My review of "Nudge"

"Nudge", a behavioral economics book, is very good at giving a reader perhaps a peak into President Obama's mind as he attempts to tackle some pretty big issues like healthcare, the environment, education and the financial urgencies of Medicare and Social Security. In his first few months in office, he does seem to be trying to win the support of political moderates just as this book presents such a case with its concept of "libertarian paternalism". The concept presents a case for giving people many choices while at the same time trying to have them lean toward directions which would likely be in their best interests. Some points from the book which caught my attention are:

1. Small details can have major impacts on people's behavior.

2. A "nudge" is an aspect of choice architecture which alters human behavior in a predictable way without forbidding any options or changing their economic incentives.

3. Never underestimate the power of inertia. The power can be harnessed by default options, for example. 'Econs' are people who respond to economic incentives. 'Humans' are people who respond to incentives AND nudges. Therefore, incentives and nudges help everyone.

4. It is false to assume almost everyone all the time makes choices in their best interest.

5. There are two kinds of thinking: intuitive/automatic (the oldest, like with voters and teenage drivers) and reflective/rational.

6. The book goes into rules of thumb like 'anchoring', 'availabilty' and 'representativeness' which affect how people make decisions.

7. Optimism/overconfidence and loss aversion affect decisions.

8. Temptation/dynamic-inconsistency can be handled.

9. 'Following the herd' must be managed.

10. 'The spotlight effect' - people unnecessarily tend to think others are watching them. So, investment clubs with conformists tend to do poorly, for instance.

11. The golden rule of 'nudges' is when they are most likely to help and least likely to cause harm.

12. Expect errors - humans are prone to making errors.

13. If Social Security is changed to allow investment choices, well thought-out defaults would be good. Medicare Part D is too cumbersome the way it is now, with about 2/3 making the wrong choices.

14. Asymmetric paternalism - help the least sophisicated while imposing the least on the most sophisticated.

The book also goes into over thirty nudges on various issues. Overall, the book is timely in giving a reader a clue into how some major issues facing the government might be handled, in order to have the best chance of progressing and working. 4 out of 5 stars.

Comment on The Economy - "The Window", update

It now looks like the "Window" which had opened where it was OK for the US to issue more Treasury debt (see previous comments), is beginning to close, pursuant to the recent S&P cutting UK's debt rating outlook to negative. This has created a worry in the markets for a weakness on US currency and US Treasury debt. This is a signal that although the markets are still OK for US currency and debt as Moody's just reaffirmed its AAA rating for US debt, they could turn on a dime if market psychology turns from currently 'nervous' to 'panic'.

So, although it is still technically OK for the US to issue more debt or print dollars, since unemployment still appears to be worsening, especially with California voters rejecting 5 of the 6 budget propositions, and asset values (stock market, housing, etc) still depressed, it has to be careful since the dollar and debt markets have become decidedly nervous.

Probably the reason that the recent nervousness hasn't turned immediately into panic mode is because the recent stimulus measures by the Fed and Administration/Congress have actually been successful in stabilizing the banking system, stock market and also other depreciating markets like housing and commodities. Though, it is important to watch oil, as it has nearly doubled to the low 60s and gold is near its high.