In their book Nudge, Richard Thaler and Cass Sunstein considered the choices made by ordinary people about their retirement.1 Many employees have the opportunity to enroll in a 401(k) plan, in which their contributions will be sheltered from taxes and to which their employer will also contribute. But a considerable number of people do not choose to enroll in a 401(k) plan and of those who do, many select levels of contribution that are far below what would be most advantageous to them. Why? Probably because of inertia. It is easier not to make a decision than go to the trouble of calculating an optimal contribution.
Employers sometimes try to educate people to make better choices, offering them retirement-planning seminars, for example. But the lessons of these seminars are soon forgotten: “Employees often leave educational seminars excited about saving more but then fail to follow through on their plans.” And so Sunstein and Thaler suggested a different strategy. Instead of teaching people to overcome their inertia, we might take advantage of their inertia to solve the problem. Suppose we arrange things so that enrollment at some appropriate level of contribution is the default position—the position that obtains if the employee does nothing. Something has to be the default position; why not make it the position that accrues most to the employee’s benefit, “using inertia to increase savings rather than prevent savings”?
Resetting the default position this way is what Thaler and Sunstein call a “nudge.” It exploits the structure of the choice to encourage a more desirable option. The decision is not taken entirely out of the employee’s hands. She can still change it and revert to a strategy of no contributions or diminished contributions to her retirement funds. But in that case she has to make an effort; this is where she has to overcome her inertia.
Nudging is an attractive strategy. People are faced with choices all the time, from products to pensions, from vacations to voting, from requests for charity to ordering meals in a restaurant, and many of these choices have to be made quickly or life would be overwhelming. For most cases the sensible thing is not to agonize but to use a rule of thumb—a heuristic is the technical term—to make the decision quickly. “If it ain’t broke don’t fix it,” “Choose a round number,” “Always order the special,” and “Vote the party line” are all heuristics. But the ones people use are good for some decisions and not others, and they have evolved over a series of past situations that may or may not resemble the important choices people currently face.
Now, every decision we face presents its own “choice architecture,” in which the possibilities we have to choose from are arrayed in a certain order. Some make themselves clamorously known; others have to be unearthed. There may be limited time to…
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