Tuesday, June 17, 2008

Review: Nudge

I've been a fan of Richard Thaler since I read The Winner's Curse, a great book explaining why winners in auctions (for instance, in the bid to invest in Facebook) often turn out to be losers.

Nudge (kindle edition) introduces the concept of Libertarian Paternalism --- the concept that while not taking away your choices, we can architect the selection process so that most people end up doing the right thing. My favorite example in this book is the Save More Tomorrow program, where employees who opt-in (perhaps even by default) get their raises automatically added to their 401(k) program. Once you get started, of course, lots of other things become obvious, such as the default choice of investments for 401(k) plans, which are notoriously difficult to navigate for typical investors.

As a matter of fact, over my last 4+ years at Google, I've seen huge numbers of financial mistakes. In one case, an employee had to be talked into putting enough money away to get the employer match (which at Google was very generous). In another, someone had split their monies across multiple funds which ended up confusing his asset allocation and made rebalancing quite difficult. Both mistakes would have been avoided had default choices been selected by the company that were reasonable.

Thaler and Sunstein apply this concept to a variety of topics, from healthcare to food selection in schools, where choice architecture can make a big difference to people's lives. They are also aware of the limitations of Libertarian Paternalism as a concept --- for instance, they don't claim that their healthcare proposals are a good substitute for universal healthcare, and they realize that capitalism will not
provide an incentive for supermarkets to stop selling you unhealthy foods.

A lot of the research for this book was drawn from much existing research that's become well known and documented in several other books. In any case, I recommend this book, but not at full price --- either check it out from the library or wait for the paperback.


md said...

"Libertarian Paternalism" - isn't that an oxymoron? I thought Libertarians followed the principle that every fool should be left to make their own darned mistakes, and live with the consequences.

Piaw Na said...

First off, Thaler was never a libertarian. And looking at the results of the last 20 years (and the results of the Swedish experiment in retirement plans), we can see that the libertarian philosophy doesn't work very well --- most people are not cut out to be investors, and the result of private accounts are as you might expect from that premise.