A Little Nudge

You may or may not have been aware of a little book that’s made waves in the econo / political blogosphere recently.  Nudge, a work by Richard Thaler and Cass Sunstein (though, one is not an economist), discusses how very small changes to our behavior lead to great(er) improvements in our well-being.

For a personal example, there’s my morning coffee routine.  A small change that not only saves a good chunk of change each year, but because coffee brings people together, I got to know some of my co-workers as better friends, especially when discussing coffee blends.  The unintended consequences of behavior change are quite interesting.

Nudge is a book that hinges on how to consciously “engineer” our choices towards some object (goal) that we aim for. For a long time in economics, we studied people as if they were rational decision makers who decide optimally.  That’s a laugh.  “Homo Econimus” may live in the museums of an Introduction to Economics book, but today is an extinct species of thought.

Sunstein and Thaler find that we make 5 common mistakes in our thinking, and that correcting these biases would help us make better decisions.

1. Anchoring -We base decisions on what we know, rather than on what actually is
2. Availability -We tend to think that our city is more violent than it is because thats’ all there is on the news until the weather 20 minutes in.
3. Representativeness -We see this in sports alot, where attribute “streaks” that encourage better streaks in the future.
4. Status Quo -We continue to do something even though circumstances change.
5. Herd mentality -We tend to do things that we see others doing.

Thinking of strategies that avoid these 5 problems tend to lead to better outcomes for us.  I can read these 5 problems and the problems of investing and retirement planning and cash flow maintenance come to mind immediately.  What I gather from these issues is that taking a step, or two back to reflect upon a decision to be made would be of great benefit.  One trick for my wife and I is to shop with a list, and if we spot something we want but isn’t on the list, that item gets on the list for the next trip…if we still want it then.  Normally, we don’t.