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A Blueprint for Intelligent Government

Virtually all university students know about the pains of procrastinating. Why start with the assignment right now instead of in a couple of minutes? Nonetheless, we do it all the time and get ourselves in considerable trouble most of the time. Suddenly, time is short and deadlines approach sooner than we anticipated. Sounds familiar?

There is help to make the right decision. One solution is to pledge to deliver your next paper on time. If you fail, you will donate a significant sum to charity. In this scenario, the short-term incentives to keep delaying are contrasted with the somewhat clearer long-term consequences of loosing money. The question remains—why do we fail to make the right choice so often, and how can we improve?

The problem lies in human nature. We are good in long-term planning, but carrying out our decisions seems awfully complicated. Humans are good “planners”, but bad “doers”, to use two terms coined by economist Richard H. Thaler and law professor Cass R. Sunstein, who also heads the White House Office of Information and Regulatory Affairs. The two have published “Nudge – Improving Decisions about Health, Wealth, and Happiness” last year, in which they deal extensively with how to turn us into better “doers”.

Their book fits in with the Obama approach of intelligent government and the general reappraisal of intellectuality. At the same time, it highlights the greatest problems with the kind of government action this school-of-thought puts forward.

Nudge Cover

Predictably Irrational

Thaler and Sunstein are both of the University of Chicago and were both informal advisors to Barack Obama’s presidential campaign.  And, they both have worked on the intersection of rational economic decision-making and the predictable irrational behavior of most humans when it comes to economic decisions. The intellectual background of the book is formed by “behavioral economics“, a subfield of economics that integrates the systemic biases of human action into traditional economic models.

The basic premise is that since people don’t seem to think very hard about the choices they make, policy makers should use their knowledge of the systemic biases to “nudge” people into making better decisions. A nudge is any device “that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives,” the authors write.

A “nudge” can take many forms. If you put fruits and salads in the beginning of the cafeteria line, you “nudge” students to eat healthier, since the way choices are arrayed to them influences their decisions. Thaler and Sunstein call the setting in which people make decisions “choice architecture”. Since there is no neutral way to arrange the foods, “choice architects” like cafeteria managers influence people in any case—so why not help the hungry students to improve their decisions about chips or Caesar salad?

Another “nudge” are default options. A lot of patients die each year, because there are not enough organs for transplant available. How can more people be persuaded to commit to donate their organs after their death? They could either be asked to tick a box opting into donation or opting in might be the default setting and they have to actively opt out. The difference? One study found that with an opt in policy, 42% of people agree to donate, whereas with an opt out policy, 82% committed to donate. They were “nudged” to follow the default.

Want more Soup?

The examples for the influence of choice settings go on and on-sometimes to the point of absurdity. One study showed that how much you eat depends on the size of the plate you eat it from. In the experiment, test persons were asked to eat as much as they liked from a bowl of tomato soup, while the soup was secretly refilled from below the entire time. Some people continued to eat until the scientists stopped the experiment.

Politically, Thaler and Sunstein’s ideas are in hot demand. Their book is popular both in circles around Tory leader James Cameron, as well as with the Obama crowd. Now add that Cass Sunstein has just been named to lead the White House Office of Information and Regulatory Affairs—there is reason enough to turn attention to the policy recommendations of the book. Thaler and Sunstein offer help for everything from drug prescription plans, student loans, mortgage rates, climate protection to the privatization of marriage.

Whatever the issue, the blueprint is the same each time. The observation that behavioral economics can be helpful in predicting the shortcomings of traditional economics leads the authors to their main idea. Policy makers can use the influence of “choice architecture” to steer people to make better decisions. If economists and political scientists can abandon the thought that people always act rationally, they arrive at the position of Thaler and Sunstein.

Paternalism vs. Liberalism

Their book offers a third way in between two dominant schemes for government action from the last century. Thaler and Sunstein set out to bridge the gap between two of the most influential economists of the last century—John Maynard Keynes and Milton Friedman. The ideas put forward by Keynes suggested a bureaucratic paternalism. His theories were turned into a top-down approach that tried to push rather than to “nudge” people. Keynes’ theoretical challenger—Milton Friedman—trusted the people more than the government; he asked policy makers to let the market work. This approach was especially salient during the Regan-era, when deregulation and limited government interference were de rigueur in the political world—and “nudges” were frowned upon.

Thaler and Sunstein try to unite these two poles in the awkward term “libertarian paternalism”, which sounds like a classic oxymoron at first. The idea is to give a subtle hint what the “choice architect” thinks is the best decision, while the cost of leaving the default path are kept extremely low. This allows policy makers to both target the systemic biases of irrational human action and eliminate the danger that people are not free to choose.

Save More, Earn More

For example, Thaler and Sunstein explain that retirement plans suffer from being overly complex. The authors cite a study that not even MBA-students are able to calculate the optimal savings rate for a retirement plan. So they advise that future plans should have a default setting that raises people’s contributions each year by the percentage that their pay increases.

This idea stems from two psychological insights. People are loss-averse; they hate loosing money more than winning it. Hence the contributions are indexed to the pay so that the paycheck doesn’t shrink. They are also effort-averse; they don’t like to download, fill out and send back the forms that are needed to raise the savings rate. Hence it is raised automatically. This so-called “save more tomorrow” scheme would thus produce a better outcome, as opposed to a plan where people choose one static saving rate and then just forget about it.

The Perils of Freedom

All these suggestions seem like good ideas to improve the outcome of government policies. The book discusses them in great length and detail. The drawback is, as the authors recognize, that the implications of their ideas are not discussed with the same scrutiny. If we can’t trust people to make informed and optimal decisions, why can we trust other people to lure them in the right direction? One failure of the political system is that it doesn’t recognize human irrationality; another is that politicians and legislators seldom act in the purest public interest. The authors fail to dismantle the argument that people need to be free to choose simply because the government tends to make the worse choices.

Another problem is that commercial interests are far better in exercising the techniques of “nudging.” The relationship between “nudging,” advertising, and marketing remains unclear. No matter to what extend the government “nudges” people to eat bananas instead of burgers, the junk-food corporations will tell them the opposite.

Can we Trust Humans?

And finally, if you say that people’s wishes, as expressed by their decisions, do not always match their real requirements, you have an argument to abandon their freedom altogether. But do scientists always know best? No, they do err quite frequently. That is why they give recommendations instead of prescribing policy.

Thaler and Sunstein mention the introduction of plastic bags in Chicago that dog owners can use to dispose their dog’s excrements. People were effectively “nudged” to use them, which the authors cite as a success. Now, people in Chicago use tens of thousands of plastic bags each year to remove organic waste that would eventually dissolve itself—a great success for pedestrians, a rather small accomplishment in terms of environmental protection. However you use “nudges”, your aims will always be up for discussion.

Which is not to understate the magnitude of the ideas Thaler and Sunstein present to the reader. They acknowledge that “nudging” needs an extremely high willingness of policy makers to reveal their true motifs to justify their actions. Sure enough, the techniques can be exploited. But if the influence of “choice architecture” is known, it is negligence to ignore it. The trick is to tell people about what you have in mind, instead of using the power of the “nudge” to manipulate them.

By Kolja Langnese

“Nudge: Improving Decisions about Health, Wealth and Happiness” by Richard H. Thaler and Cass R. Sunstein (Yale University Press, 2008; 293 pages).

More info: www.nudges.org

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