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Thaler Explains How "Choice Architecture" Makes the World a Better Place

Because of limitations in neoclassical economic theory, the world needs to nudge people toward the right choices to make their lives better, said Richard Thaler, Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics. "Although libertarianism and paternalism appear to be two of the most reviled terms in America, both of these terms are actually lovable," Thaler said.

Thaler spoke at the 56th Annual Management Conference, which drew nearly 1,000 alumni and friends of Chicago GSB to his luncheon address at the Chicago Marriott Hotel and a series of panel discussions at Gleacher Center on May 16. Thaler and fellow author Cass Sunstein, Karl N. Llewellyn Distinguished Service Professor of Jurisprudence at the Law School, coined the phrase "libertarian paternalism" to describe their approach, which they outline in their book Nudge.

"By libertarianism we mean protecting peoples' right to choose," Thaler said. "By paternalism, all we mean is caring about peoples' outcomes. We want to devise policies that will make people better off, not worse off, as judged by them. It's not that Cass and I think we know what's best for you or anyone else. It's that we think we can help people make choices that they themselves think are better."

That goal can be achieved with "choice architecture," or the careful design of the environments in which people make choices, he said. "If anything you do influences the way people choose, then you are a choice architect," Thaler said. "If you remember one thing from this lecture, remember the following: Choice architects must choose something. You have to meddle. For example, you can't design a neutral building. There is no such thing. A building must have doors, elevators, restrooms. All of these details influence choices people make."

Three key features of choice architecture are the default, giving feedback, and expecting error, he said. "Default is what happens if you do nothing, such as leaving your computer unused until the screen saver appears," Thaler said. "The main lesson from psychology on this is that default options are sticky. Whatever you choose as the default has a very good chance of being selected. If you are the choice architect, you need to spend a lot of time thinking about what those default options should be."

People respond to feedback; for instance, someone designed light bulbs that glow darker shades of red as homes use higher levels of energy, he said. Such devices helped reduce energy use in peak periods by 40 percent in Southern California, Thaler said.

By expecting error, Thaler points to the design of the Paris subway card, which allows users to insert it into an electronic turnstile in any of four ways to gain entrance to the subway. "Compare that to exiting the parking garages of Chicago," he said. "You have to put your credit card in and there are four possible ways up, down, left, right and exactly one works. This is the difference between good and bad design."

Google is developing choice architecture to remind Gmail users when they forget an attachment or may be about to send a rude email, Thaler said. "If you mention the word attachment in the text of your email and you don't include an attachment, it would prompt you," he said. "Even better would be an emotion detection system that will send you a warning if you are about to send an angry email."

More important economic applications of choice architecture include the Save More Tomorrow program, which helps employees set aside future pay hikes for retirement. "Save More Tomorrow is based on the same principle of expecting error," he said. "We ask people if they want to commit now to saving more later, because all of us have more self-control in the future. The first company that adopted it tripled savings rates, and the program is now spreading worldwide."

Thaler and Sunstein's newest idea, can be applied to many domains, including credit cards, mortgages, Medicare, and cell phone contracts, Thaler said. Called Record, Evaluate, and Compare Alternative Prices, or RECAP, it would require credit card issuers to provide each customer with an annual spread sheet showing the formulas for each way they bill and a second spread sheet of the ways in which the customer incurred charges during the previous year, he said.

"What would people do with these spreadsheets?" Thaler said. "We predict that websites would emerge immediately that would analyze these spreadsheets. In one click you could upload these to, say, comparisoncredit.com, which would explain to you what your credit card company is doing to you and suggest three other providers if you plan to continue to use your credit card in the same ways."

—Phil Rockrohr