With Nudge, I am getting a pretty good collection of behavioral economics literature. Like "Predictably Irrational", "Animal Spirits" and "Freakonomics", Thaler and Sunstein explore how human beings and "econs"- the idealized rational economic being that exist in economic models diverge.
Thaler and Sunstein advocates what might sound like an oxymoron: "Paternal Libertarianism". The thesis is simple- given that human beings are not hype-rational, it is possible to achieve social optimality with a little "nudge". This is as close to a "free lunch" as you can get in the econ world.
The standard example of "nudge" is that by simply change the default setting of the 401k plan to opt-out instead of opt-in, enrollment rate will increase dramatically. In the world inhabited by hyper-rational econs, this default setting should not matter; you should set your preference for retirements saving by doing some sort of intertemporal income redistribution optimization such that your discounted utility is maximized (insert your own bellman equation joke here).
Of course we human beings (economists included) do nothing of the sort. And here you can enact good policies by taking advantage of human nature: we tend to freeze and settle for the default setting if things are too complicated. By choosing 401k participation as the default setting, most people are now "nudged" to save for their own futures. The libertarian part of nudge is that individuals are not forced to save- if they really want to opt-out they can do so.
Another "nudge" example I think is pretty amazing is this approach to environmental policies. It turns out that simply by setting up a government database of polluters will reduce pollution. Because of the notoriety of being named and shamed, companies have incentives to get themselves off that list. That an optimal social policy is achieved with a very soft touch has an inherent elegance to it. This will not work for all environmental issues, but it would work in some.
And as an aside, any economist who takes their kid to watch Death Cab for Cuties is a pretty cool economist in my book.
3 comments:
Total agreement, human nature will trump any logical argument. So we need help sometimes. I like the idea of Nudges. I've used them to great effect when dealing with less technical people. And I've had nudges used on me... though I'm getting better at detecting them from other...
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Following the 'nudge' is essentially following an authority advice on an issue too complicated or deemed not sufficiently important to investigate. Nothing irrational here. If you get 29 pages with fine print from your mortgage broker with a note "Please sign and return", how many of us would read carefully the text?
In some cases following a 'nudge' could be a life-changing event, e.g. when you sign consent forms for medical treatments. Yet, how many of us would spend months reading medical articles before we sign?
Following the 'nudge' is as rational as trusting authority on any other issue. People assume, rationally or not (insert your own 'big brother' joke here), that somebody has put some thought into selecting the default. Seriously, try to cutomize your software every time you install a program and see how rational this is.
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