Clare Lindeque

Head of Quantitative Analysis

September 2017

Book Review - Nudge

Do we really have free will? Nudge, by Cass Sunstein and Richard Thaler, reveals the power of external influences on us when we make choices. 

The two authors of Nudge have impeccable credentials and an engaging, common-sense optimism. Cass Sunstein, a widely cited legal scholar, served in the Obama administration between 2009 and 2012. Richard Thaler is an economist with a focus on behavioural finance. They argue that choices – whether they are as consequential as a Presidential vote, or as trivial as which brand of yoghurt to select – are never presented entirely neutrally. The order of the names on the ballot may have an influence on who wins; the placement of the yoghurts on the shelf may do likewise. Humans, moreover, are lazy decision makers, inconsistent, and strongly influenced by others’ actions. Should we not strive to help others overcome these behavioural biases, in the interest of a better outcome? Nudge introduces the idea of a “choice architect”, someone who is in the position to influence the framework within which others make choices.

Being a choice architect – particularly if the influencer is the government or a similarly powerful entity – is fraught with ethical considerations and questions of freedom and autonomy. Sunstein and Thaler examine whether it is fair to direct people’s decisions towards an outcome deemed to be better or more correct. Shouldn’t I be the one to decide whether I want to wear a helmet when riding a motorbike? Wouldn’t anything else impinge on my right of self-determination?

Evidence indicates that presenting too many choices – seemingly the fairest approach – often has the paradoxical outcome that people refuse to choose at all. A classic example pertains to employees’ choice of an investment product for their company retirement savings. A disproportionate number of investors end up in the so-called “default fund”. For this reason, it is vital that the default option is chosen very carefully by the company.

The authors propose a framework that they oxymoronically dub ”libertarian paternalism”, and for the most part they succeed in walking the fine line between allowing freedom of choice and  gently guiding people in the “right” direction. There is no shortage of suggested nudges applicable to a wide range of settings that readers could find useful. 

Nudge invites us to think about situations in which we are choice architects, and to gently use this power to encourage others towards better outcomes. It also provides the raw materials for readers to identify when they are being nudged and recognise whether the nudger is an expert, whose superior knowledge earns respect for their guidance, or a self-interested party.

Nudge has particular application to investors and financial service providers. The latter frequently operate in contexts which render them choice architects, from the design of application forms to structuring of product ranges. This is a grave responsibility. Investors, on the other hand, will benefit from serious reflection on the various financial choices highlighted by Sunstein and Thaler, and whether their own decisions are as good as they can be, given the available information.

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