Congnitive Biases and Nudge

We all have inherent biases that offset our judgements and deviates us from making right decisions in many situations. For example, the universal status quo bias (inertia) makes us stick to the default and resist changes. (How many of us have selected the auto insurance terms once and then hardly ever changed it?) Another example is the confirmation bias that helps us believe what we want to believe. It’s a tendency to seek things that confirm our pre-conceived notions, while conveniently ignoring facts that defy them. Here’s a Wikipedia link that has a list of all congnitive biases.  What’s interesting about these biases is that most of them are adaptive and not necessarily caused by a malfunction in our brains. They are ingrained into our brains as a product of our evolutionary past. They are Darwinian in nature.

By and large, these cognitive biases are generated by what’s called the ‘Automatic System’. It’s an automatic, intuitive and often unconscious way in which our brain thinks. The second kind of thinking is called the ‘Reflective System’, which is more rational, deductive and self-conscious. (Both terms are borrowed from the book Nudge.) While watching a 3-D movie, the automatic system asks you to dodge a stone flung towards you, while the reflective system tells you that it’s not real. In our complex world, we often rely heavily on the automatic system (i.e. the gut feeling). And it’s often quite accurate and beneficial. After all, we acquired this trait through evolution, and the fact that we survived means that they must have better survival values! But unfortunately the automatic system also makes us vulnerable to numerous biases that can impair our judgements. We might not screw up big time, but we might be missing a lot of opportunities that could have made our lives much better. A lot of mistakes can be avoided if people used their reflective systems more, which in turn relies on knowledge and information.

This human fallibility is used as a justification for what Thaler and Sunstein has called nudge in their book Nudge: Improving Decisions About Health, Wealth, and Happiness. In this very interesting and perhaps very important book, Thaler and Sunstein, both professors, offer a new perspective (paraphrased) on how to prevent the countless bad mistakes we make in our lives – including ill-advised personal investments, consumption of unhealthy foods, neglect of our natural resources, and other numerous bad decisions regarding health care, our families, and education. Nudge can be defined as an approach that…

… tries to influence the choices that people make in a way that will make them better off without restricting their freedom of choice.

Thaler and Sunstein begins the first chapter in their book with an example of a school cafeteria. The order in which different food items are displayed in the cafeteria significantly impacts their consumption. It’s impossible to avoid some way of organizing food. Given what the choice architecture (the director of food services in this case) knows about the eating habits of students, she can choose to nudge them to eat more healthy food. By placing the fruits before dessert and juice before soda, for instance. 

To explain this approach more academically the authors have evoked a term that seems oxymoron at first: libertarian paternalism. They explain:

Libertarian Paternalism is a relatively weak, soft and non-intrusive type of paternalism because choices are not blocked, fenced off, or significantly burdened.

I am a big fan of behavioral economics, so I found this topic as well as the book quite fascinating. Being a libertarian, my initial reaction was hesitation because of the paternalistic flavor of the concept. However, in spite of my initial misgivings, I found this proposition, backed by numerous cutting-edge social science research results and day-to-day life examples, very convincing. My obvious concern is about being on a slippery slope towards paternalism (which the autors have recognized and addressed in the book). But that’s probably another post.

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