All You Need Is Nudge | Freakonomics Radio | Episode 474

When Richard Thaler published Nudge in 2008 with co-author Cass Sunstein, the world was just starting to believe in his brand of behavioral economics. How did nudge theory hold up in the face of a global financial meltdown, a pandemic and other existential crises? With the publication of a new, radically updated edition, Thaler tries to persuade Stephen Dubner that nudging is more relevant today than ever. This episode was originally published September 8, 2021. For a full transcript, resources, and more, visit: https://freak.ws/3UPp4ts Photo credit: Audrey Bernstein FOLLOW FREAKONOMICS RADIO: YouTube: https://freak.ws/3yIl6dl Apple Podcasts: https://freak.ws/3yAvQh0 Spotify: https://freak.ws/3TsdCmV ABOUT FREAKONOMICS RADIO: Discover the hidden side of everything with host Stephen J. Dubner, co-author of the Freakonomics books. Each week, Dubner speaks with Nobel laureates and provocateurs, intellectuals and entrepreneurs, and various other underachievers to uncover things you always thought you knew (but didn’t) and things you never thought you wanted to know (but do) — from the economics of sleep to the future of education, from markets for marriage to the surprising utility of wolves. ABOUT THE FREAKONOMICS RADIO NETWORK: Freakonomics began as a book, which led to a blog, a documentary film, more books, a pair of pants, and in 2010, a podcast called Freakonomics Radio. Hosted by Stephen J. Dubner, it’s one of the most popular podcasts in the world, with a reputation for storytelling that is both rigorous and entertaining. Its archive of more than 500 episodes is available, for free, on any podcast app, and the show airs weekly on NPR stations. Freakonomics Radio is now the flagship show of the Freakonomics Radio Network, which includes the podcasts No Stupid Questions, People I (Mostly) Admire, and The Economics of Everyday Things. FREAKONOMICS RADIO NETWORK PODCASTS: Freakonomics Radio: https://freakonomics.com/series/freakonomics-radio/ No Stupid Questions: https://freakonomics.com/series/nsq/ People I (Mostly) Admire: https://freakonomics.com/series/people-i-mostly-admire/ The Economics of Everyday Things: https://freakonomics.com/series/everyday-things/ Special series: https://freakonomics.com/topics/ CONNECT WITH US: [email protected] https://twitter.com/freakonomics https://www.instagram.com/freakonomics/ https://www.facebook.com/freakonomics/ https://www.tiktok.com/@freakonomicsradio https://www.linkedin.com/company/freakonomics-media Subscribe to our newsletter: http://eepurl.com/bKm0cf

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:03Stephen J. Dubner?

  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, no, not touchy, touchy. What? I don't even know what word you're saying. Sensitive?

• 0:26Stephen J. Dubner?

  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 cranky potamus, 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.

• 1:11Stephen J. Dubner?

  It's Richard Thaler. He's an economics professor at the University of Chicago. For years, he collaborated with the pioneering psychologists Danny Kahneman and Amos Tversky, helping create what has come to be called behavioral economics. Kahneman was awarded a Nobel Prize in 2002. It would have been shared with Tversky had 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 2 million people have read Nudge around the world.

• 1:56Stephen J. Dubner?

  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.

• 2:22Richard Thaler?

  So somebody thinks that they are useful.

• 2:26Stephen J. Dubner?

  Nudge theory is built around a relatively simple concept.

• 2:30Richard Thaler?

  Yeah, the phrase that I like best is choice architecture.

• 2:36Stephen J. Dubner?

  And choice architecture means what to you exactly?

• 2:39Richard Thaler?

  It's creating the environment in which people choose.

• 2:44Stephen J. Dubner?

  And who is or is not a choice architect? Are we all choice architects? Are only some members of the elite, the choice architects?

• 2:53Richard Thaler?

  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.

• 3:17Richard Thaler?

  I can tell you, call me and I'll tell you the really good stuff.

• 3:21Stephen J. Dubner?

  Okay, let's move on. What exactly counts as a nudge? Imagine you run the cafeteria at a university or hospital, and you want to encourage healthier eating. Here's an excerpt from the book read by someone we hired who wouldn't sound like such a crankopotamus.

• 3:44Speaker 02

  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.

• 4:14Stephen J. Dubner?

  Today on the show, the latest installment of the Freakonomics Radio Book Club. Those are the episodes where we interview an author and hear some of the best excerpts from their book. The book today is a new and radically revised edition of Nudge. We'll ask how useful nudging can be if you want to solve big problems.

• 4:34Richard Thaler?

  We can't solve climate change with nudging, but we can't solve it without nudging.

• 4:40Stephen J. Dubner?

  We'll talk about why there are so many big problems to solve.

• 4:44Richard Thaler?

  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.

• 4:55Stephen J. Dubner?

  And we'll try to figure out what makes Thaler so Thaler.

• 5:00Richard Thaler?

  Yeah, I think that's ridiculous.

• 5:17Speaker 03

  This is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 5:32Stephen J. 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 Cass Sunstein is a lawyer, for goodness sake. Typically, I would argue that most academics are pretty poor writers. If you agree with that, why?

• 5:50Richard Thaler?

  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.

• 6:05Richard Thaler?

  One of my advisors read the first draft and made me take out all of the jokes, of which there were perhaps three.

• 6:17Stephen J. Dubner?

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

• 6:21Richard Thaler?

  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.

• 6:54Stephen J. Dubner?

  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.

• 7:09Richard Thaler?

  Yeah, Cass is a much faster writer than I am, and a very good writer, but certainly writes in a quite different style than I do.

• 7:18Stephen J. Dubner?

  How would you describe the difference in styles?

• 7:21Richard Thaler?

  Well, I would say he's more serious.

• 7:24Stephen J. Dubner?

  Which isn't saying much.

• 7:26Richard Thaler?

  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.

• 8:09Richard Thaler?

  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 Freakonomics, it was all Dubner's voice, right? Because you were the writer.

• 8:28Stephen J. Dubner?

  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 of 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?

• 8:49Richard Thaler?

  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.

• 9:09Stephen J. Dubner?

  How'd you split the money?

• 9:11Richard Thaler?

  50/50. That's fair.

• 9:15Stephen J. Dubner?

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

• 9:22Speaker 02

  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.

• 9:38Stephen J. Dubner?

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

• 9:47Richard Thaler?

  Well, yeah.

• 9:49Stephen J. Dubner?

  So in the time that you and I will be talking today, how many books do you think Cass will have written?

• 9:54Richard Thaler?

  He's working full-time for Homeland Security. So I'm guessing he's down to writing only four books a year.

• 10:01Stephen J. Dubner?

  What's he do for Homeland Security?

• 10:03Richard Thaler?

  I could tell you, but I'd have to kill you.

• 10:08Stephen J. Dubner?

  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 the phrase.

• 10:20Richard Thaler?

  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's saving rates in three years, not forcing anybody to do anything. So he grudgingly admitted that this seemed to work.

• 10:52Richard Thaler?

  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 seatbelt. 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.

• 11:32Stephen J. Dubner?

  And kind of a joke?

• 11:33Richard Thaler?

  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 Cass Sunstein. And that's what led to nudge.

• 11:48Stephen J. Dubner?

  But if I were to ask you then or now, hey, Thaler, are you a libertarian? Or Thaler, are you a paternalist? I'm almost sure you'd say no to both.

• 11:59Richard Thaler?

  Correct. Now, look, the fact that the term seems oxymoronic.

• 12:06Stephen J. Dubner?

  Or maybe just moronic.

• 12:07Richard Thaler?

  But some would say moronic. And the fact that it really annoys libertarians. That was a big plus.

• 12:16Stephen J. Dubner?

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

• 12:43Richard Thaler?

  Yeah, so, look, I would say that it's good that we called the book Nudge and not Libertarian Paternalism is Not an Oxy Moron.

• 12:56Stephen J. Dubner?

  Or One Click Paternalism, as you toyed with.

• 12:59Richard Thaler?

  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 on to that, I think it helps.

• 13:28Stephen J. Dubner?

  Here's another excerpt from Nudge.

• 13:31Speaker 02

  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, forbid voting by mail and early voting, and reduce the number of polling stations, and place them far away from public transportation stops.

• 14:16Speaker 02

  While you're at it, try to make people spend hours in line before they can vote.

• 14:20Stephen J. Dubner?

  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?

• 14:35Richard Thaler?

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

• 14:41Stephen J. Dubner?

  Oh, they all know. We've told them before.

• 14:43Richard Thaler?

  Well, probably my most famous story, and I'm a person who's known for having many stories...

• 14:50Stephen J. Dubner?

  Here we go with the cashews again.

• 14:52Richard Thaler?

  I won't repeat the whole story, but

• 14:55Stephen J. Dubner?

  It's okay. I'll just take a nap. You tell it.

• 14:57Richard Thaler?

  It involves taking a bowl of cashews and hiding it in the kitchen so that some dinner guests wouldn't spoil their appetites while having an adult beverage.

• 15:09Stephen J. Dubner?

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

• 15:15Richard Thaler?

  Right. And we were committing ourselves not to eat any more cashew nuts, 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.

• 15:43Stephen J. Dubner?

  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?

• 15:59Richard Thaler?

  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.

• 16:18Stephen J. Dubner?

  Well, to that end, we tweeted to our listeners, Ask 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?

• 16:42Richard Thaler?

  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.

• 17:04Stephen J. Dubner?

  You write that it included the most famous graph in social science.

• 17:08Richard Thaler?

  Yeah. And what that graph shows is that if the default is to agree to be an organ donor.

• 17:20Richard Thaler?

  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. Forty, 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

• 18:04Richard Thaler?

  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.

• 18:25Stephen J. Dubner?

  Like whether, as our listener wrote in, the state can take your organs by default.

• 18:30Richard Thaler?

  Correct. And by the way, there's a scene in Monty Python where John Cleese and one of the other troupe arrive at some guy's door.

• 18:46Speaker 04

  Yes, hello, can we have your liver? What? Your liver? You know, it's reddish brown. It's sort of... Yeah, yeah, I know what it is, but I'm using it. What's this then? A liver done his can. May we say more?

• 19:05Richard Thaler?

  I think one of the lines is, but this is only in the cause of death. And Cleese assures him.

• 19:12Speaker 05

  No one who's ever had their liver taken out by us has survived.

• 19:18Richard Thaler?

  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.

• 19:42Stephen J. Dubner?

  And is that actually practiced anywhere?

• 19:44Richard Thaler?

  Essentially nowhere.

• 19:46Stephen J. Dubner?

  That we know of?

• 19:47Richard Thaler?

  That we know of. And we have looked high and hard. There are maybe half a 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.

• 20:13Stephen J. Dubner?

  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?

• 20:27Richard Thaler?

  Yes. And in fact, if they can't get in touch with the family or someone, they don't take the organs.

• 20:34Stephen J. Dubner?

  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.

• 20:54Richard Thaler?

  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.

• 21:10Richard Thaler?

  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.

• 21:29Stephen J. Dubner?

  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.

• 21:45Richard Thaler?

  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.

• 22:03Stephen J. Dubner?

  One major theme of Nudge, and this follows directly from the foundational research by Kahneman 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.

• 22:46Speaker 02

  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 Bursten 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

• 23:31Speaker 02

  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 and interviewed for a job. Here's the broader lesson. If people wrongly think that most people are committed to a longstanding social norm, a small nudge correcting that misperception can inaugurate large-scale change.

• 24:06Stephen J. Dubner?

  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.

• 24:27Stephen J. Dubner?

  Picture this. It's morning. You've just woken up and your phone is right there. But instead of looking at yet another video of a goat on a trampoline, you spend five minutes getting all the business news you need to know in a way you didn't know was possible. That's the idea behind Morning Brew, the free daily newsletter that delivers the business news of the day without all the boredom. It only takes 15 seconds to sign up for free at morningbrew.com/freakonomics. Again, sign up today at morningbrew.com/freakonomics.

• 25:07Stephen J. Dubner?

  We're talking with the economist Richard Thaler about the new so-called "final edition" of his path-breaking book, Nudge. It was co-authored by Cass Sunstein, who, for three years during the Obama administration, ran the Office of Information and Regulatory Affairs.

• 25:25Stephen J. Dubner?

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

• 25:53Richard Thaler?

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

• 26:13Stephen J. Dubner?

  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?

• 26:24Richard Thaler?

  Well, it's one big free rider problem. The literal free rider is somebody who gets on the bus and doesn't pay. And 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. So if you don't clean your furnace and emit a lot of dirty smoke, or you drive a Hummer or some other gas-guzzling car, you're causing harm to everybody, and the share of that that you bear is minute.

• 27:07Richard Thaler?

  Now, what makes that worse is, the exact same thing is 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.

• 27:25Richard Thaler?

  And we have to come to some fair deal and that's difficult.

• 27:31Stephen J. Dubner?

  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, Feller, what do you got then? What are your best nudge adjacent solutions for this incentive based problem solving?

• 27:52Richard Thaler?

  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.

• 28:18Stephen J. Dubner?

  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.

• 28:27Richard Thaler?

  Exactly.

• 28:28Stephen J. Dubner?

  If everybody does.

• 28:29Richard Thaler?

  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 10th of that. So that's a bad deal.

• 28:46Stephen J. Dubner?

  If the others don't.

• 28:48Richard Thaler?

  The early experiments showed that initially, when people play this game, they cooperate. They put in their money.

• 28:55Stephen J. Dubner?

  They're assuming that the others will do the generous thing.

• 28:59Richard Thaler?

  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.

• 29:14Stephen J. Dubner?

  But the way the game is played, you don't know what other people are going to do, correct?

• 29:18Richard Thaler?

  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.

• 29:32Stephen J. Dubner?

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

• 29:37Richard Thaler?

  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

• 29:53Stephen J. Dubner?

  Thanks a lot.

• 29:54Richard Thaler?

  is not contributing, then I can privately pay a dollar to take $2 away from him.

• 30:03Stephen J. Dubner?

  So I lose, but he loses more.

• 30:05Richard Thaler?

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

• 30:08Stephen J. Dubner?

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

• 30:11Richard Thaler?

  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.

• 30:32Stephen J. Dubner?

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

• 30:37Richard Thaler?

  So Bill Nordhaus, 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.

• 31:05Stephen J. Dubner?

  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.

• 31:19Richard Thaler?

  Right.

• 31:20Stephen J. Dubner?

  Okay, but what if they're not a country that sells a lot of stuff around the world?

• 31:24Richard Thaler?

  Well, there may have to be other ways to punish them.

• 31:27Stephen J. Dubner?

  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?

• 31:42Richard Thaler?

  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, North Korea say, but I think this is the outline of a solution.

• 32:07Stephen J. Dubner?

  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 a climate change scenario than a geopolitical scenario?

• 32:27Richard Thaler?

  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.

• 32:50Stephen J. Dubner?

  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.

• 33:12Richard Thaler?

  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.

• 33:53Richard Thaler?

  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.

• 34:18Stephen J. Dubner?

  Here's a relevant passage from the new edition of Nudge. It addresses the concern that carbon taxes will necessarily hurt the economy.

• 34:27Speaker 02

  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,

• 35:10Speaker 02

  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.

• 35:29Stephen J. Dubner?

  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?

• 36:01Richard Thaler?

  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 Ben Artzi 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.

• 36:43Richard Thaler?

  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.

• 37:25Richard Thaler?

  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.

• 38:07Richard Thaler?

  So we're asking people whether they would want to start saving more later. That's why we call it save more tomorrow.

• 38:14Stephen J. Dubner?

  Which happens to initialize itself to smart, which is a good idea.

• 38:19Richard Thaler?

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

• 39:04Richard Thaler?

  Later on, we realized that the only component of this that's really crucial is making the raises automatic and getting people signed up.

• 39:17Stephen J. Dubner?

  So this came to be called auto escalation. And another component of retirement savings that you've promoted and 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 Ben Arzti 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.

• 39:56Stephen J. Dubner?

  That said.

• 39:57Richard Thaler?

  I knew there was something coming.

• 39:59Stephen J. Dubner?

  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 skeptic's 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. Your 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?

• 40:34Richard Thaler?

  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.

• 41:19Richard Thaler?

  Now, reverse mortgages can have a sleazy part to them. But there are many people who live in places where real estate has gone 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. They're cash poor and house rich. And figuring out a way to help people do that is smart. Then calling it a reverse mortgage.

• 42:00Stephen J. Dubner?

  It should just be called like the biggest piggy bank in the world.

• 42:03Richard Thaler?

  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.

• 42:18Richard Thaler?

  We should talk about sludge.

• 42:20Stephen J. Dubner?

  We will, I promise.

• 42:21Richard Thaler?

  And I have a suggestion for an excerpt, which is the sentence we snuck in about how painful it was to do the galleys.

• 42:36Stephen J. Dubner?

  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 galleys. That's the nearly final version of a book that authors are allowed to edit before the book is published.

• 42:54Speaker 02

  The software our publishers provided when we were proofreading the galleys of this book was so sludge written 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.

• 43:15Richard Thaler?

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

• 43:23Stephen J. Dubner?

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

• 43:30Richard Thaler?

  So let's remember, what is sludge literally? It's this thick gooey byproduct of some industrial process that just gunked 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.

• 44:15Stephen J. Dubner?

  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?

• 44:28Richard Thaler?

  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.

• 44:42Richard Thaler?

  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? She 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.

• 45:27Richard Thaler?

  So this version is not evil. This is just pure incompetence.

• 45:35Stephen J. Dubner?

  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 are not the ones who would benefit or be hurt by it?

• 45:47Richard Thaler?

  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.

• 46:20Stephen J. Dubner?

  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.

• 46:41Stephen J. Dubner?

  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.

• 47:04Richard Thaler?

  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 gonna stop at some point.

• 47:41Stephen J. Dubner?

  And surrender, basically.

• 47:43Richard Thaler?

  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.

• 48:02Stephen J. Dubner?

  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?

• 48:27Richard Thaler?

  I'm sure you have accounts with some financial services companies, a bank and a brokerage or something, right? You keep your money somewhere.

• 48:39Stephen J. Dubner?

  I mean, I have a very large mattress.

• 48:41Richard Thaler?

  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.

• 48:55Stephen J. Dubner?

  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.

• 49:16Richard Thaler?

  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.

• 49:31Stephen J. Dubner?

  I see.

• 49:31Richard Thaler?

  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 cellphone providers, you had to get a new number? So there was a law passed that says you can keep your number. The banking law there says you can keep your auto pays with no sludge.

• 50:06Stephen J. Dubner?

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

• 50:12Speaker 02

  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

• 50:56Speaker 02

  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.

• 51:11Stephen J. Dubner?

  Cass Sunstein, Thaler's co-author on Nudge, has in fact just published a book called "Sludge: What Stops Us From Getting Things Done and What to Do About It." I wanted to end this conversation with Thaler by hearing whether he thinks the behavioral economics revolution he helped start will have legs, or if this is a fleeting moment.

• 51:33Richard Thaler?

  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.

• 51:48Stephen J. Dubner?

  Are we on the way toward that?

• 51:50Richard Thaler?

  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.

• 52:32Stephen J. Dubner?

  What are some of the mistakes they're making?

• 52:35Richard Thaler?

  Can we start with job interviews? Those are pretty much useless.

• 52:39Stephen J. Dubner?

  Because the relationship between the quality of the conversation and the quality of the worker, zero?

• 52:45Richard Thaler?

  Is almost zero, almost zero.

• 52:48Stephen J. Dubner?

  There's a quote from Obama, it's a three-word quote in the new edition, "Better is good," he said. Can you talk about that for a second?

• 52:59Richard Thaler?

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

• 53:06Richard Thaler?

  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.

• 53:31Stephen J. Dubner?

  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 3%. And if you do that for a bunch of years, you've totally flipped the switch.

• 53:57Richard Thaler?

  I think we do start out more idealistic and we think, well, we should just solve this.

• 54:05Stephen J. Dubner?

  Right. That should never happen again anywhere. We should ban cruelty.

• 54:09Richard Thaler?

  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.

• 54:22Stephen J. Dubner?

  And how do you explain that sentiment as a behaviorally inclined economist?

• 54:28Richard Thaler?

  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 whiz-bang technologies that we all enjoy.

• 55:11Stephen J. Dubner?

  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.

• 55:24Stephen J. Dubner?

  That, again, was Richard Thaler. His book, Nudge: The Final Edition, was recently published by Penguin Books. 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. You can get it in any episode from our archive on any podcast app. Also, if you want to hear more book club episodes, past, present, and future, we've got a separate podcast feed for those, including, soon, episodes that you can't get here at Freakonomics Radio. That's the Freakonomics Radio Book Club podcast. And again, you can get it on any podcast app. Coming up next time on Freakonomics Radio.

• 56:07Speaker 03

  The United States spends about 1% of GDP on family benefits. France, for example, spends 3.5%.

• 56:14Stephen J. Dubner?

  We get back to our occasional series about how the US is just different from other countries and how we should stop pretending it's not. This time, we look at the resources devoted to raising children. We'll hear from a big-city mayor who happens to be a Democrat.

• 56:30Speaker 06

  My mother used to say the hardest job in America was being poor.

• 56:35Stephen J. Dubner?

  A US senator who happens to be a Republican.

• 56:39Speaker 07

  I wish I could tell you that the compensation that I'm describing is sufficient to raise a child, but it's not.

• 56:44Stephen J. Dubner?

  And we'll hear from our regular assortment of econo-nerds, all of whom happen to be puzzling over the same riddle. Why are there still so many poor kids in a country as rich as ours? That's next time. Until then, take care of yourself, and, if you can, someone else, too.

• 57:06Stephen J. Dubner?

  Freakonomics Radio is produced by Stitcher and Renbud Radio. We can be reached at [email protected]. If you aren't already following the other shows in the Freakonomics Radio Network, you should be. They are called No Stupid Questions, People I Mostly Admire, Freakonomics M.D., and, as I mentioned earlier, the Freakonomics Radio Book Club. This episode was produced by Brent Katz. Thanks to Julian Nippin for reading the book excerpts. Our staff also includes Alison Kreglo, Greg Rippon, Joel Meyer, Trisha Bobita, Zach Lipinski, Ryan Kelly, Mary Duke, Emma Terrell, Lyric Bowditch, Jasmine Klinger, Eleanor Osborne, and Jacob Clemente. Our theme song is "Mr. Fortune" by The Hitchhikers. The other music in this episode was composed by Luis Guerra, Michael

• 57:50Stephen J. Dubner?

  Riola, and Stephen Ulrich. Thanks to Angela Duckworth for apparently coining the word crankopotamus. If you'd like to read a transcript or the show notes for this or any episode, go to Freakonomics.com. As always, thanks for listening.

• 58:06Richard Thaler?

  For your listeners, if you wish to be an organ donor and are not, then go to Donate Life, and you'll be able to sign up online. It takes a minute or two, and every person who becomes an organ donor can potentially help five, six people.

• 58:34Speaker 03

  The Freakonomics Radio Network, the hidden side of everything.

• 58:42Speaker 06

  Stitcher.