#1 Book Summary: Nudge, by Richard H. Thaler and Cass R. Sunstein

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1-Page Summary of Nudge

Overview

People know what’s good for them and what isn’t. Most people want to eat healthy, save money for retirement, and stop smoking. However, they don’t follow through on these things in their everyday lives.

Bad habits are prevalent in our lives. For example, we grab a chocolate bar even though eating an apple would be better for us; we hit snooze every time the alarm rings despite knowing that it will only make us rush later on.

The behavioral patterns of people can cause them to make poor decisions. For example, most Americans don’t save money even though they know that it could be harmful in the future.

If we lose our income suddenly or have unexpected expenses, and we don’t have savings to fall back on, then we get angry at the irrational decisions we made in the past. However, despite knowing this, many of us continue to make financial decisions based on short-term goals instead of long-term ones.

Big Idea #1: We often make bad decisions because we don’t have all the information or because we’re given too much information.

We often make decisions that aren’t really good for us. In many cases, we have either too little or too much information to make rational choices. We are in a position to make better choices when we have the right amount of information and can process it properly.

When we need to buy ice cream, we usually choose our favorite flavor quickly. There are two reasons for that: 1) We know from experience that strawberry is better than mango and 2) Ice cream shops only have a few flavors available. However, when it comes to more serious matters like buying a loan or car insurance, the situation is different because there are many options. For example, some loans have fixed rates while others have variable ones; some loans can be deferred but not all of them; and so on. It’s very important to read the small print before signing up for any kind of loan or other financial product because you could end up paying much more than expected (or getting less).

Even when we have all the information, it can be difficult to sort through everything and compare options. This makes us feel overwhelmed.

Bad decisions are often the result of either not having enough information or too much information.

Big Idea #2: Our decisions are influenced by our emotions.

When we see a baby laugh, it’s hard not to smile. Our reaction occurs without us thinking about it. However, when we want to figure out the answer to 347 x 12, we think about how to solve the problem consciously because that answer requires effort and time.

These examples show that there are two different ways of thinking.

  1. When it comes to babies, we use our gut instinct.

  2. When we see a math problem, our Reflective System kicks in. We don’t have the time or energy to reflect on every decision we make, so our Automatic System takes over. It works well most of the time but not all the time because it’s based on simplifications and emotions. For example, when estimating your own risk for stroke, you would take into account how many people you know who’ve had one already.

If we don’t know anyone who has had a heart attack, we assume that the risk is low. However, our own risk could be high and so precautionary measures should be taken. We make decisions based on gut feelings rather than facts.

Big Idea #3: Sometimes we make mistakes because we give into temptation or act without thinking.

A smoker who’s trying to quit will be tempted if offered a cigarette. She knows it’s bad for her and wants to stop, but she’ll probably end up taking one anyway.

Someone may be trying to lose weight and eat better, but a lack of willpower might cause them to give in easily. This happens because the person’s ability to think clearly is impaired when they’re tempted by food.

Studies have found that bigger portions cause people to eat more. If we’re given a big portion, we will consume it all even if the food is not tasty.

Researchers sent some of their test subjects to the movies. Before they entered the theater, half got a small bag and the other half got a medium-sized bag of stale popcorn.

Although most of the participants stated that stale popcorn was not good, they ate a lot of it anyway. People with big bags ate even more. Sometimes we make faulty decisions due to temptation or acting without thinking.

Big Idea #4: Some companies use human mistakes to their advantage.

To be successful, companies have to sell products and earn profits. The way they do that is by fulfilling their customers’ needs, whether it has positive or negative consequences on them.

Sometimes companies can create new needs in their customers, as well as satisfy existing ones.

For example, many people can’t help themselves when faced with temptation and don’t think twice about the consequences of their actions. Companies take advantage of this knowledge by tempting customers into buying more than they originally intended. They do that by offering XXL-sized portions instead of normal ones; these larger portions are one reason why so many people eat far too much.

Companies exploit human weakness by offering trial subscriptions to magazines. If you don’t cancel your subscription within the cancellation period, you’re automatically charged and continue receiving the magazine.

Some companies take advantage of people’s tendency to make bad decisions.

Big Idea #5: Subtle changes in the environment can help us avoid making bad decisions.

How can we make better decisions? One way is to use nudges. A nudge is a subtle action that makes it easier for us to act in the right way without dictating what we should do. For example, placing fruit at eye level and junk food on lower shelves in a cafeteria is a nudge because you have free rein but are prompted towards healthier options. Nudges can also be used by companies with less noble intentions, such as suggesting certain purchasing decisions through their advertising.

But the cafeteria example shows that subtle changes can also help people make healthier choices.

Nudges are small changes in the environment that help us make better decisions.

Big Idea #6: Defaults are effective ways to get people to do what’s in their best interest.

When we make decisions, we don’t really think about them. We just go with our gut instinct. Therefore, situations that require decision-making should be designed so that an automatic response leads to a positive outcome.

E-mail programs can save you time by reminding you to send attachments. For example, if an e-mail says “please find attached” but doesn’t have any attachment, the program will ask “did you want to send an attachment?”

Companies can set up a system that makes it easy for employees to make the right decisions. For example, if an employee is automatically enrolled in a company pension-scheme program and has to object if he or she doesn’t want to be, then employees will naturally do what’s best for them. This kind of automatic enrollment is a great way to get people to act without having to actively think about it.

Big Idea #7: Nudges are most useful in situations where we have too many choices.

Nudges are effective in situations where it is difficult for us to make the right decision. We can take that second piece of cake and drink that cocktail after work because they give us pleasure in the moment, but we only feel bad about our decisions later on – when we step on a scale at the end of the month or wake up with a headache.

A bad decision is usually made when we don’t have enough information. For example, we might not know which insurance company to choose because we’ve never had the chance to evaluate different companies before. Even if we decide on an insurance company, there’s another problem: deciding which policy to buy.

For example, if an insurance company offers many different policies but some customers have trouble choosing which policy to buy, the company can recommend a default policy that covers most medical costs for common ailments. This helps those people choose a plan that will cover the majority of their medical costs.

Nudges are most effective when you have too many choices or a future is at stake.

Big Idea #8: A lot of people rely on subtle cues to achieve their goals.

At the end of each year, many people make New Year’s resolutions and fail to achieve them. However, some people succeed and keep their resolutions. They do this by using various techniques that help them stay on track throughout the year. For example, they bet with a friend, use public weigh-ins or Internet programs to monitor their progress and stay on target.

On the website Stickk.com, more than 100,000 people have signed commitment contracts with themselves to achieve their goals. After signing up on the website you state your goal and set milestones with specific deadlines. If you achieve your goal, you get your money back. If not, your money goes to a certain institution or person that was selected previously (for example a rival team of your favorite football team).

The website’s success is an example of how people can be nudged to achieve their goals. Many people use that website to help them reach their goals.

Big Idea #9: Governments and other institutions should use subtle persuasion to encourage people to make the right decisions.

By using small cues, we can encourage people to make better decisions. This is beneficial not just for the individual but also for society as a whole because it leads to less healthcare costs and more healthy behaviors.

Even though it may cost us something at first, the benefits generally come in time. For example, when we introduce a public obligation to report carbon emissions, companies are motivated to cut down on pollution because they don’t want to look bad publicly. This is an example of how nudges can change behavior without using legal coercion.

The dollar-a-day program has reduced unwanted teenage pregnancies. In order to reduce the number of teenagers who become pregnant, a lot of US cities pay them one dollar for every day they don’t get pregnant. This is actually cheaper than paying for the children born to those young mothers.

Companies also use nudges to help customers avoid mistakes. A car will beep at you if you forget to put on your seat belt, and a warning light comes on when your gas tank is almost empty. These things don’t force us to buckle up or fill our gas tanks, but they do prevent us from making those mistakes accidentally.

The government can influence people to make wise decisions by using subtle suggestions.

Full Summary of Nudge

Overall Summary

The book “Nudge: Improving Decisions About Health, Wealth, and Happiness” (2008) explores the various factors that influence decision making. The authors are both professors. Richard H. Thaler teaches behavioral economics at the University of Chicago; Cass R. Sunstein taught law for twenty-seven years before leaving to work in the Office of Information and Regulatory Affairs under Barack Obama.

The first part of the book describes what nudges are. They’re all the various factors that influence our decisions, but don’t force us to make a choice. For example, if you have no desire to go out with friends but your friend convinces you to do so by teasing and persuading you, then going out is clearly the best option for you. After attending the party, it’s clear that attending was indeed the right decision for you.

Nudges are present in many aspects of life. Some nudges are good, and some aren’t so good. For example, supermarkets place candy by the cash registers to make an impulse sale, but that’s not a very healthy choice to make.

However, if we are aware of the nudges in our environment that can affect our behavior, then we may be able to counteract them. For example, if working on a computer all day makes us spend time online instead of getting work done, then we can install software to block access to distracting sites.

If this method of designing the environment is taken to the extreme, it can be used to ensure that nudges guide us to make optimal choices. For example, when sending an email through Gmail and we type something along the lines of “I’ve attached a file,” but forget to actually attach anything, the email client will prompt us before sending.

The authors call these types of nudges default nudges, clues in the environment that ensure we do the right thing even if we don’t consciously make a decision. For example, many companies automatically enroll their employees in a specific benefits program unless they specifically choose a different one. Gyms and other subscription-based services also automatically renew people’s memberships after they have lapsed unless the individual specifically chooses to cancel them.

The book first shows how nudging can be used at the individual level, and then it demonstrates how this technique can be scaled up to the corporate or workplace level. In the next part of the book, they show that governments can use nudges to improve their countries overall welfare.

Many Americans make bad decisions in their daily lives, including smoking and eating unhealthy food. This leads to obesity, which is costly to society. Programs that nudge people into making better choices are more effective than simply restricting access to harmful products or activities. In order for these programs to be successful, they require a lot of effort and time from the government but often end up saving money in the long run due to reduced health care costs.

Behavioral economics is a science that studies how people make decisions. It’s based on principals, which are basically guidelines for making the right decision in any situation. One of those principles involves organizing options to encourage certain behavior. For example, if you want someone to choose an option at the top of a list instead of one near the middle, you would place it higher up than the others.

Other influences on our decisions include the path of least resistance, where people will choose things that make their lives easier rather than harder. People are also influenced by recent events over those in the more distant past and events that seem to be part of a pattern over ones that seem random. Being aware of these subtle or subconscious nudges can help us make better decisions.

#1 Book Summary: Nudge, by Richard H. Thaler and Cass R. Sunstein
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