The nudge

Aug. 12, 2008
Editor in Chief Paul Studebaker, CMRP, says the "Nudge" is a powerful tool for modifying human behavior.

As experts in facts and numbers, managers, engineers and economists tend to assume people will do what’s best for them providing they’re incentivized to perform or punished if they don’t. Sure, we know we should pander to them and be nice and explain everything, but once expectations are clear, why wouldn’t they simply do what makes sense?

But, of course, they don’t.

According to “Nudge,” a new book on economics by University of Chicago Economist Richard Thaler and Law Professor Cass Sunstein, that’s because the rational choice often comes in third behind going with the flow (herd mentality) and doing nothing (maintaining the status quo). The authors say we should consider these and similar identified aspects of human psychology when we want to guide the behavior of others (and by implication, ourselves).

One key is to harness the power of the default condition. The now-classic example is increasing people’s participation in their employers’ 401(k) plans by changing them from opt-in to opt-out. This not only makes getting out or staying out a matter of changing the status quo, it implies that the herd has opted in. And it’s raised participation rates from 50% to more than 90%. A similar approach has been taken in Spain with organ donation: opt out or you’re automatically a donor.

Tax collectors in Minnesota, frustrated by the number of last-minute and late returns, improved the response by switching from threatening people with fines to to publicizing statistics on the number of residents who had already filed.

I imagine the U.S. Internal Revenue Service would have a lot harder time collecting income taxes if more people were writing checks instead of filing to collect a refund of their overpayments. But you don’t have to look far to find otherwise intelligent people deliberately overpaying so they’ll have something to put toward their post-holiday credit card bills, using one irrational behavior to support another.

If those credit card purchases were tagged with the prices people actually pay (with interest) when they carry a card balance, would it affect their buying decisions? Maybe so, but people are notoriously poor at comparing long-term costs to short-term benefits, or vice-versa.

You can overcome the bias toward the short term by converting time frames. The government can offer you tax credits this year for improving your energy efficiency partly because it can expect to get them back by taxing your increased profits. Meanwhile, you can borrow the cost of the improvement, pay back the loan with some of the savings and still generate a positive cash flow from the investment. That is, if you can convince your boss and find the money.

Anyone who is watching the price of oil, the Dow Jones industrial average or the current global economy can’t help but marvel at the power of herd mentality, made obvious lately by the skittishness of the herds. And like a bunch of college kids with stunning hangovers, “going with the flow” is about the only excuse the perpetrators have come up with for the subprime mortgage fiasco.

“Out of sight, out of mind,” right? How much of the real-world fuel economy advantage of a hybrid is due to its technology, and how much comes from the behavior-modification effect of a prominent “miles-per-gallon” display? Folks I know are claiming 50 mpg and even 60 mpg, but when Car & Driver magazine drove a Prius as they would any other test car, it delivered 42 mpg.

In this month’s Energy Expert column, Peter Garforth talks about the importance of making energy visible, for instance, by displaying dollars per day instead of cubic feet per minute.

The U.K.’s conservative Tory party leader David Cameron wants household gas and electricity bills to include a section at the bottom that tells whether the homeowner is using more or less energy than his or her neighbors, combining visibility with pressure to join the herd.

Take advantage of people’s desire to do the right thing by also making it at least seem to be the easiest, most popular and most obvious option. Chances are they’ll take you up on it.

E-mail Editor in Chief Paul Studebaker, CMRP, at [email protected].