All You Need Is Nudge (Update)

Hey there! It's Stephen W. One thing I love is going through the Frekenomics Radio Archive

and resurfacing some of our favorite episodes and some of our favorite people like Richard Thaler.

The episode you're about to hear was first published in 2021. We've updated facts and figures as

necessary I hope you enjoy it and if not you can blame Thaler.

I know we're talking about Nudge but I also know that you like what you like and you don't like

what you don't like and you can be a little no offense you can be a little touchy sometimes.

Touchy? You call me touchy? No no not touchy touchy. What? I don't even know what word you're saying.

Sensitive? We could go with sensitive but maybe the best word to describe the man

on the other microphone today is cranky, at least situationally cranky. He's pleasant enough

most of the time but in certain circumstances he becomes a bit of a crankopotamus especially

when something isn't working the way it's supposed to. Like when you go to pay your taxes

or get a mortgage and you're suddenly tossed into a quagmire of fine print and red tape

or think about navigating the healthcare system or managing your retirement savings.

There's so much low hanging fruit because so many things are done so stupidly.

I should probably tell you the name of this situationally cranky man. It's Richard Thaler. He's an

economics professor at the University of Chicago. For years he collaborated with the pioneering

psychologist Danny Kahneman and Amos Tversky helping create what has come to be called behavior

economics. Kahneman was awarded a Nobel Prize in 2002. It would have been shared with Tversky

at he not died young. Thaler would go on to win his own Nobel Prize in 2017. Back in 2008

Thaler published a book called Nudge. Improving decisions about health, wealth and happiness.

It was co-authored with the legal scholar Cass Sunstein. Nudge proved to be phenomenally popular.

I think something like two million people have read Nudge around the world.

It's also been an influential book as governments and other institutions rushed to set up so-called

Nudge units. They use the tools of behavioral economics to get people to consume less energy,

to save more for retirement, to pay their taxes on time and pay more attention to their health.

The latest count is that there are over 400 such units around the world.

So somebody thinks that they are useful. That number has now grown to over 600. Nudge theory is

built around a relatively simple concept. Yeah. The phrase that I like best is choice architecture.

And choice architecture means what to you exactly? It's creating the environment in which people

choose. And who is or is not a choice architect? Are we all choice architects or only some members of

the elite the choice architects? I mean if you think about you're the choice architect for this

episode. You're asking the questions and then you're going to dictate to your listeners which parts

you'd play and the really good funny stuff he's left out. I can tell you call me and I'll tell you

the really good stuff. Okay, let's move on. What exactly counts as a Nudge? Imagine you run

the cafeteria at a university or a hospital and you want to encourage health you're eating.

Here's an excerpt from the book read by someone we hired who wouldn't sound like such a crank

eponymous. A Nudge as we will use the term is any aspect of the choice architecture that

alters people's behavior in a predictable way without forbidding any options or significantly

changing their economic incentives. To count as a mere Nudge, the intervention must be easy and

cheap to avoid. Nudges are not taxes, fines, subsidies, bans or mandates. Putting the fruit at

eye level counts as a Nudge, banning junk food does not. Today on the show we'll ask how useful

nudging can be if you want to solve big problems. We can't solve climate change with nudging but

we can't solve it without nudging. We'll talk about why there are so many big problems to solve.

Look, you don't have to be a genius to have thought of this. You have to be an idiot to have

created the system that needed this fix. And we'll try to figure out what makes Thaler so Thaler.

Yeah, I think that's ridiculous.

This is Frekenomics Radio, the podcast that explores the hidden side of everything with your host,

Stephen Dubner. I've always argued that Nudge is one of the best written books by

academics. I mean, you're an economist and your co-author cast Sunstein is a lawyer for goodness

sake. Typically, I would argue that most academics are pretty poor writers. If you agree with that, why?

Well, writing in academic journals, you're almost discouraged from good writing. When I was working

on my PhD thesis, which was on the value of a human life, one of my advisors read the first draft

and made me take out all of the jokes of which there were perhaps three.

Right. Because it's such a nice light topic, the value of a human life.

Well, yeah. And then I started writing these anomalies columns in the Journal of Economic Perspectives.

I remember around that time, thinking of myself primarily as a writer and thinking that most

academics should think of themselves as writers. Because that's what they do. I mean, there's the

teaching part, but the research part, the output is a written document. But I'm also really curious

to know how the collaboration between the two of you works. An economist and a lawyer writing about

what is often not quite economics and not quite law with two guys whose output is totally different.

Yeah. Cast is a much faster writer than I am and a very good writer, but certainly writes in a

quite different style than I do. How would you describe the difference in styles?

Well, I would say he's more serious, which isn't saying much. There are some toddlers

that are more serious than me, or so my wife would say. But when we sat down to start writing

Nudge, much of it was based on research I had done. And he graciously offered that this book should

be Thaler and Sunstein, which is out of alphabetical order, but reflected the fact that it was based

more on my research than his. But then it came to writing things up. And it was clear that the

chapters he wrote read very different than the ones I did. And so we made a decision that

every chapter would be in my voice, because we didn't want the reader to be jarred.

So when you and Levitt were writing economics, it was all Dubner's voice, right? Because you were

the writer. Although I have to say with Nudge, there are not whole chapters, but there are passages

where I feel like, oh, that's so Thaler. And then there are a couple sentences. And it's not

just because they're a little bit legalistic-ish, but they're a little more sober. But are you

saying that everything went through your brain and fingers in the end, every word? Every word went

through my word processor. Now, every word went through both word processors many times,

but it was meant to sound like it had been written by one person. There's a lot of sunstein in

there, but it sounds more like me talking. How'd you split the money? 50-50. That's fair.

Here's a quick excerpt from Nudge about the two authors' different styles.

Thaler loves wine. Sunstein prefers Diet Coke. Thaler loves long dinner parties. Sunstein dreads

them. Sunstein enjoys philosophical arguments. Thaler avoids them at all costs.

We should also say that Sunstein is an extremely prolific writer. Thaler, meanwhile, admits to being

famously lazy. Well, yeah. So in the time that you and I will be talking today, how many books do

you think Cass will have written? He's working full-time for Homeland Security. So I'm guessing he's

down to writing only four books a year. What's he do for Homeland Security? I could tell you about

I'd have to kill you. Sunstein is no longer working for Homeland Security. He's a professor at Harvard

Law School. This seems to have given him even more time to write this past year. He published five

books. Anyway, back to Thaler. Thaler invented a phrase which describes the not too hot, not too cold

nature of nudging. He calls it libertarian paternalism. I asked him how he came up with that phrase.

I was presenting a paper at the University of Chicago, and my discussant was Casey Mulligan,

who's a very Chicago school member of the Chicago Economics Department, and the data I was

presenting was that we were able to triple people saving rates in three years, not forcing anybody

to do anything. So he grudgingly admitted that this seemed to work, but then he said, but isn't this

paternalism? Which at the University of Chicago is like saying, aren't you a child molester or

a communist? And I said, well, I'm not sure because there's no coercion here. Normally we think of

paternalism as like, you have to buckle your seat belt. And you can't buy pot because it's not

good for you. So I said, I guess if this is paternalism, maybe it's some different flavor of

paternalism. Maybe we could call it libertarian paternalism. So this was an ad lib.

And kind of a joke? Well, you know, everything with me is kind of a joke, but I kind of liked it.

And the next day, I was having my weekly lunch with gas on steam. And that's what led to nudge.

But if I were to ask you, then or now, hey, failure, are you a libertarian or a failure? Are you

a paternalist? I'm almost sure you'd say no to both. Correct. Now, look, the fact that the term

seems oxymoronic or maybe just moronic, but some would say moronic. And the fact that it really

annoys libertarians. That was a big plus. But it's taking two things that are in many instances

negatives or at least have some negative connotations and putting them together to make a good thing.

It reminds me of when my kids were little, they had a babysitter whose name was Matheryn,

which was spelled M-A-T-H-U-R-I-N-E. So it was math and urine combined. But she was lovely.

Yeah. So look, I would say that it's good that we called the book nudge and not libertarian

paternalism is not an oxymoron or one click paternalism as you toyed with. Yeah. I will say also,

I lost a battle on the subtitle for this book. I wanted the subtitle to be the gentle power of

choice architecture. That's the message of the book. People should understand that they are the

recipients of choice architecture in almost every aspect of their life. Once you catch onto that,

I think it helps. Here's another excerpt from nudge. Perhaps the most basic principle of good

choice architecture is our mantra, make it easy. If you want to encourage some behavior,

figure out why people aren't doing it already and eliminate the barriers that are standing in their

way. If you want people to obtain a driver's license or get vaccinated, make it simple for them,

above all by increasing convenience. Of course, this principle has an obvious corollary.

If you want to discourage some behavior, make it harder by creating barriers.

If you want to make it harder for people to vote, for bid voting by mail and early voting,

and reduce the number of polling stations, and place them far away from public transportation

stops while you're at it. Try to make people spend hours in line before they can vote.

The title of the new edition is nudge, the final edition. I don't know quite how to read that. Are

you planning on going somewhere? Is it a commitment device so that you'll never revise it again?

It's exactly a commitment device. So for your listeners who don't know what that means.

Oh, they all know. We've told them before. Well, probably my most famous story, and I'm a person

who's known for having many stories. Here we go with the cashews again. I won't repeat the whole

story, but I'll just take a nap. You'd tell it. It involves taking a bowl of cashews and hiding,

and in the kitchen so that some dinner guests wouldn't spoil their appetites while having an

idle beverage. So that was meant to illustrate our lack of self-control, even though we might profess

we want self-control. Right. And we were committing ourselves not to eat any more cashew,

not at least without going to the effort of walking 20 meters to the kitchen. So as far as we

can tell, no one has been stupid enough to do what we've done, which is to take a book that was

still selling 50,000 copies a year and just say, oh, yeah, let's write it again.

This wasn't just a little tweak. Some chapters were added, some were subtracted, and almost all

were pretty substantially revised. I'm guessing this is a product of COVID-19. Had you not been

cooped up? Yeah, definitely. And the whole thing just felt a bit dated. One of the reasons for

taking a Mulligan on this book was that almost everyone thought they knew our view on organ

donations. Well, to that end, we tweeted to our listeners, asked for questions for you.

This person says, Reddit, meaning nudge, but his chapter on organ donation freaked me out.

The book said that to increase organ donation numbers, the default should be that you donate

your organs and that you have to opt out. I think the state having the right to take your organs

by default is evil. Is that what you said? It's just the opposite of what we said. I think the

confusion begins. And I should say, when we started to write that book, we wrote down a list of

chapters we would write. And that was one because we knew about a famous paper that was written by

two friends of ours, Eric Johnson and Dan Goldstein. You write that it included the most famous

graph in social science. Yeah. And what that graph shows is that if the default is to agree to

be an organ donor, meaning you have to go out of your way to opt out, then hardly anybody opts out.

And this is true, say in Austria, whereas if you have to do something to become a donor,

as you have to do in the United States, then although 75, 80%, say, if you ask them, would you like

to be a donor? They say, yes, 40, 50%, get around to it. So wow, that's a huge effect, right?

And then we started reading the literature. And here's the crucial mistake that people have

made in thinking about this problem. If having failed to opt out meant that should you have a fatal

automobile crash, that your organs will be automatically harvested, then that would be a very

attractive policy, setting aside for the moment some ethical questions. Like whether as our

listener wrote in, the state can take your organs by default. Correct. And by the way,

there's a scene in Monty Python where John Cleese and one of the other troop arrive at some guy's

door. Yes. Hello. Can we have you all live at? You live at? You know, so it's

British brand. It's sort of, yeah, yeah, I know what it is, but I'm using it.

What's this thing? I live with on his can. I mean, we say more. I think one of the lines is, but

this is only in the cause of death. And Cleese assures him, no one is ever and dead to

imitate not my asses. So now there is a policy called routine removal. And it wouldn't be the

Monty Python version. What it would be is that if a patient becomes brain dead, then the transplant

teams will automatically take whatever could be used. And is that actually practiced anywhere?

Essentially nowhere that we know of that we know of. And we have looked high and hard. There are

maybe half dozen countries that have that as their law, but in fact, still don't do it. And many

of the countries that have switched to what's called presumed consent explicitly describe their

policy as soft presumed consent, which means that if a young person who has not opted out is,

let's say, killed in a car crash, then the family or the survivors are still consulted as to whether

to go ahead. Is that about it? Yes. And in fact, if they can't get in touch with the family or

someone, they don't take the organs. So this famous chart that showed almost everybody in countries

where they have presumed consent for organ donation. Yes, everybody's not opted out, but not being

opted out doesn't mean that that person's organs are necessarily donated because there's a whole other

level to go through that most people just didn't think about. Yeah, that's point one point two is

that if almost no one is opting out, then we should not be giving a lot of credence to the fact

that you didn't opt out. I mean, you have a teenage son. If he failed to fill out some form,

how confident would you be that that omission was based on careful thought? Right? Zero.

But even you, I'm sure, can see why someone who has read most of Nudge and gets to the chapter on

organ donations and starts to read about countries like Austria that do have presumed consent,

why they would think, oh, well, that's the answer. Look at that chart. It must work. Yeah.

So that was one of the reasons that we decided, let's tee it up again and see if we at least get

the people who read the book to know what our view is. One major theme of Nudge, and this follows

directly from the foundational research by Conan and Tversky. This has to do with cognitive biases

and how they lead to errors in judgment. The availability bias, for instance, this can make us

overweight some threat just because it's been in the news a lot. A terrorist attack, for instance,

and underweight a more likely threat like heart disease. Another common blind spot is something

called pluralistic ignorance. We think we know what other people are thinking, but often we don't.

This can lead us to assume that certain social norms are much stronger than they are.

Here's how it's explained in Nudge. A vivid example comes from an experiment in Saudi Arabia.

In that country, there has long been a custom of guardianship by which husbands are allowed to

have the final word on whether their wives work outside the home.

Asking a large group of young married men in private, whether they are in favor of female

labor force participation, economist Leonardo Burston and his colleagues learned that the

overwhelming majority answer yes. At the same time, they found that those men are profoundly mistaken

about the social norm. They wrongly think that other similar men, even those in their local

community, do not want their wives to join the labor force. Burston and his colleagues randomly

corrected the beliefs of half of those young men about what the other young men believed.

As a result, they became far more willing to authorize their wives to work. Four months after

the intervention, the wives of men in the experiment who had received the information about others'

beliefs were more likely to have applied an interview for a job. Here's the broader lesson.

If people wrongly think that most people are committed to a long-standing social norm,

a small nudge correcting that misperception can inaugurate large-scale change.

Coming up after the break, can the climate be nudged? I'm Stephen Dubner. This is Frekenomics

Radio. We'll be right back.

We're talking today with the economist Richard Thaler about his path-breaking book Nudge.

It was co-authored by Kess Sunstein, who for three years during the Obama administration ran

the office of information and regulatory affairs. It was not a nudge unit per se, like the ones

adopted by other governments around the world, but it did bring a bit of nudge theory to the realm

of federal policymaking. The idea was that some nudges might be useful, even with large,

complex and seemingly intractable problems. Climate change, for instance.

The revised edition of Nudge has a heavily revised chapter called Saving the Planet.

We're quite explicit that we don't think nudging is the answer to everything.

On climate change, we are pro-carbon tax, as is every economist that I know.

You've got to get the prices right, and then nudging can help, and every 1% helps,

but you describe it as a perfect storm. Where all the behaviors that could happen

do happen, essentially. What do you mean by climate change being the perfect storm?

Well, it's one big free-rider problem. The literal free-rider is somebody who gets on the bus

and doesn't pay. In economic terms, this term is used for somebody who isn't paying their fair share,

or on the flip side, is causing more than their share of harm. If you don't clean your furnace,

and emit a lot of dirty smoke, or you drive a hammer, or some other gas guzzling car,

you're causing harm to everybody, and the share of that that you bear is minute.

Now, what makes that worse is the exact same thing as true for countries. The US and Europe

have gotten rich by emitting a lot of carbon, and now countries like China and India

are trying to catch up, and we have to come to some fair deal, and that's difficult.

You write that it helps to think about climate change as a global choice architecture problem.

The findings of psychology and behavioral economics can help us understand how to make progress.

Okay, failure. What do you got then? What are your best nudge adjacent solutions for this

incentive-based problem-solving? Let me explain a little game called the public goods game.

We get, say, 10 people in a room, and we give them each $5, five singles, and we say,

you can contribute as many as five of those into the public good, and we're going to take all

that money that was contributed and double it, and then divvy it up among all 10 of you.

So if all 50 goes into the pot and you double it to 100, but then divide it back by the 10 of us,

I could double my money. I get 10 bucks instead of the five. Exactly.

If everybody does it. If everybody does it. So we all contribute everything and we double our money.

Now, on the other hand, the problem is that if I put in all $5, it becomes 10, but I only get a

tenth of that, so that's a bad deal. If the others don't. The early experiments showed that

initially when people play this game, they cooperate. They put in their money.

They're assuming that the others will do the generous thing. Yeah, they are conditional cooperators.

They will cooperate, assuming others will, but if they see that some people are free riding,

then they start to contribute less. But the way the game has played, you don't know what other people

are going to do, correct? Right. On the first trial, about half the money gets donated, but as you

repeat it, that goes down to something very low. So people learn that other people are jerks.

They're learning that free riders are riding free, and they don't like it. They want to punish them.

Punishment is the key word, so two Swiss economists have run an experiment where they allow people

to punish bad actors. So if I see that player SD, thanks a lot, is not contributing, then I can privately

pay a dollar to take two dollars away from him. So I lose, but he loses more.

Right. According to economic theory, I will never do that.

Right. Why would I want to lose any of my money for some smell?

But people will try to teach people a lesson. So the first surprising, surprising to economists

thing is people use this punishment tool, even though it hurts themselves. And the second

surprising thing is it works. The people who've been punished say, oh, okay, I guess I'm supposed

to cooperate. And how does that relate to the actual climate change situation?

So a Bill Nordhaus, a Nobel Laureate in economics, has suggested creating what he calls climate clubs.

I'm not sure that's the best name, but the idea would be, it's very much like the Paris Accord,

that countries would agree that we're all going to reduce our emissions, and that if anybody

doesn't live up to their promise, they'll be punished via tariffs. So if country X, which might

look a little bit like China, let's say, says we're in, but then they don't hold up their end of

the bargain. We collectively punish that country by imposing tariffs on the goods that they make.

That's the idea. Right. Okay. But what if they're not a country that sells a lot of stuff around

the world? Well, there may have to be other ways to punish them. Presumably, there might be some

countries who find it cheaper or in their interest to pay the fine, essentially, rather than cooperate

by cutting emissions so much. Is there anything you can do other than punish them or kick them out?

I think that being a member of the global society is pretty valuable. So I think in principle,

it's possible. We've put sanctions on various countries. Now, they don't always work in North

Korea, say, but I think this is the outline of a solution. It's interesting though, sanctions often

fail in the political realm. In other words, we put sanctions on, as you said, North Korea or Iran,

and they don't, quote, do what we want them to do. Do you have any reason to believe that

this kind of dynamic would work better in climate change scenario than a geopolitical scenario?

Well, I'm hopeful for it. It's the best solution I can think of. And the reason is that we are all

in this together. Climate change is going to make things worse for everyone. So there is an incentive

for us to figure this out. But all the cognitive biases or blind spots we have that you write about

in Nudge, that we only really think about things that are in front of us that are salient.

We think about ourselves more than other people. All those seem to conspire to prevent

the kumbaya-ish solution you're describing for climate change.

That's why we can't solve climate change with nudging, but we can't solve it without nudging.

The whole purpose of this climate club thing is to get a global carbon tax or the equivalent.

All right, now we've got prices set. And so now it's going to cost you twice as much to

heat and cool your house. Well, we can now use some technology and nudging

to help you manage that. If there's variable pricing, maybe your thermostat starts to beep

if the cost of cooling or heating has suddenly gone up. Or you can program it to automatically adjust.

There's lots of possibilities of helping people

automatize some of the things they want to do and make it more salient. But we've got to get the

prices right first. Here is a relevant passage from the 2021 edition of Nudge. It addresses the

concern that carbon taxes will necessarily hurt the economy. Sweden currently has the highest

carbon price in the world, about $130 per metric ton. Since the tax was introduced in 1991

at about $28 and gradually increased to its current level, the country has seen an 83% increase

in real GDP, comparable to that of other OECD member countries and a 27% decrease in emissions.

Though the tax increased gasoline prices, the response to the tax promoted significantly

larger behavioral changes than would be expected under a gasoline price increase alone.

There is a general lesson here. If a tax is understood to be responding to a serious problem,

people might respond even more than they would to the purely economic incentive.

In this context, they might hear a signal that it's good to reduce greenhouse gas emissions,

and they might be willing to do that even if it's not in their economic interest. Humans are like that.

Coming up after the break, how successful is nudging? And why is there the need for so much nudging?

We should talk about sludge. The epic showdown. Nudge versus sludge. Right after this break.

A lot of the dissent in the US in particular, especially in the political realm, is based around

these my way or the highway, black or white choices. And we rarely talk about serious policy things

and social things as both and versus either or. I'm curious whether this is a tactic that you

and others have used. Is it recent? Am I late in noticing it? And how effective is it?

My philosophy has been in designing policies to use everything that we know that works.

So let me give you an example. And it's this program that my former student Shlomo Benarzi and I

created called Save More Tomorrow. And the idea was there are some people that are saving too little

in their retirement plan. How can we help them? And Fidelity, the big mutual fund company,

once asked me to come give a talk. And they asked me to talk about this question. I hadn't

written anything about it, but I thought about it some and created this plan. And we should say

they're not unself interested. That's correct. For self serving and other reasons, they would like

people to be saving more. So we go to people and say, would you like to sign up for a plan?

Where we will increase your retirement saving soon like in a few months. Increase your saving

meaning take a little bit larger share out of your own check. Right. So let's suppose you're

saving 5% of your salary, which is woefully inadequate. We say, okay, how about when you get your next

raise, we increase it by one or two percentage points. And we do that every year until you reach

some sensible level of saving, whatever that might be, 10%, 12%. So what does this do? First of all,

it's using the fact that we all have more self control in the future. A Saint Augustine said,

God give me chastity, but not yet. Many of us are planning diets, starting, say after the next

holiday. So we're asking people whether they would want to start saving more later. That's why

we call save more tomorrow, which happens to initialize itself to smart, which is a good idea.

Then the second thing was we were linking it to raises. And the reason was that we know about

loss of version, that people are more sensitive to losing than to winning. And we know that people

make those calculations not adjusting for inflation. So if they get a 3% raise, even if inflation is

2%, they're thinking about as 3%. And so if they never see their paycheck go down, that's going to

help. And so this was throw the kitchen sink at the problem. And that's been my philosophy. Later on,

we realized that the only component of this that's really crucial is making the raises automatic

and getting people signed up. So this came to be called auto escalation. And another component

of retirement savings that you've promoted written about is called auto enrollment, meaning when

I'm an employee at a firm, rather than having to fill out 20 pages to get into the retirement

savings program, I'm just automatically enrolled unless I choose to opt out. So to me, these are the

great successes. Laws were passed. And research by you and Shlomo Benarzi and others was invoked

to really, really change the trajectory of the retirement savings of probably millions and maybe

someday billions of people. So that's awesome. That said, I knew there was something coming. And I

don't mean to imply that this wasn't a really smart idea and solution. I think it really was.

It shouldn't have taken that in the first place is my skeptics view of it. It should have been made

more attractive for people to save more in the first place rather than having to nudge people

into it. You're nudging has done a lot of good in the world. I would argue. But wouldn't it be

almost obviated if there was more good design thought that goes into the origin of programs rather

than having to fix things that are so entrenched? What you're saying is, look, you don't have to be

a genius to have thought of this. You have to be an idiot to have created the system that needed

this fix. And I have quite a bit of sympathy for that. And it's worse than that. So automatic enrollment.

I think I wrote about for the first time in the early 1990s. And I couldn't convince anybody to

do that. And one of the reasons was it had a terrible name. It was called negative election.

Oh, yeah. Let's get behind my program of negative election. A similar one is reverse mortgages.

Now reverse mortgages can have a sleazy part to them. But there are many people

who live in places where real estate is going up a lot, say in California, that a reverse mortgage

makes a huge amount of sense in that they're sitting on, say, $2 million worth of real estate

that dwarfs their other assets, their cash poor and house rich. And figuring out a way to help people

do that is smart. Then calling it a reverse mortgage, it should just be called like the biggest

piggy bank in the world. Yeah, it should be spend more today. Live a little. Get a life. I mean,

you almost can't think of a name worse than reverse mortgage.

We should talk about sludge. We will, I promise. And I have a suggestion for an excerpt,

which is the sentence we snuck in about how painful it was to do the galley.

Okay, I serve at the pleasure of Richard Thaler. Here is the excerpt he wants you to hear from

the new edition of Nudge about revising the galley. That's the nearly final version of a book

that authors are allowed to edit before the book is published.

The software our publishers provided when we were proofreading the galley of this book

was so sludge ridden that Sunstein gave up and typed up a list of changes.

We couldn't help but wonder whether this bit of sludge was designed to reduce the number

of last minute changes we introduced, such as this one.

Yeah, isn't that good? And I'm almost sure that no one at Penguin knows that sentence is in there.

So while we're here, you write at length about the omnipresence of what you call sludge.

Define that for me. So let's remember what is sludge literally? It's this thick gooey

byproduct of some industrial process that just gunk's up the works. And the prototypical Nudge,

like automatic enrollment, the principle is make it easy. Sludge makes things difficult.

And so there's lots of different kinds of sludge from massive forms. You have to fill out to

apply for student aid if you're going to college. And also business practices that involve sludge.

And of course, the fact that it rhymes with Nudge is amusing.

I'm curious if you can give us any sense of the cost of sludge on a much larger scale.

The sludge that prevents economic activity or entrepreneurialism. Any sense of the magnitude?

No, and I don't know how you would even go about it. But once you start to pay attention to it,

you see it's everywhere. I was running some experiment and had to fill out some compliance form

at a well-known university in Cambridge, Massachusetts. I filled out the form. It was three

online pages. And I got to the end and clicked finish. And I sent an email to the person

who had been pestering me to fill out the damn form and said, I'm done. And the next day I get

an email from her saying, no, you're not done. I said, what do you mean? He says, well, actually,

when you click finish, you have to then go back to the first page and press submit.

Now, to me, finish kind of means you're done. So this version is not evil. This is just pure

incompetence. Now, how much of this do you attribute to what you economists call the principal agent

problem, that the people who are making the decision or the rule or whatever, not the ones who

benefit or be hurt by it? I'm not sure. I think the much bigger problem is what we call curse

of knowledge, which is the idea that once you know something, it's hard for you to put yourself

into the position of someone who doesn't. It's hard to explain. And people who write code,

first of all, are doing it on the next generation computers, super fast. And they know how everything

works. The home mortgage market, as you write in Nudge, is highly decentralized and competitive.

And therefore, if one reads what economists generally say about centralization and competition,

you'd think that there'd be incentive to make mortgage information transparent and user friendly.

But as anyone who's ever gotten a mortgage knows, the process is not transparent and user friendly.

So this is a case where there's tons of sludge. A lot of people make poor decisions. Why has a

decentralized and competitive market not solved a problem like that? I mean, the cynic in me just

says the lobby is better than the regulators. The lobby is better than the regulators. The cynic

in you is right. And even a little bit of monopoly power goes a long way. On a busy road,

if the gas station on the other side of the street is 10 cents cheaper, how much out of your way

are you willing to go? Now, if you're my father who is no longer with us, he would drive around

burning a lot of gas to make sure he got the cheapest price. But if you're not him,

you're going to stop at some point and surrender basically. Right. And so we have proposals

along the lines of smart disclosure of making every feature of a mortgage available online,

which would allow you to shop more intelligently. And that's the way to fix that.

When you write about smart disclosure, one example you use is that it would make switching banks

much easier because if you're allowed to marshal all your existing financial information into one

place and you control the data and so on. But given the remarkable abilities of cyber criminals

these days, isn't that maybe moving in the wrong direction? I'm sure you have accounts with some

financial services companies, a bank and a brokerage or something, right? You keep your money

somewhere. I mean, I have a very large mattress. Yeah. Which room? In case I happen to be visiting.

But so they use two factor authentication and so forth. I don't think they are likely to

steal from you that way. Oh, I'm not worried about my institution stealing from me. But if you're

talking about how there's so much sludge in the system, whether I'm trying to get a mortgage,

just have a good financial setup and so on. And that one potential solution is to have all my

financial information in one place. Oh, no, no, no. I'm not suggesting that. I'm saying you

should just have access to it. In the UK, there was a bill passed that if you want to switch banks,

they have to make it easy. So you can export all your automatic payments. I see. Now that makes

banking more competitive. Now it turns out people are lazy and there's a lot of inertia. So it

hasn't been transformative, but it's the kind of law that I would like. And you know what it's

equivalent to? Remember when it used to be that if you wanted to switch cell phone providers,

you had to get a new number. So there was a law pass that says you can keep your number.

The banking law there says you can keep your auto pace with no sludge.

Here's one last excerpt from Nudge, the final edition.

Governments both create and reduce sludge. In recent years, the United States government

has imposed a whopping 11 billion hours in annual paperwork burdens on the American people.

This number includes burdens imposed on hospitals, doctors, and nurses who have to spend a lot

of time satisfying government requirements. On poor people seeking to get benefits to which they

are legally entitled, on truckers who have to fill out a lot of forms, on students, colleges,

and universities, on people who are seeking visas to study or work in the United States.

The cost of those 11 billion hours is not merely time. In many cases, sludge operates as a wall,

and people cannot find a way to get over it. As a result, they are blocked from getting permits,

licenses, money, healthcare, or some other kind of right or assistance. A sludge reduction effort

would pay big dividends. Cast Sunstein, failure's co-author on Nudge,

wrote a book called Sludge. What stops us from getting things done and what to do about it.

And we made a two-part Frekenomics Radio series about sludge. The first episode is called

Sludge Part One. The world is drowning in it. I want to end this conversation with

failure by hearing whether he thinks the behavioral economics revolution will have legs,

or if this is maybe a fleeting moment. Well, I don't think it's a fleeting moment.

And I've often said that my goal is for the field of behavioral economics to eventually disappear,

because economics will just become as behavioral as it should be.

Are we on the way toward that? I think so. And one sign of that is that I see

behavioral economics papers being presented by people who don't identify as behavioral economists,

a health economist writes a paper about a mistake people are making in choosing health insurance

plans, right? But what I would say is there are opportunities to apply behavioral economics

in all kinds of domains. And the place I think that's ready for a revolution

is human resources. What are some of the mistakes they're making?

Can we start with job interviews? Those aren't pretty much useless.

Because the relationship between the quality of the conversation and the quality of the work

zero is almost zero, almost zero.

There's a quote from Obama to three word quote in the new edition.

Better is good, he said. Can you talk about that for a second?

Yeah, so I gather from Cass is that this was something he would often say

if you're having some conversation about some policy that won't solve things but will make

things better, he would say, well, better is good. We could talk for the rest of the year about

the problems that the world faces. And in each case, we should do what we can to make incremental

changes. Do you think that the embrace of incrementalism is something that comes with age?

Because when I look at the solutions proposed by people younger than you and younger than

me, I do see more of the either or binary. I'm right, you're wrong or vice versa.

As opposed to, hey, let's improve things two or three percent. And if you do that for a bunch

of years, you've totally flipped the switch. I think we do start out more idealistic and we think,

well, we should just solve this. Right. That should never happen again anywhere. We should ban

and ban rich people. Everybody wants to get all their groceries delivered from Amazon,

but they don't want Jeff to be able to buy that yacht. And how do you explain that sentiment

as a behaviorally inclined economist? It is the case that there's growing inequality

and there's resentment about that. On the other hand, the companies that have gotten so big,

like Apple and Google and Amazon, have by and large done it by being better than everybody else.

And that is our system. So we can debate what share Larry Page and Jeff Bezos ought to get,

but the system is creating all these whizbang technologies that we all enjoy.

What did I fail to ask you that I should have? How did I get so good looking? I think we've covered

that in previous episodes. Yeah, all right. Good.

That again was Richard Thaler talking about his book Nudge, The Final Edition. If you want to hear

another show we did with Thaler some years ago, check out episode 340. It's called People Aren't

Dumb. The world is hard. I'd love to know what you thought of this episode. Our email is Radio

at Freakonomics.com. We will be back very soon with a new episode. Until then, take care of yourself.

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