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Chapter 1: What is sludge and how does it affect consumers?
Hey there, it's Stephen Dubner. Some news you may have missed. Congress is considering the Unsubscribe Act, a bill that would make it easier for consumers to cancel subscriptions. But as you are probably not surprised to learn, the bill is moving slowly. Why? Well, there's an episode about that. We first published it a little over a year ago.
I thought it might be nice to play it again now as a bonus episode.
Chapter 2: What challenges do consumers face with subscription cancellations?
We have updated facts and figures where needed. As always, thanks for listening. I have a story to tell you, and I'm curious if anything like this has ever happened to you. I recently got a letter from the Department of Motor Vehicles saying it's time to renew my driver's license. This is a letter that no one looks forward to receiving.
Chapter 3: How does the Unsubscribe Act aim to combat subscription sludge?
In many places, the DMV is famously hard to deal with. long lines, confusing protocols, et cetera, et cetera. But as I read the letter, I see there is a loophole that if you are a member of AAA, the American Automobile Association, which I happen to be, then you can renew your license at their office. And even better, you can set up an appointment ahead of time. That was exciting.
So I made my appointment online, put it in my calendar, got all my documents together, and I showed up on the right day, the right time, and found, to my surprise, a long line of people waiting for what looked to be just two or three clerks. I asked a couple of people online what time their appointments were for, and they said they didn't have appointments. They had just walked in.
And so I, being an optimist, I thought maybe there's a separate line for appointments. So I asked around and one helpful AAA employee told me that, no, the line is the line, is how he put it. And how long do you think that line will take? I asked. Oh, probably just two hours, maybe three, he said.
I had pictured myself buzzing in with my appointment being done in 15 minutes, maybe 30, even an hour would have been OK, but two hours or three that I could not swing. So the next time you hear about a guy being arrested for driving with an expired license, that will be me.
What happened at AAA surprised me, especially because after I'd made my appointment, I received a couple emails confirming it and asking me to let them know if I'd be late. So I really thought I had an appointment, the way the word is commonly used. But I realize now that their definition and mine were not the same.
Either that or I had simply run into a situation where a seemingly simple thing is made complicated or slow or frustrating. Has this sort of thing ever happened to you? Of course it has. It happens all the time, and it comes in many flavors. For instance, when it takes 30 seconds to sign up for some subscription service and then forever to cancel it.
Or when you fill out some massive government form online, but that one data field won't accept your answer, and when you try to hit submit, the whole thing freezes. Or when your insurance company sends you a menu of health care plans and you literally cannot understand the difference between the options or how much they will actually cost.
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Chapter 4: What examples illustrate the concept of sludge in everyday life?
There is a word for this kind of thing.
This is my example of sludge.
Sludge. Sludge. Sludge. Sludge. The sludge was impenetrable. When something is made easier to do, that is called a nudge. When it's made harder, that is sludge. It's no coincidence that these words rhyme. As we will hear later, they come from the same person. But where does sludge come from? Is it the inevitable residue of bureaucracy?
Does it come from a lack of effort or maybe sheer incompetence? Is sludge ever a strategic maneuver? Today on Freakonomics Radio, we try to answer some of those questions because sludge is everywhere and it's time to fight back. This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner. Here's a voice you may recognize.
He's been on the show a few times.
If you make things harder, I call that sludge. Kind of a fun word for stuff that's the opposite of fun. Name, please. Richard Thaler. I'm a professor at the Booth School of Business at the University of Chicago.
And you co-wrote a book years ago, a beloved book, really, called Nudge. Correct. For anyone who's had the ill fortune to have not read Nudge, how would you describe it?
It's a book about how to make life better through what we call choice architecture. which means arranging the environment in which we make decisions to make it easier to navigate. A nudge in that context is what exactly? Nudge makes things easy, right? It's the WD-40 of life. But sludge is the opposite. Sludge literally is gunk.
As for the word itself, the way we're talking about it today, who pioneered the use of the word sludge in this context? Are you laying claim to having invented that?
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Chapter 5: How does Richard Thaler define nudges and sludge?
So most products, consumers have money. And they either buy them or they don't. And then Econ 101 applies, supply, demand, etc. In health care, there's a whole host of other issues, and those issues are caused by the fact that as a society, we don't want to make people pay for all of their own health care. Say someone has a serious disease, going to cost $80,000, and that person has no money.
We want them to get care, but we don't want them to pay for it. That means we're in a world where price rationing doesn't work.
And so then all healthcare systems around the world and in different settings in the U.S., they're set up with some basket of rationing policies, some basket of policies that say, we're not going to give you everything you want, and we're going to have to have some mechanism to figure out what you get and what you don't get. Almost every other market, that's prices.
Amazon is going to charge you $65 for something. You either buy it or you don't. Healthcare, that doesn't work because we say we're going to charge you $80,000 and the person says, well, I'm insured. I'm not paying this.
How much of this complication is due to the fact that the U.S. has such a different system of healthcare providers than just about every other wealthy country? Going back to what some people think of as the original sin after World War II when health insurance became something that companies buy for their employees rather than having some kind of national health service system.
I think it's closely related. Take a system like the UK where there's nationalized health care. What are the rationing policies there? How are they limiting care so that people aren't just consuming everything they want? Time. They have time. They make you wait in line. And then they also have an institute called NICE, the National Institute for Clinical Excellence.
And there they just crunch numbers, cost-benefit, and they say, as a national health system, we're going to cover this thing and not this thing. The U.S. has a privatized system, as you mentioned, much more privatized. What that means is that while there's some regulation in the U.S., the onus is really on insurers, UnitedHealthcare, Aetna, Humana, Blue Cross.
The onus is on the insurers to form that basket of rationing policies. What that means is that instead of having some kind of centralized national way, you're rationing health care. Your insurance company is saying, OK, we have to ration health care in some way. If we don't ration health care, our premiums are going to be sky high.
Nobody's going to choose our plans and we're going to go out of business.
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Chapter 6: What solutions can help reduce the impact of sludge?
And so actually insurers with the sludge and all of these rationing mechanisms, they're probably contributing to lower costs, even though we don't necessarily like that experience.
Let's back up for a minute here to see where Handel is coming from. His interest in healthcare economics goes back to when he was getting his Ph.D. from Northwestern University. He managed to get his hands on a very large and detailed set of insurance data.
It's a data set for one large employer with about 10,000 employees offering a menu of insurance options and basically had data on every medical claim, every interaction with a doctor. I could observe the menu of options, the premiums people were paying. I got really into the nitty-gritty details, and then I collected that up into studying insurance choice in a behavioral sense.
Insurance choice meaning picking your plan, correct? Exactly. Picking your plan. I was looking at the data, and I said, wow. Some of these consumers are making just terrible choices.
Handel found that just about every health plan offered to employees included what he calls a dominated option. That's a phrase that comes from game theory. And in this case, it means an option that is objectively worse than every other option. Theoretically, firms should not offer this option and no employees should choose it. But they did anyway. And they do.
Here's how Ben Handel put it later in a research paper he wrote along with Joshua Schwartstein. There is strong evidence that people do not translate readily available information into knowledge that would help them make better decisions.
What I showed there is that people were losing at least $1,000 by choosing one option versus the other. And these were often poorer people earning less than $40,000 a year.
I mean, my first question there would be, you're saying these are employed people getting insurance through their employer. Why are the firms offering such bad choices?
There's a combination of factors. The answer I usually give is that the firms don't know they're offering a dominated option. Since I wrote that paper, there have been a couple studies, one by Justin Sidnor, who's at the University of Wisconsin. And what he found was that this was happening because of the way firms update their premiums according to algorithms. But in a naive way.
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