Laura Vanderkam reviews Nudge and the idea of “libertarian paternalism” — a way of helping people choose wisely:
The classic example is saving for retirement. Most of us know that we should be saving more—but fully 30 percent of eligible employees fail to enroll in company-sponsored 401(k) retirement plans, even though employers tend to match employee deposits up to a point. Is this because the employees are too strapped to make contributions, even with the employer match? Apparently not, the authors say, citing data from the United Kingdom, where a handful of defined-benefit plans don’t require any employee contribution at all. They do, however, require employees to sign up. Scarcely half of eligible people do. “This is equivalent to not bothering to cash your paycheck,” they write—something that no rational economic actor would ever choose.A better solution? Rather than requiring employees to opt in, require them to opt out. This changes the numbers dramatically. One 2001 study found that under opt-in 401(k) rules, barely 20 percent of employees had enrolled after three months of employment, and 65 percent had done so after 36 months. With automatic enrollment, 90 percent of new employees were participating shortly after joining their firms. “Never underestimate the power of inertia,” Thaler and Sunstein write. Drop-out rates are modest, suggesting that “workers are not suddenly discovering, to their dismay, that they are saving more than they had wanted.” In other words, on some level, people appreciate the nudge.
The examples of nudge-worthy situations abound. School cafeteria managers, rather than banning junk food, can put the apples at eye level and the Twinkies a little farther away. Utilities pushing conservation can put smiley or frowny faces on power bills, indicating whether a customer is using more or less energy than his neighbors. Universities, rather than getting hysterical about underage drinking, can put up signs noting that most students either don’t drink, or do so moderately. These nudges all recognize that human beings—as opposed to rational economic actors—are systematically biased about their choices. We are biased toward the status quo, toward things that are easy, and toward our notions of what everyone else thinks. “The picture that emerges is one of busy people trying to cope in a complex world in which they cannot afford to think deeply about every choice they have to make,” Thaler and Sunstein write. We are free to ignore the frown on the power bill, but if it gets us to turn off the lights, is it really a bad thing?