{"id":15613,"date":"2020-10-09T17:53:00","date_gmt":"2020-10-09T21:53:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=15613"},"modified":"2020-10-20T11:06:44","modified_gmt":"2020-10-20T15:06:44","slug":"nudge-economics","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/nudge-economics\/","title":{"rendered":"Nudge Economics: Humans Aren&#8217;t Always Rational"},"content":{"rendered":"\n<p>What are the principles of <em>Nudge <\/em>economics? What is the connection between <em>Nudge<\/em> and economics?<\/p>\n\n\n\n<p>Humans do not always behave in their own best interest. <em>Nudge<\/em> economics principles explain what affects their choices and how to improve decisions.<\/p>\n\n\n\n<p>Read more about <em>Nudge<\/em> economics examples and principles and why nudges are necessary.<\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\">Nudges: Economic Rationality vs. Actual Human Behavior<\/h2>\n\n\n\n<p>One of the most important insights of <em>Nudge<\/em> economics is that <strong>self-interested human beings are actually terrible at doing what\u2019s best for themselves<\/strong>. That is, despite having the intellectual capacity to write symphonies or design aircraft or edit genes, <strong>we humans consistently and predictably <a href=\"https:\/\/www.shortform.com\/blog\/make-bad-choices\/\">make bad choices<\/a> in our everyday lives<\/strong>.<\/p>\n\n\n\n<p>A classic example of our poor <a href=\"https:\/\/www.shortform.com\/blog\/methods-of-decision-making-crucial-conversations\/\">decision-making<\/a> is diet. More than 60% of Americans are either obese or overweight, despite the well-known health risks of excess weight. If human beings unfailingly acted in their self-interest, they would always\u2014or, at least, most of the time\u2014choose healthy foods over unhealthy ones.<\/p>\n\n\n\n<p><strong>The fact that human beings don\u2019t always make the right choice for themselves contradicts a central assumption underlying traditional economics<\/strong>: <strong>that human beings are always rational and always choose what\u2019s in their self-interest<\/strong>.<\/p>\n\n\n\n<p>Traditional economics gets us wrong because it conceptualizes us as \u201cEcons\u201d\u2014fantastical beings with incredible powers of perception and self-awareness. On the contrary, in behavioral economics<strong>, people are conceptualized as \u201cHumans\u201d\u2014often irrational beings prone to make mistakes<\/strong>.<\/p>\n\n\n\n<p>The reasons for humans\u2019 fallibility are legion, but the dominant factor is simply the <em>way we think<\/em>. We favor gut feeling over reflection. We rely on rules of thumb rather than research. We allow the way a question is phrased to sway us. Unfortunately, these deeply ingrained ways of dealing with the world tend to lead us astray. <em>Nudge <\/em>economics recognizes this and offers solutions.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Automatic vs. Reflective Thinking<\/strong><\/h3>\n\n\n\n<p>Many psychologists and neuroscientists have begun to theorize the brain\u2019s function by drawing a distinction between intuitive, instinctual thinking and deliberate, rational thinking: <strong>the <em>Automatic System<\/em> and the <em><a href=\"https:\/\/www.shortform.com\/blog\/reflective-system\/\">Reflective System<\/a><\/em><\/strong>. These systems also explain the need for <em>Nudge<\/em> economics. <\/p>\n\n\n\n<p><a href=\"https:\/\/www.shortform.com\/blog\/automatic-thinking\/\">The Automatic System<\/a> comprises the almost instantaneous actions or reactions that, in normal conversation, we might call \u201cunthinking.\u201d This system is engaged when we flinch at motion near our face or adopt a silly voice to address a pet or child; it also includes what we mean when we say we have a \u201cgut feeling\u201d about something. (It also happens to be the part of our brain we <em>share <\/em>with our pets.)<\/p>\n\n\n\n<p>The Reflective System, oppositely, is what we engage when we apply our brains to something consciously, for example, a nonobvious math problem or a career decision. When we say we\u2019re \u201cmulling it over\u201d or \u201cconsidering all the options,\u201d we\u2019re using the Reflective System.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Automatic System<\/strong><\/td><td><strong>Reflective System<\/strong><\/td><\/tr><tr><td>Fast<br>Unconscious<br>Immediate<br>Mindless<br>Easy<\/td><td>Slow<br>Conscious<br>Delayed<br>Mindful<br>Labor-intensive<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>Although the Automatic System is essential in certain situations\u2014for example, when we grasp the railing if we trip on the stairs\u2014it can get us into trouble when a situation calls for slow, conscious thought (for example, when deciding with health insurance plan to choose). <strong>A key finding of the behavioral economics literature is that humans far too often think automatically when they should be thinking reflectively<\/strong>.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Heuristics&nbsp;<\/strong>and <em>Nudge<\/em> Economics Examples<\/h3>\n\n\n\n<p>Heuristics\u2014more commonly known as \u201crules of thumb\u201d\u2014allow us to make judgments when we aren\u2019t sure of the right answer. In many cases, they\u2019re helpful\u2014for example, when we estimate distances based on landmarks or seek a rental apartment that costs no more than a third of our monthly earnings. But, as discovered by psychologists <a href=\"https:\/\/www.shortform.com\/blog\/daniel-kahneman-and-amos-tversky\/\">Amos Tversky and Daniel Kahneman<\/a>, <strong>our tendency to rely on rules of thumb also leads to systemic biases that skew our judgments<\/strong>. (Shortform note: <a href=\"https:\/\/www.shortform.com\/app\/book\/thinking-fast-and-slow\">Read our summary of Kahneman\u2019s <em>Thinking, Fast and Slow<\/em> here<\/a>.) Tversky and Kahneman identified three <a href=\"https:\/\/www.shortform.com\/blog\/heuristics-and-biases-2\/\">common heuristics<\/a> and the misapprehensions each entails. The <em>Nudge<\/em> economics examples below show how heuristics make for poor decisions without nudges.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Anchoring and Adjustment<\/strong><\/h4>\n\n\n\n<p>When we \u201canchor and adjust\u201d when making a judgment,<strong> we take a fact we know (or think we know) and adjust it to account for the fact we don\u2019t<\/strong>.&nbsp;<\/p>\n\n\n\n<p>Let\u2019s say, for example, that someone asks you to guess the population of Boston. You don\u2019t know the population of Boston, but you <em>do <\/em>know the population of Worcester, and you know that Boston is quite a bit bigger than Worcester. So, using Worcester\u2019s population as your \u201canchor,\u201d you adjust upwards to make an \u201ceducated guess\u201d at the population of Boston. All good, right?<\/p>\n\n\n\n<p><strong>Unfortunately, studies have shown that people who \u201canchor and adjust\u201d guess incorrectly in entirely predictable ways<\/strong>. For example, people who use a lower number as an anchor\u2014e.g., using the population of Worcester to guess the population of Boston\u2014will tend to guess too low, whereas people using a higher number as an anchor\u2014e.g., using the population of <em>New York<\/em> to guess Boston\u2019s\u2014will tend to guess high.&nbsp;<\/p>\n\n\n\n<p>This <a href=\"https:\/\/www.shortform.com\/blog\/common-types-of-biases\/\">type of bias<\/a> occurs in nonquantitative guesses as well. For example, one study asked college students two questions: (1) How happy are you? and (2) How often are you dating? When the questions were ordered 1-2, there was little correlation between the two answers. <strong>When the order was reversed, however, so that the dating question came first, the correlation jumped nearly<\/strong><strong><em> sixfold<\/em><\/strong>\u2014the students took their dating number and used it to determine whether they were happy.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Availability<\/strong><\/h4>\n\n\n\n<p>The <a href=\"https:\/\/www.shortform.com\/blog\/availability-bias\/\">availability heuristic<\/a> finds human beings answering questions and making judgments <strong>on the basis of whether comparable examples come readily to mind<\/strong>. When it comes to <a href=\"https:\/\/www.shortform.com\/blog\/the-availability-heuristic\/\">the availability heuristic<\/a>, we are biased against statistical probabilities (Reflective Thinking) and toward the most vivid examples (Automatic Thinking).&nbsp;<\/p>\n\n\n\n<p><strong>The availability heuristic is especially active in assessments of risk<\/strong>. For example, people who have experienced a natural disaster themselves are more likely to overestimate disasters\u2019 frequency; and research shows that flood and earthquake insurance purchases jump in the immediate aftermath of these events and taper off as people\u2019s memories fade. Similarly, because nuclear meltdowns receive sensational coverage in the news, people tend to be more concerned about nuclear power plants than about heart health<strong>, even though heart disease kills over 10,000 times more people than nuclear accidents<\/strong>.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Representativeness<\/strong><\/h4>\n\n\n\n<p>The third heuristic Tversky and Kahneman identify is the \u201crepresentativeness\u201d heuristic, although it might be better termed the \u201csimilarity\u201d heuristic. <strong>We use this heuristic when we categorize a phenomenon based on how similar it is to the <\/strong><strong><em>stereotype<\/em><\/strong><strong> of some category<\/strong>.&nbsp;<\/p>\n\n\n\n<p>A simple example concerns our categorization of people based on their appearance. If we come across a diminutive white-haired man wearing glasses and a corduroy blazer and carrying a briefcase, we\u2019re more likely to think \u201cprofessor\u201d than we are \u201cprofessional basketball player.\u201d<\/p>\n\n\n\n<p><strong>However, our bias toward \u201crepresentativeness\u201d becomes dangerous when we confront random processes<\/strong>. We tend to expect random processes to conform to our <em>idea <\/em>of randomness\u2014as producing unpatterned, impossible-to-predict outcomes. Unfortunately, random processes, especially in the short run, can <em>appear to have causal or predictable results<\/em>. That means, again because of the \u201crepresentativeness\u201d heuristic,<strong> we ascribe those results to some particular cause rather than chance<\/strong>.<\/p>\n\n\n\n<p>A classic example of humans misinterpreting randomness is sports fans\u2019 notion of the \u201chot hand.\u201d When, say, a basketball player makes a shot\u2014or even better, a number of shots in a row\u2014fans believe he or she is more likely to make the next shot than if he or she had missed. The idea is that shooters get \u201chot,\u201d and thus should be passed the ball more frequently.<\/p>\n\n\n\n<p><strong>However, upon careful statistical analysis, the \u201chot hand\u201d proves not to exist<\/strong>\u2014a shooter\u2019s probability of making his or her next shot is the same <em>regardless of the result of the previous shot. <\/em>We simply <em>believe <\/em>the \u201chot\u201d shooter is more likely to make the next shot because of the <a href=\"https:\/\/www.shortform.com\/blog\/representative-heuristic-example\/\">representativeness heuristic<\/a>.<\/p>\n\n\n\n<p>Whereas exhibiting a <a href=\"https:\/\/www.shortform.com\/blog\/cognitive-bias-definition\/\">cognitive bias<\/a> in sports is relatively harmless, exhibiting one in the world of disease control can cause panic and wasted resources. For example, American public health officials receive more than 1,000 reports of so-called \u201ccancer clusters\u201d each year. (A \u201ccancer cluster\u201d is a sudden incidence of cancer diagnoses over a short period of time and in a limited area.) The fear is that environmental (or some other) factors are causing the uptick in cancer. However, in the vast majority of cases<strong>, the sudden increase in cancer is completely random\u2014a chance fluctuation bound to occur in a population of 300 million.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>What are the principles of Nudge economics? What is the connection between Nudge and economics? Humans do not always behave in their own best interest. Nudge economics principles explain what affects their choices and how to improve decisions. Read more about Nudge economics examples and principles and why nudges are necessary.<\/p>\n","protected":false},"author":6,"featured_media":2753,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[81,9],"tags":[132],"class_list":["post-15613","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economics","category-psychology","tag-nudge","","tg-column-two"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.3 (Yoast SEO v24.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Nudge Economics: Humans Aren&#039;t Always Rational - Shortform Books<\/title>\n<meta name=\"description\" content=\"What are Nudge economics principles? They take irrational humans and try to help them make more rational decisions. 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