A quarterly magazine of urban affairs, published by the Manhattan Institute, edited by Brian C. Anderson.
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Can libertarian paternalism make the world a better place?
11 June 2008
Nudge: Improving Decisions About Health, Wealth, and Happiness, by Richard H. Thaler and Cass R. Sunstein (Yale University Press, 304 pp., $26.00)
In classical economics, human beings are rational actors. We make choices that maximize our utilitythat is, that make us happier, wealthier, or whatever we desire most. Averaged over all of society, the invisible hand of these rational choices should make everyone better off.
Its a good theory. Unfortunately, as University of Chicago economist Richard Thaler and others have demonstrated in the relatively new field of behavioral economics, most human beings bear little resemblance to these rational actors. In many cases, individuals make pretty bad decisionsdecisions they would not have made if they had paid full attention and possessed complete information, unlimited cognitive abilities, and complete self-control, write Thaler and newly appointed Harvard Law School professor Cass Sunstein in Nudge: Improving Decisions About Health, Wealth, and Happiness. So they advocate a different approach, which they call libertarian paternalism. Its a clunker of a name, but a fascinating concept: in general, people should be free to do what they like and to opt out of arrangements that they dont like. However, because many situations require us to choose, its legitimate for choice architects (those who set the ground rules for a situation) to make it easier for people to make choices that will leave them better offas judged by themselves. If choice architects consciously try to do this, Thaler and Sunstein argue, we will wind up with better public and private policies.
The classic example is saving for retirement. Most of us know that we should be saving morebut fully 30 percent of eligible employees fail to enroll in company-sponsored 401(k) retirement plans, even though employers tend to match employee deposits up to a point. Is this because the employees are too strapped to make contributions, even with the employer match? Apparently not, the authors say, citing data from the United Kingdom, where a handful of defined-benefit plans dont require any employee contribution at all. They do, however, require employees to sign up. Scarcely half of eligible people do. This is equivalent to not bothering to cash your paycheck, they writesomething that no rational economic actor would ever choose.
A better solution? Rather than requiring employees to opt in, require them to opt out. This changes the numbers dramatically. One 2001 study found that under opt-in 401(k) rules, barely 20 percent of employees had enrolled after three months of employment, and 65 percent had done so after 36 months. With automatic enrollment, 90 percent of new employees were participating shortly after joining their firms. Never underestimate the power of inertia, Thaler and Sunstein write. Drop-out rates are modest, suggesting that workers are not suddenly discovering, to their dismay, that they are saving more than they had wanted. In other words, on some level, people appreciate the nudge.
The examples of nudge-worthy situations abound. School cafeteria managers, rather than banning junk food, can put the apples at eye level and the Twinkies a little farther away. Utilities pushing conservation can put smiley or frowny faces on power bills, indicating whether a customer is using more or less energy than his neighbors. Universities, rather than getting hysterical about underage drinking, can put up signs noting that most students either dont drink, or do so moderately. These nudges all recognize that human beingsas opposed to rational economic actorsare systematically biased about their choices. We are biased toward the status quo, toward things that are easy, and toward our notions of what everyone else thinks. The picture that emerges is one of busy people trying to cope in a complex world in which they cannot afford to think deeply about every choice they have to make, Thaler and Sunstein write. We are free to ignore the frown on the power bill, but if it gets us to turn off the lights, is it really a bad thing?
Thaler and Sunstein have written an engaging book with a fascinating thesis. Despite their quip that economists should make up no more than 25 percent of the guests at a dinner party, its easy to imagine them as engaging hosts, entertaining guests with their theoretical examples. And in keeping with dinner-party etiquette, the authors strive to be non-ideological, hoping that their recommendations might appeal to both sides of the political divide.
The reader hopes so, too. But the authors seem to address their arguments mostly to libertarians rather than paternalists, insisting that we emphatically agree that for government, the risks of mistake, bias, and overreaching are real and sometimes serious. We favor nudges over commands, requirements, and prohibitions in part for that reason. . . . We are not for bigger government, just for better governance. Since government is involved in our lives, they say, heres what it can do better. But they dont spend as much time persuading folks who do prefer commands, requirements, and prohibitions that they are wrong. Animal-rights activists wont be satisfied with a frown next to the foie gras on menus; they want the stuff banned. As we learned from the last attempt at Social Security reform, a sizable chunk of Americans are not asking whether the default option for individual Social Security accounts should be a well-balanced blend of domestic and international stocks and bonds; they simply do not want people to have any choice within the governmental portion of their retirement funds.
In addition, while the idea of restructuring choice architecture to encourage good choices is intriguing, the reader gets the picture after just a few examples. So to fill a $26 book, Thaler and Sunstein haul out various other topics that one suspects they simply enjoy writing aboutarguing that marriage should be a private rather than a state matter, for example, and that patients should be able to give up the right to sue in return for lower medical bills. While these make interesting discussions, tying them to the central nudge thesis is a stretch.
Nonetheless, Nudge is a compelling read and provides a different way to think about many policy questions. Rather than spend millions of dollars dealing with the fallout from teen mothers having second children, for instance, why notalong with the more typical counselingpay at-risk teen mothers $1 for every day that they dont get pregnant again? Its relatively cheap, its noncoercive, and a program in Greensboro, North Carolina that tried it found that it works. In other words, its the perfect nudge.
Laura Vanderkam, a New York Citybased freelance writer, is a member of the Board of Contributors of USA Today. Her work has also appeared in Readers Digest, The American, The Huffington Post, and other publications.