The Magic of Libertarian Paternalism (a.k.a nudging)
In the New York Times is an article by David Leonhardt about the idea that a small change, or “nudge”, can often yield a better end-result than a big change.
Here’s one example from Leonhardt:
Five years ago, the Charlotte-Mecklenburg Schools, the largest district in North Carolina, started a school choice program, giving parents a bigger say over where their children went to school. But finding good information about schools, like their average test scores, sometimes seemed like an unpleasant exam in its own right. Parents often had to wade through a Web site filled with acronyms like EOC, EOG, ABC and AYP.
Last year, at the urging of an economist named Justine Hastings and two other Yale researchers, the Charlotte schools conducted a little experiment to see if this complexity mattered. Along with their school choice applications, a few thousand parents were also mailed a sheet of paper listing a single test score — the average of the math and reading scores — for each school they could apply to.
And guess what? These parents were much more likely than others to apply to schools with high scores. They were starting to create the feedback loop that is the whole point of school choice.
The article goes on to mention that the new Medicare Part D is so complex that millions of seniors have simply done nothing instead of choosing a plan. Are there ways to “nudge” people into choosing a good Medicare plan without expanding an already bloated bureaucracy or limiting existing choices?
One example not mentioned that also demonstrates the power of nudging is the new rules many businesses have for their retirement plans. Instead of opting in to a 401k plan, many businesses enroll new employees automatically and require them to opt out if they so desire. Anyone who sincerely doesn’t want to save for retirement in their company plan can still say no thanks, so no one’s choices have been limited in any way. But by changing the default behavior, plan participation has increased dramatically (a desirable outcome).
Leonhardt mentions Cass Sunstein and Richard Thaler, two professors at the University of Chicago who are writing a book about these very ideas. They call the concept libertarian paternalism. Here’s an abstract from a paper they authored:
The idea of libertarian paternalism might seem to be an oxymoron, but it is both possible and legitimate for private and public institutions to affect behavior while also respecting freedom of choice. Often people’s preferences are ill-formed, and their choices will inevitably be influenced by default rules, framing effects, and starting points. In these circumstances, a form of paternalism cannot be avoided. Equipped with an understanding of behavioral findings of bounded rationality and bounded self-control, libertarian paternalists should attempt to steer people’s choices in welfare-promoting directions without eliminating freedom of choice. It is also possible to show how a libertarian paternalist might select among the possible options and to assess how much choice to offer. Examples are given from many areas, including savings behavior, labor law, and consumer protection.
When used correctly, nudging can be a powerful tool to help people make desired choices without limiting choice. But it may be most powerful when we use it on ourselves. Buying individual bags of chips instead of giant bags to nudge portion control, or using direct deposit to nudge a savings goal. I’ll be giving a lot more thought to these ideas over the weekend.
