When Humans Need a Nudge Toward Rationality
Thaler
In their book and in a blog (nudges.wordpress.com)   Mr. Thaler and Mr. Sunstein  favor nudging people to save more  eat better  weigh less  invest more sensibly  pay down debt  avoid hazardous mortgages  drive safely and wear bike helmets â a list that expands as new ideas and new problems conducive to nudging emerge.
In a phone conversation   Mr. Thaler  said that carefully applied nudges might help ameliorate some of the problems that led to the financial crisis. Some nudges need to be more forceful than others. For example  rigorous public disclosure of leverage (the ratio of debt to capital) would be a burden. But it might be necessary to induce the people who run hedge funds  insurance companies and big banks to behave more sensibly.
âDisclosure does help at every level â  he  said. âMaybe itâs not a panacea  but thatâs not a reason not to do it.â
 Mr. Sunstein and Mr. Thaler  say that this apparent contradiction is reconciled through what  they  call âchoice architecture.â This is the deliberate imposition of structure in an environment â etching flies in a urinal â to induce people to make better choices. Consider a cafeteria where healthy foods like fruit and yogurt are placed in a prominent location  while junk foods are relegated to an out-of-the way spot. People are free to choose  but they are being nudged toward healthier decisions.
Similarly  Mr. Thaler and Shlomo Benartzi  an economist at U.C.L.A.  applied these theories to 401(k) plans with the âSave More Tomorrowâ program  which gives employees the option of increasing payroll deductions in the future. This arrangement acknowledges the human desire to enjoy life now and put off self-discipline â a tendency observed by Aesopâs fable of the ant and the grasshopper and confirmed through much recent behavioral research. With âSave More Tomorrow â you can have it both ways â consuming as much as you like now  while automatically increasing your savings rate on the next Jan. 1  and in every successive year.
Nudging derives from research by Daniel Kahneman  a Nobel laureate in economics; by Mr. Kahnemanâs late colleague  Amos Tversky; and by Mr. Thaler and others over several decades. Mr. Kahneman  a psychologist  gives  Mr. Thaler  considerable credit for the birth of behavioral economics.
 Mr. Thaler  has found that people often donât act rationally and in their own best interests  as is assumed by traditional economic models.  He  calls such idealized people âEcons â as distinguished from âHumans.â Econs are walking computers  and behave according to the laws of classical economics; Humans are quirky  like the people you meet on the street. Humans may know that they should eat less and exercise more  but they often miss the mark. They may know that they should save more  but often donât. And so   Mr. Thaler  says  most of us would benefit from a nudge.
DISCLOSURE aimed at enabling people to make more informed choices is often  Mr. Thaler âs preferred solution for complex issues involving markets.  He  cites disclosure rules imposed on mutual funds by the Securities and Exchange Commission that  imperfect as they may be  have allowed third-party firms like Morningstar and Lipper to create Web sites comparing fees and performance. The point is to make it âeasier for Humans to make decisions as if they were Econs â  he  said. Such comparisons arenât really possible now when it comes to hedge funds  for which standard  reliable data is not available.
In financial markets  where evidence of irrationality has been abundant lately   he  says  he  would increase regulations  but very carefully. Thereâs no evidence   he  said  that regulators could actually determine appropriate leverage for specific investments  for example  and âheavy-handed regulationâ could shut down financial markets and weaken the economy further.
âThe trick is to try and figure out a way of forcing these firms to disclose more of what theyâre doing without giving away so much that they can no longer make a living â  he  said. Such information would help individuals decide whether to invest in the funds  and would help regulators assess overall risk imposed on the financial system and the economy. In addition   he  said  disclosure itself often has a salutary effect on behavior because people tend to be mindful of the opinions of others.
As a principal in  the firm of Fuller & Thaler Asset Management    he  has applied  his  own theories  looking for behavioral biases that may affect specific stocks or market sectors. Two mutual funds managed by  the firm  havenât done very well lately  though  with returns over the last year that have slightly lagged the miserable stock market.
âWeâre not exceptions â  he  said with a chuckle. âWeâre just Humans.â
In their book and in a blog (nudges.wordpress.com)   Mr. Thaler and Mr. Sunstein  favor nudging people to save more  eat better  weigh less  invest more sensibly  pay down debt  avoid hazardous mortgages  drive safely and wear bike helmets â a list that expands as new ideas and new problems conducive to nudging emerge.
In a phone conversation   Mr. Thaler  said that carefully applied nudges might help ameliorate some of the problems that led to the financial crisis. Some nudges need to be more forceful than others. For example  rigorous public disclosure of leverage (the ratio of debt to capital) would be a burden. But it might be necessary to induce the people who run hedge funds  insurance companies and big banks to behave more sensibly.
âDisclosure does help at every level â  he  said. âMaybe itâs not a panacea  but thatâs not a reason not to do it.â
  [TGT] say that this apparent contradiction is reconciled through what   [TGT]   call âchoice architecture.â This is the deliberate imposition of structure in an environment â etching flies in a urinal â to induce people to make better choices. Consider a cafeteria where healthy foods like fruit and yogurt are placed in a prominent location  while junk foods are relegated to an out-of-the way spot. People are free to choose  but they are being nudged toward healthier decisions.
Similarly  Mr. Thaler and Shlomo Benartzi  an economist at U.C.L.A.  applied these theories to 401(k) plans with the âSave More Tomorrowâ program  which gives employees the option of increasing payroll deductions in the future. This arrangement acknowledges the human desire to enjoy life now and put off self-discipline â a tendency observed by Aesopâs fable of the ant and the grasshopper and confirmed through much recent behavioral research. With âSave More Tomorrow â you can have it both ways â consuming as much as you like now  while automatically increasing your savings rate on the next Jan. 1  and in every successive year.
Nudging derives from research by Daniel Kahneman  a Nobel laureate in economics; by Mr. Kahnemanâs late colleague  Amos Tversky; and by Mr. Thaler and others over several decades. Mr. Kahneman  a psychologist  gives   [TGT] considerable credit for the birth of behavioral economics.
  [TGT] has found that people often donât act rationally and in their own best interests  as is assumed by traditional economic models.   [TGT]   calls such idealized people âEcons â as distinguished from âHumans.â Econs are walking computers  and behave according to the laws of classical economics; Humans are quirky  like the people you meet on the street. Humans may know that they should eat less and exercise more  but they often miss the mark. They may know that they should save more  but often donât. And so    [TGT] says  most of us would benefit from a nudge.
DISCLOSURE aimed at enabling people to make more informed choices is often  Mr. Thaler âs preferred solution for complex issues involving markets.   [TGT]   cites disclosure rules imposed on mutual funds by the Securities and Exchange Commission that  imperfect as they may be  have allowed third-party firms like Morningstar and Lipper to create Web sites comparing fees and performance. The point is to make it âeasier for Humans to make decisions as if they were Econs â  he  said. Such comparisons arenât really possible now when it comes to hedge funds  for which standard  reliable data is not available.
In financial markets  where evidence of irrationality has been abundant lately   he  says  he  would increase regulations  but very carefully. Thereâs no evidence   he  said  that regulators could actually determine appropriate leverage for specific investments  for example  and âheavy-handed regulationâ could shut down financial markets and weaken the economy further.
âThe trick is to try and figure out a way of forcing these firms to disclose more of what theyâre doing without giving away so much that they can no longer make a living â  he  said. Such information would help individuals decide whether to invest in the funds  and would help regulators assess overall risk imposed on the financial system and the economy. In addition   he  said  disclosure itself often has a salutary effect on behavior because people tend to be mindful of the opinions of others.
As a principal in  the firm of Fuller & Thaler Asset Management    he  has applied  his  own theories  looking for behavioral biases that may affect specific stocks or market sectors. Two mutual funds managed by  the firm  havenât done very well lately  though  with returns over the last year that have slightly lagged the miserable stock market.
âWeâre not exceptions â  he  said with a chuckle. âWeâre just Humans.â