Today’s post started from a question concerning the ethics of nudging. To be clear, I’ve always been of the opinion that nudging is a no-brainer: if you’re not decreasing choice options but just changing the default, nobody should object. After all, you can still choose as you wish, so what’s the problem? Well, there are problems involved, as it turns out.

But first, to sensibly talk about nudging, we need to define what we mean by a nudge. Specifically, what I mean (and what I’ve understood Thaler and Sunstein to mean in their book Nudge) is the following:

A nudge:

•  is a cue that drives behavior in a collectively beneficial direction
  
• does not reduce freedom of choice
  
• is behavior-based, not just an incentive

The problem with this argument is the assumption people choosing rationally, according to their best interest. This is directly in conflict with another assumption of nudging, which is that people do not choose rationally. After all, if we didn’t assume that, why would we do nudging in the first place? So, it seems to me that first nudging assumes (quite correctly) imperfect rationality, but when people question the ethics, then suddenly we’re assuming perfect rationality. Something seems off here.

On the other hand, I don’t think this is a knockdown argument for all nudges. The above fruit section example seems ethical to me, since it’s not really imposing any extra costs for the DM. The tax letter, in contrast, is more difficult. Paying taxes is a direct cost to the person, compared to not paying them. On the other hand, if she doesn’t pay her taxes, she’ll probably have a lot of trouble with the authorities on the longer term, thus ending up to be even more costly. But can we use such a long-term argument? Where’s the limit? How much better does the long-term benefit have to be so nudging is justified?

A final thing is that nudges aren’t really independent. For example, if an organization would start building all kinds of nudges using defaults and the status quo bias, at some point there’s just too many for us to pay attention. For example, the BIT in the UK once said companies might enroll employees into plans that automatically donate a percentage of their paycheck to charity. Even though you could of course opt out, this is very suspect. Imagine, if a company made tens of such choices: at some point you’d probably be too tired to think things through, so you’d just accept the defaults – which would cost you money. So even though charity is beneficial for the society as a whole, I don’t think it’s justifiable to have a default option donating to charities.

So, all in all, the freedom of choice argument that defenders of nudging often use (I’m one, personally), doesn’t really seem to be as strong as I thought before. With this problem in my mind, I just want to wish everyone a perfectly Merry Christmas and a Happy New Year! Bias Hunter will be back in January again!

The problem with this argument is the assumption people choosing rationally, according to their best interest. This is directly in conflict with another assumption of nudging, which is that people do not choose rationally. After all, if we didn’t assume that, why would we do nudging in the first place? So, it seems to me that first nudging assumes (quite correctly) imperfect rationality, but when people question the ethics, then suddenly we’re assuming perfect rationality. Something seems off here.

On the other hand, I don’t think this is a knockdown argument for all nudges. The above fruit section example seems ethical to me, since it’s not really imposing any extra costs for the DM. The tax letter, in contrast, is more difficult. Paying taxes is a direct cost to the person, compared to not paying them. On the other hand, if she doesn’t pay her taxes, she’ll probably have a lot of trouble with the authorities on the longer term, thus ending up to be even more costly. But can we use such a long-term argument? Where’s the limit? How much better does the long-term benefit have to be so nudging is justified?

A final thing is that nudges aren’t really independent. For example, if an organization would start building all kinds of nudges using defaults and the status quo bias, at some point there’s just too many for us to pay attention. For example, the BIT in the UK once said companies might enroll employees into plans that automatically donate a percentage of their paycheck to charity. Even though you could of course opt out, this is very suspect. Imagine, if a company made tens of such choices: at some point you’d probably be too tired to think things through, so you’d just accept the defaults – which would cost you money. So even though charity is beneficial for the society as a whole, I don’t think it’s justifiable to have a default option donating to charities.

So, all in all, the freedom of choice argument that defenders of nudging often use (I’m one, personally), doesn’t really seem to be as strong as I thought before. With this problem in my mind, I just want to wish everyone a perfectly Merry Christmas and a Happy New Year! Bias Hunter will be back in January again!

Thomas came to see the new flat, climbing to the fifth floor in the cramped hallway – and no elevator. Ugh. What a trek. But as the estate agent showed him around the place, he was engulfed by light and the smell of fresh baked bread came from the kitchen. No matter that this was 20 minutes further from work. Thomas was sold.

What’s wrong with this decision case? Well, it looks like Thomas is making his decision to buy an apartment based on criteria that only seem noteworthy at the apartment, not beforehand. Even worse, he ends up being carried away by the fresh smells – surely a trick from the estate agent’s sleeve. I’d venture to say that Thomas hasn’t made an exemplar decision here. What could he have done better?

An old adage works also in decision analysis: Think before you act. In the context of decisions, it refers to thinking about the problem itself first. In decisions, two key parameters largely define your success: the criteria, and the alternatives.

The criteria mean dimensions along which you compare and evaluate the alternatives. For example, for the apartment common ones are size, price, location, and so on. What’s the key is defining those criteria yourself. You don’t have to be constrained by what other people think. Your criteria are anything you care about. For example, one of Thomas’ criteria could be the amount of ambient light in the apartment, if he had thought about it beforehand. Thinking about the criteria before the decision helps to stay on the premeditated path, and not be drawn away by other enticing things. If you’ve given thought to criteria in advance of seeing the alternatives, you’re less likely to focus on salient, but ultimately irrelevant ones (like the fresh smell above). It’s like when you’re going to work: you decide to walk straight there, and don’t go into shops even when you see that shiny new guitar in the window (also, your boss might not value your musical enthusiasm to make it a good idea).

Another thing about criteria: they don’t necessary have to be numeric. Sure, there are benefits to using numerical values, especially when they are objective, like size. But inherently there’s nothing wrong with subjective criteria like a “feel” of an apartment, the comfort of a chair or the taste of a wine. After all, it’s your decision we’re talking about. The only thing that matters is that you can be consistent with the criteria, ie. you can rate equally tasty wines as equal on the taste. This is crucial, because otherwise you might be tempted to reevaluate some criteria to end up with the “best alternative”. The point of evaluation is to determine the best option, not to “prove” the choice ex post facto. 

There’s one other trick that’s useful to remember: thinking about the alternatives. This might sound like an obvious thing, and often it is, too. For example, when buying a flat, most of us tend to spend countless hours on websites and with estate agents, looking at alternatives. However, that’s not exactly what I’m referring to. What’s important as well is conceptual alternative-generating before actual data gathering phase. In concrete terms: thinking about conceptually possible alternatives that you would like. In my case, as we’re thinking about apartments just now, it means the following. I enjoy living with a bike distance to the center, so I’ll mentally think of all neighborhoods that fill that criterion.

The point with this is that your decision quality is driven by the alternatives you’ve come up with. If you don’t find good alternatives, you might consider them nonexistent and fall for the status quo bias. Enlarging the conceptual alternative space will help to see what’s possible. An alternative you didn’t think of won’t get picked.

The major point being: you can improve decisions heavily by structured, reflective thinking. This is an idea that Ralph Keeney, an emeritus professor from Duke University, has championed for decades now (for example, in this paper, or this book). Most decisions are not important enough to require a huge decision analysis trade-off analysis. But thinking is almost free, and has the potential to help a lot.

The status quo bias is in short the tendency to continue with the current state of affairs, despite being given an option to pick something better. Let’s illustrate it with an example:

At least here in Finland, one has the opportunity of comparing different electricity service providers. The quality of the product is the same, but the price is different. Now, if a consumer- let’s call him John – chooses to remain with his current provider despite knowing that there are equally good and cheaper options, he is epitomizing the status quo bias: overly preferring the current state.

The example above is in reality often more due to just not wanting to expend effort into comparing providers and so on. However, what’s especially worrying about the status quo bias is that it gets even worse: it affects our judgments of what is good in the first place. The existence of better alternatives is what marks the difference between a rational status quo choice and an irrational bias.

Consider the case of comparing electricity providers in the US. A study was done with two groups of people: one group with reliable, more expensive service, and the other with cheaper, less reliable service. Both groups were given six options of electricity plans to choose from: their current status quo and five alternatives. Each alternative had a service level and price defined relative to their current plan, to make the options realistic. Even though both groups were earning comparable amounts, there was a huge difference in their choices. In fact, almost 60 % of respondents – in both cases – chose their own current status quo!

It appears that their choices were driven only by their current plan, and as the groups had very different plans, they ended up with very different preferences. Why is this case an example of a bias? Well, if we consider that reliability-preferring and price-preferring customers are demographically equal (as they were in the experiment) it is nonsensical that there would be two optimal price-service combinations, and that the current plans would be just those. In contrast, it seems the customers‘ preferences were caused by the status quo.

What makes status quo bias difficult to notice is that sometimes, in fact, the current state might be good enough. As we have limited energy for thinking, it’s best to focus on improving things going badly. But – as the bias shows us – what we think is “good enough” could in many cases be improved with little effort. Sure, in the case of electricity the stakes might not be very high, but there are cases with much more import.

Consider long-term saving, for example. You probably have some portfolio of investments like shares, managed investment funds, index funds and so on. How good is your portfolio, compared to others? The general answer – “probably good enough” – is understandable. However, it just highlights the status quo bias, sticking to the current state even despite having options. And in this case, the gains can be immense. Having 1 percentage points better return over a 10 000 euro initial investment makes for an almost 7000 euros difference in 25 years!

At this point, unfortunately I don’t know any good magic tricks to avoid status quo bias. But in my opinion noticing the problem is the first step to success. So in that spirit, the noticing phase might look like this:

1. Am I preferring the current state?
   
2. What other alternatives are there?
   
3. Is the current state really better than all the other options?
   

The trick here is to generate alternatives first, because by comparing with those it’s easier to notice the bias. If you go from step 1 to straight to asking whether the status quo is good enough, it’s just too easy to answer “yeah, probably so”. If it really is, at worst you’ll lose a few minutes by thinking about the alternatives. If it isn’t, at least you’ll find out!