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Nudging Us — With Advice, or with Guns?

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.”