Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler Cass R. Sunstein

Author:Richard H. Thaler, Cass R. Sunstein [Sunstein, Richard H. Thaler, Cass R.]
Language: eng
Format: epub, pdf
Tags: 9780300122237
ISBN: 9780300122237
Published: 2008-12-18T12:16:44+00:00

characteristics relevant for rational investors, such as funds’ fees. And while

funds heavily advertised past returns (for those funds that had high re-

turns), such ads in no way forecasted good future returns. Nevertheless,

fund advertising did strongly affect investors’ portfolio choices. It steered

people into portfolios with lower expected returns (because of higher fees)

PRIVATIZING SOCIAL SECURITY

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and higher risk (through a higher exposure to equities, more active man-

agement, more “hot” sectors, and more home bias).

Doing (Badly) Without Nudges

The tale of privatization of social security in Sweden is highly re-

vealing. The basic problem is that government planners did not choose the

best choice architecture. Instead, they relied on a kind of dogmatic com-

mitment to the Just Maximize Choices mantra, in a way that led to pre-

dictable effects from availability bias and inertia. Better choice architecture

could have helped.

We have emphasized that on the key issue of choosing a default, the de-

signers of the Swedish plan did an excellent job. The default plan was se-

lected with care, and we think many people outside of Sweden would in-

vest in the fund if it were available. This outcome belies the notion that

governments are inherently incapable of doing anything right. The worst

feature of the Swedish plan was the decision to encourage participants to

choose their own portfolios. In complex situations, the government might

actually be able to provide some useful hints. Recall a main lesson from

Part 1: if the underlying decision is difficult and unfamiliar, and if people do

not get prompt feedback when they err, then it’s legitimate, even good, to

nudge a bit.

In this context, it would have been better for the government to say

something like this: “We have designed a program that has a comprehen-

sive set of funds for you to choose from. If you do not feel comfortable

making this decision on your own, you could consult with an expert, or

you could choose the default fund that has been designed by experts for

people like you.” The Swedish government seems to agree with us: it no

longer actively encourages people to choose their own portfolios.

If the United States ever adopts similar partial privatization of its own

Social Security system, whether as an alternative to or substitute for the

traditional system, many lessons can usefully be learned from the Swedish

experience. Because the U.S. economy is more than thirty times as big as

Sweden’s, a similar free-entry system would probably generate thousands

of funds. This might make those who believe in the Just Maximize Choices

mantra happy, but most Humans would find choosing from such a long

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MONEY

list bewildering. A better plan would start by following Sweden’s lead of

choosing a good default plan, containing mostly index funds with man-

agers selected by competitive bidding. Participants would then be guided

through a simplified choice process (preferably on the Web). The process

would start with a yes-or-no question: “Do you want the default fund?”

For those who said yes, their task would be done (though of course they

could always change their minds at a later date). Those who rejected the

default would be offered a small set of blended funds, perhaps based on the

age of the participant (again privately managed with competitive fees).

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