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The Actuary The magazine of the Institute & Faculty of Actuaries

Review/Q&A: Nudge/Richard Thaler

[Read Peter Tompkins’ review of Nudge below

Your book Nudge seems to have caught the mood of the moment.
That is mostly luck. The book is based on 30 years of research, and now seemed like a good time to aim at a larger audience.

Beneath your theory lies the assumption that there are experts who are best able to understand good choices. Is that a feature of an increasingly complex society?
Yes. Just consider telephones. In our grandparents’ generation there was only one kind of phone, and one colour: black. Now, choosing a phone is a complex problem worthy of a Masters thesis, so a group of experts might design a programme to help you find the right package.

What do you think defines an expert?
Take one illustration. There was a recent study about when men should stop being tested for prostate cancer. A small interdisciplinary team collectively brought the required knowledge to act as a good ‘nudge’. They suggested that men stop being tested at 75 but allowing them and their physicians to overrule that guideline. Notice that there is a strong actuarial component in the right decision here. Since prostate cancer is usually slow, men should avoid treatments with a high risk of bad side effects if they are likely to die of something else first.

Are journalists a help or a hindrance in telling the public what to think of the experts?
We all think that everything in a news story is completely right until we read one about a subject in which we are an expert, and then we realise there can be errors. Still, most journalists I talk to try hard to give an accurate picture.

Do you think actuaries do enough to educate others about the merits of long-term financial planning?
My father and uncle were both actuaries, so I know full well that actuaries think they understand everything better than anyone! Still, you could probably be doing more to explain the importance of saving. Certainly the ‘downside’ of increasing life expectancies is a message you are uniquely qualified to deliver.

Where do you see the boundaries for libertarian paternalism? In particular, why do you think the State is reluctant to leave pension saving to individual choice?
In some domains, making things compulsory is quite popular. Here in the US, the social security system is wildly popular. If societies want to decide collectively to tie themselves to the mast, then libertarian paternalists have to shrug and say ‘okay’.

Where do you think the balance should be between something that is good (and needs a nudge) and something that is less so? How do you apply this to pensions?
It is important to make sure that the costs of opting out are small. We strive for policies we call ‘one-click’ paternalism, because someone can opt out with one mouse click. It is also important to give advice to people for whom the default might not be a good choice.

You have described the world as consisting of ‘humans’ and ‘econs’, a rational creature that is half-actuary. What do you like best about actuaries today?
Actuaries have a rare mix of skills and knowledge. In many situations they can be just the ‘experts’ we are looking for. I hope they take the idea of choice architecture seriously, and go into that line of work!

Did you ever think of being an actuary yourself – and if not, why not?
I didn’t think I had the self-control to take all those exams so I did something easier – a PhD in economics!

Book review:
Nudge by Richard H. Thaler and Cass R. Sunstein
(2008, Yale University Press, ISBN 13: 9780300122237)

Imagine my surprise, quietly listening to BBC Radio 3’s evening arts magazine, to suddenly hear the words “auto-enrolment in pension plans” tripping off the tongue of the author being interviewed. It was Professor Richard Thaler of Chicago University who, along with his colleague, Cass Sunstein, has recently published their excellent book Nudge on the way in which people can be offered choices to help them reach better conclusions to difficult life challenges.

Thaler and Sunstein are what they term ‘libertarian paternalists’. By the end of the book, I think I’d added myself to that category. They divide the world into two – mostly humans but with a tiny number of ‘Econs’, which they admit are “part actuary”, who can make rational decisions. Most humans can’t – it is they who need to be nudged, hence the title.

Choices of pension plans or investment options come in for the greatest investigation. Enrolling people automatically into pension plans with an opt-out facility does lead to far more taking out a plan than if they had to actively elect in to one. The UK’s impending introduction of such a regime in 2012 must surely meet with the authors’ blessing.

The new Swedish pensions system is lauded in its intention but comes in for heavy criticism not only for having introduced over 700 different funds to choose from but for then letting the State encourage people to make their own choices. The authors wonder whether more effort should have been put into promoting the use of the default option.

If there is one drawback of the book it is that, as a US book, it is a little parochial. Thaler and Sunstein’s efforts might benefit from some wider generalisations and less focus on the minutiae of American prescription financing. Maybe a future revision could widen its appeal and its impact on a range of issues.
Peter Tompkins

Reader offer
Readers wishing to purchase a copy of Nudge at the special price of £16.20 (RRP £18), with free postage (UK only), should contact the sales department at Yale University Press on +44 (0)20 7079 4900, or send a cheque made payable to ’Yale University Press’ to: Sales Department, Yale University Press, 47 Bedford Square, London WC1B 3DP.