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Illustration by Jack Hudson.

In a TED talk in Monterey, California in February 2010, just before he came to power
and had to make decisions, David Cameron was extremely keen to look like the future.
"Politicians will only succeed if they actually try to treat people as they are, rather than
as they would like them to be," was his fresh-faced rallying cry, as he attempted to
channel the spirit of Bobby Kennedy in an open-necked shirt. "If you combine this very
simple, very conservative thought go with the grain of human nature! with all the
advances in behavioural economics, I think we can achieve a real increase in wellbeing,
in happiness, in a stronger society without necessarily having to spend a whole lot more
money."
This "revolution in government" would be brought about in
particular, Cameron suggested, by his devotion to the theories of
a group of thinkers who had come to establish and dominate a
Nudge economics: has push come to
shove for a fashionable theory?
A rival psychologist has published a book debunking the
behavioural economics of Daniel Kahneman and the men behind
Nudge, who, along with the authors of Freakonomics, were once
the PM's pet thinkers. So how do you choose between them?
Tim Adams
The Observer, Sunday 1 June 2014

Risk Savvy: How To
Make Good
Decisions
by Gerd Gigerenzer
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new self-help/psychology/economics corner of the bookshop, the
decision-makers' decision-makers. "We are working with these
people," Cameron said proudly, and flashed up a slide featuring
three of them: Cass Sunstein and Richard Thaler, authors of the
bestselling Nudge, and Daniel Kahneman, Nobel prize winner
and author of the soon-to-be bestselling Thinking, Fast and
Slow.
Cameron then gave a few examples of how this revolution would
work in practice. The "best way" of making homes energy
efficient, he suggested, was not by the "bullying or badgering of
government" but through bills that showed citizens how much
less their neighbours spent on gas and electricity than they did.
The tricks of behaviourial psychology (which, you couldn't help
thinking, had been used by the advertising industry for about a
century) could "nudge" the public into doing the right economic
thing. The government would in this way embrace the lucrative counterintuitive lessons
of Freakonomics, it would listen to evidence-based data, not political gut instinct, it
would, as the authors of that latter bestselling book Steven Levitt and Stephen Dubner
had it, "think like a freak".
With all this in mind, that spring, Cameron established his behavioural insights team,
led by the former Blair adviser David Halpern, which immediately became known as his
"nudge unit". In a book published this month, Levitt and Dubner, who made their
names with a behavioural-economics agony aunt column in the New York Times, recall
how they were called in to address this new team and the prime minister, back in 2010.
Cameron could not have been more chuffed to meet them: "Right, where are the clever
people?" This ebullience drained quite quickly, however, when Levitt and Dubner
turned their particular brand of freak-thinking to the NHS.
"We tried to make our point with a thought-experiment," they recall. "We suggested to
Mr Cameron that he consider a similar policy in a different arena. What if, for instance,
every Briton were also entitled to a free, unlimited lifetime of transportation? That is,
what if everyone were allowed to go down to the car dealership whenever they wanted
and pick out any new model, free of charge and drive it home?"
At this, Levitt and Dubner expected the prime minister to "light up" and say: "I see your
point about the free healthcare we are doling out!" They expected him to embrace their
behaviouralist argument that no one places a value on anything unless they are charged
for it. In fact Cameron said nothing at all, but "the smile left his eyes", there was a quick
handshake and he "hurried off to find a less ridiculous set of people with whom to
meet". The freakonomists can't help feeling this was a missed opportunity, though they
concede "fixing a huge problem like runaway healthcare costs is about a thousand times
harder than, say, figuring our how to take a penalty kick" (for which their book offers a
Buythebook Buythebook Buythebook Buythebook
Tell us what you
think: Star-rate and
review this book
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more workable solution).
This was, in retrospect, perhaps also the moment when the prime minister began to lose
a little of his messianic faith in his behavioural revolution. Certainly, in the years since
he has come to power and had to make actual messy decisions, he has had a good deal
less to say on the decision-making theorists about whom he was previously so
evangelical. The nudge unit has had some successes in testing and rethinking how
choices are presented to citizens, championing opt-out rather than opt-in pension
provisions, for example, or proving the efficacy of labelling rubbish bins with the word
"landfill" to encourage recycling. Some of Cameron's ambitions have come to seem a
cognitive fallacy in themselves, however: telling people how much their neighbours pay
for electricity produces only about a 1% change in usage; traditional tough economic
decisions a carbon tax, or an increase in fuel duty are far more effective in the goal
of energy-saving.
Daniel Kahneman, the
'godfather' of behavioural economics, has been challanged by psychologist Gerd
Gigerenzer, who claims that Kahneman presents 'an unfairly negative view of the
human mind'. Photograph: Richard Saker
Though nudge-economics remains seductive, what once seemed like a panacea has
come to look a bit more like a series of sticking plasters. Earlier this year the nudge unit
was removed from direct government control, partly sold to the Nesta innovation
charity run by New Labour guru Geoff Mulgan, a move which seemed to suggest the
prime minister no longer viewed it as quite so central to his philosophy. That move has
coincided with a backlash, or at least a critical analysis, of some of the tenets on which
its brand of behavioural economics is based.
Cameron would not have seen it in these terms but in his freakonomics moment over
the NHS he was also confronting an extremely crude version of one of the most heated
academic debates of the last two decades: the question of whether purely rational
decision-making is feasible in the real world. That has been part of an ongoing
argument between the "godfather" of behavioural economics, Kahneman, and his most
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serious opponent, a psychologist named Gerd Gigerenzer, director of the Centre for
Cognition and Adaptive Behaviour at the Max Planck institute in Berlin. The substance
of this argument concerns the best way for human beings to make decisions.
It is generally possible to judge the depth of an academic disagreement by the way the
two principal opponents address each other in the footnotes of their life work. In
Kahneman's hugely influential Thinking, Fast and Slow he notes that "a prominent
German psychologist has been our most persistent critic" and goes on to list the
references to articles in which those criticisms have been made (a list that cumulatively
makes Gigerenzer seem a little obsessive, a behaviouralist stalker). Back at the turn of
the millennium, when Kahneman was not yet an academic superstar, he admitted to
being troubled by the feud to one interviewer. "It was embarrassing, the level of
hostilities," he said. "Gigerenzer speaks very well. Even when he's completely wrong, it's
hard not to be impressed "
The shorthand of Gigerenzer's criticism then and now was that Kahneman presents "an
unfairly negative view of the human mind". Or, as Gigerenzer himself explained it when
I spoke to him on the subject in London last week, "in concentrating only on fallacies
and biases Danny [Kahneman] pushes the idea that people are dumb." That shorthand
that because of various provable fallibilities in reasoning when making decisions,
human beings are incapable of choosing the best outcome for themselves is the basis
of the philosophy behind nudge economics.
Gigerenzer thinks Kahneman is wrong. People are not stupid, he argues, just
ill-educated in "risk literacy". Gigerenzer does not, for his part, mention Kahneman's
name once in his new 320-page book, Risk Savvy, though arguably the entire volume is
dedicated to a dismantling of some of the tenets of Thinking, Fast and Slow.
In an increasingly complex and specialised world, Gigerenzer preaches a gospel of
greater simplicity. He suggests that the outcome of decisions of any complexity a
complexity of, say, trying to organise a successful picnic or greater are impossible to
accurately predict with any mathematical rational model, and therefore more usefully
approached with a mixture of gut instinct and what he calls heuristics, the learned rules
of thumb of any given situation. He believes, and he has some evidence to prove it, that
such judgments prove sounder in practice than those based purely on probability.
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Gerd Gigerenzer, who believes that, with education, the
teaching of critical thinking about statistical probability, people can become more
usefully 'risk savvy'.
"This is not," Gigerenzer concedes, "an easy message to convey to economists, who have
been trained in optimisation techniques or to managers in corporations who believe that
one can maximise every decision." There are, too, plenty of people who have a vested
interest in preserving the idea that the future is complex but calculable, even if in most
cases they know that the illusion of certainty that they present is untrue.
In Gigerenzer's view this group includes much of the medical profession, most financial
analysts and advisers, and, of course, many academics. The desire for ever greater
complexity in the process of decision-making, driven by ever greater access to data, in
practice produces what he calls risk-averse "defensive decision-making", or covering
your backside. You don't do what your instinct and experience tells you is right: you
find the data to support an inferior, but less personally risky choice.
Gigerenzer believes above all in the power of simple rules in the real, unfathomably
complex world. "Probability theory is the best thing in a world where you can measure
the risks exactly and the parameters are not too complicated. But for most problems it
provides another illusion of certainty, and becomes part of the problem," he argues. His
favourite example is that of Harry Markowitz, who won a Nobel prize in economics for
creating a formula to produce maximum gain from an investment portfolio, in a
sophisticated mathematical weighting of gain and risk. When it came to investing for his
own retirement, however, Markowitz didn't bother with that his formula which
Gigerenzer proved to be certainly effective only over a 500-year period he simply
divided his investment equally among a given number of assets. He used the heuristic of
"not putting all his eggs in one basket" because he knew that would probably be good
enough.
Gigerenzer often talks with investment analysts and bankers who, despite the illusions
of sophisticated risk management they sell to their clients, tell him that more often than
not they tend to rely on similar rules of thumb when it comes to placing their own bets.
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Politicians, he observes, also routinely trade on our inability to gauge competing risks,
not least in exploiting anxieties over terrorism to erode civil liberties. Though
Kahneman himself carefully limits its potential political application, his argument that
we are irretrievably in thrall to our fallacies, in Gigernzer's view, only strengthens the
argument for such paternalism from government. Nudge theory becomes the more
palatable expression of a deliberate wider manipulation. It makes us weaker and less
questioning citizens.
Gigerenzer proposes an alternative solution. He believes, with education, the teaching
of critical thinking about statistical probability, people can become more usefully "risk
savvy" (again, you would have to say that Kahneman's work absolutely shares this
ambition, even if his route to it is different, and arguably more rigorously scientific).
The day before I spoke to him Gigerenzer had met the newly privatised behavourial
insights team. How did that go? He told them two things: "that given the will you can
teach even fourth-graders critical reasoning", and second, that "I am not against a bit of
nudging here and there but it can never be a philosophy for a country." It is, he argues
to me, more the evidence of political cowardice, of giving up on trying to inform or
make clear arguments. A political cop-out. Why not, he asks, "instead do something
sustainable? Teach children statistical thinking, not as a branch of mathematics, but
with evidence from the real world, in health and finance. And teach them heuristics,
give them a tool kit that will help them to understand risk and question choices."
He offers one such heuristic, which, if ingrained, might have saved a lot of grown-up
difficulties in recent years: "Never buy financial products you do not understand." And
another, which he swears by: "At a restaurant, don't study the menu for clues, say to the
waiter, 'if you were eating here tonight what would you have?'"
The one certainty of our lives is that we are never going to be stuck for uncertainty.
Choices multiply along with information. So which book should you buy, which
philosophy should you follow in the ever-growing literature of the art and science of
making decisions? You decide.
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