Libertarian Paternalism

NUDGE

Richard H. Thaler and Cass R. Sunstein

 Yale, 2008, 293 pp., $26, h/b – ISBN 978 0 300 12223 7

Described in the latest issue of Prospect as ‘2008’s noisiest ideas book’, Nudge is an important and timely book as governments struggle to reconcile liberalism and paternalism, freedom of choice and the nanny-state. Hence the title of my review — libertarian paternalism, which might seem an oxymoron at first sight. The subtitle of the book informs us that it is about improving decisions on health, wealth and happiness. The problem, according to the authors, is that we often make poor choices, susceptible as we are to various biases, not to mention the weight of inertia.

Early in the book, we are introduced to the notion of choice architecture, using a very practical example of how the way in which foods are arranged for display influences the choices made by schoolchildren. They can be ‘nudged’ towards a healthier choice. Libertarian paternalism draws on, respectively, the insistence that people should be free to do what they like, and the legitimacy of choice architects trying to influence people’s behaviour in order to make their lives longer, healthier and better. Nudge does not represent coercion, and is defined as ‘any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives.’ For interventions to count as nudges, they must be easy and yet keep to avoid.

Readers who have studied economics will remember the rational consumer who always makes rational choices, called here an ‘Econ’ as a reminder that real human beings are not in fact exclusively rational Econs, who react to incentives in order to maximise their satisfaction. The authors point out at the outset that we falsely assume that most people make choices that are in their best interest or better than choices made by someone else; this assertion is disproved by empirical research. Nor is it possible to avoid influencing people’s choices, since choices are always set up in a particular way. The ideal, therefore, becomes to set up good choice architecture options, which make life as easy as possible. Hence the authors advocate better governance rather than bigger government, all of which makes a great deal of sense.

Our rationality is compromised by the fact that we think in two systems, one reflective and the other automatic, each of which has its appropriate sphere of action. However, they can get mixed up so that we are operating in the wrong mode. It is instructive to consider the role of inertia, especially in relation to financial decisions. We tend to remain with our existing arrangements, rather than question them and go to the trouble of changing them. For instance, given the recent debacle  in the banking system, one might think of switching to Triodos, who operate on an ethical basis and did not overreach themselves. I even experience reluctance to change my telephone provider if offered a better deal. Conformity is another form of inertia – we are easily nudged by others, a fact not lost on advertisers.

The authors outline six principles of good choice architecture: incentives, understanding mappings, defaults, feedback, expectation of error, and structuring complex choices. They then apply these, with examples, to money, especially investment, health and freedom to choose, for instance schools. It is a commonplace that we do not save enough for retirement, even if we know we should, which sets up a good case for a nudge. A key point is to make choices clear and straightforward, and not to overburden people with too much information. The result can be that people give up and therefore do not receive money to which they might be entitled. In this respect, Sweden is held up as a good example, but the US prescription scheme gave people too much choice. The lesson is that the more choices we give people, the more help they will need.

One specific useful suggestion is RECAP – record, evaluate and compare alternative prices. The system can also be used to provide a printout of total expenditure on a particular item in the course of the year. Most of us simply do not add this up, and if we did, we might change our behaviour. A further interesting and topical issue discussed in some detail is how to increase organ donations. Clearly, a system of presumed consent will far exceed the numbers of an explicit consent system. Interestingly, some online research showed that only 42% opted in as an organ donor, but when people had to opt out, 82% agreed to be donors.

The book ends with a dozen suggestions for mininudges and addresses some possible misgivings. They argue, convincingly in my view, against the slippery slope argument, partly on the basis that choice architecture inevitably entails some kind of nudge. They finish by observing that the sheer complexity of modern life and the rapid pace of change militate against both rigid authoritarianism and what they call dogmatic laissez-faire; hence the underlying case for libertarian paternalism. This will surely be a topic of much political argument, but I do find the concept of choice architecture extremely useful.

.

Leave a Reply