THE field of Behavioural Economics has brought forth a new stepchild: "libertarian paternalism", or "new paternalism". The brain child of law professor Cass Sunstein and famed behavioural economist Dick Thaler, the basic idea is that because various cognitive errors cause us to make decisions that are at odds with our "true" preferences, companies, and perhaps the government, should set operational parameters on our lives that nudge us towards realising those true preferences.
The most famous example of this is 401(k)s, the American tax-advantaged savings programme administered through companies. Most companies had made the default that people weren't enrolled, for liability reasons. It turns out, however, that this substantially lowers participation rates. Since the plan has to have some default, Messrs Thaler and Sunstein argue, why not make it a modest contribution, say 5%?
I attended a fascinating luncheon at the Cato Institute today at which Mario Rizzo, a professor at NYU, denounced this idea in no uncertain terms. In part, because it too easily shades into the old kind of paternalism. We might start by arguing that cafeterias should be required to put the fruit displays before the trays of sweets (which evidence shows causes more people to choose a healthy dessert), because after all, the fruit has to go somewhere. But then why not require them to order the healthier sorts of cakes? After all, they can't order everything, so why not "nudge" those choices?
But he also challenged the notion that there are "true" preferences that should supercede our temporary ones. The behavioural economics arguments generally rest on our faulty timebinding skills. The "true" self--the one that has duration in time, as well as space--would like to be thin, well excercised, happily married, and loaded up with retirement savings. But unfortunately, it delegates responsibility to the temporary self, whose brain chemistry has been programmed by evolution with overwhelming signals to indulge now!
It's not clear, however, what that means. Is the true self something more than the sum of the temporary selves, all of whom enjoyed indulgence more than austerity? Our brain systems seem obviously programmed with hordes of desires that fight against a bourgeois economic, moral and social system that values thrift and moderation in all things. But those brains, with their various interlocking ad hoc subsystems, are, self-wise, all we've got; I'm not sure it's meaningful to try to discuss preferences as if they could somehow exist apart from the admittedly imperfect devices we use to generate desires, such as our dopamine reward networks.
That said, some of the professor's critiques are too strong. Behavioural economics has shown people having different responses to rewards that are mathematically identical, depending on how the question is asked. That should not be; and to the extent that we think we can tell that one answer or another is better in a majority of cases, it's not ridiculous to think that we might want to carefully choose how we ask those questions. Of course, we'd also want to ask how the deciders are overcoming those cognitive biases the rest of us suffer from.
Entertaining copy - but somewhat unfair. For an explanation and defence of libertarian paternalism see:
I harbour no major concerns with the libertarian paternalist approach. Trying to correct for consumer or investor myopia, information asymmetries, well-established cognitive failings etc through structuring incentives and choices differently is surely in most cases preferable to the main alternative - greater regulation or higher public spending.
In any case, the scope for libertarian paternalism to reshape public policy has been exaggerated both by friend and foe. It's an interesting approach, to be sure - but no panacea for many social and economic ills. Let's not get carried way by the hype.
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