Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein (Yale University Press, 2008) revisits a lot of familiar behavioral economic territory in support of the authors’ increasingly popular idea of libertarian paternalism. (Ben Bernanke, for one, seems to be a fan.) I’m going to limit this post to a single topic: feedback.
I wrote about it earlier in “Trading and the problem of random reinforcement.” Thaler and Sunstein address the topic very briefly but add a couple of thoughts that are worth mentioning.
They make the fairly obvious point that “learning is most likely if people get immediate, clear feedback after each try” and take the example of learning to putt. Even a golfing doofus can figure out how hard to hit the ball if he stays in one place and takes ten practice shots toward the same hole. On the other hand, if he doesn’t get to see where the balls are going he’ll never improve. The markets, alas, offer an even tougher challenge. We know that, although they provide immediate feedback, much of it is anything but clear; on the contrary, for the most part it is random. Ten similar trades will have unpredictably different outcomes. What kind of rotten feedback is that?
Moreover, Thaler and Sunstein suggest another problem with getting good feedback—in trader talk, that we normally get feedback only on the trades we take, not the ones we either reject or don’t know about. “Unless people go out of their way to experiment, they may never learn about” sometimes far superior “alternatives to the familiar ones.” (p. 75)
When feedback doesn’t work, the authors say a nudge might be appropriate. A web site that they tout, developed by Yale academics, is stickK. It provides a free venue for people to enter into commitment contracts, which show the value you put on achieving your goals. You can put either money or your reputation on the line. As the stickK FAQ reads, “stickK was founded on the principle that creating incentives and assigning accountability are the two most important keys to achieving a goal. Thus, the ‘Commitment Contract’ was born. Entirely unique to each person, a Commitment Contract obliges you to achieve your goal within a particular time-frame. Not only are you challenging yourself by saying ‘Hey, I can do this,’ you’re also putting your reputation at stake. If you are unsuccessful, we’ll let your friends know about it. Oh but wait, there’s more. . . . Sometimes losing face with your friends might not be enough to keep you on track. So, what is the one thing no one can stand to part with? You guessed it! Cold hard cash. As a true test of your commitment, StickK will let you put your money on the line for any Commitment Contract. Achieve your goal and you don’t pay a thing (and you’re much happier than before, aren’t you?). But if you aren’t successful, you forfeit your money to a charity, an anti-charity or even that neighbor who keeps stealing your newspaper.”
A commitment contract is a more powerful incentive than simply filling in your own report card. Now all you have to do is figure out some measurable goal that doesn’t invite cheating!