'Nudge' Your Way to Doing Well and Doing Good

I've been hearing a great deal lately about Nudge, the new book by big name economists Richard Thaler and Cass Sunstein that explores how people can and should be 'nudged' into making better decisions since, as it turns out, we often don't make the choices that are best for us.

 

The works comes out of the tradition of behavioral economics first formalized by Amos Tversky and Daniel Kahneman that claimed that people don't actually act like the rational robots that traditional economic models take them for (surprise, surprise). While I have not read the book yet, what does seem fascinating to me based on what I have read so far is that Thaler and Sustein propose that rather than trying to ignore or overcome our irrational tendencies we should actually create policies and incentive structures that use these irrational tendencies to push us in the 'right' direction. The easiest example would be a policy that requires employees to 'opt-out' of 401k retirement plans rather than to 'opt-in' (which is the case today). Such a policy would likely significantly increase participation in these programs. I've also written in the past about behavioral economics since some of my personal heroes including Warren Buffet and Charlie Munger have often talked about how irrational decisions affect investment choices in particular. Finally, there are some pretty interesting examples also on the Nudge blog.

 

But what is most powerful about the ideas behind Nudge to me is that the book is part of a larger trend that seeks to carve out a middle path between market forces and profit motives on the one hand (doing well), and social objectives on the other (doing good). The old way of thinking took for granted that you had to let people choose freely for the market to work and for their rational self-interest to take hold. In this old mindset any 'social objective' overlaid on top of this would distort the free market. No longer. Today more and more businesses, non-profits, and academics are acknowledging what perhaps we should have known all along: there is a third way, all it takes is a little nudging.

Comments

[Brendan Stock]

Thanks Rimmy for the review. I've heard of this book on some other blogs, but I didn't know that it covered "doing well and doing good" as well.