Econs and Humans

Econs and Humans

Economics has traditionally ignored psychology. In Nudge, Richard Thaler and Cass Sunstein take a step toward greater realism about it. […] The authors start off by differentiating “Econs” from “Humans.” The former are the efficient calculators imagined in economic theory, able to weigh multiple options, forecast all the consequences of each, and choose rationally. The latter are ordinary people, who, like the analysts on Wall Street, fall well short of homo economicus. Humans operate by rules of thumb that often lead them astray. They are too prone to generalize, biased in favor of the status quo, more concerned to avoid loss than make gains, among other shortcomings. So they often fail to manage their personal affairs to the best advantage.

Thaler and Sunstein think that ordinary folk should be “nudged” to decide more rationally. A “nudge,” as they conceive it, means some change in the “choice architecture” surrounding personal decisions that will cause Humans to choose differently and better, even though an Econ would be unswayed. Often that means changing the default option—the choice made for people if they do not choose. For example, many employees save too little for their retirement because they fail to sign up for 401(k) plans offered by their employers. The authors would change the default from opt-out to opt-in-employees would be enrolled in pension plans unless they said otherwise. Workers would also be encouraged to commit now to pay higher pension contributions in future, if not today. Both steps would raise savings substantially. Another nudge would be to establish better defaults for allocating pension contributions among different investments. Also, many people say they are willing to donate their organs for transplants when they die, yet fail to sign up. Again, the authors would change the default from opt-out to opt-in-people would be presumed willing to donate unless they declined.

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Cass Sunstein’s new book Nudge (At Democracy NOW)

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