April 11, 2010

IF YOU DON'T SHOVE THE BIG STUFF HOW DO YOU NUDGE THE LITTLE?:

Nudge Nudge, Wink Wink: Behavioral economics—the governing theory of Obama’s nanny state. (Andrew Ferguson, April 19, 2010, Weekly Standard)

During his campaign, the candidate Obama was often portrayed as an intellectual acolyte of “behavioral economics,” a très chic social science that culls up-to-the-minute laboratory research about why human beings behave the way they do and applies it to the world of buying, selling, borrowing, and investing. At the candidate’s elbow, said Time magazine, was a “behavioral dream team”: economists and psychologists steeped in the latest behavioral literature. And once in office the president surrounded himself with many dream-team veterans: Lawrence Summers, Austan Goolsbee, Peter Orszag—behavioralists all.

He also appointed Cass Sunstein, a former colleague from the University of Chicago Law School, to be his “regulation czar” (journalese for the director of the Office of Information and Regulatory Affairs in the Office of Management and Budget). Being DOIRA of OMB may not sound glamorous—it sounds more like a sinister potentate in Lord of the Rings—but it is easily the most powerful regulatory position in the executive branch, after the president’s. Every significant rule proposed by every federal agency must win the approval of Sunstein’s office, which is now staffed with still more behavioral economists recruited from Harvard, MIT, Princeton, and the Brookings Institution. It’s like behavioral summer camp over there.

“Relying on behavioral science,” Time announced, Obama and “his administration [are] using it to try to transform the country.”

It’s harder than it looks.

Behavioral economics—the idea of it, anyway—is a great help to President Obama in his efforts to define himself as a man too complicated and thoughtful to fit the categories of conventional politics. As a candidate he identified himself as an admiring reader of Nudge, a bestseller written by Sunstein and Richard Thaler, another Chicago economist who is often considered the founder of behavioral economics. Nudge was behavioral economics’ popular manifesto, a guide, for policymaker and citizen alike, to “improving decisions about health, wealth, and happiness.” Nudge became a big bestseller, predictably enough, for it was another in a long train of books—the Wisdom of Crowds, Freakonomics, Sway, Wiki-nomics, The Black Swan, the entire oeuvre of New Yorker writer Malcolm Gladwell—that claim to scour the arcane literature of social science and then cleverly apply its findings to everyday life, in ways that the wealthy white people who buy books find flattering, reassuring, amusing, and provocative. But not too provocative.

In Nudge, Thaler says, he and Sunstein drew on behavioral economics to create a “philosophy that was beyond left and right.” They call it “libertarian paternalism,” also “soft paternalism.” It’s libertarian (and soft) because it forswears government mandates wherever possible. It’s paternalistic because it wants government to “nudge” citizens into behaving in ways that policymakers prefer. Thaler and Sunstein know that libertarians find their philosophy too paternalistic and paternalists find it too libertarian, and that’s just fine with them. They cast libertarian paternalism as the via media, the third way, moderate and reasonable, avoiding political extremes and the snares of ideology. It’s Gergenism for the thinking man. The oxymoron, joining two incompatibles, perfectly encapsulates the promise of Obama himself: something fresh, exciting, and highly improbable.

Obama’s courtiers in the press, hungry for hints of their man’s moderation, have been happy to oblige the oxymoron. When Sunstein announced that Obama wasn’t “an old style Democrat who’s excited about regulations for their own sake,” the New Republic pointed out, Pavlov-style, that Obama was a New Kind of Democrat—newer than the last New Kind of Democrat, Bill Clinton, and newer certainly than Michael Dukakis, an older New Kind of Democrat who inherited the title from an even earlier New Kind of Democrat, Gary Hart. (You have to go all the way back to poor Walter Mondale to find an Old Kind of Democrat, and even he was preceded by Jimmy Carter, himself a very old New Kind of Democrat circa 1976.)

“Obama has no intention of changing the nature of American capitalism,” the New Republic reporters insisted. He didn’t have to, with behavioral economics at hand. “His program doesn’t set out to reinvent whole sectors of the economy. .  .  . Unlike postwar liberals, he has no zeal for ramping up the regulatory state.” Instead, they said, he was a “nudge-ocrat,” who would preside over a “nudge-ocracy.” The Wall Street Journal proclaimed the onset of the “nudge state,” and Thaler declared that Sunstein, as DOIRA of OMB, would be “nudger-in-chief.” The word play went on and on.

Just as Obama is a liberal Democrat who, his admirers insist, isn’t really a liberal Democrat, behavioral economics proposes government regulation that, behavioral economists insist, isn’t really regulation. Under the influence of libertarian paternalism, regulators abandon their old roles as mini-commissars and become “choice architects,” arranging the everyday choices that members of the public face in such a way that they’ll naturally do the right thing—eat well, conserve energy, save more, drive safely, floss. In the literature the unavoidable example of this involves cafeteria food. Customers in line are more likely to choose food displayed at eye level; this concept, called “salience,” comes to us from behavioral science lab work. A wised-up cafeteria operator who wants his customers to eat healthier foods—at a high school, for example—will give prominent place to fresh fruits in the dessert line and push the Boston Cream Pie to the back. The kids won’t be forced to choose the fruit; the pie will still be there, if their pudgy little arms can reach it.

Look what happens next. Behavioral economics tells us that fruit consumption will surge, because the choice architect has nudged the customers—not forced them!—into making the healthy choice.

A more substantial instance of behavioral economics in action has to do with 401(k) savings plans. If an employer simply offers employees the plan, allowing them to choose to opt in or opt out, most of them, under the power of inertia, won’t bother to enroll, even though the 401(k) clearly works to their advantage. Yet all they need is a good nudge to save them from their bovine lassitude. Employers can reverse the default choice and automatically enroll them in the plan. Now lazy people who do nothing find themselves with a 401(k); those alert employees who don’t want to participate can actively choose to opt out, though behavioral economics says that few will do so. Thus the savings pile up and futures brighten, and none of these indolent but suddenly happy people will even know they’ve been nudged.

The premise of behavioral economics is “predictable irrationality.” (Another catchphrase—you have to get used to them.) We all know we do dumb things. But the behavioralists say they’ve discovered that we do dumb things systematically; we act against our own best interest (eating pie, failing to save for the future) with a consistency that smart people can observe, catalogue, anticipate, and exploit. If you as choice architect, for example, know about the “status quo bias”—people are disinclined to alter their immediate circumstances even in the face of a clear long-term benefit—you’ll switch the default option on the 401(k). A list of the irrational quirks, or cognitive biases, that behavioral science claims to have uncovered would be endless. In addition to status quo bias, there’s delusional optimism, loss aversion, the representativeness heuristic, the law of small numbers, disaster myopia, the availability heuristic, the planning fallacy, the mere-measurement effect, the mere-exposure effect, even the “yeah, whatever heuristic,” so named by Sunstein and Thaler, who have a bias for whimsy, often fatal.

This grounding in the real world, confirmed by social science, is supposed to make behavioral economics superior to traditional economics as a guide to regulating human activity. Traditional economics—rational choice economics, or neoclassical economics—gets a rough going over from behavioral economists. By their reading, its gravest error is to accept homo economicus, the notion that man is a rational economic actor who is acting always and everywhere in his own best interest, however conceived. Traditional economists don’t really believe this, at least not with the dogmatic insistence they’re accused of, but pretending that they do allows behavioral economists to position themselves as hard-headed realists trying to correct the airy abstractions of out-of-touch dreamers—a clever reversal of the cliché that usually makes liberals out to be the softies and right-wingers the no-nonsense types. Behavioral economics, wrote a smitten correspondent for the New York Times, “is the study of everyday life as it actually happens, not as some textbook says it should.”

It’s been 15 months now since behavioral economics was enthroned as the administration’s reigning regulatory philosophy. If it does indeed break with a century of conventional wisdom in economics, as its partisans claim, then we should be seeing its effects already.


The UR is entirely too conservative to achieve anything via nudging. Had he been visionary as regards health care reform he'd have not just required everyone to purchase health care but had HSA's be the default option. 401k's are used as the example in nearly all these discussions because they are a good social policy to get folks saving for retirement. Universalizing them and HSA's would be an excellent idea, but an idea to big for him.

Posted by Orrin Judd at April 11, 2010 6:13 PM
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