Nudge

Nudge: The Final Edition. Richard Thaler. 2021. Yale University Press. 340 pp.

Back Cover

An essential new edition―revised and updated from cover to cover―of one of the most important books of the last two decades, by Nobel Prize winner Richard H. Thaler and Cass R. Sunstein. More than 2 million copies sold.

Since the original publication of Nudge more than a decade ago, the title has entered the vocabulary of businesspeople, policy makers, engaged citizens, and consumers everywhere. The book has given rise to more than 400 “nudge units” in governments around the world and countless groups of behavioral scientists in every part of the economy. It has taught us how to use thoughtful “choice architecture”—a concept the authors invented—to help us make better decisions for ourselves, our families, and our society.

Now, the authors have rewritten the book from cover to cover, making use of their experiences in and out of government over the past dozen years as well as an explosion of new research in numerous academic disciplines. To commit themselves to never undertaking this daunting task again, they are calling this the “final edition.” It offers a wealth of new insights, for both its avowed fans and newcomers to the field, about a wide variety of issues that we face in our daily lives—COVID-19, health, personal finance, retirement savings, credit card debt, home mortgages, medical care, organ donation, climate change, and “sludge” (paperwork and other nuisances we don’t want, and that keep us from getting what we do want)—all while honoring one of the cardinal rules of nudging: make it fun!

Summary + Notes

Introduction

The Cafeteria. Experiment in food choice. By rearranging the cafeteria, Carolyn can increase or decrease the consumption of food items. A Choice Architect has the responsability for organizing the context in which people make decisions. In Amsterdam's Airport a black fly image was etched into each urinal. It improved the aim and spillage was reduced by 80%. Libertarian paternalism. Libertarian: Free to choose. As long as they are not harming others people should be free to do what they like. Paternalism: It is legitimate to influence people's behavior to make their lives longer, healthier, and better. Nudge: Any aspect that alters people's behavior in a predictable way without forbidding any options or significantly changing their economics incentives. The intervention must be easy and cheap to avoid. Econs and humans. Homo economicus and Homo sapiens. Econs: Make unbiased forecasts. Humans: Make predictable mistakes. False assumption: Most people, most of the time, make choices that are in their best interests. Misconception 1: It is possible to avoid influencing people's choice. Misconception 2: Paternalism always involves coercion. Freedom to choose is the best safeguard against bad choice architecture. Choice architecture in action. Designers should make life as easy as possible.

HUMANS AND ECONS

1. Biases and blunders

Rules of thumb. 

1. Anchoring and adjustment. You start with some anchor, a number you know, and adjust in the direction you think is appropriate. The bias occurs because the adjustments are typically insufficient. Anchors serve as nudges. Examples: default settings: insufficient or aggressive. Reactance: Do the opposite of what is being ordered. If you get greedy, you might end up with nothing.
2. Availability. Assess the likelihood of risks by asking how readily examples come to mind. Accessibility and salience are closely related. People is greatly affected by recent experiences. Biased assessments of risk can perversely influence how we prepare for and respond to crises, business choices, and the political process. When availability bias is at work, both private and public decisions may be improved if judgments can be nudged back in the direction of true probabilities.
3. Representativeness. Stereotypes are sometimes right. 

Optimism and Overconfidence. The “above-average” effect is pervasive. Nearly everyone thinks they are above-average. Unrealistic optimism can explain a lot of individual risk-taking, especially in the domain of risks to life and health. Unrealistic optimism is a pervasive feature of human life; it characterizes most people in most social categories. When they overestimate their personal immunity to harm, people may fail to take sensible preventive steps.

Gains and Losses. People are “loss averse.” The prospect of losing something makes you twice as miserable as the prospect of gaining the same thing makes you happy. Loss aversion produce inertia, a strong desire to stick with your current holdings, so you will turn down trades you might have otherwise made. Loss aversion has a lot of relevance to public policy. People don’t want to lose money, even if the amount is trivial (Environmentalists, please remember this point).

Status quo. Status quo bias is easily exploited. One of the causes of status quo bias is a lack of attention. Many people often adopt what we call the “yeah, whatever” heuristic. The combination of loss aversion and mindless choosing is one reason why if an option is designated as the default, it will usually (but not always!) attract a large market share. Default options thus act as powerful nudges.

Framing. Framing matters in many domains. Choices depend, in part, on the way in which problems are described. The point matters a great deal for public policy.

How We Think: Two Systems. Imagine the brain as consisting of two systems. One is fast and intuitive (gut reaction); the other is slow and reflective (conscious thought). We call them the Automatic System and the Reflective System. 

So What? In a complex world in which they cannot afford to think deeply and at length about every choice they have to make, people adopt rules of thumb that usually work well but sometimes lead them astray, especially in challenging or unfamiliar situations. What can we do?Help. People are nudge-able. Their choices can be influenced. Example: Lake shore drive, Chicago.

2. Resisting Temptation

Warning: Temptation and mindlessness together. Some people realize that temptation exists, and take steps to overcome it (Ulysses). So, strategies work well if the risk of submitting to temptation can be anticipated, and removing the temptation is feasible. But in many situations we do not correctly forecast a pending self-control problem. Self-control problems can be illuminated by thinking about an individual who contains two selves: a farsighted “Planner” and a myopic “Doer.”

Self-Control Strategies. Since we are at least partly aware of our weaknesses, we sometimes take steps to engage outside help. Example: Clocky, promissory notes for PhD students. In some situations, people may want the government to help them deal with their self-control problems. Examples: taxes for smokers, casino bans. In many cases, markets provide self-control services, and government is not needed at all. Examples: Planning apps. But even when we’re on our way to making good choices, competitive markets find ways to get us to overcome our last shred of resistance to bad ones. 

Mental accounting. Adopt internal control systems, otherwise known as mental accounting. According to economic theory (and simple logic), money is fungible, meaning that it doesn’t come with labels. But households adopt mental accounting schemes that violate fungibility for the same reasons that organizations do: to control spending. Mental accounting matters precisely because the accounts are treated as nonfungible. Using mental accounts can be extremely valuable. They make life both more pleasurable and more secure.

 3. Following the Herd

Econs are not followers of fashion. Their hemlines do not go up and down except for practical reasons. Humans, on the other hand, are often influenced by other Humans, even when they shouldn’t be. Humans are easily nudged by other Humans. Why? One reason is that we like to conform. 

Doing What Others Do. Why, exactly, do people sometimes ignore the evidence of their own senses? We have already sketched out the two main answers. The first involves the information that seems to be conveyed by other people’s answers; the second involves peer pressure and the desire not to face the disapproval of the group. There is an important clue here about how seemingly similar groups, cities, and even nations can converge on very different beliefs and actions simply because of modest and even arbitrary variations in starting points. people tend to think that confident speakers must be correct. For this, they can move groups and practices in their preferred direction. Significantly, the initial judgments were also found to have effects across the laboratory equivalent of “generations.” an arbitrary “tradition,” in the form of some judgment about the distance, can become entrenched over time. Social pressures nudge people to accept some pretty odd conclusions.

Cultural Change, Political Change, and Unpredictability. Small interventions and even coincidences, at a key stage, can produce large variations in the outcome. Nothing is better than a perception that voters are shifting to a candidate in droves. Driven by the widespread perception that other people are flocking to that candidate.

Identity: What People Like You Do. For choice architects who want to use social influences, a challenge is to work with, rather than against, people’s sense of who they are. We might even give it a name: identity-based cognition. Nudges use social influences and social norms, they are most likely to be promising if people are asked to learn from and act like people who are like them—and whom they trust.

Pluralistic Ignorance. pluralistic ignorance—that is, ignorance, on the part of all or most, about what other people think. The Emperor’s New Clothes. 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.

Social Norms as Nudges. If you would like to increase turnout, please do not lament the large numbers of people who fail to vote. But do tell people that many of their neighbors vote! People seem simply to respond best to norms set by others in similar settings and circumstances. The researchers called such specific in-grouping “provincial norms.” As any adolescent will tell you, peer pressure is real.

PART II: THE TOOLS OF THE CHOICE ARCHITECT 

4. When Do We Need a Nudge?

What’s the best response? Offer nudges that are most likely to help and least likely to inflict harm. 

Spacing out. Perhaps the single most common mistake any of us make is simply to forget something. Reminders have become ubiquitous and can work as terrific nudges.  

Get out the vote. Voting intentions: 1) What time do you expect you’ll head to the polls? 2) Where do you expect you’ll be coming from? and 3) What do you think you’ll be doing before you head out? The idea for these follow-up questions came from research by psychologist Peter Gollwitzer, who found that people were more likely to fulfill their goals if they had made explicit “implementation intentions.”

Checklists. The Checklist Manifesto, by Atul Gawande. Lower-status members of the team, such as nurses, might normally be reluctant to pipe up if a famous surgeon has skipped a step, but if it is considered part of their job, they do it. All organizations work better if everyone is empowered to speak up when the boss is about to make a mistake.

Benefits Now, Costs Later. Predictable problems arise when people must make decisions that test their capacity for self-control. Self-control issues are most likely to arise when choices and their consequences are separated in time. At one extreme are what might be called investment goods. For these goods the costs are borne immediately, but the benefits are delayed. At the other extreme are what might be called temptation goods. We get the pleasure now and suffer the consequences later. Both investment goods and temptation goods are prime candidates for nudges.

Frequency. Even hard problems become easier with practice; solving them can even become automatic. Unfortunately, some of life’s most important decisions do not come with many opportunities to practice. Difficult and rare choices are good candidates for nudges.

Feedback. Even practice does not make perfect if people lack good opportunities for learning. Learning is most likely if people get immediate, clear feedback after each try. For example, we usually get feedback only on the options we select, not the ones we reject. Long-term processes rarely provide good feedback. When feedback is ineffective, we may benefit from a nudge.

Knowing What You Like. These are examples for which we have had the time to sample the alternatives and learn about our tastes. But suppose that you have to forecast your preferences for the unfamiliar. The benefit of having so little choice is that the chef is authorized to serve you things you would never have thought to order. It is particularly hard for people to make good decisions when they have trouble translating the choices they face into the experiences they will have. When people have a hard time predicting how their choices will end up affecting their lives, they have less to gain from having numerous options and perhaps even from choosing for themselves. A nudge might be welcomed.

Markets: A Mixed Verdict. Do competitive markets protect consumers from scams? Sadly, the answer is no. With respect to health, romance, and money, it is not at all hard to exploit people’s lack of information. Companies have a strong incentive to exploit behavioral biases, including availability, unrealistic optimism, and anchoring. And they certainly try to create informational cascades. Much of the time, more money can made by catering to human frailties than by helping people to avoid them. If Humans have problems, they might benefit from a well-chosen nudge.

5. Choice Architecture 

Stimulus response compatibility. The idea is that you want the signal you receive (the stimulus) to be consistent with the desired action. When there are inconsistencies, performance suffers and people blunder. It is possible to incorporate human factors into design (The Design of Everyday Things by Don Norman) Good design is often no more expensive than bad design. If you want to encourage some action or activity, Make It Easy. Kurt Lewin called “channel factors” to the small influences that could either facilitate or inhibit certain behaviors.

Defaults: Padding the Path of Least Resistance. Many people will take whatever option requires the least effort, or the path of least resistance. This imply that if there is a default option—an option that will prevail if the chooser does nothing—then we can usually expect a large number of people to end up with that option, whether or not it is good for them. Defaults are ubiquitous and powerful. If people know their preferences, and know that they dislike the outcome that is embedded in the default, they will probably change it. Active choosing. There is an intermediate option: prompted choice. When choice is complicated and difficult, people might greatly appreciate a sensible default. Required choosing is often more appropriate for simple yes-or-no decisions than it is for more complex choices.

Expect Error. Humans make mistakes. A well-designed system expects its users to err and is as forgiving as possible. Examples: Paris subway system, Le Métro versus Chicago parking garages. Postcompletion error: when you have finished your main task, you tend to forget things relating to previous steps.

Give Feedback. An excellent way to help Humans improve their performance is to provide feedback. Well-designed systems tell people when they are doing well and when they are making mistakes.

Mappings. The relation between choice and welfare is a mapping. A good system of choice architecture helps people to improve their ability to map choices onto outcomes and hence to select options that will make them better off. One way to do this is to make the information about various options more comprehensible, by transforming numerical information into units that translate more readily into actual use.

Structure Complex Choices. People adopt different strategies for making choices depending on the size and complexity of the available options. When we face a small number of well-understood alternatives, we tend to examine all the attributes of all the alternatives and then make trade-offs when necessary. But when the choice set gets large, we must use alternative strategies, and these can get us into trouble. Good choice architects often winnow the choice set down to a manageable size. Compensatory strategy: A high value for one attribute can compensate for a low value for another. Elimination by aspects: First decide what aspect is most important, establish a cutoff level, then eliminates all the alternatives that do not come up to this standard. The process is repeated, attribute by attribute, until either a choice is made or the set is narrowed down enough to switch over to a compensatory evaluation of the finalists. As the choices become more numerous or vary on more dimensions, people are more likely to adopt simplifying strategies. Collaborative filtering: Algorithms use the judgments of other people who share your tastes to filter through the vast number of books or movies available in order to increase the likelihood of picking one you like. Public-spirited choice architects know it’s good to nudge people in directions that they might not have specifically chosen in advance. Structuring choice sometimes means helping people to learn, so they can later make better choices on their own.

Incentives. Choice architects must think about incentives when they design a system. Sensible architects will align the incentives of the most important decision makers. One way to start to think about incentives is to ask four questions about a particular choice architecture: Who chooses?, Who uses?, Who pays?, Who profits? The most important modification that must be made to a standard analysis of incentives is salience. Do choosers actually notice the incentives they face? In free markets, the answer is usually yes, but in important cases it can be no.

When to Take a Break. Intermissions. 

6. But Wait, There’s More

Curation. Curation is essential for any business that wants to compete with online giants. Small shops compete via curation, while online megastores use navigation tools to make finding and choosing among so many options easy. Good curation combines getting rid of bad options and introducing novel ones.

Fun. First mantra of nudging is to make it easy to take the desired action. A good complement to this advice is to make the desired activity fun. Work consists of whatever a body is obliged to do. Play consists of whatever a body is not obliged to do. Whenever we can make some activity seem like play, pique our curiosity, or build excitement or anticipation, we will find that people are not only willing to undertake that activity; they even may be willing to pay for the opportunity! Participants are likely to find a lottery more enticing if they find out whether they would have won. The idea is to play on people’s feelings of regret. 

7. Smart Disclosure

Smart Disclosure. How information is collected and made available to consumers.

Measurement. Good choice architects not only have to pick a standardized way to measure but also need to think carefully about how to report the findings, so that Humans do not get confused. Truth in Lending Act, required all lenders to report interest rates using the same formula. This method of calculating an interest rate was dubbed the annual percentage rate (APR). Borrowers could compare the cost of borrowing by looking at just one number: the quoted APR. Through regularization, consumers can easily compare the offers from competing suppliers.

Smart Disclosure. The fine print contains that information the seller is required to tell you but does not want you to read. Make All Disclosures Machine Readable. 

8. #Sludge

The opposite to Make It Easy. The dark side of choice architecture. The term was originally used in a 2016 article in the Huffington Post. The term dark patterns refers to an assortment of online practices that are specifically designed to manipulate people (in order to take their money). Some choice architects intentionally impose sludge, inserting friction into a process in order to achieve goals of their own. Some dark patterns count as sludge; they impose a lot of friction if people want to avoid certain charges. Other types of sludge are the inevitable by-product of a well-intended administrative process, designed to ensure that people actually qualify for or are entitled to something they want. Sludge can be a by-product of efforts to ensure program integrity. A more formal term for red tape is administrative burdens.

The Unsubscribe Trap. Asymmetry between the ease of joining and the pain of leaving. California and New York now require that any subscription that is initiated online can also be canceled online.

Shrouded Attributes as Sludge. The headline price of the good understates the true cost to the user because the shrouded attributes, and their costs, are hard to discover. Example: razor and blades. Strategies to make pricing less transparent.

Private Sector Red Tape. Refundables. Some expenses may increase with freedom. But the costs from overspending are not nearly as high as the gains that freedom provides. With expense freedom, employees will be able to make quick decisions to spend money in ways that help the business.

College Admissions. Susan Dynarski: Encourage high-achieving Michigan high school students from low-income families to apply to the University.

Governments. Sludge at the Airport. Sludge Online. Taxes. Design of tax systems. Factors to emphasize: incentives (how taxes alter behavior), equity (how much each person should pay), incidence (who actually pays for a particular tax), and compliance (to what extent people pay what they legally owe). All of these are obviously important, but to that list we would like to add sludge: how much time and effort is spent either complying with or evading a given tax. Progress on reducing sludge in government will likely be incremental.

PART III: MONEY

9. Save More Tomorrow

Only recently did the combination of rising life expectancy and geographical dispersion of families make it necessary for people to think about providing for their own retirement income rather than depending on their children. Defined-benefit plans, so named because the promises made to workers are about the payments, or benefits, they will receive when they retire. In such plans, participants are usually entitled to a lifetime payment stream that starts when they retire. Defined contribution comes from the fact that the plans stipulate only how much employers and their employees contribute (invest) into a tax-sheltered account in the employee’s name. 

Are People Saving Enough? Whenever we engage in directional nudging, we should be confident that we are likely to make people better off, as judged by them. First, it seems clear the costs of saving too little are usually greater than the costs of saving too much. Second, some people are definitely saving too little. Humans could use some help on three fronts: enrolling in the plans, increasing their contribution rates, and improving their investment returns.

Enrollment Decisions. Nudging People to Join. The first step in participating in a defined-contribution plan is enrollment. Make joining the default. Automatic enrollment. Firms have an average participation rate of 93 percent. In contrast, the firms that still require employees to opt in obtain only a 47 percent participation rate.

Increasing Savings Rates. Save More Tomorrow. Self-control restrictions. Loss aversion. Money illusion. Inertia. The Save More Tomorrow plan invites participants to commit themselves to a series of contribution increases timed to coincide with pay raises. By synchronizing pay raises and savings increases, participants never see their take-home amounts go down. Kitchen sink strategy of incorporating as many favorable features as possible. Automatic escalation: savings rates are automatically increased annually, in which employees start at 3 percent and increase by 1 percent per year up to some maximum, such as 10 percent. Others simply make it an option that employees can elect.

Default Investment Options. Qualified Default Investment Alternatives. Most companies now pick a so-called balanced fund, which means a mixture of stocks and bonds.

Best Practices. National Employment Savings Trust (NEST) system was created in the UK in 2008. The law required that all employers that do not offer a retirement plan automatically enroll their workers into NEST. Both employees and employers make contributions, and the government administers the plan. Fees are reasonable. 

10. Do Nudges Last Forever? Perhaps in Sweden

Social Security funded on a “pay as you go” basis, means that the taxes paid by people working now support the benefits to those retired. That system is being threatened by two demographic trends. The first is that people are living longer, which means they collect benefits for more years. The second is that people are having fewer children, so the ratio of workers to retirees is falling, threatening the viability of the system. Sweden has a social security tax rate of 16 percent of income. Participation is mandatory and it is mostly a defined-benefit plan. Pro-choice: Maximize Choices strategy. Give people as many options as possible, and then let them do whatever they want. Laissez-faire approach:

1. Participants were allowed to create their own portfolios by selecting up to five funds from an approved list.
2. One fund was chosen (with some care) to be a default fund for anyone who, for whatever reason, did not make an active choice.
3. Participants were encouraged (via a massive advertising campaign) to choose their own portfolios rather than rely on the default fund.
4. Any fund meeting certain fiduciary standards was allowed to enter the system. Thus, market entry determined the mix of funds from which participants could choose. As a result of this process, there were initially 456 (!) available funds.
5. Information about the funds, including fees, past performance, and risk, was provided in a booklet to all participants.
6. Funds (except for the default) were permitted to advertise to attract money.

The Default Fund. Two-thirds select portfolios: Active Choosers. One-third ended up with the default: Delegators.

Did Active Choosers Make Good Choices? First, although the allocation to stocks in the default plan was quite high, it is even higher in the portfolios actively chosen. Second, the Active Choosers elected to invest nearly half their money (48.2 percent) in the stocks of Swedish companies. This reflects the well-known tendency of investors to buy stocks from their home country, something that economists refer to as the home bias. Third, the fees paid by the Active Choosers were much higher. Investors have traditionally had trouble distinguishing between past returns and forecasts of future returns.

Advertising. Fund advertising did strongly affect investors’ portfolio choices. It steered people into portfolios with lower expected returns (because of higher fees) and higher risk (through a higher exposure to equities, more active management, more “hot” sectors, and more home bias).

Lessons. It is healthy for investors to be encouraged occasionally (once every twenty years does not seem too often) just to start over.

11. Borrow More Today: Mortgages and Credit Cards

Complexity problem: to have expert advisers providing help. Advisers: conflicts of interest. Complicated markets, unsophisticated and less-educated shoppers are disadvantaged. Unsophisticated shoppers are more likely to be given bad or self-interested advice by people serving in roles that appear to be helpful and purely advisory. Transparency: fees and costs are not hidden: full disclosure. Smart Disclosure: To make all the details available in a structured electronic format, continually updated in an online database.

Credit Cards. Credit cards inhibit self-control in other ways. The traditional approach to dealing with issues like this is thorough regulation. Credit Card Accountability Responsibility and Disclosure (CARD) Act. The law has been found to save consumers about $11.9 billion annually: The savings are concentrated among people with poor credit ratings. 

12. Insurance: Don’t Sweat the Small Stuff

Insurance: To get protection against rare but significant mishaps that can lead to financial ruin. Don’t insure the small stuff is really good advice. When purchasing insurance, choose the largest deductible available. People choose a deductible that is too low. A name for this mistake: deductible aversion.

Extended Warranties. My Own Account. 

Health Insurance. Myopia. The default plan better than many of the policies people actively chose. A majority of employees selected a plan dominated by another one. High-deductible plan usually guarantees lower costs.

PART IV: SOCIETY

13. Organ Donations: The Default Solution Illusion

In presumed consent countries, few people chose to opt out. In explicit consent countries, most people failed to opt in. Prompted choice. Central goal is to save lives, by making more organs available. But it is also important to consider competing interests, preferences, and rights. Three groups of people: Patients, who need or will need an organ to save their life. Potential Donors, who at some point in their life may be close to death and whose organs could help save lives. And Families. Actions by both Potential Donors and their Families, who are often consulted, are important in determining how many organs are obtained. Routine removal: In this regime, the state owns the rights to the body parts of people who are dead, and their organs can be removed without asking anyone’s permission. This violates the right that individuals should be able to decide what is to be done with and to their bodies.

Presumed consent. All citizens are presumed to be consenting donors unless they explicitly register as unwilling donors. When opt-out rates are quite low, we have two plausible explanations: Lack of salience (they didn’t know they had a choice) and sludge (opting out is costly). Soft presumed consent because the law requires that Families always be consulted and their wishes honored. Families have very little information about donors’ wishes.

Explicit Consent. People have to take some concrete steps to state that they want to be donors. Prompted Choice. It enhances explicit consent with a concerted effort to nudge willing donors into becoming registered donors. Example: Immortal Fans, Sport Club Recife.

Mandated Choice. It requires everyone to declare whether they want to be an organ donor. Mandated choice can backfire. When Texas implemented a mandated choice system, only 20 percent of citizens agreed to be donors. Reactance: when people feel ordered around, they might get mad and do the opposite of what is being ordered.

Lives saved. Does switching to presumed consent save lives? United States, with its prompted choice opt-in system, has one of the highest donation rates in the world. In fact, donations are 27 percent higher in opt-in jurisdictions than in those using opt out.  

Bottom Line. The goals should be to save lives, to respect the rights of Potential Donors, and to protect the interests of Families. First, learn the best practices from elsewhere (emphasis on technical and administrative issues), and second, experiment alternative ways of prompting more sign-ups, incentives for joining the list, and media campaigns.

14. Saving the Planet

A Perfect Storm. Some basic lessons of behavioral economics help explain why nations have not done more.

• Present bias. People much more concerned with now as opposed to later.
• Salience. Greenhouse gases are invisible. If you can’t even see them, you might not worry about them.
• No specific villain. Climate change is faceless.
• Probabilistic harms. The harms caused by climate change are often probabilistic.
• Loss aversion. First, people do not get clear feedback on the environmental consequences of their actions. Second, free riding.

Creating Cooperation. Tragedy of the commons (Garrett Hardin, 1968). Public goods (Paul Samuelson, 1954). The free-rider problem exacts coordinated actions by governments around the world. Conditional cooperators: They are willing to contribute to the public good as long as others are doing so, but if others are free riding, contributions dry up. The tricky part, Who’s going to contribute how much to the public good pot? Fehr and Simon Gächter shown that cooperation in repeated public goods games increase if players are allowed to punish noncooperators at their own expense. Cooperation increases as the game is repeated.

Better Incentives. First, to impose costs on those who pollute. A tax on greenhouse gas emissions is one example. Second, a cap-and-trade system. Those who pollute are given (or sold) a limited number of “rights to pollute” (the cap), and these rights are then traded in a market.

Green Taxes. Set a price that they think will give people the right incentives to reduce the amount of emissions they produce. Incentives, including taxes, have helped spur innovation. I.e., from carbon to green. To assure progressivity a carbon tax should be “bundled” with economic help, so as to ensure that lower-income people are not net losers from the tax (at least on average). If you want strong and immediate reductions, taxes can definitely get us there. We can reduce emissions significantly with a stiff tax that becomes increasingly stiffer over time. 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. 

Cap-and-Trade system starts by specifying the desired level of emissions (the cap), then allows markets to determine the price of emissions permits.

Energy Paradox. Consumers might not take adequate account of the potential savings when choosing efficient appliances. Research suggests that consumers pay too little attention to those benefits.

Feedback and Information. A serious obstacle to improved incentives is that the costs of pollution are hidden, while the today cost is quite salient. Information can be a surprisingly strong motivator. Example: Toxics Release Inventory. Disclose Greenhouse Gas Emissions.

Automatically Green. Make the green option the easy option. Policy and technology are making green defaults available. Example: Default green energy in Germany. 

PART V: THE COMPLAINTS DEPARTMENT

15. Much Ado About Nudging

Not everyone has the well-being of others as a first priority. Choice architecture and nudging are inevitable; you cannot wish them away. Well-designed choice architecture can achieve a lot, it is not just tweaks. 

Freedom and Active Choice. Active choosing is a form of choice architecture, and people can be nudged to make active choices. Required active choosing is most suitable when the choices are simple. In more complex situations, such as choosing from a menu of hundreds of mutual funds, forcing people to choose is a dubious strategy. Active choosing is often a good idea, although in some occasions, curation and well-designed defaults are preferable.

Don’t Nudge, Boost. Training. First, the longer the training period, the bigger the results. Second, the effects are modest. Third, beneficial effects are found to vanish over time.

Is Nudging Sneaky? Transparency about nudging does not reduce its impact. The publicity principle. John Rawls. No choice architect in the public or private sector should adopt a policy that she would not be able or willing to defend publicly.

On Mandates and Bans. There are plenty of externality-reducing nudges. But nudges are not enough to control externalities. When we should move from nudges to bans and mandates (or vice versa)? Cooling-off periods: To fix ill-considered or improvident decisions taken in the heat of the moment. Mandatory waiting period. Mandates and bans are certainly justified in some contexts. If people’s choices result in harm to others, we might want a prohibition (consider laws against assault and theft) or a corrective tax (consider greenhouse gas emissions). If people are making stupid, myopic, or self-defeating decisions, we wouldn’t put mandates off the table.