Richard Thaler – the economist who gave birth to the Nudge
To mark Richard Thaler’s acceptance of the Nobel Prize for Economics, here’s our 2009 interview with him marking the publication of Nudge
You have an idea. It’s a good one. Not original, but that’s not a problem because you have a fresh angle – and maybe in your own small way you can influence things. Maybe a little. On the fringes.
But the idea takes hold. It has traction. Suddenly your idea, encapsulated in a little book with a catchy title, is the talk of the town. And not just any town – but Washington DC.
And your idea gets caught up in the battle of ideas at the heart of the US election and the most free-thinking candidate for a generation becomes a torch bearer for your new way of thinking.
And your man gets into office with a rallying cry of “change!” and your co-author is straight away called into the heart of government to ensure that your idea becomes part of the framework of how the country conducts itself.
Meanwhile, you’re over in Britain, spreading the word, seeing if you can capture the mood in a country also desperate for something different, something new. And you’re talking to another big fan – David Cameron of the Conservatives, the man most likely to be the next prime minister.
Your name is Richard H Thaler and your idea is the “nudge”. The notion that people can be prompted towards making better decisions if the “choice architecture” acknowledges that we are not rational creatures who pore over options and take informed decision but, instead, irrational, sometimes lazy, mostly stressed humans who will opt for the simplest thing, or the thing sold to us, or nothing at all if that’s easiest. Life is way, way too complicated to think things through.
Meeting David Cameron
Like with computers. There are a myriad ways to set up a computer, but the majority stick with the default settings because they figure someone back at the factory on a high salary has worked out what’s best. If those default settings and those “choice architects” can help us set up our iMacs – what about our pension provision, our climate, our health care and, of course, our financial systems.
Your name is Richard H Thaler, professor of behavioural science and economics, and your co-author is Cass Sunstein, now head of Information and Regulatory Policy in President Barack Obama’s administration. And every new policy crosses his desk so he can figure out better ways to nudge the US citizens to make better choices.
Your name is Richard H Thaler, director of the Centre for Decision Research in Chicago and you’re in a taxi crossing London, on the back of a breakfast meeting with David Cameron, and you’re talking to The Wharf answering the obvious question. Was all this – all this – an ambition for your book?
“Ambition! Maybe wild dream! Certainly, we never could have dreamt that it would get the reception that it has in the UK. It’s been quite gratifying to have David Cameron pick it up, and President Obama. I’ve referred to my co-author as the Nudger in Chief although in the press they refer to him as the regulation czar which shows, for better or for worse, they’re taking it seriously.
“It’s also your worst nightmare – I mean, come on! We’re just a couple of professors.”
Nudge is the catchy term for the philosophy. The shorthand. But there’s another way to explain the concept of persuasion for the public good. Libertarian paternalism, and that concept feels like the Victorian grandpappy of the Nudge.
The eureka moment came when Thaler was working on Save More Tomorrow – a rolling pension plan that would see people automatically build up an adequate provision for retirement without much forethought or intervention.
A bit paternalistic?
“One of my colleagues in the economics department said, ‘you know I have to ask you about this – isn’t a bit paternalistic?’ I said, ‘I guess so but there’s no coercion here, people are free to join the programme if they want to. It’s not the nanny state – we’re not telling anybody what they have to do so I could guess you could call it libertarian paternalism.’ And thus the phrase was coined.
“I remember the next time I had lunch with Cass, I said, ‘you know I have this new phrase and I think there may be something to it.’ So we wrote up a little article sketching out what the idea might be and as we talked more about it we thought, ‘well this could be a unifying theme for a book’.
It has the ring of a political movement in its own right, I say.
“We often joke about forming the libertarian paternalism party. Both Barack Obama and David Cameron are smart enough not to have adopted that phrase. We set out to write a non-partisan work and it’s gratifying that one leader from the left and one from the centre right taken the idea seriously. The truth is that I don’t think they are that far apart politically.”
Ardent marketers will recognise what Sunstein and Thaler have done. They have taken the dark arts of subliminal salesmanship and applied them to social policy.
Thaler holds his hands up. “We don’t claim to have invented the Nudge. People have been nudging you in bazaars for thousands of years and when you go to a supermarket the choice architect is the one who laid the store out and worked out what path you should be taking to make sure you wander past the things that are most likely to catch your fancy.
“You can say that what we’re trying to do is get governments up to same level that businesses are in thinking about how people really make decisions.”
I point out to Professor Thaler that the accepted premise of the book (backed by copious evidence) is that people are essentially inert, vulnerable and stupid and the duty of the “choice architects” was to guide the myopic along the path of good. Isn’t that a cynical view of humanity?
“I don’t think of it as cynical I think of it as realistic. I think the thing that unites the politicians that have been drawn to it is pragmatism. Certainly Barack Obama, if nothing else, is a pragmatist and not particularly an ideological pragmatist.
“He’s interested in things that work – so if changing default options works, let’s do it.
“ [The US administration] has just announced that companies must disclose their carbon emissions. As we point out that in and of itself, just disclosing, will have a beneficial effect because companies can be embarrassed.”
And what about the sorely-tested notion that the State has the best interests of its citizens at heart?
“We favour nudges over commands. Freedom to choose is the best safeguard against bad choice architecture. The risk of mistake and bias are real and sometimes serious but governments have to provide starting points.”
Which brings me to my next point. I ask Prof Thaler whether libertarian paternalism is the right idea at the wrong time. The age of light-touch regulation, of benignly disposed choice architecture had been swept away in the financial crisis and we are now in the territory of state control, heavy-handed interference and in-your-face regulation.
CEOs don’t understand their companies
Prof Thaler responds: “I spoke at an event with Mr Cameron and what I was saying was just the opposite. The lessons we should have learned from this episode is that things have gotten so complicated that the CEOs of major companies didn’t fully understand what was going on in their companies.
“It is the height of folly to think that we could turn those companies over to bureaucrats and hope that they would succeed – it’s just too hard. I gave a talk at the Treasury Department in Washington, to career Treasury executives, and I asked who in the room would be competent to run Citibank. I asked the same question of the Cabinet Office about RBS. In neither case did anyone raise their hands.”
His response to the failure of the financial system is not greater regulation but greater transparency, greater democracy.
“If we can require companies to disclose more of what they’re doing we turn every computer into a warning system that would inform the market – and it would also inform the CEOs. The president of Citicorp admitted to not knowing everything that was going on and I’m not familiar with the RBS but the same must be true.
“The needle that we need to thread in regulation is to disclose enough that the market and regulators can see what they’re doing but not so much that they can’t make money. So we can’t have hedge funds revealing all their trades or they’re out of business. But we can ask hedge funds to reveal their leverage – and certainly we can ask Bernie Madoff where the money is.
The final nudge
“The idea that heavy handed regulation is the solution to this mess is completely misguided. The most heavily regulated part of the economy was [Us mortgage companies] Fannie May and Freddie Mac. They were quasi federal agencies and obviously that didn’t protect them from getting into trouble.”
Prof Thaler has just passed Buckingham Palace in his taxi. He’s close to his destination so we have to finish.
I tell him, “When I finished reading your book I immediately joined the company pension scheme.”
He laughs and says: “You have been Nudged.”
Your name is Richard H Thaler and your time has come.