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Fri 8 Jan 2010 04:00 AM

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Nudge nudge, win win

From flies in urinals to whistling bins, the power of suggestion could save us all, says Nudge author Richard Thaler.

Nudge nudge, win win
Thaler’s theories have found takers in US president Obama; the South Korean president and British Tory leader David Cameron.
Nudge nudge, win win
Nudge nudge, win win
Nudge nudge, win win

From flies in urinals to whistling bins, the power of suggestion could save us all, says Nudge author Richard Thaler. He has US president Obama's ear, but are the rest of us too fat and lazy to listen?Picture the scene. You're waiting at the counter of a coffee shop to buy a latte and cake. One tray of doughnuts carries a label ‘10 percent fat', but parked next to it is a plate of pastries marked '90 percent fat-free'. Both have an identical, gut-swelling fat content - and yet chances are you'll pick the pastry. To borrow a term from Richard Thaler, you've been nudged.

Thaler, an affable professor in behavioural economics at the University of Chicago, is the latest in a new breed of economist - a celebriconomist, if you will - peddling glossy science to the masses. Like Superfreakonomics, Outliers and Sway, Thaler's book ‘Nudge', co-authored with Cass Sunstein, has topped bestseller lists worldwide. (Even, he tells me later, in South Korea, "The President is a fan.")

Nudge is where economics meets psychology. In it, Thaler turns on its head the idea that has underpinned economic models for decades - namely that man is rational. Classic financial theory hinges on the idea that people are smart, lucid and can be counted on to make decisions that are in their best interests.

In reality, argues Thaler, we are lazy, greedy and follow the herd. We can't be bothered to hunt for the best pension plan, we over- borrow and under-save; we lie on the sofa snaffling cheeseburgers when we should be in the gym. Then we repeat our actions, lemming-like. If economists of the Thaler school were to pick a poster-boy for the human condition, it would be Homer Simpson.

The financial catastrophe is a case-in-point says Thaler. "It's not even that the events of the last year were that different," he tells me exasperatedly in a telephone interview from Chicago, fresh from a speaking tour that took in Dubai, Las Vegas and the Netherlands. "We've had three crises in the last decade. Much of this crisis had similarities to the Asian crisis and the internet bubble. This was the worst, but we just don't seem to be very good at learning from experience. Human nature changes incredibly slowly."

Still, if sales of his book are anything to go by, the crisis is at least prompting a rethink of the status quo.

"People are now asking the questions," he says. "Even Alan Greenspan gave a famous mea culpa speech saying he was wrong to have relied on essentially rational parties."

Greenspan might have done better to put his faith in choice architects. A core theme in Nudge, Thaler argues that almost all aspects of life are influenced by these slightly malevolent-sounding designers. "Choice architects recognise that ‘neutral' design is impossible," he writes, "and that seemingly arbitrary decisions - such as where to put the bathrooms in a building - are of enormous importance."

Take, for example, goods in supermarkets. The priciest brands are placed in eye-level shelf space to ‘nudge' you into ignoring the cheaper produce underneath. Or, slightly more left-field, the mens urinals at Schiphol airport, Amsterdam. Each urinal has a black housefly etched beside the drain. Men, it seems, are drawn to aiming at a target, a fact that has cut spillage by 80 percent.

"This is the exemplar of the nudge," Thaler chuckles, "a small feature producing a useful result."

What Nudge posits - and why Thaler has hit publishing pay dirt - is that these subtle jolts can be used for good. With some careful engineering, you can coax or ‘nudge' people into making good decisions. Thaler has dubbed the concept ‘libertarian paternalism,' splitting the difference between free market theory and a nanny state.

As he puts it: "To count as a nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not."

In many cases, it means removing the need for people to do anything at all. (Inertia is apparently a pillar of human psychology.) With employer pension schemes - where companies match their staff's contributions; a win-win situation if ever there was one - Thaler favours automatic enrollment. Instead of ticking a box to opt in to the scheme, employees have to tick a box to get out.

The difference sounds minor, but the results are dramatic. In one experiment, ticking to opt in resulted in a 42 percent take-up. Using ticking to opt out, participation rocketed to 82 percent. People, it seems, like the default option.Politically speaking, this is dynamite. The idea that you can invisibly manipulate people into doing the right thing has - unsurprisingly - won the vote of US president Barack Obama, British Tory leader David Cameron and, of course, the president of South Korea.

Thaler has consulted with Cameron while his co-author, Sunstein, has been appointed as President Obama's regulation "czar".

"The appeal for governments is that these ideas are simple, pragmatic and they work," suggests Thaler. "Between Obama, Cameron and the president of South Korea, who is quite conservative, you really span the political spectrum - but they all have something they see in this.

"The business sector has been nudging us for years with these tricks. This is an effort to get the public sector up to speed."

These same tricks could prove invaluable in helping the UAE live up to its promises on green policies. Despite high profile projects such as Abu Dhabi's zero-carbon Masdar City, the UAE has yet to make any dent in its residents' gas-drinking, water-wasting habits.

According to Thaler, success lies in creating policies that exploit our group mentality. For example, making utility companies print the average local electricity and gas usage on people's bills is enough to drive power use down, as energy guzzlers will dial back their consumption to fit with the crowd.

"There is, of course, a very traditional economic solution, which is to raise the prices," Thaler says. "The price for a gallon on gasoline in Copenhagen is $8, and [in Dubai] it is virtually free. But if you give people feedback on how much energy they're using relative to their neighbours, it really helps. And that nudge costs nothing."

This taps into the other idea behind nudging, that by giving people clearer data they will make a better-informed decision. Thaler argues this approach would have dramatically lessened the impact of the recent financial crash. Take collateralised debt obligations - why not publish details of the borrower's credit rating, or data on the house and neighbourhood, he says.

"The stress has to be on greater transparency more than strict regulation. The reason the world has gotten so complicated is that the CEOs didn't know what was going on in their own companies - that's true for Bear, Lehman, AIG and many others" he says.

"The companies that are too big to fail, we need them to disclose a lot more of what they are doing, particularly about their exposure to systematic risk and leverage.

"The needle we have to thread is to force them to disclose enough to ensure they can't cause another crisis, but not so much that they can't make a living - not their proprietary  trading tools."

In itself, disclosure often has a beneficial effect as firms will moderate their risk to blend more with the crowd, he points out.

Still, he adds; "We're entitled to know what risk we bear, if we're the insurer of last resort. Too big to fail is too big to hide."

As a principle in the firm Fuller & Thaler Asset Management, Thaler has brought his theories to bear on the stock market. The firm's policy is to hunt down stocks that are affected by behavioural biases - for example, investors being slow to react to a newly-rising stock because it has historically done poorly - and then snap them up at a cheap rate.

"It boils down to two kinds of errors," he explains. "Let's say that 90 percent of the stocks are fairly priced, at least relative to the rest of the market. However, sometimes stocks over or under react to news and we try to find the situation in which that is most likely to happen, pick those securities and buy or sell accordingly. These strategies work over the long run, and we trust that human nature doesn't change."

So in light of the global stock market meltdown of the last year, I ask, has he made a mint?

"We're not exceptions," he chuckles, "but everybody gets lucky occasionally."

Top nudges

Food for thought

Japanese treadmills generate pictures of food on their calorie count screen, to ‘nudge' runners into exercising for longer. At 35 calories, a cappuccino appears, followed at 126 by an ice cream cone and cheesecake at the 325 mark.

Stairs and graces

In a bid to persuade commuters to take the stairs over the escalator, a staircase in a Stockholm station was transformed into a piano - complete with sounds on each step. (Imagine the classic scene from the film ‘Big'.)

The result? Compared to an average day, 66 percent more people took the stairs.

Light theory

In parts of America, utility companies have equipped their customers with bulbs that reflect their energy usage. When the bulbs glow red, energy use is high, and when it switches to green, usage is low. Utility firms say power consumption has dropped significantly as a result.

What rubbish

To coax people into putting their rubbish in the bin, a park in Sweden upgraded its garbage facilities. Each time a piece of rubbish was dropped into the bin, it emitted a whistling sound, like the sound of a cartoon character plummeting into a canyon.

The bin collected 72kg of rubbish in one day - 41kg more than the soundless bin a few yards away.

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