Amazon.com: What is "choice architecture" and how does it affect the average person's daily life?
Thaler and Sunstein: Choice architecture is the context in which you make your choice. Suppose you go into a cafeteria. What do you see first, the salad bar or the burger and fries stand? Where's the chocolate cake? Where's the fruit? These features influence what you will choose to eat, so the person who decides how to display the food is the choice architect of the cafeteria. All of our choices are similarly influenced by choice architects. The architecture includes rules deciding what happens if you do nothing; what's said and what isn't said; what you see and what you don't. Doctors, employers, credit card companies, banks, and even parents are choice architects.
We show that by carefully designing the choice architecture, we can make dramatic improvements in the decisions people make, without forcing anyone to do anything. For example, we can help people save more and invest better in their retirement plans, make better choices when picking a mortgage, save on their utility bills, and improve the environment simultaneously. Good choice architecture can even improve the process of getting a divorce--or (a happier thought) getting married in the first place!
. . . Amazon.com: You point out that most people spend more time picking out a new TV or audio device than they do choosing their health plan or retirement investment strategy? Why do most people go into what you describe as "auto-pilot mode" even when it comes to making important long-term decisions?
Thaler and Sunstein: There are three factors at work. First, people procrastinate, especially when a decision is hard. And having too many choices can create an information overload. Research shows that in many situations people will just delay making a choice altogether if they can (say by not joining their 401(k) plan), or will just take the easy way out by selecting the default option, or the one that is being suggested by a pushy salesman.
Second, our world has gotten a lot more complicated. Thirty years ago most mortgages were of the 30-year fixed-rate variety making them easy to compare. Now mortgages come in dozens of varieties, and even finance professors can have trouble figuring out which one is best. Since the cost of figuring out which one is best is so hard, an unscrupulous mortgage broker can easily push unsophisticated borrowers into taking a bad deal.
Third, although one might think that high stakes would make people pay more attention, instead it can just make people tense. In such situations some people react by curling into a ball and thinking, well, err, I'll do something else instead, like stare at the television or think about baseball. So, much of our lives is lived on auto-pilot, just because weighing complicated decisions is not so easy, and sometimes not so fun. Nudges can help ensure that even when we're on auto-pilot, or unwilling to make a hard choice, the deck is stacked in our favor.
401(k) retirement plans provide what is perhaps the most widely discussed possible "nudge". Many people will simply accept whatever the default option is. If the plans are set up so that employees will be enrolled unless they opt out, many more people elect to participate than would have participated if they were required to opt in. It seems unbelievable, but in fact merely requiring people to check a box can have a profound influence on their behavior. (If you're interested in this sort of thing, I highly recommend Dan Ariely's Predictably Irrational: The Hidden Forces That Shape Our Decisions.)
The really exciting aspect of this pick, at least to someone with my sensibilities, is not how much regulation it predicts but what kind. Sunstein, along with Richard Thaler (another informal Obama campaign advisor) recently published Nudge, a fantastic book about how to apply behavioral economics to public policy. With the advent of neuroeconomics, behavioral approaches to economic theory are rapidly gaining influence, and this pick signals that economic thought as implemented in government is finally catching up. The Milton Freidman style free market positive economics is predicated on an idea of humans as agents who seek to perfectly maximize their utility in economic decision making. Behavioral economics opposes this conception of human nature, observing that in many cases cognitive biases force us into decisions that are less than perfectly rational or just plain bad.
. . . It looks to me like Obama picked Sunstein to institute an broad new theoretical approach to regulatory policy. It’s fair not to agree that the root cause of the financial crisis was a simple paucity of regulation, but I’m conviced that what regulation we had failed because it did not properly acknowledge our basic human nature. Done properly, the goal of behavioral regulatory strategies will be to maximize long-term utility, which is what human nature ultimately fails at. Hopefully, this choice signals the begining of the end of our Instead of arguing about more or less regulation, we might finally start debating the best regulation.