What would Professor Friedman say about this if he were still alive? His rule was that to be responsible, a practice must avoid deception. Would you consider Chris’s idea deceptive? I hope so. But the policy I described is one that was used by many banks, which were later fined by regulators but did not admit to having done anything wrong.
Financial institutions don’t have a monopoly on questionable business practices. For example, at most airline websites, when you’re ready to buy a ticket, you are offered something euphemistically called “trip insurance,” although it of course does not cover rain, mosquitoes, or quarrels with your traveling companion. Yet before buying a ticket, customers are sometimes required to indicate whether they want to buy trip insurance—with the “yes” box helpfully prechecked and labeled “recommended.”
Disturbingly, trip insurance is even recommended for fully refundable tickets, for which the product is worthless. And to add insult to injury, the insurance is more expensive in that case, because it turns out that the price of trip insurance is proportional to the price of the ticket.
Ten years ago, my friend Cass Sunstein and I wrote the book Nudge, in which we advocate using what we call choice architecture, such as the design of websites, to help people make what they judge to be better choices. Automatically enrolling people in the company pension plan qualifies as a “nudge” because most people want to join, but some never get around to it.
I have a different term for practices such as processing the bills from a debit card from large to small and hawking expensive trip insurance: “sludge.” Unlike a nudge, which is designed to make it easier to make wise choices, sludge does the opposite—it makes wise choices more difficult.
In your job, if you work for a corporation, you will have a duty to your shareholders, but you may also want to sleep well at night. Strategies that enrich shareholders at the expense of customers, employees, neighbors, or the environment demand scrutiny. The bottom line should not be the only line to consider. This train of thought leads to some advice. First, before taking some action, consider whether you would be willing to publicly announce the policy. If not, don’t do it. Also, instead of encouraging employees to find creative new ways to hide fees and lay traps, concentrate on finding ways to deliver a high-quality product at competitive prices, and compete by developing a reputation for fair dealing. Trust can be a company’s greatest asset.
In the short run, you may lose some customers to competitors who create the false impression that their prices are cheaper, because the full prices of their products are shrouded. But in the long run, you may be able to make a profit by creating loyal customers, who are confident that their pockets aren’t being picked when they’re not paying attention, and loyal workers, who know that the company has their back. Companies that fail to take this advice shouldn’t be surprised to observe an increase in regulatory scrutiny. As a matter of logic, if the only standard you’re willing to live by is the letter of the law, you should expect that the more sludge you emit, the more regulations you will face.
To sum up: if the usual techniques are not working for you, don’t be afraid to try something different, even if it makes you look foolish when you flop. But try to have a soft place to land. And create organizations that customers, employees, and neighbors can trust. A trustworthy company can earn a good profit without emitting any sludge. Indeed, it can nudge for good.
Richard H. Thaler is Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at Chicago Booth and was the recipient of the 2017 Nobel Prize in Economic Sciences.