Book Review: “Nudge” by Richard H. Thaler

Today’s book is “Nudge”, by Richard H. Thaler and Cass R. Sustein.

Let me start with the bad first. This book may get a bit dry for some people in the middle, especially when it starts talking too much about specifics of the US Social Security system.  However, there are parallels with Canada that should be useful to a Canadian reader as well.

It’s a good follow-up of my previous book review.  The underlying theme is still the same: people aren’t perfect rational beings.  The book accepts that we will make poor decisions if left to our own devices and admits that controlling people’s behaviour via over-regulation is undesirable.  Instead, it argues that governments and businesses can nudge people in the right direction.  It calls it libertarian paternalism. 

One primary argument is that the government can mandate defaults that people can opt out of.  Let me make the example somewhat Canadian.  Take RRSP.  My employer provides group RRSP with 100% matching (yes, I put in $1, they match it with $1 of their own in my RRSP).  It’s a great deal. Yet the default setting is “no contribution”.  If I did nothing when I started, I wouldn’t have any RRSP and I would be missing out on a great matching deal.  Essentially if I do not opt in myself then I miss out.

Instead, Thaler would argue that the default should have been contribution up until the company max (the point at which they stop matching).  So if I did nothing when I started working, the company would automatically take x% of my income, put it in the RRSP and match it with their own money. This means that unless I opt out, I get a great deal. 

The book gives many such examples where “choice architects” can enable people to either make better decisions (eg. by forcing credit card companies to do better disclosure in layman’s terms) or set better defaults. 

All policy makers should be required to read this book.  You can read first few pages at Amazon. I highly recommend it.