At the Wall Street Journal‘s Econoblog, Mario Rizzo, one of my former professors at NYU, recently debated the University of Chicago’s Richard Thaler on “libertarian paternalism.”
The following is from Thaler’s opening remarks:
In light of human limitations, Cass Sunstein and I argue for policies that we call libertarian paternalism. Although the phrase sounds like an oxymoron, we contend that it is often possible to design policies, in both the public and private sector, that make people better off — as judged by themselves — without coercion. We oppose bans; instead, we favor nudges.
Consider two examples, both designed to increase savings. The first is to enroll people, automatically, into savings plans — while allowing them to opt out. The second is the Save More Tomorrow plan, which allows employees to commit themselves now to increasing their savings rates later, when they get raises. Both approaches have been remarkably successful.
Well-chosen default rules are examples of helpful “choice architecture.” Since it is often impossible for private and public institutions to avoid picking some option as the default, why not pick one that is helpful?
And what’s next here is excerpted from Rizzo’s contribution:
It is a good thing to help people make better decisions. But law requires us to go beyond intention. What is the appropriate standard for better decisions? Thaler and Sunstein say it’s what people would do if they had “complete information, unlimited cognitive abilities, and no lack of willpower.” This is a very ambitious standard that could tax the abilities of even well-meaning policymakers.
Can we discover “true” preferences through individuals’ statements that they are too fat and save too little? Talk is cheap. These could be expressions of mere desire, not a real willingness to make trade-offs between values. We all want to have more savings and more consumption, too.
Moreover, the public sector is not governed by science or even by behavioral economists, but by ambitious people with limited cognitive abilities, lack of willpower, and faulty memories, not to mention expanding waistlines. Whom should we trust more: individuals who face the costs and benefits of their own choices, or politicians and bureaucrats who do not?
I encourage you to read the entire, interesting debate here.
By the way, you can hear here a podcast that Russ did with Thaler back in November 2006. And here you can hear a podcast that Russ did with Ed Glaeser, who is critical of the concept of “libertarian paternalism.”
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{ 17 comments }
The changing the default saving option idea, from an opt-in to an opt-out, is a great idea and extremely consistent with social psychology (e.g. the status quo bias) with which Thaler is intimately familiar.
If you did the same thing for organ donation, change it from opt-in to opt-out, I believe that you would go a long way toward solving the problem.
A true libertarian would "opt out" of all government programs and join with like-minded people who understand that society is inherently self-organizing:
http://liberalpost.wordpress.com
First, I have read Thaler's work extensively and it's fascinating.
Second, I'm not talking about government programs. I'm talking about things like employer-organized savings and health care programs.
Extensive research shows that people have a strong bias toward picking the default option because they tend to believe that there is a reason why that is the default (even when there actually is no good reason). This phenomenon is related to the Status Quo Bias and the Endowment Effect.
For example, if you present 3 groups of people with investment options A, B, and C and make Option A the default for Group 1, Option B the default for Group 2, and Option C the deafult for Group 3, you will find that most people in each group will tend to stick with the default, regardless of what that default it.
For whatever reason, people seem to be wired to like the default option.
As a result, you can shape (or nudge) people's behavior by changing which option is the default.
If many people are going to choose the default, regardless of what it is, then you might as well ensure that the default does the best job of serving the average person's interests.
How does anyone know what the best investment option is in advance? And if you did know what is was, why would you give (and why would one take) poorer investment options?
If everyone exercised more, then people would have less health problems and healthcare cost would be lower. Perhaps, the government should have an opt-out option for health clubs. Every month Americans would be automatically enrolled in their local health club (with their payment automatically deducted from their pay check) unless, of course, they decided to opt out each month. Wouldn't that be wonderful!
It's a preferable system to the use of force to make people do or not do things, but straight up libertarianism is still the most attractive system to me. Maybe with some ice, though.
"How does anyone know what the best investment option is in advance? And if you did know what is was, why would you give (and why would one take) poorer investment options?"
Have you ever wondered why there remains so much money in under-performing mutual funds when people would be better-served by putting their money in an index fund?
To a degree it's because people aren't entirely rational. They invest in things because that's what everybody is doing, because that's what their friend told them to do, or because that was the default allocation.
While I love Libertarianism, you have to take into account the fact that people don't always make decisions that serve their own or society's long-term interest (e.g. with respect to organ donation). That doesn't mean that the government should run everybody's life, but it means that we should sometimes think about things.
How does anyone know what the best index fund is in advance? And if you did know what is was, why would you give (and why would one take) poorer index fund options? (The name has changed, but the song remains the same.)
You site organ donation as an example that people don't alway make the best decisions. But why would you think the government does or at least better decisions than the public. With organ donation, why would you think an opt-out opition would be the optimal option? I would think that giving people the freedom to make there own decision how to dispose of organs as the optimal option. A market in the supply of organs would give people an incentive to sell their organs and this would provide an incentive to meet the current demand.
Charitable organizations to help purchase organ for those who could not afford it. Where there is no government intervention seems optimal to me. But let the people decide, even if they sometimes make mistakes.
"You site organ donation as an example that people don't alway make the best decisions. But why would you think the government does or at least better decisions than the public. With organ donation, why would you think an opt-out opition would be the optimal option? I would think that giving people the freedom to make there own decision how to dispose of organs as the optimal option. A market in the supply of organs would give people an incentive to sell their organs and this would provide an incentive to meet the current demand."
You're ignoring how people actually work.
By setting the default as "don't donate" you're guaranteeing that most people will not donate their organs since most people choose the deafult option.
If we were to switch to an opt-out, presumed consent system (as I think is in place in some European countries), then for reasons that are true but not logical, far more organs would be available.
The mistake you're making is assuming that people are perfectly logical when in truth they are not.
IMO this whole issue is one of the challenges of Libertarianism.
How do you not encroach on liberties but still take into account that fact that people aren't entirely rational?
Chris, keep it in the realm of private business, and sure, it's a great idea. Firms that care about employees should, in theory, have an advantage attracting employees who like to be cared for. Win win.
My experience with this kind of this came as a grad student at a public university in the mid 90s. Grad students were required to participate in the grad student health plan, unless you petitioned to opt out. Your petition had to have the right kind of health coverage and every year at opt-out time, I got a call from a coordinator informing me that a high deductible plan wasn't a good idea for me and was only borderline acceptable. I thought of it as a sales call and it infuriated me more
. Grad students who did not opt out had their premiums invoiced on their quarterly fees. So you could not enroll without buying health insurance. Some times, the waivers weren't processed in a timely manner, so if you were paying your own fees, you'd have to lend the health program money until the waiver was approved. The clear motivation for the foot dragging on the waivers was simply pool size. The more people who opt out, the higher price they have to charge. But the dirtiest little secret of the whole deal is exactly the thesis of the libertarian paternalists… Once a grad student starts getting fees paid by the department, they don't bother with the opt out process. The default option is what makes the system float.
"How does anyone know what the best index fund is in advance?"
You can't.
However, you should see how much money is invested in funds that Morningstar gives a grade of "F". Look it up some time when one of the business magazines does its mutual fund scorecard.
"And if you did know what is was, why would you give (and why would one take) poorer index fund options?"
People are not entirely rational.
IMO, that (among other things) is what drives liberalism.
Libertarianism has to take this fact into account. I believe that's what Thaler is suggesting when he talks about Libertarian Paternalism.
Chris, to the organ donation issue… I think all libertarians would agree that issues of supply and demand need to be dealt with via the price system, not command and control, whether it's opt-in or opt-out. A Constitutional precedent for this is the 3rd Amendment. Soldiers need a place to stay, but we don't have a system here that says all homeowners by default agree to let a small platoon crash on the couches and help themselves to what's in the pantry. Same with organ donation. Morally, we do not solve it by telling people that by default, they approve of the state divvying up their parts when they die. What if, by chance, the state decides to use my parts to help someone who mistreated me or someone I cared about? If you donate by your own positive choice (or sell if we ever come to our senses and allow a market), you're accepting that possibility. But to have them taken and given away is reprehensible, just as the British soldiers borrowing people's homes in revolutionary times was.
Chris,
You keep come back to the point that people are not entirely rational, which I agree with, but the government is also made up of not entirely rational people.
If the government officials don't know what the best fund is why would we let them pick the default fund.
If an employer or many employers choose to offer an index fund and they pick a default fund I don't have any problem with that. Employees can alway move to a different employer if the employer screws up badly.
With government mandates there is no way to get out of the system.
With organ donations, there is no way out of the system. One cannot freely sell ones organs. One can only donate one's organs.
The other problem with government making decision for us is that individual's know there circumstances better than bureaucrats in Washington and are in a better position to make choices for themselves than government. Although, many people think that their choices are superior than others people's choices and if only the government could force their choices on the benighted things would be so much better.
Perhaps people opt for default because they are ignorant of the benefit of opt out.
Example:
This fund will earn you $300 per month at retirement and that fund will earn you $375 per month at retirement.
vs.
Do you want fund A or Fund B?
I think that this is fine policy for the private sector (as was mentioned, if a company has to pick a default, why not pick a default that it thinks is best for its employees (or, alternatively, best for its bottom line)?
While I do think that forcing people to jump through hoops to opt out of something (especially if you have to do it more than once, like having to opt out each year) is bad, I think that fundamentally, the private sector should be able to do whatever they want, so if they want to pick "good" defaults, that's their choice.
ugh, as a Chicago guy, it is painful and embarrassing – but not really surprising – to read such clever communism coming from a Chicago professor. what business of Mr. Thaler's is it to care how much I save?
So they put me into a situation, without asking me first, then claim that it's libertarian just because if I try to wrestle free of this situation, they'll let me. What right do they have to put me in this situation to begin with? Why can't they just leave me alone? My guess is because they're still busybodies who like to control other people & they're counting on us being lazy enough to let them, & then they'll claim that anyone who fails to extract themselves from their control is voluntarily submitting. To call this non-coercive relies on a loose definition of coercion.
This reminds me of that thing kids do where they close their eyes & walk towards you with their fists swinging, declaring that if you don't get out of the way then it's not their fault, that you're agreeing to get hit.
I think Thaler missed the point —
It's entirely inconsistant with Libertarianism for the government to set up a system of 401K/IRA/ROTH IRA/ROTH 401K/Sep IRA/403b plans at all. Tinkering with the default rules for this regulatory boondoggle is like trying to empty the ocean with a teaspoon.
It is inconsistant with Libertarian philosophy for the government to seek to control people's behavior beyond the basic tasks of keeping us from killing or cheating eachother (and the cheating bit is debatable).
That said, it's hard to argue with the idea of setting thoughtful default rules once you accept the existence of some system that needs default rules at all. But that's a question of how to regulate better, not whether the regulation should exist in the first place.