In 2008, three professors were in Napa, California, to lead a one-and-a-half-day class for some tech industry types, titled “A short course in behavioral economics”.
Those attending included Jeff Bezos, the Amazon founder; Elon Musk, the PayPal and Tesla co-founder; Sean Parker, Facebook’s first president; Evan Williams, the Twitter co-founder; and Salar Kamangar, then the YouTube CEO, now a senior executive at Google. The transcript of the class, published online, records that at one point, in a discussion on “the psychology of scarcity” and marketing strategies, Bezos felt moved to mention a “famous strip club in Seattle” which had the slogan “99 Beautiful Girls and 3 Ugly Ones”. Musk interjected: “You know it well?”
One of the professors leading the class was Richard Thaler of the University of Chicago, a pioneer in the field of behavioural economics, who had just co-authored a book titled Nudge: Improving Decisions about Health, Wealth, and Happiness with his then Chicago colleague Cass Sunstein. Thaler would go on to win a Nobel prize in 2017 for his work pre-dating the book.
The Silicon Valley students heard him explain how behavioural economics challenges the “restrictive assumptions of traditional economics”, which hold that all humans are “unbelievably smart”, and instead aims to “incorporate lessons from psychology about how the mind works and how real humans think”.
Thaler recalls subsequently emailing Bezos to enquire why Amazon was selling Nudge for the same 9.99 price in dollars, pounds and euros: “He didn’t reply, but the prices did change.”
Amazon has shifted a good few units of Nudge since then – and is now doing so with the updated “final edition”, published in August, of a work described in its blurb as “one of the most important books of the twenty-first century”. The nudges of behavioural science and economics are now being deployed by tech companies to “determine the news we read, the products we buy…and the human networks, online and in real life, of which we are a part”, one academic has argued. Meanwhile, the Organisation for Economic Cooperation and Development has counted 200 instances of “nudge units” worldwide being used to bring behavioural insights into public policy. Thaler’s work has also helped ensure that millions of people, in countries including the US and UK, are auto-enrolled in workplace pension schemes.
So just how did he achieve such extraordinary impact, and what social and political legacy might his work be leaving?
“When you’re studying economics, you find yourself studying this fictional creature, Homo economicus…I just never met anybody like that,” says Thaler on what led him to shape the field of behavioural economics.
Homo economicus, adds the Charles R. Walgreen distinguished service professor of behavioural science and economics at Chicago, “could look at a dozen mortgages and immediately figure out which one is best, figure out how much to save for retirement, what career to choose, what spouse to pick. They never eat too much or drink too much. They’re kind of weird.”
Although Thaler wrote “a very traditional thesis” (at the University of Rochester), he found that the disconnect between economic theory and the reality of human behaviour “kept troubling me”. Eventually, in the mid-1970s, he “stumbled on” research by Israeli psychologists Daniel Kahneman, now professor emeritus of psychology and public affairs at Princeton University, and Amos Tversky, who worked at Stanford University until his death in 1996 (Kahneman subsequently won a Nobel prize, for “having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty”). Thaler and Kahneman went on to become academic collaborators?– Kahneman also taught that Silicon Valley class in 2008, having led a similar event focused on psychology in 2007.
Although Kahneman and Tversky were psychologists writing for psychologists, Thaler “realised that they had an insight that was really fundamental for economists…The way people solve problems and in particular the way they deal with uncertainty – yes, they make mistakes, but they are predictable mistakes. Just that sentence – ‘people make predictable mistakes’ – made behavioural economics possible.”
After working at Cornell University, Thaler moved on in 1995 to Chicago, despite the of leading figures of the famously orthodox Chicago School, who were rather fond of Homo economicus.
Thaler cites Max Planck’s adage about science advancing funeral by funeral: “I don’t think I ever changed anybody’s mind in economics. Once we did get a little bit of traction, my strategy was to corrupt the youth.?I think the reason the field has taken off is largely due to the fact that very talented young scholars – who are now middle-aged – didn’t find anything particularly heretical about this…Most of the economists under 45 at my institution think of behavioural economics as just part of the repertoire now.”
So what nudged this New York City actuary’s son to take on the mantle of?Homo academicus? The main thing he learned from his father’s career with?a large insurance company, he says, “was that I didn’t want to be a company man…I’m a lousy subordinate – that was the insight I had when I was a kid. I became an academic not because I’m some sort of intellectual, but because I’m not very good at taking orders.”
An aversion to orders characterises Nudge, which has at its core a philosophy the authors term “libertarian paternalism”. Thaler and Sunstein use the example of a school cafeteria presenting its food and menus in a way that encourages kids to choose food that is better for them. The libertarian element of their thought reflects their belief that people should be “free to do what they like” and opt out of arrangements they don’t like; the paternalistic element the idea that it is “legitimate for choice architects”, whether in governments or the private sector, “to try to influence people’s behaviour in order to make their lives longer, healthier, and better”.
A nudge “alters people’s behaviour in a predictable way without forbidding any options or significantly changing [their] economic incentives” – like putting the fruit at eye level in a school cafeteria. Or, in the book’s best-known example, painting flies on to the urinals in the toilets at Amsterdam’s Schiphol Airport, which created a target that apparently improved men’s accuracy and thus cleanliness (worth a shot at home for anyone with young sons).
In terms of where his work has had the greatest impact, Thaler singles out pension auto-enrolment – something he had been banging the drum for since as far back as 1994, well before Nudge. The book uses this as a central example of how “choice architects” can help people make better choices by making sensible options the default: pension auto-enrolment is a way of getting people to save for their retirement, weighing against their mostly poor or lazy decisions not to enter a workplace scheme, but not compelling them to do so (workers can opt out after being auto-enrolled).
In the US, the federal government has encouraged companies to adopt this policy since 2006. The UK scheme, phased in by the government since 2008, has ensured that more than 90 per cent of eligible private-sector workers are now part of a workplace pension scheme.
Thaler says: “I think 90 per cent plus freedom of choice is a pretty attractive combination…These ideas, which were radical when they were introduced, are now considered part of best practices.”
Boiled down, Nudge is a synthesis of academic papers from economics and psychology, many by other academics, explained in a folksy style for non-specialists, supporting an overarching argument on libertarian paternalism. Rohan Silva, an adviser to then Conservative shadow chancellor George Osborne when Nudge was published in 2008, read the book, “bought a pile of them and put them in Conservative Party headquarters, and David Cameron [then Tory leader] picked one of them up. That was a nudge,” says Thaler. “He liked what he read and they put it in the Tory manifesto.”
Meanwhile, in the US, Sunstein was hired by Barack Obama (a friend from his time as a fellow Chicago law professor) to run the US government’s Office of Information and Regulatory Affairs. That “gave us two places to see how things might work”, reflects Thaler. “We certainly didn’t do a lot of proselytising” for the book, he adds. Out of the 200 nudge units around the world, in nations including Australia, New Zealand, Singapore and Finland, “I’ve probably talked to five of them”.
Nudge led directly to the creation of the UK’s Behavioural Insights Team, or “Nudge Unit”, established as part of the Cabinet Office under the Cameron government, although now spun out into an independent company. That unit’s work has looked at ways of encouraging people to pay their tax on time, increasing rates of organ donation and cutting the rate of reoffending among drivers caught speeding.
The existence of the UK nudge unit also led to behavioural science becoming an integral part of government decision-making during the pandemic: the unit’s chief executive, David Halpern, is a member of the Scientific Advisory Group for Emergencies, as are two other employees of the unit.
The OECD’s tally of?more than 200 nudge units in governments and NGOs is “pretty amazing”, says Thaler, especially “considering that publishers were running away from us as quickly as they could when we were shopping this book”.
Why the lack of interest? “Let’s just say that the phrase ‘libertarian paternalism’ doesn’t roll off the tongue,” he replies. “In fact, the title Nudge was suggested by one of the publishers who turned the book down…I’ve offered to buy him dinner.”
In addition to Thaler’s policy influence, there’s his corporate influence, some of it maybe via that 2008 Silicon Valley class. Bezos referred to “automated machine-learned ‘nudges’” deployed by Amazon in a letter to shareholders in 2015.
The Silicon Valley students “asked a lot of questions”, Thaler says. “Who knows what impact it had on any of them? But Amazon now has the largest economics department in the world. There are over 100 economists, PhD economists, that work at Amazon. I don’t know how many of them are doing behavioural economics, but they are certainly running experiments all the time.”
Perhaps there is a nudge influence in the way the Amazon website, for example, uses what the firm knows about customer interests, and their susceptibility to the opinions of others through reviews, to influence our choices.
“Some people think of [Amazon] as some evil villain…I think that’s bit naive,” Thaler says. “If Amazon recommends things to me, it’s not in their interest to recommend things I won’t like.” He is “aware of all the market power that is held by those large technology firms”, but thinks “they have all gotten where they are in part because they are very good at what they do”.
Some critics would challenge that as simplistic. In for The New York Review of Books, mainly on the work of Kahneman and Tversky but also addressing Thaler’s, New York University philosopher Tamsin Shaw traced a line from behavioural science through to the commercialisation of preferences in the digital economy, and even to the psychological manipulation deployed in politics by Cambridge Analytica and by Donald Trump’s successful 2016 presidential campaign. Shaw argued that behavioural change “imposed on us through nonrational means” results in a situation where the “sources of influence that shape social behavior, markets, and politics increasingly become invisible and rationally inscrutable”.
Thaler calls this “a bit overwrought and ill-informed. I think we make clear in the final edition [of Nudge] that nudging can be done for good or evil. We didn’t invent it, we just gave it a word, and we do not have many secrets that [notorious conman Charles] Ponzi had not deduced for himself.”
Political critiques include a recent by?Nicholas Gane of the University of Warwick characterising Thaler’s libertarian paternalism as “neoliberal” since it “treats the underlying structure of life-choice as psychological rather than social in basis and thus as something that can be remedied through small behavioural interventions”. It was also, under the Cameron government, “partner” to a state-shrinking austerity programme, Gane argues.
So is Nudge a political project?
“We thought of it as a kind of third way,” replies Thaler. Both he and Sunstein “consider ourselves centrists – and have gotten criticism from both left and right…Which I view as a badge of honour. Our goal is to be practical.?It’s not really a political book.”
However, Nudge says that “when incentives and nudges replace requirements and bans, governments will be both smaller and more modest”. A belief in small government is, of course, a political position.
New Statesman columnist Peter Wilby wrote after Thaler’s Nobel win that his “premise is that there’s nothing wrong with markets, only with people, and the state’s role is to make people fit for markets, not the other way round. If you use drugs, eat junk food or get into unsustainable debt, it’s not because of poverty, inequality or lack of hope but because of your behavioural flaws.”
Thaler responds: “I would say it’s impossible that the person who wrote that read anything I have ever written…One misconception is that behavioural economics is sort of a criticism of humans as a species, which is a really stupid argument…We don’t think people are dumb; we think the world is hard. Our goal is to make the world easier.”
After winning a Nobel prize and becoming a senior adviser for retirement and behavioural economics at investment management firm Pimco in 2019, as well as co-founding Fuller & Thaler Asset Management (which manages about $17 billion in assets and describes itself as having “pioneered the application of behavioral finance in investment management”), Thaler has clearly reached a level where critiques aren’t going to affect him much.
“I’m always telling business people that the next revolution in business is in human resources,” he says. He “once introduced the general manager of a basketball team [at a company’s] all-hands-on-deck meeting. I said, ‘this guy has 15 quantitative analysts working for him and his job is to hire 12 people. You guys have 2,000 employees, how many [analysts] do you have?’ Why shouldn’t every company be as smart about who they hire and how they train them as the smart professional sports teams?”
The incredible reach of Thaler’s work comes down to a combination of working across disciplines; drawing insights from psychology into his own field of economics; writing in an accessible style; getting a snappy title from a publisher who turned down his book; reaching influential policy figures; and working at an elite university where a US president used to work.
Funny where a book about a bunch of economics and psychology papers can lead.
