Richard Thaler Speaks at RSA

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Richard Thaler, an economist at the University of Chicago, co-wrote the book Nudge: Improving Decisions about Health, Wealth and Happiness with the legal scholar Cass Sunstein. Here Thaler presents his views about decision making, policy and goverment before an audience at the RSA – often called the Royal Society of Arts.

For those of you looking to read something shorter, Thalen and Sunstein give an overview of their book in this LA Times article Designing Better Choices. They also have a scholarly article Libertarian Paternalism Is Not an Oxymoron. And for the truly devoted, you can check out their website Nudges.

Thalen is a behavioral economist, and thus sees the notion of perfect rationality and idealized cost/benefit decision making as irrational. We are human, flawed and imperfect; more importantly, our “choice architectures” are significantly shaped by features of the environment, such as what captures our attention or simply following the default option like the rest of the herd. Hence the nudge, those small features in the environment that we can shape in specific directions while still letting people make their own decisions.

As Evan Goldstein writes in his Chronicle of Higher Education Nudge review, “A nudge is thus any noncoercive alteration in the context in which people make decisions. The libertarian paternalism behind it is rooted in Thaler’s lifelong fascination with the power of small, seemingly innocuous details — the arrangement of food in a cafeteria, the drawing of a small fly in the bowl of a urinal, a pattern of lines on the road — to influence people’s behavior.”

Thaler summarizes the three main points of his talk as (1) Humans are imperfect. We need all the help we can get. (2) It is possible to improve choices without restricting options. and (3) Don’t use bans and mandates – use nudges. In critiques of Thaler, Sunstein and Nudge, economists often revert to a classic libertarian view (see Gary Becker and Richard Posner on their joint blog). But it is the third point that I find the most relevant – our default policy option is often to ban, limit or punish.

Sunstein takes this view a step further in a blog post at the Chicago Law School:

What libertarian paternalists add is that the opposition between “individual choice” and “government” is confusing and unhelpful when government is inevitably establishing default rules that govern outcomes if choices haven’t been specifically made — and that influence people’s choices in any case. A key point, then, is that private and public institutions can’t possibly avoid a form of paternalism, so long as they establish default rules and starting points. (For some reason, economists in particular seem not to understand this point.) The question is how to make those starting points as good as possible, while also preserving free choice.

While many call this a soft paternalism (see Wikipedia), I see it as a change from a punitive paternalism to a more communitarian paternalism. For certain problems – public health problems are one of the best examples – people make decisions that affect themselves and others in ways that are well-beyond the scope of “subjective utility” and the regulation of the market and also do not respond well to straight-out bans or punishments. For other problems, where long-term abstract outcomes are generally preferred (for example, automatic enrollment in savings or pension plans), having default options that favor these long-term results is often preferable from a policy viewpoint.

But this sort of paternalism has its share of critics. David Gordon defends libertarianism while critiquing even a weak paternalism. Benjamin Friedman suggest that this is rather like common sense, just thinner on practical ideas. James Harkin says that while it might seem like a good idea, there’s precious little evidence. Jonathan Carr-West points out that nudging presents itself as value free, but is not – and thus hides that important decisions are often about values. Matthew Taylor calls the incentives approach clever on paper, but not accounting for the many unintended outcomes and consequences that happen out in the real world.

The nudge approach sounds to me a lot like motivational interviewing, one of the most successful therapies for addiction. Thaler’s Recap (record, evaluate and compare alternative prices) looks like a more confusing version of the decision balance chart used in MI (e.g., good vs. bad aspects of using drugs). But motivational interviewing grew out of long-term clinical experience, remains resolutely client-centered, and has a clear focus (destructive behaviors). For nudging to be successful, it will have to gain the same features. Otherwise, I fear, it will grow too paternalistic and too idealistic, designing better “choice architectures” for us based on other people’s paternalism and ideals.

Finally, from an anthropological angle, I found it recreates the two main problems behavioral economics supposedly solves – recognizing that we are irrational, and that decision making is affected by the environment and doesn’t just happen in the individual. Libertarian paternalism is presented as an ideal mix of individual choice and enlightened policy, thus recreating the individual-environment split right from the start. (Funny how our ideological default options creep back in – some people call that culture.) Moreover, “irrational” means a whole gamut of things, such as values, beliefs, fantasies, cultural traditions and the like. It doesn’t just mean psychologically irrational, solved by a quick legal fix.

Still, how we deal with our irrationality, the power of environments to shape our choices, and the increasing presence of societal institutions in our everday lives are all crucial topics in the present day. Raising these problems sounds like a nudge in the right direction to me.

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