Dear Dr. Thaler,
Congratulation on the Nobel Prize for Economics last year! Your insights in behavioral economics and behavioral finance have established the connection between the subject of economics and human psychological nature. Your empirical findings and contributions paved the way for more future studies in behavioral economics and inspired so many professionals, scholars and students, including myself to think about human behaviors in a different way.
What particularly interested me is your study on nudge. Based on the assumption that individuals are not able to make the most rational decisions, nudge intends to create a better environment and lead people to pick the best choice. According to the research studies by University of Stirling, nudge has been used in more than 20 countries and 12 industries, including healthcare, education and energy. Specifically in 2009, former UK Prime Minister David Cameron has launched a project to establish a “big society” with a philosophy of intelligent, inexpensive and regional solutions that are inspired by behavioral economics and nudge. (Burgess, 12) In addition, in 2011 you, along with Dr. Sunstein, the co-author of your book Nudge, were appointed by President Obama as head of the Office of Regulatory Affairs. The influence of nudge has reached beyond borders and helped choice architects like government and institutions encourage populations to make the most beneficial decisions, as you tweeted “ A Nudge dream come true.”
However, with the wide applications, nudge has also raised some problems that seem to contradict to your original ideas presented in your book. One of the biggest issues is the concern that nudge can be coercive. In 2012, New York City Mayor Michael Bloomberg proposed a plan to enact far-reaching ban on the sale of supersized sugary sodas at restaurant, street carts and theaters in order to combat the rising obesity rate. Supporters believed that Bloomberg was merely nudging large-size soda consumers to give up the unhealthy diets instead of absolute prohibition and coercion. (Selinger, 3) Nevertheless, opponents argued that drinking soda is not an addictive behavior and people should have the freedom to buy whatever they want. Even worse, Bloomberg's authority was challenged with the question that if he or the city government has the right to determine people's preference and how anyone can know the true preference of individuals without the perfect knowledge and unlimited power. In your book, you claim, “human forecasts are flawed and biased. Human decision making is not so great either.” (Thaler, 625) The idea of nudge is established with the basis understanding that individuals, most of the time, are not able to differentiate the best choice and make the right decision. Nevertheless, policy makers and regulators will not know better what the true preferences are if they have the same cognitive bias as individuals.(Selinger, 3) The only reason that they are capable of nudging other people is because they have more knowledge in specific fields. For instance, patients normally do not have the same medical expertise that doctors do and therefore need help when making their choices. Yet, the knowledge disparity leads to another concern: the transparency of nudge.
An example of a non-transparent nudge caused by knowledge disparity is the trip insurance of flights. It is common to see that the flight company asks the traveler to opt in trip insurance before buying the ticket and highlights the “yes” choice as recommended. However, what most people do not know is the insurance only covers the non-refundable part of the trip. In other words, customers will get refunded only if the flight is canceled or delayed. If the customer wants to cancel the trip and gets paid back, he/she needs to provide valid proof such as doctor's note along with the trip insurance. According to the research, more than 65% of people do not know the specifics of the policy and pick the “yes” option because it is recommended. Among the 35% who are aware of the policy, 70% got to know because they ran into problems when cancelling trips and called service line to get the information. (Volpp, 2) The nudge of flight companies on trip insurance is non-transparent because most of the companies fail to provide detailed information for customers to pick the best choices. Even worse, companies use it as a way to make profits. The purpose of their nudge is purely maximizing their own benefits rather than customer's interests.
The lack of clarification in your book leaves the impression that almost anyone can use nudge, especially for private sectors like flight companies. The theory of nudge was proposed to help government set policies to solve public issues more efficiently but now it has been used as a tool by private sectors to nudge people in a possibly undesirable way. In fact, it is very easy for private sectors to fall in the grey area of nudge and smart marketing— there is only one intention away between them. Consider the case that grocery store puts fruits near the check-out line so customers may think twice and are very likely to purchase in the end. Through nudge, the store promotes its business and does not create harm to customers. (Gandhi, 2) However, what if the grocery store and a junk food company made a deal to increase the sales and thus increase the profits of the store by putting junk food in a purposeful location, would customer still benefit from the nudge?
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