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Full Interview. (12:17)
 

Tavis: We continue our "Road to Wealth" series tonight with Richard Thaler, Professor of Behavioral Science and Economics and the Director of The Center for Decision Research at the University of Chicago. He's the co-author of the new book, "Nudge: Improving Decisions About Health, Wealth and Happiness." Professor Thaler, nice to have you on the program.

Richard Thaler: Thank you. Thanks for having me.

Tavis: I've been waiting to get you here to ask you first and foremost what is decision research?

Thaler: Well, it's a study of decisions, not surprisingly. So psychologists and some economists are interested in how people make choices. It can be from as simple as do you tend to take the one on the left, do you tend to take the first one, to very complex things about - I've done a research paper on the TV show, "Deal or No Deal," where we looked at how people made the choices for big stakes.

Tavis: Yeah. The value as an academic for how we make decisions is what?

Thaler: Well, you know, economists are very important in establishing policies. Most of the economic models are based on a kind of fiction that people make decisions like robots, that they can calculate like a fast computer, that they never make mistakes, that they're not absentminded, that they don't have any self-control problems.

So what we behavioral economists do is look at the mistakes that people make, and then what the book is about is trying to devise institutions and environments where, when we stumble along as humans as we usually do, we're more likely to stumble into a good choice than a bad one.

Tavis: Can you ultimately impact that?

Thaler: Oh, it's very easy to impact it.

Tavis: Uh-huh.

Thaler: It's frighteningly easy to impact it. Let me give you a simple example.

Tavis: Sure.

Thaler: One of the big problems we face in this country is people aren't saving enough. The savings rate for Americans over the last few years has been around zero. It can get lower than that.

Tavis: (Laughter) Like a round zero, yeah.

Thaler: Yeah. Now one of the problems is that even people who have pension plans don't get around to joining. So one thing that companies have done is something that's called "automatic enrollment." The way that works is, when you're first eligible for the plan under the normal system, you have a bunch of forms to fill out.

Under automatic enrollment, you get all those forms and it says, "If you don't fill these forms out, we're enrolling you anyway." Well, boom, you get ninety-five percent of the people to join right away. Now we didn't take away anybody's freedom, we didn't take away anybody's options, but we nudged them.

Tavis: We nudged them, yeah (laughter).

Thaler: We nudged them. Also in the savings domain, a colleague and I invented a plan that we call "Save More Tomorrow."

Tavis: Um-hum.

Thaler: The way that works is we go to people and we say, "Tavis, we noticed you're not saving very much. Here's a deal for you. You can commit yourselves now to saving more every time you get a raise. We call it Save More Tomorrow." The basic idea is, we all have self-control tomorrow. We're gonna go on diets next month. So by giving people the opportunity to sign up in advance for a plan, they think, "Yeah, sure. I can afford that next month" and then the next thing they know, they're saving away.

Tavis: What you're saying to me, Professor Thaler, in a very nice way and I appreciate you being so kind about this - what you're really saying to me is that every day businesses manipulate me by nudging me towards choices even when I'm unaware of it?

Thaler: Sure. Businesses, government, advertisers, talk show hosts (laughter). You know, everybody's out there manipulating you. What the book is really about is to say, look, nudging exists, so let's nudge for good. So, yes, you know, you go into a department store and there are big TVs there that are saying, "Buy me, buy me." And the only way to defend yourself against that is to commit yourself to saving, so that's why we've spent so much time thinking about how to get people to save more successfully.

Tavis: I think of a friend now who may be watching who is a McDonald's franchisee. He owns a number of stores. I remember being in a conversation not too long ago. He, of course, is no behavioral scientist. He's an entrepreneur, but he was expressing to me one day his surprise at how, when inside the store they put up the special, you'd be amazed, he said to me, at the number of people who, when they get to the counter, came to get one thing, but we nudge them to buy this because they see that today, Wednesday, is the two cheeseburger special. You put it in front of them and you nudge them toward it and they go for it.

Thaler: Well, you know, one of the things that makes nudges work is just getting peoples' attention.

Tavis: Right.

Thaler: Here's one of my favorite examples in the book. It's a little scatological, but this is an adult show, I think.

Tavis: Yeah.

Thaler: In the Amsterdam Airport, they noticed that when guys are going about their business, they're not paying a lot of attention. So what they did is, they etched the image of a housefly in the urinal right near the drain. Well, all of a sudden, you give guys something to aim at, boom, they aim at it. Spillage was decreased eighty percent.

Tavis: (Laughter).

Thaler: So, you know, you take a task that people are doing -

Tavis: - every day routinely.

Thaler: Sort of routinely, and going into McDonald's is like that. Oh, you know, I go in, I get my double cheeseburger with fries, blah, blah, blah. Now if you all of a sudden get my attention that, oh, there's a special, what's the special, then that will influence what people do.

Tavis: One of my readings from the text, though, is that around issues unlike going to the bathroom, unlike going to McDonald's, around things that are connected to issues that we're not so familiar with, choices that we're not learned in, we tend to actually do less research about those things.

Thaler: Well, people do a frighteningly small amount of research on very big decisions. Consider taking out a mortgage. Now many people have discovered to their dismay that they didn't think about that nearly enough. Taking out a mortgage can be a decision where there's tens or hundreds of thousands of dollars in interest at stake. They're likely to be just influenced by some guy who knocks on the door and says, "I've got a good deal for you." So many people will spend more time figuring out what their next tennis racket ought to be than they spend thinking about which mortgage to take.

Tavis: Um-hum. The research indicates that this varies from men to women, from racial group to racial group, or is this across the board?

Thaler: Well, there are small differences. I think women pay a little more attention to detail than men. There are other cultural differences, but by and large, humans are all hardwired the same way. We're all busy. We all have trouble controlling our impulses and the kinds of things that we talk about in the book are the universals.

Tavis: Even for those of us who are more educated?

Thaler: Absolutely. We're all human. You know, one of the most powerful biases we have is over-confidence.

Tavis: Um-hum.

Thaler: There's a demonstration I do in my class. The first day of class, these are MBA students at the University of Chicago. They all went to top undergraduate schools. I ask them, "In what percentile in this class do you think you'll end up at the end of the semester?"

Now ten percent can be in the top decile, ten percent in the next one and so forth. Always ninety percent think they're gonna be above the median, ten percent below the median. Now they know that can't be true. Half of them are gonna be above the median, half below. They've all had statistics, but they all think, "Oh, yeah, sure. I'll ace this course."

Tavis: And what drives that, do you think?

Thaler: Well, you know -

Tavis: - over-confidence.

Thaler: Over-confidence, yeah, over-confidence.

Tavis: So one of the solutions to all of this nudging, to your earlier point, you want to nudge for good, you and your co-author call for - is it libertarian paternalism?

Thaler: Libertarian paternalism.

Tavis: I like the phrase, libertarian paternalism. Nice sound, but what does it mean?

Thaler: Yeah. Obviously, some people think that this phrase is an oxymoron.

Tavis: Um-hum.

Thaler: But by libertarian, what we mean is respecting peoples' right to choose. So liberty preserving, choice preserving. By paternalism, all we mean is trying to be helpful. So we tried to design environments where we respect peoples' choices, but tried to help them make a good choice.

We think that this approach can create a new middle between our two parties that seem to be growing further and further apart every day because it respects the sort of tradition on the right of respecting markets and the tradition on the left of trying to help people, and we try to do both in our approach.

Tavis: I guess the libertarian part, I'm cool with that. I got the preserving liberty for all of us. I'm down with that part. That paternalism part scares me a bit, particularly given that your definition of it is trying to help folk make good choices when good is so subjective.

Thaler: Well, what we say is, we're trying to help them make choices that they think are good for them, not what I think, not what Cass thinks. So if we go back to the savings example, if you ask people, "Do you think you ought to be in the savings plan?" they say, "Yes." "Do you think you ought to be saving more?" They say, "Yes." There's no controversy about that. Let me give you another example. You know, the government launched this new prescription drug program.

Tavis: That nobody understood (laughter).

Thaler: That nobody understood and understands. I can tell you, when I was researching the chapter that we wrote in that book, I went and logged on to the web page. What a nightmare. So I wouldn't wish that on anybody. Now all we're suggesting is, let's make it easier for people to choose the plan that's best for them. There's no real controversy there. People want to save money and have good service.

The ironic thing is that, in that situation, the government knows everything they need to know because, once the program was up and running for a year, you know what drugs people were taking last year. Especially the older you get, you just start taking more drugs. So the drugs you take this year are gonna be the drugs you took last year.

So they can make a very good guess and say, "Tavis, here's probably the plan that's best for you." You know, we're libertarians, so we'd say, "Take whichever one you want, but these three are the ones that look like they're the best for you." That's libertarian paternalism.

Tavis: I'm going to end this conversation on that note. I don't want to think about getting older and taking more pills with each coming year. As my grandmother said, "We'll cross that bridge when we get to it." The book, though, that Professor Richard Thaler has co-authored is called "Nudge: Improving Decisions About Health, Wealth and Happiness." An honor to have you on the program.

Thaler: Thank you. Thank you for having me.

Tavis: My pleasure.