nudge economics_ has push come to shove for a fashionable theory_ _ science _ the observer

8/12/2019 Nudge Economics_ Has Push Come to Shove for a Fashionable Theory_ _ Science _ the Observer

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Illustration by Jack Hudson.

In a TED talk in Monterey, California in February 2010, just before he came to power

and had to make decisions, David Cameron was extremely keen to look like the future.

"Politicians will only succeed if they actually try to treat people as they are, rather than

as they would like them to be," was his fresh-faced rallying cry, as he attempted to

channel the spirit of Bobby Kennedy in an open-necked shirt. "If you combine this very

simple, very conservative thought go with the grain of human nature! with all the

advances in behavioural economics, I think we can achieve a real increase in wellbeing,

in happiness, in a stronger society without necessarily having to spend a whole lot more

money."

This "revolution in government" would be brought about in

particular, Cameron suggested, by his devotion to the theories of

a group of thinkers who had come to establish and dominate a

Nudge economics: has push come toshove for a fashionable theory?A rival psychologist has published a book debunking the

behavioural economics of Daniel Kahneman and the men behind

Nudge, who, along with the authors of Freakonomics, were once

the PM's pet thinkers. So how do you choose between them?

Tim Adams

The Observer, Sunday 1 June 2014

Risk Savvy: How To

Make Good

Decisions

by Gerd Gigerenzer

ge economics: has push come to shove for a fashionable theory? | Sc... http://www.theguardian.com/science/2014/jun/01/nudge-economics-fre...

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new self-help/psychology/economics corner of the bookshop, the

decision-makers' decision-makers. "We are working with these

people," Cameron said proudly, and flashed up a slide featuring

three of them: Cass Sunstein and Richard Thaler, authors of the

bestsellingNudge, and Daniel Kahneman, Nobel prize winner

and author of the soon-to-be bestselling Thinking, Fast and

Slow.

Cameron then gave a few examples of how this revolution would

work in practice. The "best way" of making homes energy

efficient, he suggested, was not by the "bullying or badgering of

government" but through bills that showed citizens how much

less their neighbours spent on gas and electricity than they did.

The tricks of behaviourial psychology (which, you couldn't help

thinking, had been used by the advertising industry for about a

century) could "nudge" the public into doing the right economic

thing. The government would in this way embrace the lucrative counterintuitive lessons

ofFreakonomics, it would listen to evidence-based data, not political gut instinct, it

would, as the authors of that latter bestselling book Steven Levitt and Stephen Dubner

had it, "think like a freak".

With all this in mind, that spring, Cameron established his behavioural insights team,

led by the former Blair adviser David Halpern, which immediately became known as his

"nudge unit". In a book published this month, Levitt and Dubner, who made theirnames with a behavioural-economics agony aunt column in theNew York Times, recall

how they were called in to address this new team and the prime minister, back in 2010.

Cameron could not have been more chuffed to meet them: "Right, where are the clever

people?" This ebullience drained quite quickly, however, when Levitt and Dubner

turned their particular brand of freak-thinking to the NHS.

"We tried to make our point with a thought-experiment," they recall. "We suggested to

Mr Cameron that he consider a similar policy in a different arena. What if, for instance,

every Briton were also entitled to a free, unlimited lifetime of transportation? That is,

what if everyone were allowed to go down to the car dealership whenever they wanted

and pick out any new model, free of charge and drive it home?"

At this, Levitt and Dubner expected the prime minister to "light up" and say: "I see your

point about the free healthcare we are doling out!" They expected him to embrace their

behaviouralist argument that no one places a value on anything unless they are charged

for it. In fact Cameron said nothing at all, but "the smile left his eyes", there was a quick

handshake and he "hurried off to find a less ridiculous set of people with whom to

meet". The freakonomists can't help feeling this was a missed opportunity, though they

concede "fixing a huge problem like runaway healthcare costs is about a thousand times

harder than, say, figuring our how to take a penalty kick" (for which their book offers a

BuythebookBuythebookBuythebookBuythebook

Tell us what you

think:Star-rate and

review this book


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more workable solution).

This was, in retrospect, perhaps also the moment when the prime minister began to lose

a little of his messianic faith in his behavioural revolution. Certainly, in the years since

he has come to power and had to make actual messy decisions, he has had a good deal

less to say on the decision-making theorists about whom he was previously so

evangelical. The nudge unit has had some successes in testing and rethinking howchoices are presented to citizens, championing opt-out rather than opt-in pension

provisions, for example, or proving the efficacy of labelling rubbish bins with the word

"landfill" to encourage recycling. Some of Cameron's ambitions have come to seem a

cognitive fallacy in themselves, however: telling people how much their neighbours pay

for electricity produces only about a 1% change in usage; traditional tough economic

decisions a carbon tax, or an increase in fuel duty are far more effective in the goal

of energy-saving.

Daniel Kahneman, the

'godfather' of behavioural economics, has been challanged by psychologist Gerd

Gigerenzer, who claims that Kahneman presents 'an unfairly negative view of the

human mind'. Photograph: Richard Saker

Though nudge-economics remains seductive, what once seemed like a panacea hascome to look a bit more like a series of sticking plasters. Earlier this year the nudge unit

was removed from direct government control, partly sold to the Nesta innovation

charity run by New Labour guru Geoff Mulgan, a move which seemed to suggest the

prime minister no longer viewed it as quite so central to his philosophy. That move has

coincided with a backlash, or at least a critical analysis, of some of the tenets on which

its brand of behavioural economics is based.

Cameron would not have seen it in these terms but in his freakonomics moment over

the NHS he was also confronting an extremely crude version of one of the most heatedacademic debates of the last two decades: the question of whether purely rational

decision-making is feasible in the real world. That has been part of an ongoing

argument between the "godfather" of behavioural economics, Kahneman, and his most


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serious opponent, a psychologist named Gerd Gigerenzer, director of the Centre for

Cognition and Adaptive Behaviour at the Max Planck institute in Berlin. The substance

of this argument concerns the best way for human beings to make decisions.

It is generally possible to judge the depth of an academic disagreement by the way the

two principal opponents address each other in the footnotes of their life work. In

Kahneman's hugely influential Thinking, Fast and Slowhe notes that "a prominentGerman psychologist has been our most persistent critic" and goes on to list the

references to articles in which those criticisms have been made (a list that cumulatively

makes Gigerenzer seem a little obsessive, a behaviouralist stalker). Back at the turn of

the millennium, when Kahneman was not yet an academic superstar, he admitted to

being troubled by the feud to one interviewer. "It was embarrassing, the level of

hostilities," he said. "Gigerenzer speaks very well. Even when he's completely wrong, it's

hard not to be impressed "

The shorthand of Gigerenzer's criticism then and now was that Kahneman presents "anunfairly negative view of the human mind". Or, as Gigerenzer himself explained it when

I spoke to him on the subject in London last week, "in concentrating only on fallacies

and biases Danny [Kahneman] pushes the idea that people are dumb." That shorthand

that because of various provable fallibilities in reasoning when making decisions,

human beings are incapable of choosing the best outcome for themselves is the basis

of the philosophy behind nudge economics.

Gigerenzer thinks Kahneman is wrong. People are not stupid, he argues, just

ill-educated in "risk literacy". Gigerenzer does not, for his part, mention Kahneman's

name once in his new 320-page book,Risk Savvy, though arguably the entire volume is

dedicated to a dismantling of some of the tenets of Thinking, Fast and Slow.

In an increasingly complex and specialised world, Gigerenzer preaches a gospel of

greater simplicity. He suggests that the outcome of decisions of any complexity a

complexity of, say, trying to organise a successful picnic or greater are impossible to

accurately predict with any mathematical rational model, and therefore more usefully

approached with a mixture of gut instinct and what he calls heuristics, the learned rulesof thumb of any given situation. He believes, and he has some evidence to prove it, that

such judgments prove sounder in practice than those based purely on probability.


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Gerd Gigerenzer, who believes that, with education, the

teaching of critical thinking about statistical probability, people can become more

usefully 'risk savvy'.

"This is not," Gigerenzer concedes, "an easy message to convey to economists, who have

been trained in optimisation techniques or to managers in corporations who believe that

one can maximise every decision." There are, too, plenty of people who have a vested

interest in preserving the idea that the future is complex but calculable, even if in most

cases they know that the illusion of certainty that they present is untrue.

In Gigerenzer's view this group includes much of the medical profession, most financial

analysts and advisers, and, of course, many academics. The desire for ever greater

complexity in the process of decision-making, driven by ever greater access to data, inpractice produces what he calls risk-averse "defensive decision-making", or covering

your backside. You don't do what your instinct and experience tells you is right: you

find the data to support an inferior, but less personally risky choice.

Gigerenzer believes above all in the power of simple rules in the real, unfathomably

complex world. "Probability theory is the best thing in a world where you can measure

the risks exactly and the parameters are not too complicated. But for most problems it

provides another illusion of certainty, and becomes part of the problem," he argues. His

favourite example is that of Harry Markowitz, who won a Nobel prize in economics forcreating a formula to produce maximum gain from an investment portfolio, in a

sophisticated mathematical weighting of gain and risk. When it came to investing for his

own retirement, however, Markowitz didn't bother with that his formula which

Gigerenzer proved to be certainly effective only over a 500-year period he simply

divided his investment equally among a given number of assets. He used the heuristic of

"not putting all his eggs in one basket" because he knew that would probably be good

enough.

Gigerenzer often talks with investment analysts and bankers who, despite the illusions

of sophisticated risk management they sell to their clients, tell him that more often than

not they tend to rely on similar rules of thumb when it comes to placing their own bets.


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Politicians, he observes, also routinely trade on our inability to gauge competing risks,

not least in exploiting anxieties over terrorism to erode civil liberties. Though

Kahneman himself carefully limits its potential political application, his argument that

we are irretrievably in thrall to our fallacies, in Gigernzer's view, only strengthens the

argument for such paternalism from government. Nudge theory becomes the more

palatable expression of a deliberate wider manipulation. It makes us weaker and less

questioning citizens.

Gigerenzer proposes an alternative solution. He believes, with education, the teaching

of critical thinking about statistical probability, people can become more usefully "risk

savvy" (again, you would have to say that Kahneman's work absolutely shares this

ambition, even if his route to it is different, and arguably more rigorously scientific).

The day before I spoke to him Gigerenzer had met the newly privatised behavourial

insights team. How did that go? He told them two things: "that given the will you can

teach even fourth-graders critical reasoning", and second, that "I am not against a bit ofnudging here and there but it can never be a philosophy for a country." It is, he argues

to me, more the evidence of political cowardice, of giving up on trying to inform or

make clear arguments. A political cop-out. Why not, he asks, "instead do something

sustainable? Teach children statistical thinking, not as a branch of mathematics, but

with evidence from the real world, in health and finance. And teach them heuristics,

give them a tool kit that will help them to understand risk and question choices."

He offers one such heuristic, which, if ingrained, might have saved a lot of grown-up

difficulties in recent years: "Never buy financial products you do not understand." And

another, which he swears by: "At a restaurant, don't study the menu for clues, say to the

waiter, 'if you were eating here tonight what would you have?'"

The one certainty of our lives is that we are never going to be stuck for uncertainty.

Choices multiply along with information. So which book should you buy, which

philosophy should you follow in the ever-growing literature of the art and science of

making decisions? You decide.


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nudge economics_ has push come to shove for a fashionable theory_ _ science _ the observer

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