Nudging

The human capacity for perspective is amazing. We can generate opinions on nearly anything and do a great job at convincing ourselves of the ideal qualities of our reality compared with all others. I appreciate friends who challenge my own perspectives and also encourage me to take a step back and disengage from my outlook to enable a better analysis. This is one of the reasons I've appreciated my new friendship with Mike out here. Mike, like Ab, was a part of the Fulbright program last year, but he is far from your "typical" Fulbrighter. Mike wasn't a tradition college student (he worked for a few years prior to attending full time) and has taken time to literally travel the world. It's funny to be in conversation and for him to insouciantly mention an anecdote about Thailand, Taiwan, or Turkey. Needless to say, his life experiences have created a unique perspective very distinctive from my Type-A, defined-path lifestyle :) Anyway, I bring up Mike to introduce a way in which I'm currently being "nudged."

Obviously, based on both the title of this post and my usage in the first paragraph, I have been thoroughly enjoying reading "Nudge" by Thaler and Sunstein. Thaler is an economics and business professor at UChicago and Sunstein is a Harvard Law professor, and their approach to this book has validated my faith in economics as a discipline. At the end of my undergraduate studies, I became disenchanted because of my macroeconomic focus (specifically in growth economics) and the conspicuous failure, or even disservice, of macroeconomists over time. It is not that I believe macroeconomists are overtly malicious, it's just that the basis for most of their studies are inherently flawed; extrapolating past performance. An overly simplistic example of this is that when a pitcher throws a perfect game, one cannot expect he will repeat this performance in his next outing. (As an aside for all non-baseball fans, no major league pitcher has ever thrown two consecutive perfect games) Anyway, the focus of this book is how "choice architecture" can be manipulated to align intentions with outcomes on a microeconomic level. I've been reading a number of books of late that address the connection between economics and psychology ("How We Decide" by Lehrer, "More Sex is Safer Sex" - essentially a "Freakonomics"-type book - by Landsburg, and "Nudge") and believe that psychoeconomics should be a foundation of microeconomic study because of some essential truths between our brains and the subsequent choices we make and choices are inherently a part of making business decisions, ergo fundamental to any discipline dealing with business.

Ultimately, why and how we decide things is extremely powerful, and greater cognizance of these forces can help us realize a greater potential in transforming our intentions into actions. For example, economic factors like loss aversion stem from the neurological responses to losing something. It is much more painful for our brain to lose something than to gain something (a fact that has been quantified to the uncanny result of our brain views a $5,000 loss to our portfolio equally with a $10,000 gain - or that, in general, we need to gain back twice as much as we lost to reestablish our "mental equilibrium.") The focus of "Nudge" is upon iNcentives, Understanding mappings, setting helpful Defaults, Giving feedback, Expecting error, and Structuring complex choices. In reading this book, I've found it interesting to examine the ways I already "nudge" myself; organizing a consistent ojek driver for the mornings (setting a helpful default time to arrive at school and actively combating expected error of sleeping in too late), taking public bus home (tricking myself with the incentive of it costing 1/3 of other modes of transportation, while simultaneously providing a default period of time to read), and so on.

The book has a section on money that breaks apart the important ways in which scary, confusing, and important things could be unbiasedly (or as unbiased as possible) nudged. For example, the savings rate in America is abysmal, with enormous repercussions on the vast majority of Americans as they edge towards retirement. The idea, and importance, of saving is nearly universally accepted, however, due to loss aversion (we all hate to see our paychecks go down!), people tend not to optimize their potential pre-tax savings opportunities. Thaler and Sunstein promote the use of better defaults, simplifying overly complex financial information, and an interesting concept, Save More Tomorrow, to help combat this issue. The Save More Tomorrow idea is that if you realize your savings rate is too low, you can opt to have your savings rate increased whenever you get a raise (the majority of the raise going to increasing your savings rate so that your paycheck doesn't ever decrease, just increases at a slower rate with raises) until you're maximizing your employer opt-in contribution match. Elegant solutions such as this are where economists should spend more energies: matching our natural psychological tendencies with beneficial economic results.

On the Indonesian front, I worry about the savings rate in this country, but I also wonder with the overall rate of growth and tendency of cohabitation among the nuclear family will cause this to be as big of a concern. Additionally, tonight I successfully made nasi goreng with my rice cooker! It wasn't quite like the beef ribs from the Ibu's restaurant last night, but I feel accomplished and that I'm more actively embracing the culture!

"He once challenged his reflection to a staring contest. On the fourth day, he won. He has won a lifetime achievement award...twice. He has found Waldo several times, but released him because he likes the hunt. He is the only person Chuck Norris has ever apologized to."