NUDGE FACTOR:

The Radical Minimalist: Obama's regulatory czar, Cass Sunstein, has a complex faith in market initiatives. But sometimes a "nudge" is not enough. (Robert Kuttner | April 14, 2009, American Prospect)

In good University of Chicago fashion, Sunstein prefers market-like incentives to get businesses to behave themselves and consumers to optimize their well-being. This process is described as "libertarian paternalism," another characteristically Sunstein oxymoron meaning subtle government interventions that prompt consumers to make the decisions they would voluntarily choose if they were as smart as he is.

Sunstein's latest book, Nudge, co-authored with University of Chicago economist Richard Thaler, observes that ordinary people make ill-informed financial choices because they lack adequate time or knowledge or because the deck has often been stacked in favor of bad consumer decisions by self-serving merchants. There are really two kinds of people, Sunstein and Thaler puckishly write, "Econs" and "Humans." Econs are the hyper-rational creatures imagined by University of Chicago economists. Humans are the rest of us. Econs, somehow with infinite time, carefully weigh every economic decision. Humans decide on the fly and make systematic mistakes. By using public regulation not to dictate outcomes but to alter "choice architectures," enlightened government can help consumers to make better decisions, both for their own well-being and to discipline producers. Thus does libertarian paternalism make markets work better.

A favorite Sunstein example is the 2006 Pension Protection Act, which changed the default option for workers whose employers offered tax-deferred savings plans. Under the law, workers now must choose to opt out, rather than opt in, which was the previous rule. This simple constructive "nudge" has dramatically increased both employee participation and savings rates.

A little bit of choice goes a long way.

Posted by Orrin Judd at April 14, 2009 9:51 PM