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Richard Thaler. Photo: Ramesh Pathania/Mint
Richard Thaler. Photo: Ramesh Pathania/Mint

It’s hard to make ‘good’ decisions

Richard Thaler advocates using 'nudges' for good outcomes, or putting in place a choice architecture that induces people to take decisions that are 'good' for them

A small group of business leaders was part of Mint’s Breakfast With CEOs event on 16 April 2015 at ITC Maurya’s Dum Pukht restaurant in Delhi. They were in conversation with a person who is known as the father of behavioural economics—Richard Thaler. The Charles R. Walgreen Distinguished Service Professor of Behavioural Science and Economics at the University of Chicago Booth School of Business and co-author of global bestseller Nudge: Improving Decisions About Health, Wealth and Happiness has challenged the status quo among Economics academics to prove that the world is not made of Econs, or perfectly rational people analyzing reams of information to perfectly maximize utility, but of Humans, or real people who take irrational decisions and are suscptible to biases. Thaler advocates using ‘nudges’ for good outcomes, or putting in place a choice architecture that induces people to take decisions that are ‘good’ for them. The discussion, moderated by R. Sukumar, editor, Mint, generated a lively conversation about the use of behavioural economics in solving problems in business and policy. Some edited excerpts:

Ravi Narain, vice-chairman, National Stock Exchange: I find that if people are dealing with physical goods, say buying a TV or a washing machine, intuitively they have the good sense of who to seek advice from. But money management is seen or perceived as very complex and so a lot of us fall unknowingly into bad advice that leads to sub-optimal consequences. Why is that so? Also, do you think that the change in behaviour of individuals and businesses is structurally different from changing the behaviour of government?

Thaler: When it comes to washing machines, at least in the US, there have been plenty of studies to show that people don’t buy the appropriately energy-efficient models. Never mind the environment, on a strictly financial basis too, if they have to pay $100 more for an efficient washing machine which will save them $50 a year in electricity, they do not do it because the $100 is upfront and $50 a year is off in the future. So there are monetary aspects to even the purchase of everyday goods. I think all decisions are hard. We want people to make decisions for us but we need a government to set an even playing field. I think the word ‘disclosure’ is probably the most misused term. Here’s an example. I did some work for the UK government which set up a behavioural insight team nearly five years ago. There was a law in the UK that said you are entitled as a customer to your usage data. So, if I have a cellphone plan and I am shopping for a new one, I need to know how I use the phone. The law said customers have a right to that data in accessible format. The firms decided that what ‘accessible’ meant was if they are paid 20 pounds, they would send a 200-page PDF file. We got that law modified by two words—from accessible to machine-readable. Eventually, that is going to transform the marketplace.

For the next part of your question, I think changing the government is harder. We all think that we have the worst possible government and that cannot be true. But then there are all kinds of questions about how they should be organized. To give you an example, when David Cameron took over, he had under 30 or 40 political appointments to make. But I think Barack Obama had over a 1,000 appointments to make, many of which had to be approved by the Senate. So there are ways to improve every government, but I admit that it is harder to change governments compared to individuals and businesses.

Biju Dominic, CEO, Final Mile Consulting: You work with governments and corporate heads. How aware are they about human behaviour, which you say is imperfect?

Thaler: Economists not only assume that people are perfect, they also assume that organizations are perfect; that firms are maximizing profits. The reason why they assume that is because it is the easiest thing to do. All of you as CEOs know that if I just tell you to maximize profits, does it mean raise or lower the price? Should you advertise more or less? This math is complicated and what you see in every domain of life is that there are these rules of thumb and ways of doing things because we have always done them that way, whether or not they make any sense. I have a book coming up titled Misbehaving, and the title applies to the author as well the subject matter, and I have been misbehaving because I have been pointing out that the emperor does not seem to have that many clothes on. What we are trying to do is add realism; but at the same time we are adding complexity. So if we take a problem like sanitation, somebody gave me a very nice line about this which says “The TED talk on how to solve the problem of open defecation is that there is no TED talk". But then somebody told me that there is actually a TED talk. So we think: just give everyone a toilet and it will work, but that is not going to happen. If you pay people to use the toilet, as a behavioural economist I think they will use it more. That is not a deep insight and that is not much of a solution because in the long term we do not think the answer is to pay people every time they use the toilet. So what we are going to have to do is to change people’s habits. And anyone who has tried to quit smoking or tried to lose 20 pounds knows that changing habits is easier said than done. So we need to change habits in every domain of life.

D. Shivakumar, chairman and CEO, Pepsico India: From your experience of the corporate world, what are the habits that need to change?

Thaler: We have preconceptions about what kinds of people are good at what jobs. That could range from whether all-important jobs should be done by men to less obvious preconceptions. Say, for instance, CEOs tending to be tall and handsome. Is it obvious that being tall is an important criteria for being a CEO? I don’t think so. What kind of training is appropriate for giving jobs? Do we have a proper organizational structure? Should marketing and finance be departments that basically do not speak to one another? Take manufacturing, for example. If we are going to launch a new product, we have to think about designing it, we have to think about who is going to use it, how we are going to market it, what it is going to cost and setting up these different divisions that do not speak to one another. In meetings, no one describes an efficient way of conducting business. I have never been involved in an organization in the public sector or in the private sector that I thought was close to being one in an efficient way. Almost anybody who walks into an offices and asks why something is done a certain way will get the answer that it is the way it has always been done.

Sanjay Kapoor, chairman, Micromax Informatics Ltd: In this day and age of digitization, a lot of data and a lot of information is going to come to each individual and company and I think there is going to be a problem of plenty and the problem is going to around analytics—to say how do we convert this information and data into analytics. Do you think there is any government in the world which is even prepared for it?

Thaler: This is something I have been working on and I told you the story about the usage data. I worked on it in both the UK and the US, and the policy that I have advocated is simply that the government should, when in doubt, release data and then all kinds of great things can happen. Take the example of GPS. We now own GPS on our phones. Where did GPS come from? It came first as a defence initiative for sending up to satellites and then Bill Clinton decided that data will be released to the public sector. Now, notice that the government did not go to the GPS business. They just made data available and now we have Google Maps, and I don’t get lost as often as I used to. Here’s another example: for years after GPS, they started putting GPS locators on buses and trains. And then someone in the San Francisco Bay area got the idea to put that data on the cloud. Then again, probably some teenager created an app, and if you are standing on the corner, it will tell you when the next bus is going to come or is not going to because it broke down. Again what did the government do? It took data that it already had, which essentially was nothing, and made it available to the public sector and now the private sector competes in providing services by using that government data. So, I think that we are going to see over the next 10 years smart governments making all kinds of data available in machine-readable forms. There is going to be enormous business opportunities for people creating ways of using that data. I cannot create my own GPS apps, consumers cannot. It took a Google to do it. We need the private sector to do that. And there will be lots of competition.

A. Krishnakumar, managing director and CEO, Philips India: We are present in a number of categories where we are creating markets. How do you see companies do it best by applying the concept of nudge to enable market adoption?

Thaler: Apple is probably the most successful company over the past 20 years. What Apple has done is that it has created a whole series of products that are so easy to use that you do not need to use a manual. You open the box and turn it on and it works. We can all remember buying our first home computer and unless you had a teenager at home it was never going to work. Not everybody can be Steve Jobs, but there are lessons to learn from Apple and not just for smartphone competitors. It is also worth noting and many people will downplay this, but Apple’s products are physically attractive. Design was something that Steve Jobs obviously cared a lot about. From the logo to packaging, he took great care of aesthetics. It does not make the phone work any better but people care about that and we have always known that people care about that for things like cars and clothing. Part of the reason why you buy a suit or a car is that you like the way it looks. But it was not obvious pre-Apple that people would buy a phone because of the way it looks. I am sure they buy air purifiers and there is one that you need to hide if it is that ugly and there is another that you are not embarrassed to have out in the public, we know which one people will prefer to have. Apple is obviously not the only successful company but they are worth $150 billion for a reason.

Aditya Ghosh, president, IndiGo: Should one look at products and services that answer the needs of the consumer versus being lost in looking for what the consumer wants from us? As you said, I should never assume what is good for others. It is also true that people often do not know what is good for them and what they want from a particular product?

Thaler: Let’s take the example of a smartphone. Obviously I could not imagine that it is what I needed. I need a computer that is faster than the one that is on my desk and will fit into my pocket and will have a map and will give me stock quotes from all over the world. Have you noticed how lunch time arguments are completely different from how they used to be 10 years ago? That is because we are having some fight and somebody gets the phone out and checks the answers. So disruption is a popular word these days and we need constructive disruption. Companies like yours (airline) are relatively young businesses coming into what I think was a heavily regulated market. There are lots of ways to do that. We see successful models such as Southwest Airlines, EasyJet and Ryanair. They have different attitudes towards their customers.

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