In Nudge, Richard H. Thaler and Cass R. Sunstein propose a series of reforms—“nudges”—that can help policymakers and other choice designers lead people to make better choices without restricting their freedom to choose. Thaler and Sunstein argue that no choice is ever neutral because the way a choice is presented, even if randomly, affects the way people engage with it—and so governments, private companies, and other entities should frame options in ways that can improve people’s decisions. Thaler and Sunstein call their approach to designing choices “libertarian paternalism,” which implies the freedom of libertarianism combined with the guidance of paternalism, but without the coercion often associated with paternalism.

Major Concepts

Common Biases

Thaler and Sunstein argue that people have evolved to make snap decisions in a wide variety of areas in order to save time and mental energy—we’re more likely to survive if we rely on rules of thumb (largely accurate guides based on experiences in similar situations) when deciding, for example, whether an animal is a threat (if we spend time carefully analyzing it, we might be eaten before reaching our conclusion). They note that while such rules of thumb—also called heuristics or biases—can be helpful, they can also mislead us into making poor decisions.

(Shortform note: Thaler and Sunstein focus on how mental shortcuts can lead us into poor judgment calls, but other writers note that these kinds of gut reactions can be enormously beneficial. In Blink, Malcolm Gladwell argues that judgments made by our unconscious mind, based on limited information and made in fractions of a second, can often prove more accurate than well-thought-out analysis. He says that this is due to the fact that evolution has trained our minds to home in on the most important aspects of a situation and ignore all irrelevant facts. In contrast, our more rational brain tries to give equal consideration to all facts, which can distract us from the most important aspects of a decision.)

Some of the biases that Thaler and Sunstein discuss, upon which many of their nudges rely, include:

• The anchoring bias—when we take a fact we know (or think we know) and adjust it to account for a fact we don’t (Shortform note: Impulsive decision-making favors anchoring bias, so using a simple checklist can help you overcome it.)
• The availability bias—when we answer questions and make judgments on the basis of whether comparable examples come readily to mind rather than statistical probability (Shortform note: In business, you can avoid availability bias by creating diverse teams and seeking broad input.)
• The representativeness bias—when we categorize a phenomenon based on how similar it is to the stereotype of some category (Shortform note: To avoid representativeness bias, ask others to point out when you’re relying on it.)
• The status quo bias—when we stick with our first choice or current situation for no good reason (Shortform note: Marketers often try to overcome consumers’ status quo bias by framing the current status as a losing proposition.)
• The loss aversion bias—when we psychologically feel losses more strongly than gains, and therefore try to avoid them, even if it means we pass up opportunities in doing so or make risky decisions to avoid losses (Shortform note: Studies show that people feel losses more than gains by approximately two to one.)

(Shortform note: The names of these biases were coined by various behavioral economists, including Thaler, Daniel Kahneman, Amos Tversky, William Samuelson, and Richard Zeckhauser. They’re widely used today in the field of behavioral economics and are accepted as a basis for many psychology theories in both academic circles and on more informal platforms, like blogs.)

Libertarian Paternalism

Thaler and Sunstein developed “nudges” to work against these common biases. They call their method of nudges “libertarian paternalism,” defined as a combination of libertarianism (prioritizing individual freedom regardless of ends) with paternalism (constraining choice to bring about better results).

Libertarian paternalism seeks to preserve liberty—our freedom to do what we like, as long as it doesn’t infringe on another—while using techniques suggested by behavioral economics and psychology to point us in the most beneficial direction.

Choice Design

According to Thaler and Sunstein, any choice, from the most mundane to the most momentous, has a certain design—that is, a method, order, or style of presentation that affects how we choose. Think about grocery stores. There’s a reason food companies pay for prime shelf space: The more likely we are to see a product—and to easily reach it—the more likely we are to choose it.

The authors spend the bulk of the book discussing how choice designers (policymakers or others who craft the presentation of options) can encourage people to make choices that bring about better outcomes.

(Shortform note: The idea of choice design (termed “choice architecture” in the book) is now an accepted theory in the field of behavioral economics. Many in the field still frame choice design around the authors’ tools to create nudges, but other psychologists emphasize different ways that choices can be purposefully structured, such as which choices and how many to present as well as how to describe those choices (in other words, which choices get recommendations or don’t).)

Nudges

Nudges are subtle ways of designing options that push us toward the best choices—the choices we would make for ourselves if we weren’t susceptible to cognitive bias, temptation, or social influence. An effective nudge takes advantage of our decision-making weaknesses to steer us toward beneficial—or, at least, less harmful—choices.

Critiques of Libertarian Paternalism

Thaler and Sunstein fashion libertarian paternalism as a happy medium between far-right libertarianism and far-left paternalism. As a result, libertarian paternalism has come in for critique from both directions.

On the right, orthodox libertarians believe that libertarian paternalism is problematic because any kind of paternalism is problematic. For example, in his book The Manipulation of Choice: Ethics and Libertarian Paternalism, philosopher Mark D. White argues that presuming to know what the “right” choice is for anyone is a nonstarter; people are too different for there to be any baseline standard of what’s “good” or “bad” for someone.

On the left, critics have taken issue with the libertarian commitments of libertarian paternalism. For example, in a review of Sunstein’s How Change Happens (2019) in The New Republic, Aaron Timms points out that “nudges” are inadequate to large-scale problems like climate change or income inequality that require societal, “paternalistic” regulation and reform.

When to Nudge

The authors don’t advocate that policymakers provide nudges for every decision people make. Certain decisions could benefit from the guidance of nudges more so than others. These types of decisions include:

Rare and Difficult Decisions

Saving for retirement, buying a house, or choosing a college are each monumental decisions that come around once or rarely in a lifetime. Because we only have one or two cracks at each decision, we have no opportunity to learn if we make a mistake. Thus they’re prime candidates for nudges.

(Shortform note: A libertarian counterargument might be that, when it comes to major life decisions, no one, no matter how well intentioned, should be putting their finger on the scale. But, as Thaler and Sunstein note, all choices, whether purposely or not, already feature nudges, and so it’s acceptable to curate that choice to improve outcomes.)

Decisions With Delayed Outcomes

For many decisions, the results of our choices are delayed or obscure. For example, someone can smoke for years and experience no negative effects—until the day he or she suffers a stroke. Nudges can help us make better decisions in situations like these, when the consequences of our actions aren’t immediately apparent.

(Shortform note: Thaler and Sunstein assume that, although the outcomes are delayed for the chooser, they’re immediate—or at least known—to the choice designer. But there are any number of choices with delayed results whose ultimate outcomes are unknown to all. Take smartphone use, for example. Studies have shown that smartphones boost worker productivity—in addition to providing convenience—yet the long-term health effects of consistent cell phone use remain unclear. In this circumstance, it might be perilous to nudge someone toward or away from using a cell phone.)

Decisions Requiring Specialized Knowledge

Many of our most important decisions—choosing a retirement or health care plan, for example—are presented to us using specialized terms that can confuse more than inform. Most of us—unless we work in finance—would be at a loss when faced with terms like “defined contribution” and “expense ratio.” Given especially complex and unpredictable options, nudges can be vital.

(Shortform note: Nudges can also be used to take advantage of the layperson. For example, a financial firm might nudge a naive client toward an investment that benefits the firm itself more than the investor.)

How to Design Choices

Thaler and Sunstein name six primary techniques a choice designer can use to structure a set of options in order to nudge people toward the best decision: offer defaults, draw a map, narrow the field, offer incentives, anticipate error, and emphasize outcomes. Of these, the authors spend the most time examining the first four—offer defaults, draw a map, narrow the field, and offer incentives. We’ll look at each more closely below:

Offer Defaults

Thaler and Sunstein’s most versatile nudge is providing a default—a choice that’s automatically made if the chooser does nothing.

The theory underlying this style of nudge is people’s innate status quo bias, which says that when faced with a choice, many people will choose to either do nothing or stick with their initial choice, even if the new choices are superior to that initial choice.

(Shortform note: Status quo bias is related to two other biases: inertia and loss aversion. Inertia describes the human tendency toward inaction. Loss aversion describes the tendency to psychologically feel losses more strongly than gains—studies show that people overvalue losses to gains by approximately 2:1, causing them, on occasion, to make riskier decisions to avoid loss. Loss aversion also encourages inertia, as people tend to stick to their original decisions rather than risk losses through change.)

Thaler and Sunstein apply the default nudge to a number of areas, including investment choices.

Defaults to Improve Investment Choices

Thaler and Sunstein note that not long ago, the most common retirement plan offered by employers was a “defined benefit” plan—that is, one that made fixed payments to the beneficiary based on tenure and salary. Now, the most common type of retirement benefit is a “defined contribution” plan, in which employees make periodic contributions to a tax-sheltered investment account, on the assumption that they’ll get back an increased return in later years.

(Shortform note: In 2020, 64% of private industry workers had access to a defined contribution plan while only 15% had access to defined benefit plans. In 1990, those numbers were 34% and 35%, respectively, showing that slightly more people used defined benefit plans in the past.)

This shift put a greater decision-making burden on workers. What level of risk am I willing to take, and how do I allocate my savings accordingly? Should I be investing in stocks or bonds or both? How often should I revisit my allocation of assets, and what real-world information should I be looking for to know when to change it?

According to classically trained economists, we should have no trouble making the right investment choices. This is because, in most economic models of human behavior, people are thought of as eminently rational and self-interested actors who consistently make the best decisions for themselves—that is, people are homo economicus.

The Critique of Homo Economicus

Introduced by classical economists like Adam Smith and John Stuart Mill, the term homo economicus—“economic man”—conceives of people as predictably rational and self-interested, thus able to make the most beneficial economic choices for themselves. In most of the economics research of the last century, people are modeled in just this way: as able to maximize their own economic benefit.

With the advent of behavioral psychology and economics, however, researchers have established that homo economicus is a fiction—that people’s rationality is limited by many cognitive and contextual factors. (In fact, one study determined that real people who meet all the criteria of homo economicus might be diagnosed as psychopathic.) Thus, much of the economics literature rests on a flawed assumption and so can’t be applied to real-world policy.

Debates are ongoing about the accuracy of economic models that rely on homo economicus. Some commentators find that people do in fact act consistently and self-interestedly when faced with decisions while others maintain homo economicus is a chimera. Thaler and Sunstein, for their part, fall into the latter camp, arguing that “Econs”—or “economic people”—simply do not exist.

If people indeed met the criteria of homo economicus, we would have no trouble (1) recognizing that stocks outperform bonds historically and (2) calculating our tolerance for risk based on the probability distribution of stock market returns. But, because we’re human, the complexities and variability of defined-contribution plans cause us to make mistakes that end up—quite literally—costing us.

One way to remedy these mistakes, Thaler and Sunstein argue, is better defaults, specifically “target maturity funds” that automatically reallocate their asset mix based on a worker’s age. A target maturity fund will have a riskier asset allocation—more stocks, fewer bonds—when a worker is young and gradually recalibrate as the worker ages. By the time the worker retires, his portfolio will be heavily weighted toward fixed income assets like bonds. In other words, the “target maturity fund” will have done all the benefit maximizing on behalf of its investor.

Nassim Nicholas Taleb explores the biases that make people bad at assessing risk in his book Fooled by Randomness, in which he argues that when we make decisions, we are typically guided by our primitive brain, which runs on emotion, likes simplicity, and has trouble understanding abstract concepts. When investing, we therefore do things like act impulsively, sell a stock too soon if it’s doing poorly (even if its long-term prospects are good), and misjudge our abilities to play the stock market—in reality, it’s luck that rules the market and determines most success, not our skill in choosing stocks.

Thaler and Sunstein’s solution of using targeted maturity funds to sidestep our natural impulses addresses Taleb’s concerns, as it takes the decision-making process away from our primitive brain and relies instead on rational algorithms.

Draw a Map

A carefully engineered default combats the human tendency toward inertia and the status quo, but how can a choice designer help active choosers navigate complicated decisions?

One way, according to Thaler and Sunstein, is to draw choosers a map that shows them where their options will bring them if they settle on one option or another—an outline that explicitly connects their choices to outcomes.

To help choice designers effectively draw a map, Thaler and Sunstein advise that regulators mandate transparency programs whereby companies would be required to provide consumers with more—and more clearly organized—information about their products so that consumers can better compare choices and make the right decision.

By presenting us with clearer information, a transparency program could help combat our tendency to use rules of thumb, and help us see more clearly the potential outcomes of our decisions.

Are Transparency Programs Actually a Nudge?

In some of Thaler and Sunstein’s examples of transparency programs, they conflate disclosures made before a transaction with those made after it. For example, Thaler and Sunstein categorize both of the following as transparency:

• A cellular service enumerating all of its fees, including real-life examples, before a person purchases the service

• A cellular service providing its customers with a detailed report listing all the ways a person actually used the service and the fees that person incurred

The problem with classifying the second example as a nudge is that it’s helpful only after the person has already made a choice. In other words, under that scenario, we might make a terrible initial choice and receive our “nudge” only when we get the detailed report. The transparency, therefore, doesn’t change our behavior during the decision-making process and therefore is not an actual nudge.

Some critics of the book have pointed out as much, arguing that some of what Thaler and Sunstein press for is merely more transparency, which is hardly a revolutionary idea.

Credit Cards

Thaler and Sunstein note that transparency programs would be especially helpful for consumers with credit cards.

Credit cards are a primary vehicle for US indebtedness, and Thaler and Sunstein produce an array of statistics that illustrate their centrality to Americans’ personal finances, including the average number of credit cards per cardholder (8.5) and the average American’s credit card debt ($8,000).

(Shortform note: However, Americans’ debt situation has changed significantly since Nudge’s publication (and the corrective of the 2008 financial crisis). Whereas, in 2007, the credit card debt of the average American household was around $8,000, as of March 2021 it was $6,741.)

Thaler and Sunstein’s solution to the spendthrift effects of credit cards is a credit card-specific transparency program.

They propose requiring credit card companies to send cardholders a detailed annual statement featuring not only the year’s purchases but also the year’s fees, interest charges, and penalties. This information would make the true cost of our credit card spending clearer to us and allow us to more easily compare cards.

(Shortform note: The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD act) took steps toward making their idea a reality. The act outlawed many of credit card companies’ most unsavory practices, including raising interest rates arbitrarily and giving cardholders insufficient time to pay their debts before incurring a penalty. It also nudged credit card companies to provide (1) simpler and more transparent agreements and (2) more information in their statements, including target dates for paying off the card if the cardholder only made minimum payments. In addition, most credit cards’ online banking interfaces offer annual reports as well as real-time transaction information.)

Narrow the Field

Thaler and Sunstein are firm believers in people’s right to choose (hence the libertarian half of libertarian paternalism). But they also recognize that too much choice can be overwhelming and counterproductive. (Shortform note: Researchers refer to this as choice overload or the Paradox of Choice: We want more options because we think it maximizes our chances of making the best choice, but having too many choices paralyzes us.)

One way to narrow the field is simply to offer fewer options. However, since this limits choices, which Thaler and Sunstein oppose (as it contradicts libertarianism), they propose another way of narrowing the field of options: grouping and structuring the choice set to make it more manageable.

For example, many retirement plans offer “tiered” investment choices. Rather than hand enrollees a voluminous and undifferentiated list of funds to choose from, retirement plans will offer, say, three different tiers, each corresponding to enrollees’ level of investment interest and experience.

(Shortform note: Because choices aren’t limited in a tiered system, this type of nudge isn’t foolproof: If an inexpert but risk-seeking enrollee wants to bet her retirement on the most aggressive and fee-laden actively managed fund, she’s free to do so, even if it could result in catastrophe.)

Offer Incentives

Old-fashioned incentives, financial or otherwise, can nudge choosers toward better decisions. The key to a successful incentive, argue Thaler and Sunstein, is to make its benefits relevant and obvious to the person making the choice.

Economists have long noted the power of incentives in driving human behavior—the concept underpins a capitalist society. Most economists agree that the primary incentives that drive behavior are self-interested incentives. As outlined in Charles Wheelan’s Naked Economics, when people work to benefit themselves, they generally benefit others as well (as when they work to earn a salary, what they produce raises the standard of living for others).

This is not always cut-and-dried, though—different people will be motivated by different wants, which makes an economist’s job difficult when identifying incentives that will motivate large numbers of people. However, Thaler and Sunstein’s proposals aim to appeal to the majority through simplicity: No one wants to pay more than they need to for an item or service, and the authors’ nudges bank on that.

Thaler and Sunstein suggest that an area ripe for incentives is environmental policy, in particular policies to reduce carbon emissions.

Reducing Atmospheric Carbon Through Incentives

Thaler and Sunstein are advocates of a “cap-and-trade” mechanism for reducing greenhouse gases.

In a cap-and-trade system, the government sets a ceiling (the “cap”) on a certain pollutant—say, carbon dioxide—and confers on industries and firms rights to pollute up to that amount. If a firm chooses to reduce its emissions below the cap, it can “trade” its excess cap space to other companies for cash. According to Thaler and Sunstein, a cap-and-trade system meets the principles of libertarian paternalism because it preserves choice while nudging firms, through economic incentives, to clean up their operations.

(Shortform note: While a cap-and-trade system in operation might conform to the precepts of libertarian paternalism, its creation and implementation almost certainly don’t. That is, there’s no way to “nudge” Thaler and Sunstein’s cap-and-trade model into existence—it has to be created by top-down government rulemaking (in other words, paternalism). Moreover, cap-and-trade, at least when instituted at the state level, has produced mixed results, leading many commentators to advocate broader and more explicitly paternalistic interventions.)