cases they actually do not. For example, incentives of car ownership are only noticed when salient. You only have to buy the car once, and after that, you will forget these costs. The only costs you see are the maintenance and gas station stops. Thus, people are usually quite bad at weighing the options of owning a car. They might at the same time overestimate the salient costs of a taxi, because you have to pay every time you use it and the price depends on the length of your trip. But actually, the same is true for owning your own car. These gains and losses can be treated asymmetrically. The same idea can be switched and thus create a completely different reaction with people. A step counter is less effective as an app to track your exercise than a calorie burned meter. People enjoy watching the calories burned meter more than watching the amount of steps taken. People enjoy watching how much calories they burn even better when they are displayed in a more understandable way. For example, after forty minutes of working out, you burned the same number of calories a cookie has.

How do people save? - Chapter 6

An example of saving is the 'Save More Tomorrow program'. When the Great Depression hit the United States, the national spending was higher than the amount of money that was actually possessed (earnings, savings and loans). The situation then was quite bad and only became worse. The 'Save More Tomorrow program' was one of the two options created to improve the situation. The other one is an automatic enrollment in a savings plan. The plans were especially developed to save for a retirement. The nudges work because the tasks are relatively simple: people have to calculate how much they will earn for the rest of their life, calculate how much they will need when they are retired and then save enough to enjoy a cozy retirement without sacrificing a lot when they are still working. While the idea is simple, compliance is not as simple. Not everyone is capable of calculating how much they will need in the future, how much they can save now and if they actually have a stable income. Complex software is needed to make a good estimation.

The second problem is that people need to have willpower to save and stick to the program. Economically, the theory will not fail but when you look at it psychologically, there are two big problems. Societal changes made it necessary to think about their future and especially retirement, like the rising life expectancy and families not living in the same house or village anymore. Defined-benefit plans are early pension plans. In this defined-benefit plan, people are allowed a benefit that depends on the salary and length participation of the person in the plan. They are forgiving to mindless people, seen from the perspective of choice architecture. The plan is suitable for people who have the same job their entire life, but it becomes harder to realize when there is a lot of job switching. They will end up with no retirement benefits, because a minimum employment period is necessary. Another downside is that the plan is expensive. More and more companies switch to a defined-contribution plan. This means that employees have to make contributions to a tax-sheltered account. The benefits then depend on how much is saved by the particular person. Switching jobs with this plan is easier. Also, the plan is more flexible for the participants. But the plan is not forgiving for mindlessness or human errors. Participants need to decide by themselves how much they will save, they have to keep up a portfolio of saving when being a participant, and they need to make their own plan for their retirement and how the savings can be received.

Are people saving enough?

If people are saving enough is a controversial discussion. There are different optimums of the amount of saving. Some economists say that the retirement savings should be as high as people have when they are working, some economists say they need less money because they live a less expensive lifestyle. One thing that is clear is that saving too little is a bigger problem than saving too much. When one saves too much, they can retire possibly sooner, taking up a hobby or sport, travel more, or spoil (grand)children more. Also, a lot of employees state that they should be saving more. But few of them change their behavior. Nudges can be helpful to help people save more money or have that as a goal in mind.

How do we nudge people to enroll in a savings plan?

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. However, this does not mean that all high paid workers sign up. Signing up might never happen and sometimes it is procrastinated. A nudge is needed to make those people join.

How to make savings automatic?

The default rule can be changed in this occasion. Now, non enrollment is the default. If this is switched to enrollment if someone does not make a decision, more people would join such savings programs. A lot of choices after the decision to join are needed. People have to fill out a form, they have to decide how much to put aside, and how to allocate investments among the funds. Automatic enrollment is effective to increase enrollment in these types of defined-contribution plans in the United States. The automatic enrollment also promotes that people will join sooner, next to that more participants will join in the end. Even if enrollment is easier and more people are enrolling, there is still a dropout rate. This suggests that the system is still not perfect.

How do forced choosing and more simplicity help decision making?

Instead of giving the default of enrollment for employees, there is also an option for employees to be forced to make an active decision about joining a program. This might increase enrollment rates. Also, simplifying the enrollment process is an option. For example, people just have to choose if they want to join the savings plan with a fixed savings rate. They do not have to calculate or decide how much they want to save then. These are described as channel factors mentioned in chapter 3. People dig a channel if they want to join the savings plan which removes small barriers. When people have more options, choice becomes more difficult and this generally lowers the rate of people joining.

How are contribution rates chosen?

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.

How to increase savings more?

Education is an option in increasing savings. People understand how it works, what they need to do, how much they need to save in order to have a proper retirement, etc. But education does not solve the whole problem by itself. The quality of teaching also needs to fit the employees.

What is the Save More Tomorrow program?

Save More Tomorrow is an automatic escalation of contributions. The choice architecture system is developed on the basis of the following psychological principles:

1. People say they should save more, and plan to do so, but never get to the goal.
2. Self-control restrictions are easier when planned for the future.
3. People hate to see their paychecks go down. This is called loss aversion. They feel like they are losing something.
4. The losses are felt in nominal dollars. This is called the money illusion.
5. Inertia is powerful.

In Save More Tomorrow, participants have to commit into the program by timing contribution increases. The Save More Tomorrow plan is adopted by quite some employers in the United States.

What is the role of the government?

The government can help remove barriers to adoption of savings programs. Thus, this has been happening more and more. There are more factors and barriers than the government can help with. It is personal when one needs to start saving and when to stop. The following factors play a role:

1. The life expectancy;
2. the age, health, working history, and retirement expectations of you and your partner;
3. how much money will be made in the future;
4. how impatient you are.

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 naive investing? - Chapter 7

Investing is a difficult decision. There can be a lot of risks. Generally, the riskier the investment, the higher the rate of return. A risk 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 it is different for every person.

What are stocks and bonds?

Stocks are usually an option that can earn more money than bonds. Bonds are a safer option for investing. It depends on the person if they would invest more in stocks than in bonds or the other way around.

In economic terms, stocks are equities. The difference in the returns between treasury bills and equities is an equity premium. This is considered to be compensation for the greater risk associated with investing in stocks.

If someone is the right person to take risk depends on the frequency with which the person monitors their portfolio. Also, when people tend to wait for a long time, investing in stocks and waiting the time is best.

In the 1990s, people were investing in stocks increasingly, both in amount and percentage. There are some explanations for this. For example, people learned from finance and economic journals that stocks are usually higher than bond returns over the century. Also, they might have believed that stocks only go up, so then it is a good investment to buy sooner. However, this is not always effective. People have to check their investments in their portfolio frequently. They tend to buy things when the price is high and sell again when the price is low.

What rules of thumb play a role?

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.

What is company stock?

Investing in a company’s stock can be beneficial. People are nudged to buy more stock over the years, the company is also invested in the employees, and the trend of the stocks is easier to follow because you work there. This can also be a downside, especially when the employee does not check when the stock value is high and when it is low. Also, the employee has to notice how the company is doing. This is not always that easy. Putting all your investments into one company can be quite tricky. Also, employees risk losing both their job and their savings all at once. This has the reason that employees do not see the risk in company stock. Also, when the company is doing well for some years, people tend to invest even more in the same. When a company is already performing poorly, employees are more reluctant to invest more. But the past performance is not a prediction for what in the future will happen. Lastly, when employees receive a matching contribution in company stock from their employer, they view this as implicit advice.

Economists also state that investing in a mutual fund instead of a company stock is more efficient. This, because a dollar in a company stock is worth less than half the value of a dollar in a mutual fund. It is better to diversify in your investments and also to invest in funds instead of company stocks. Firms could nudge employees in investing less in company stocks and more diversity in investments. A Sell More Tomorrow plan can be an option. Two problems need to be solved:

1. Firms are afraid that people will sell their stocks at once. This can cause a lower stock’s price.
2. Firms do not want to give the assumption

   Investing is a difficult decision. There can be a lot of risks. Generally, the riskier the investment, the higher the rate of return. A risk 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 it is different for every person.

   What are stocks and bonds?

   Stocks are usually an option that can earn more money than bonds. Bonds are a safer option for investing. It depends on the person if they would invest more in stocks than in bonds or the other way around.

   In economic terms, stocks are equities. The difference in the returns between Treasury bills and equities is an equity premium. This is considered to be compensation for the greater risk associated with investing in stocks.

   If someone is the right person to take risk depends on the frequency with which the person monitors their portfolio. Also, when people tend to wait for a long time, investing in stocks and waiting the time is best.

   In the 1990s, people were investing in stocks increasingly, both in amount and percentage. There are some explanations for this. For example, people learned from finance and economic journals that stocks are usually higher than bond returns over the century. Also, they might have believed that stocks only go up, so then it is a good investment to buy sooner. However, this is not always effective. People have to check their investments in their portfolio frequently. They tend to buy when the price is high and sell again when the price is low.

   What rules of thumb play a role?

   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.

   What is company stock?

   Investing in a company’ stock can be beneficial. People are nudged to buy more stock over the years, the company is also invested in the employees, and the trend of the stocks is easier to follow because you work there. This can also be a downside, especially when the employee does not check when the stock value is high and when it is low. Also, the employee has to notice how the company is doing. This is not always that easy. Putting all your investments into one company can be quite tricky. Also, employees risk losing both their job and their savings all at once. This has the reason that employees do not see the risk in company stock. Also, when the company is doing well for some years, people tend to invest even more in the same. When a company is already performing poorly, employees are more reluctant to invest more. But the past performance is not a prediction for what in the future will happen. Lastly, when employees receive a matching contribution in company stock from their employer, they view this as implicit advice.

   Economists also state that investing in a mutual fund instead of a company stock is more efficient. This, because a dollar in a company stock is worth less than half the value of a dollar in a mutual fund. It is better to diversify in your investments and also to invest in funds instead of company stocks. Firms could nudge employees in investing less in company stocks and more diversity in investments. A Sell More Tomorrow plan can be an option. Two problems need to be solved:

3. Firms are afraid that people will sell their stocks at once. This can cause a lower stock’s price.
4. Firms do not want to give the assumption that investing in their company is a bad thing.

5. The Sell More Tomorrow plan can give employees the option to sell their stocks gradually, with a direction towards investing in a more diverse way.

   What nudges can be used?

   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.

   When defined-contribution plans were new on the market, default options were not used. Now, there are a lot of options in defaults and also good options. Employees can be offered a set of model portfolios that give varying degrees of risk to decide what kind of investments they want to make. Another example is that target maturity funds can be offered. In target maturity funds, employees match their fund to the expected retirement date. Automated solutions for portfolios are a default given to the participant.

   Also structuring complex choices is possible. For example, giving the choice between one’s own composition of a portfolio or a default option. If participants want to be more involved, they can be offered a choice among a set of balanced or life-cycle funds. If someone wants to be fully involved, they can be provided with the full range of options of mutual funds.

   A third is expect error. Automatic enrollment can be a fix for people who fail to join. Also Save More Tomorrow is a plan that is forgiving for the expected errors of people.

   Fourth, mappings and feedback can help people in understanding investments. Most people have a hard time making sense of the numbers like saving rates, expected rates of return, and volatility translate into changes in their life and when they are older. Translations can be used for this like pictures.

   Last, incentives can solve conflicts between the employer and the employee in interest. There can be laws that protect the employee’s interest.

   that investing in their company is a bad thing.

The Sell More Tomorrow plan can give employees the option to sell their stocks gradually, with a direction towards investing in a more diverse way.

What nudges can be used?

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.

• When defined-contribution plans were new on the market, default options were not used. Now, there are a lot of options in defaults and also good options. Employees can be offered a set of model portfolios that give varying degrees of risk to decide what kind of investments they want to make. Another example is that target maturity funds can be offered. In target maturity funds, employees match their fund to the expected retirement date. Automated solutions for portfolios are a default given to the participant.
• Also structuring complex choices is possible. For example, giving the choice between one’s own composition of a portfolio or a default option. If participants want to be more involved, they can be offered a choice among a set of balanced or life-cycle funds. If someone wants to be fully involved, they can be provided with the full range of options of mutual funds.
• A third is expect error. Automatic enrollment can be a fix for people who fail to join. Also Save More Tomorrow is a plan that is forgiving for the expected errors of people.
• Fourth, mappings and feedback can help people in understanding investments. Most people have a hard time making sense of the numbers like saving rates, expected rates of return, and volatility translate into changes in their life and when they are older. Translations can be used for this like pictures.
• Last, incentives can solve conflicts between the employer and the employee in interest. There can be laws that protect the employee’s interest.

How do credit markets work? - Chapter 8

Not only are people not wise in investing money, they also do not know the ins and outs of loaning money. The most important lending markets are mortgages, student loans, and credit cards.

How do mortgages work?

In the early days, mortgages had a fixed rate for life and were typically spread over 30 years. Nowadays, it is a bit more complex and people have difficulty picking out the best loan. There are a variety of fixed-rate loans and variable-rate loans. There are also teaser rates, low interest rate for over a period of two years after which the rate goes up. There are also fees which can vary. Points are fixed payments for the borrower to make in order to receive a lower interest rate. Prepayment penalties must be paid if the loan is repaid early. And that is just a grasp of the options. It can make people better off, but it also makes it more complex. 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 more interested in making money off those people than helping them in that case. So, there are 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 costs of exotic mortgages outweigh the benefits in this situation. A version of the RECAP plan could help. There are two options for this:

1. Borrowers are required to report lending costs in the categories fees and interest. This is the more simplified form.
2. In a more complex form, all the different types of fees are reported and will be added into a single salient number.

When the reports of the RECAP are made machine-readable, it is easier to give the borrower better advice, which is understandable for the borrower. When the RECAP data is used to buy mortgages online, the market would be made much more competitive. Online shopping can be beneficial for women and minority groups, who are much more discriminated against then white males.

How do student loans work?

The cost of being a student is rising quite fast. Scholarships and jobs do not cover all the costs. Student loans are 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.

In the private sector, the only thing a student has to do is send proof that they are enrolled in a college. The student can decide how much they will borrow and this money can be used for any expenses. Students can go to the financial office for advice, but will not get a thought through and efficient nudge. Instead, they will get self-serving shove advice. The combination of loan guarantee and subsidy by the government makes these loans profitable. Thus, lenders spend a lot of time and money to get the business. When borrowers can compare loans more easily, the price competition might emerge.

A helpful nudge would be to simplify the financial aid application. A RECAP policy can make it easier for students to compare loan options and can be also implemented in class. Also helping families to avoid loans can be helpful. This can be done by helping them start saving for college sooner.

How do credit cards work?

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 for example. 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 can only be used as a mode of payment.

The use of credit cards comes with several problems. People have more than one credit card and the debt people create with it could be solved by more transparency about the costs of these cards, for example by giving out annual statements that lists the total fees that occurred over the whole year. People can look for better deals this way and also, they will have a better sense of what they are paying for. Now, credit card companies are not completely transparent about raised prices and they are giving more penalties because they send out the bill later and put the due date to pay the bill more forward. It makes that more people miss the date and have to pay the penalty and the interest on the purchases of the next month. Another downside of the current situation is that the credit card company do not include the fees for the credit card itself in the annual fees, only the purchases you made. These can be monthly costs, but also additional fees for purchasing something in another currency. Nudges may help too. Giving a minimum of spending per month to keep the credit card gives people an anchor. This will be much lower than an anchor that is higher, when the maximum spending limit is given. Besides, automatic payment for the credit card should be made possible, instead of manual transactions each month.

How does privatizing social security work? - Chapter 9

Around 2000, privatizing social security was implemented in both the United States and Sweden. Although the plan did get attention in 2005 in the United States, it is likely that parts will be used for later plans.

What is the design of the Swedish privatization plan?

The Swedish plan is described as ‘pro-choice’. People have a lot of options and they can choose whatever they want. This is a laissez-faire approach. Key features are:

1. Participants are allowed to form their own portfolio by making their own choices.
2. The default fund is for people who did not actively choose a fund.
3. People were motivated by a massive advertising campaign to choose their own portfolio.
4. There were 456 funds to choose from because any fund meeting certain fiduciary standards was allowed to enter the system.
5. Information about all of the funds was provided in book form to all participants.
6. Funds were allowed to advertise towards people.

None of these choices would be controversial or complex when all people would be economics. However, they are not.

What was the default fund?

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

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

Which is the best option depends on the architect’s level of confidence in the ability and willingness of people. Option 1 is hardly a nudge, because people do not have a choice. The other extreme, at number 5, is only suitable if participants have the ability and willpower to make a good choice. It makes sense to encourage people to select the default when the designers are terrific. If the default is universal, and if the choosers are likely to fail at choosing a good option. The Swedish plan had a picked default and the selection was discouraged. Participants were encouraged to make their own choice of portfolio during an advertisement program. 66 percent did choose their own portfolio. The other third of the people did end up with the default, which is still quite a lot. This especially happened when the advertising diminished.

Did active choosers make good choices?

People were generally better off in choosing their own portfolio. It is impossible to state what is the best option, because everyone’s situation is different. The default option was generally also not a bad choice. It did not need a lot of maintenance, it was a good division of funds and 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. So, 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.

How does advertising play a role?

Advertising can be quite efficient in changing behavior of people into motivating them. Advertisers can help to inform their potential consumers. This is on the positive side of the spectrum. Another scenario is that advertisers are not at all transparent about their intentions and additional fees. In reality is only a small percentage of advertisements structured into giving only information. Other options in advertising are more common, like using famous figures in an advertisement. Fund advertising still affects people’s investment choices.

How to use or not to use nudges for privatization of social security?

The government did not choose the best choice architecture in privatizing social security. They relied on the Just Maximize Choices mantra; 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.

A good option for the United States would be to follow what Sweden has done and to learn from those mistakes. A good default plan, containing a lot of index funds, is something to start with. Also, it is important to not give too many choices to people, because this would call for more help needing to be provided.

What role do prescription drugs play? - Chapter 10

The prescription drug coverage developed by George W. Bush was referred to Medicare Part D program. This entails that it meets needs of the consumers. People can choose a specific program that fits their needs. This was not laissez-faire, but the government gave a lot of structure to the people. There were requirements and the private plans needed to be approved. This constrained free choice is an example of libertarian paternalism in real life. There were a few downsides:

• It had little guidance towards people to make their best choice of all the options.
• The default option was non enrollment.
• There were also other people who got a default option that was picked for them at random. This was when they were enrolled, but did not fill in their choice.
• There was a failure to serve vulnerable people, mainly the poor and poorly educated.

What is the design of Medicare Part D?

Medicare Part D exists of six key features that are federally approved:

1. Part D is voluntary. Thus, you will only benefit if you enroll. Anyone who is enrolled, but does not make their own decision in the type of plan they exactly want, will be enrolled automatically in a random plan.
2. The enrollment ran from November 2005 to May 2006, but the enrollment was also open at the end of every following year. The seniors not enrolling when eligible, and those who lack a comparable private plan, receive a penalty of every month of delay.
3. Participants have the choice to enroll in a stand-alone prescription drug plan or a joint Medicare-Prescription Drug plan. Stand-alone plans are most suitable for people who already have some kind of insurance next to the plan. Joint plans were developed for the seniors that enrolled in Medicare Advantage.
4. The plans differed across states, to fit with the needs best. There were between 50 to 60 stand alone plans and 15 to 142 joint plans in each state. Nowadays, there are even more options available.
5. There was a public awareness campaign developed by the government. It emphasized on enrolling and advising seniors to only rely on people they trust or know and to choose a plan they are familiar with. They also could find info in the Medicare Prescription Drug Plan Finder guide or the Medicare Web site.
6. The coverage stops after people have spent a certain amount of budget and start up again when another spending plateau is reached. This coverage gap is referred to as the doughnut hole. This is a failure in the plan.

In theory, these plans are perfect but people can get confused and confounded and the plan does not work as perfectly as intended.

What is the negative side of Part D?

With a close deadline, seniors had a hard time enrolling. Especially those in need of the benefits had to go through the plan by themselves. They had to look into 47 prescription drug plans. This takes a lot of time and also there are a lot of options for someone that is not an expert in prescription drug plans. The seniors were told to have patience and get help with all the choices. After some time, users became more positive towards the program. There is quite some learning needed however. Also, a lot of people really needing the benefits of the program are not yet enrolled. The number of choices can overwhelm people when they do enroll and this makes the program quite complicated. The consumer satisfaction can be improved when the design is better, thus less options are available.

How do the random default plans work?

People who enrolled in the program 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 are 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. A lot of time and energy get wasted on 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.

What makes the plan not user-friendly?

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 website 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. Moreover, the website is not perfect. Type errors in the names drugs are common and the website does not correct 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.

Did choosers make the good choice?

Not everyone picked the right prescription drug plan for themselves. It is really hard to see which plan is best for you. But even when there are four different plans available, most fail to choose the right plan for them. They fail to connect choices to their actual health and needs, prescription use and attitude toward risk. 66 percent failed to choose the plan that was best for them.

What nudges can be used?

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 customers quite some money. The intelligent assignment system switched already 22% of the people into a better choice option.

The RECAP system could also make the choosing process less complex. Participants will receive an itemized list of all the drugs they used and all the fees that come with it. This could nudge people away from a status quo bias and encourage comparing options. A similar nudge can be used for people who are not yet enrolled. The RECAP information can be used to improve the intelligent assignment program.

How does one increase organ donations? - Chapter 11

An increase of organ donation 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, increasing by 12 percent per 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.

How does explicit consent work?

Most states in the United States use an explicit consent rule. This means that people need to take steps to demonstrate that they want to be donors. A lot of people fail to take the steps, even if they want to donate organs.

What is routine removal?

Routine removal is more than a default rule. In this regime, the state decides for the bodies of the deceased to donate organs, even for those who would not be willing to. This routine removal already exists for corneas, to give blind people sight again. The practice has increased corneal transplants from 25 in 1978 to more than 1000 in 1984. Also, routine removal for kidneys can prevent premature deaths. The routine removal does violate the principle that individuals are decide over their own body.

What is presumed consent?

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 into being a donor to opting out of being a donor, the percentage of donors rose from 43 percent to 82 percent.

What are the complexities?

There is a lot of planning involved in presumed consent. This makes this approach complex. The exact result of changing the default rule is also not known beforehand and might have a different effect in different countries. Also, family is still asked permission and this makes the difference between presumed consent and explicit consent quite blurry. Overall, the default rule is of importance. Families usually reject donating organs of their loved one when there is no record of the wishes. The shift towards indecisive people being a donor instead of a nondonor, might make it easier for the family to consent for organ donation also.

What is mandated choice?

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 tick 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.

What norms play a role?

Potential norms can be nudged. The Web page for potential donors and to convince people to become donors is a good example of this. It stresses for example the importance of the overall problem and brings the problem closer to home. Social norms can be used for social influences. People like to do what most people do. People can also share online their worries and choices. This can result in more people registering to become a donor.

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

Nudges can play a role in reducing greenhouse gases. The governments worldwide 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. Goals and deadlines are set. For example, in ten years all new cars must produce 90 percent less carbon monoxide than they do now. The government might also set standard levels of air quality which limits pollution.

For the degree of environmental problems, gentle nudges might not seem effective. Not everyone who pollutes gets the full costs that come with this pollution and also the ones harmed by pollution lack a feasible way to negotiate with polluters to make things better. Also, people do not get adequate feedback on their pollution behavior.

How can better incentives work as a nudge?

When incentives are badly aligned, they can be improved. 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.

How can feedback and information work as a nudge?

Feedback and better information towards customers can improve the operation of markets and the government. They are not that expensive, not as intrusive, as the command-and-control approach. Disclosure by itself might be not enough to change behavior, but sometimes information can act as a strong motivator. It might influence the type of car people buy if it is disclosed how much pressure they will be for the environment. It might be that future technology makes more environmental behavior easier.

What are ambitious environmental nudges?

If people could see how much energy they use in one day, it would 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 turns 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 by up to 40 percent.

How to improve school choices? - Chapter 13

Freedom in choosing a school can improve the quality of schools because there is competition between schools. Now there is competition between students to get a place in a popular 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 you are from a minority group. If schools would compete, they would have to make a plan for parents on how to choose the perfect school for their kids.

How are complex choices and mental shortcuts related?

The intention of the plan 'No Child Left Behind' in 2001 was to improve the school options for students in public schools. Schools were labeled ‘in need of improvement’. 4700 students were eligible to transfer schools and 1800 students had the right to collect federal money for educational services. The plan seemed to fail, because only one student switched schools and only two took advantage of the supplemental services.

This was mainly the fault of the Worcester officials. They notified parents about their rights, their options and the performance of the school, but they discouraged people and made them reluctant to exercise their right to choose.

The presentation of the qualities of a school does matter. With a default option school, but also multiple public schools to choose from, low-income parents tended to look less at the school quality, measured by test scores, than the high-income parents. But low-income parents want to choose a better school, actually much better. When presented fact sheets, the weight of the quality of the school doubled.

How do incentive conflicts and matching play a role?

Good choice architects can help parents achieve their own self-interest, but also reduce latent incentive conflicts between advantaged and disadvantaged parents.

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.

How can you nudge high school students to go to college?

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.

It is not an option to only focus on the available options. A choice also needs to be taken and not every parent can make the perfect choice for their kid. Both the parents and the children need some incentives.

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

Health care in the United States is generally quite expensive. Health care can get cheaper if people maintain a healthy lifestyle, buy healthcare products and services only when they need them and visit a doctor only when necessary. Increase in freedom would help both the health care system and the patients. Buying healthcare comes with the right to sue. This makes it quite expensive to buy healthcare, because there is the chance that the providing doctor gets sued. Both patients and providers might see it as a relief if suing would not be an option anymore, making health care more accessible for all. This is not an option yet because courts claim that waivers of medical malpractice liability are unenforceable against public policy. The court does not allow a deal between patients and providers that lowers treatment costs. They want to prevent deals because they think that sensible patients would not waive their right to sue and the doctors will not treat patients without the threat of malpractice liability to frighten patients.

Why should it be allowed for patients to give up the right of suing their doctor?

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

1. 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.
2. 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.
3. It has been found that this system will scare doctors against malpractice and medical negligence.
4. Jury awards for pain and suffering that may be associated with a medical malpractice claim are highly erratic.

The suggestion made is to use choice architects to give serious consideration to allowing freedom of contract in the context of negligence in medical care. This might help both patients and doctors. It is not the idea to generally cross out waiving liability, but it should be described precisely what is being waived.

How to privatize marriage? - Chapter 15

The idea of marriage is quite outdated, especially considered the origins. It goes accompanied by discrimination, for example couples of the same sex that want to get married. It is suggested that the government and religion should not be intertwined. Thus, that marriage would not appear in any law, but only stays within the religion. Now, marriage refers to both a legal status and a religious status. Besides religious reasons, there are also people that want to get married for other reasons (for example love). To keep marriage away from the government, it could be organized by private organizations. The rules that apply to the weddings would be different then. Thus, couples could pick what suits their lives best. Choice architecture can be used to help design such an idea.

What is marriage?

Marriage is an official status created by the state and accompanied by government entitlements and mandates. There are benefits to marriage for both partners:

• Tax benefits.
• Entitlements: it is for example allowed for an employer to give unpaid leave to an employee who needs to take or seek care for their spouse.
• Inheritance and other death benefits.
• Ownership benefits: there is an automatic ownership right over your spouse’s stuff.
• Surrogate decision making: this is in the sense of emergencies to make decisions for your spouse.
• Evidentiary privileges: courts recognize marital privileges.

These benefits are just some of the many more and also, they are stable over time.

How would things go without state licenses?

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.

How does the state control marriage?

State-run marriage makes it impossible to protect the freedom of religious organizations to proceed as they see fit while also having the ability to maintain the freedom of couples in making their own commitments and without them being treated as second-class citizens by the state. But the current system is not modern at all. People are not only discriminated against based on their sexual orientation, but also on their race. Interracial couples are sometimes declined to marriage. Even the need to be married as a couple to adopt a child, has diminished. Marriage sometimes leads to more stability however. When separation is harder, people can stay committed more easily. This stability is beneficial for children.

Is official marriage beneficial?

Marriage is sometimes seen as a protection for children. This, however, could also be established in other, more direct ways. 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).

How is nudging couples effective?

It is important to let choice architects make improvements on the appropriate default rules for people who make a commitment to each other. People start with a specific goal and make promises to each other. The law is demanding those promises. Unrealistic optimism is of great importance in marriage and plays a big role. People do not see themselves get divorced or think that anything else will happen to them as a couple. This makes it hard to decide on some promises. This makes people more vulnerable and this needs some default rules to protect people. Also, because people getting married do not know what exactly will happen to their children and properties when they decide on divorce.

A formula taking into account the age of both partners, their earning capabilities, the length of the marriage and more aspects should help start people being more prepared when they get divorced. This formula might work as an anchor for people.

What nudges do exist? - Chapter 16

What are other nudges?

The nudges that are described before are the bigger nudges so to speak. There are a dozen more, but they are mini nudges. Some of the additional mini nudges are discussed below.

• 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.
• Quit smoking without a patch: there are several programs that help you quit smoking. For example, depositing the amount of money that is spent on cigarettes to a special bank account. This will also come with a punishment of not getting your money back if you fail the urine test on the date that was set. This savings program is offered by the Green Bank of Cariaga.
• Motorcycle helmets: there is a ban on riding without a motorcycle helmet, but the ban is questionable. Emphasizing the danger of this could help more. It is also an option to get a special driver’s license for those who do not want to wear any motorcycle helmet. They have to take extra driving courses and they have to have health insurance.
• Gambling self-bans: gambling is addictive and people need to be aware of this. Gambling addicts can put themselves on a ban list of casinos in several states in the United States.
• Destiny Health Plan: the Destiny Health Plan is offered in a few states in the United States. It features a Health Vitality Program designed to give people an incentive to make healthier choices. People are able to earn Vitality Bucks if they work out in a health club, have a child join the soccer league, or have normal results with a blood pressure check. The Vitality Bucks can be used to ‘buy’ airline tickets, hotel rooms, magazine subscriptions, and electronics. These nudges make that people live healthier lives.
• Dollar a day: the dollar a day program focuses on teen pregnancies and helping to avoid this. It is likely when a teen pregnancy happens that the mother gets pregnant again within a year or two. In the program, these moms receive a dollar for every day they are not pregnant. Results have been promising, and the costs are low. The small, recurring payment is enough to nudge the teen moms to avoid getting pregnant again.
• Filters of air conditioners; the helpful red light: people use air conditioners in hot weather. Due to this, the filter needs to be changed regularly. If this does not happen, the system can freeze and break down. People do not know exactly most of the times when the best time is to change the filter, so a red light lighting up when the filter needs to be changed could be a helpful nudge.
• No-bite nail polish and Disulfiram: by using products that make a bad habit unpleasant or painful, the Reflective System can discipline the Automatic System. There is for example nail polish to help stop biting your nails and Disulfiram is used for alcoholics to quit drinking.
• The Civility Check: the modern world lacks sufficient civility. When something like this happens, for example sending an angry email towards someone, the Civility Check can send a warning that the email contains uncivil language. An extra response from you is needed to send the mail either way, just like with the warning that you get when you want to send an email without a title.

What are the objections to nudges? - Chapter 17

Skeptics of nudges fear that once modest paternalism for savings or cafeteria lines or environmental protection are accepted, highly intrusive interventions will follow. It might be like the way 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 a danger of overreaching.

On the other hand, it helps people to better their behaviors and their lives, that the steepness is not as steep as presumed because of low-costs and opt-out rights, and that in some cases nudging is inevitable.

What are evil nudgers and bad nudges?

Choice architects might have their own agenda in offering ‘helpful’ nudges. It is unclear if this is something to worry about for 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.

What does the right to be wrong have to do with nudges?

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 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.

How do punishment, redistribution, and choice play a role?

Not all redistribution is illegitimate. Trade-offs can be good for society. Skeptics say that the economy will suffer more if some of the nudges are implemented. But this seems a small price to pay to give up a little of the economy for the humans living in it. Nudges can be helpful, but actively choosing is sometimes better.

What line is there to draw and what is the publicity principle?

It is the question if nudges are only allowed when the result is desirable. For example, for the safety of people on festivals, place signs with the nudge ‘drink more water’ or ‘you sweat in the heat: you lose water’. But the government can also maneuver people in preferred directions, even if this is not only for safety reasons. It is better to rely on transparency than to say what is allowed and what not and what is right and what is wrong. The publicity principle bans the government from selecting a policy that it would not be able or willing to defend publicly to its own citizens. This is both practical (for reasons of embarrassment) and respect towards the citizens. This can be an efficient guideline into guiding when nudges are allowed and when not. This is the same for legal default rules.

How does neutrality play a role?

In many situations, the government can not remain neutral. A form of neutrality is thus important and feasible in these kind of situations. It would not be correct to make the government decide which candidates on a ballot are listed first, but governments are trusted in nudging people towards the insurance plan that fits people the best. In one situation people do have a right to government neutrality of some kind. It should not be possible for the government to favor a particular candidate, to be affiliated with any kind of religion, or about free speech. This is applicable for both private and public sectors. In some domains it might be better to avoid nudges, skeptics say. But it is hard to avoid choice architecture, and thus impossible to avoid influencing people. Also, nudging can be beneficial if focused on the greater good for society. If the government wants to nudge people into reminding them that smoking is bad for your health, it is not entirely untrue or for a specific governmental agenda. Nudges also only help when the choice is not too hard. This complexity depends on the person’s expertise on the specific topic. One might know nothing about mortgages, but someone else might have some expertise in it because of work. When the situation is too complex, a nudge might do harm to someone.

Why stop at libertarian paternalism?

Some strive for libertarian paternalism. They say that it could even go further with enthusiastic paternalism. Libertarian paternalism might be too modest and cautious. They argue that this is necessary to protect people further. They want to allow people to go their own ways at the lowest possible costs. If there are costs, for example to disenroll, that would take some effort, but not a lot of time. Asymmetrical paternalists believe in the cost-benefit analysis and balance. If the costs are low enough and the risk is high enough, then the default option should be there to avoid the risk. Even if the government has to step in. They also stress cooling-off periods, or periods to think about decisions that might be otherwise ill-considered or improvident. This can help the impulse that people sometimes have, which does not always make us make the right decisions and choices. It is best imposed in situations where people make the decision infrequently and thus lack the experience to make that kind of choice and when emotions are running high.

Thus, there are different ways of paternalism to see the ‘right’ way of nudging people. The pros and cons are different in every situation.

What is the real third way? - Chapter 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 discussed in the twentieth century, but does not actually exist yet. It is stated that there is a hope for a Third Way to be developed at some point, but it is not yet clear if this will happen.

What are the twenty more nudges discussed? - Chapter 19

What are the twenty other nudges?

The following nudges are submitted by various people:

• 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.
• Smart meters: smart meters are advanced meters and thermostats that are programmed to heat and cool throughout the day, but specifically raising the rates during peak afternoon hours for gas.
• Energy use and neighborhood comparisons: people like to compare favorably with their neighbors, especially when social values are involved. Giving feedback on the usage of energy use or water use can reduce the usage. Also giving personalized tips passed on the use and housing profile can help people.
• An affordable home energy meter: there are several wireless connectors to your home energy meter nowadays. A nudge can also help to show people how much they use. A red light might indicate that they use more than normal, and a green light means that less electricity is being used than normal. This can also help people financially.
• Fight global warming through driver feedback: feedback on driving can create shifts in behavior. The program Driving Change gives feedback on the carbon dioxide emissions of the car one is using and they will be nudged with either a green or red statistic.
• Power-Aware Cord: the Power-Aware Cord shows the intensity of electric current running it with pulses of light. The longer the light is on, the brighter it starts to glow.
• Carbon labels: Japan will label consumer goods with their carbon footprints to raise awareness about the environment.
• 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.
• Eliminate the dividing lines or show drivers a smile: removing the lines on the road makes people reduce their speeds. There are also digital speed trackers that give a smiley face when you drive the speed limit or lower and a sad smiley when you are above the speed limit.
• Calories count in New York City: the Big Apple adopted a law that makes fast food restaurants state the calories of each menu or food item next to it. Thus, the costs for nudging people into a healthier option are quite limited.
• Trayless cafeterias: it is easy to load a tray full, but this comes with a lot of food waste. When trays are not offered, food and beverage waste drops with 30 to 50 percent.
• A Japanese nudge against obesity: Japan wanted to reduce the economical and social costs of obesity, by stating that a man’s waistline should not be larger than 33.5 inches and for women 34.5 inches. Companies and local government are required to track this between the ages 40 to 70. People who do not fall into the standard will be looked at disapprovingly.
• Prescription drug nudges: noncompliance, which is not taking your drugs, as a patient is a huge problem. They have large social consequences through unnecessary medical costs and lost revenue. Devices can help remember people to take their pills.
• Procrastinator’s Clock: the Procrastinator’s Clock is a program that displays a digital clock that is up to fifteen minutes fast. The speed is unpredictable. Thus, people might be better at tracking the time and being in time.
• Put a stop to people who blabber on: the ‘I will be brief’ sentence does not work. Saying ‘please interrupt me if I speak more than [number] minutes’. This might help people blabber less.
• Clear airline seat pockets: if airline seat pockets are see through, it will be easier for people to see if they leave something behind.
• Parking meters instead of panhandlers: Denver helped the homeless with donation receptacles that look like parking meters. The money donated would be used to help the homeless.
• Limos for would-be drunk drivers: Road Crew has used luxury cars that pick people up, take them to the first bar, drive them between bars, and bring them back home at the end of the night. For a small fee, people can ‘rent’ a car with a driver. There was a decline in alcohol-related crashes in the first year, no increase in drinking behavior, and large savings between the reactive cost of cleaning up after a crash and the proactive costs of avoiding a crash.
• 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.