Book Review: Nudge - Improving Decisions About Health, Wealth, and Happiness by Cass Sunstein and Richard Thaler

Nudge is an excellent book if you want to get a quick understanding of basic behavioural economics. But, of course, you--dear reader--already have a basic understanding of the field. Regardless, this book may be for you too. Thaler and Cass summarize key concepts in a fantastic way. Whether you're a beginner or an expert. You'll probably like Nudge.

Maybe you're not convinced. If you want something more academic and complex than Nudge, try Misbehaving by Richard Thaler. I picked up that book immediately after reading this one. It too, is a big recommend.

But if you're not that picky, or you just want a solid behavioural book, let's talk about Nudge.

Nudge

This book is slow to start. I had some trouble with the pace at the beginning, but it picks up quickly. Once you're into it, the writing style is excellent.  A good illustration of the style is the authors' "yeah, whatever" heuristic. The heuristic summarizes in just two words a lengthy discussion on what they call “choice architecture” in a memorable way. While they go into depth on many subjects, and the basic theory they cover is interlaced with technical detail, none of the subject matter is inaccessible. The language is readable, the style flows easily.   I think the "yeah, whatever" heuristic illustrates authors' effort to keep it simple, and synthesize important concepts into naturally understandable ideas.

Much of the book was very enjoyable. There were a few sections that really took me in, but there was one part that threw me out.  In the discussion on health the authors describes a much more interesting book than Nudge--which they have yet to write--on why it's ok to barter for organs but not buy them. I eagerly await that publication.

Here are some of my highlights from Nudge.  If you’re the type to jump around, look for these sections.

Self Control

This section delved into the power of an individual suggestion on group decisions. It has strong implications, and contains a very funny "theory." The theory goes, that at a party, there should be a limit to the number of economists in attendance, per capita. It then goes on to describe a party where there were too many economists. It's worth a read.

Market Correction

This section described how market forces ought to reliability mitigate negative results from fraught choices. Their example, simply stated, reasons that the market dictates that a $50 bottle of wine is better than a cheaper bottle. If market forces can't order preference, then fraught choices (between unimportant factors) will guide consumer choice. If unimportant factors could guide choices, wine with nice labels, for example, would be systematically overpriced.  It is not. The example is far more detailed and I encourage you to read it yourself. Wine is a frequent subject of examples in Nudge.

Defaults

Since you're reading a blog in an obscure corner of the internet it's likely that you have some experience downloading software, and more likely than not, software from weird sources. As a result you would probably find Nudge’s section on defaults very applicable. If you weren't paying attention, those softwares probably installed a lot of extra bloatware on your PC by default.

Incentives

This section is very likely useful for most people. It concerns designing incentives. They recommend and detail a four step approach to thinking. Who uses it? Who chooses it? Who pays? And who profits? It's an excellent framework.

They discuss the framework using power consumption incentives. Many regions charge a different rate when power usage is high as a method to curb consumption. But who profits from high consumption at peak hours? And how effective is this as an incentive on usage? The book details other and then walks through the benefits and drawbacks of them.

Finance and Complexity

The finance section was long and technical, but one concept stood out. Complexity. In many different settings the authors describe scenarios where choice availability reduced adoption by potential buyers. I'd recommend the book just for the sections on 401K plans.

In some ways the finance section of the book does more to explain how instruments work than how behavior plays into their successes and failures. But, given that the whole purpose of this section is to point out that the instruments discussed are too complex, this may be forgivable.

What was missing

What the book was lacking was case studies. Many of the conclusions were formed of observational data which contradicted existing theory, but few real world cases were given where behavioral theory completely described what happened.  

The section on the EPA's Toxic Release Inventory policy offered one of the book's few real world cases.  The EPA policy had little legal force, but had an unexpected reduction on the use of hazardous chemicals in industry by creating a social stigma. Evaluating these sorts of cases is the  interesting part of behavioural economics. It was was mostly missing from this book.

Conclusion

My only precaution with this book is that it's starting to age.  Descriptions such as "Netflix, the 'mail order DVD rental company'," pop up frequently. This book even lists the historic return on equity as 10%.
Wouldn't that be nice.

All told, Nudge is a very good high level overview of many concepts in behavioural economics. It isn't comprehensive, but it could be good Sunday reading for someone who knows the material, and a good intro for someone who doesn't.


If you have any comments or questions about the above or anything else click here and I'd be happy to chat.

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