Wednesday, May 3, 2017


As imperfect humans, we often don’t have the time, skills, or information necessary to make good decisions. In their fascinating book, Nudge, Richard H. Thaler and Cass R. Sunstein show the many ways we can help people make better choices about health, investments, and many other areas without taking away their freedom to make any choice they want.

One simple example concerns default choices for company retirement plans. Often, if workers take no action, they don’t get enrolled in a company retirement plan. In such a case, an alarming number of workers fail to accept the free money a company offers in matching any contributions workers make to their retirement funds. However, when a company automatically enrolls workers (meaning they would have to take some action to avoid being enrolled), far more workers end up in the retirement plan. It seems that when we are faced with choices, we often just don’t choose.

The authors call themselves libertarian paternalists. The “libertarian” part means that they don’t want to restrict people’s freedom of choice. The “paternalist” part means they want to set up the circumstances under which we make our choices in such a way that we are nudged toward options that are in our best interests.

The authors show clever ways that make it easier for us to save more money, invest better, and improve other types of choices. When it comes to saving more money, a successful method is to time increases in your saving rate to coincide with raises. This way, you see no decrease in take-home pay that makes you not want to save more.

As an example of how we can be influenced easily, “forty thousand people [were] asked a simple question: Do you intend to buy a new car in the next six months? The very question increased purchase rates by 35%.” Most of us probably believe that while others may be susceptible to such things, we’re not. We’re wrong.

In another example of influencing you without taking away your freedom of choice, “Suppose the thermostat in your home was programmed to tell you the cost per hour of lowering the temperature a few degrees during the heat wave.” Making costs visible definitely drives behaviour.

The authors have an interesting take on the problems of either saving too little or too much money. “The costs of saving too little are greater than the costs of saving too much.” Spending more is easy enough, but “coping in the opposite direction is less pleasant.” This argues for adding some buffer to your savings. Unfortunately, those who are already saving too much will embrace such advice, and those who are saving too little will ignore it.

Owning too much of one stock is very risky, but for some reason, we tend to be blind to the risk of holding stock in our employers. An alarming statistic: “five million Americans have more than 60 percent of their retirement savings in company stock.” This is reckless, but I can’t be too critical; my own percentage was higher during the late 1990s. I took an insane risk and came out okay.

On the subject of mortgage brokers, “after controlling for risk and other factors,” “Loans made by mortgage brokers are more expensive than those made by direct lenders by about $600.” This surprised me. I thought the selling point of mortgage brokers is that they can extract good deals from banks that more than make up for the broker’s fee. Apparently not.

The book has a few funny parts as well. In a discussion of alerting users to excess energy consumption, the authors suggest a device that makes “annoying sounds, such as cuts from ABBA’s Gold: Greatest Hits.” Another suggestion is to allow motorcycle users to ride without a helmet only if they have signed up to be organ donors.

Overall, I highly recommend this book. Whether you agree with their proposals or not, the book contains very thoughtful discussions of many areas where we might help people make better choices.


  1. Thanks for the review. Another book has been added to my reading list. On mortgage brokers, I wonder whether the situation described applies in Canada. They are Americans writing in the U.S. context, after all. Not that I know the answer, though.

    1. @Russ: It may be different in Canada. Certainly, the mortgage lenders in Canada look different.