Nudge, Nudge, Know What I Mean?

• Posted by Jeff Carter
• on April 11th, 2010

Nudge is a book written by Richard Thaler and Cass Sunstein. If one name sounds familiar to you, it’s because Mr. Sunstein is deeply involved in the Obama administration. He is the Director of Information and Regulatory Affairs, or DOIRA. The lead regulator in the entire Obama administration. Previous to this post, Mr. Sunstein was a Professor of Law at the University of Chicago. It is not a stretch to say that he would be allied with the more liberal side of the law. Not exactly a poster boy for the Federalist Society! Mr. Thaler is currently a Professor of Economics at the Booth Graduate School of Business. The Booth School is at the University of Chicago as well.  If there is a school in the world that does better in economics, I have yet to see it. For your edification, Booth encourages debate. Classical economics argue with Keynesians and Behavioralists there. Great for academia, and hopefully for the public at large.

Nudge is a very interesting book in many ways. If you boil down Behaviorial versus Classical economics into a few short distinctions, they are these. Behaviorialists don’t believe that all humans make rational decisions. Some behave very irrationally.
Behaviorialists believe in “choice architecture”. The way you design things causes certain behaviors to happen, even if you as an individual don’t necessarily want them to happen. Behaviorialists believe in the market, but don’t believe that all information is included in the price of the market, and that markets behave irrationally. So markets are to be watched, but not implicitly trusted.

There are several other distinctions, but you would have to go deep into an entire PhD dissertation to illustrate them.

Why is Nudge critical for you to understand? Obama is using the ideas presented in “Nudge” to revamp the whole of government regulation. These ideas are not necessarily proven to work. Application of many of them could lead to a very slippery slope, in which government becomes more of a Stasi like presence than purely a regulator designed to help the common good. Because of this clear switch, it’s important to understand what they are trying to do.

Professor Thaler makes a great point in his argument for Behavioral Econ, “If you are going to have choice architecture, you might as well make it good choice architecture.” This is very hard to argue against. A simple example would be a lunch line. Marketers know that if you put things at eye level and easy to get at, you will sell more of these types of things. A typical person putting together a lunch line might haphazardly put things along the lunch line in the easiest to put together fashion, ending with the cash register. Not much thought goes into the architecture of the lunch line. A behavioral economist would first decide what you wanted to achieve with the lunch line. Then, design a line to achieve that goal.

Let’s assume that you wanted to achieve the goal of healthy eating, and we thought healthy eating meant more fruits and vegetables. The behaviorist would put all the fruit and vegetables early on in the line, and at eye level. They would make junk food hard to get at, cumbersome to put on your tray. Diet soft drinks, water, teas would be easy to put on your tray, sugared drinks and juice hard to find. At the end of the day, the lunch line would sell more healthy food and people would conceivably be “healthier”. Very hard to find fault in that type of logic because we all assume that people want to be healthy.

However, think of application of the same idea in a different way. Almost everyone knows that incandescent light bulbs burn more energy than florescent light bulbs. A classical economist wouldn’t care which was offered for sale, they would let the consumer decide what they wanted to use. Consumer demand would drive what retailers stocked at the store. A “soft” behaviorist might put information in big letters on the side of the box telling you how much you would save by using the florescent, and how you would be saving energy for America. A little information might nudge you to make a different choice. The incandescents would be on the lowest shelf, and hard to stoop down to get. But, if you didn’t choose florescent over incandescent, the soft behaviorist wouldn’t be alarmed. A “hard core” behaviorist would simply ban the sale of incandescent bulbs, eliminating choice. Big brother decides for you. If you wanted incandescent, it would be illegal for you to use them. Kind of alarming when simple choices you take for granted become crimes.

In the last scenerio, there is still a market. Competing florescent bulb manufacturers will compete for your business. They will continue to innovate the bulbs to make them better. However, your choice has been eliminated from the market. The question becomes, is it a real market or not? Classical economists say it’s not. They like to see how people react in a market, warts and all. The range of behaviors interacting in a big marketplace let the invisible hand decide what the price is, and ultimately what the demand and supply curves look like. Behaviorists, soft core or hard core, use influence to “nudge” the market to where they think it should be. Not all markets are really pure markets.

Suppose by regulatory fiat you had to install a thermostat in your home that transmitted information to you, and to a central collection agency. The information to you would be very useful. You would have simple, easy to read info on how much it cost to heat or cool your home. When you decided to increase the a/c on a hot day, the thermostat might beep and tell you how much money it would cost you to change the temperature. Useful stuff because it helps you make a better economic decision.

One day, the “guvmint” decides that it’s best for America to set our summertime thermostat temp at 72 degrees. Their reasoning is that America will use less energy. One day it’s blistering hot, and you decide to set the temp in your home at 66 degrees. The first thing that would happen is the thermostat would beep. You are compromising America, and increasing your costs by setting the temp so low. But, you don’t care. It’s a hot and steamy, and you want quick relief. The thermostat transmits the change in temp to a central information system monitored by a regulatory agency. That agency might telephone and tell you to raise your temp. Or, it might levy a tax because too much energy was being used. Vary the temp from the centrally approved temperature enough, and you could be hauled into a court that would force complicity with the regulation. Creepy stuff.

This is where the altruistic ideas of Nudge get downright totalitarian. My confidence that a government bureaucrat wouldn’t travel quickly down the slippery slope of creepiness is low. The current occupant of the office of Secretary of Transportation, Ray LaHood, added to the creep factor when talking about Nudge with regard to driving.  He proposed a Vehicle Mileage Tax (VMT).  Obama rejected it, but I think this trial balloon was done to see the public attitude toward these types of taxes.  I don’t believe anything out of any administration, Republican or Democrat, is done in a vacuum. Since the Obama administration has a propensity for central planning and control, Behavioral economic ideas could become very dangerous in their hands.

This attitude of “Nudge” restricts your freedom.  America was invented as a country of limited government.  Our founders understood how governments, no matter their good intention, could degrade into tyrannical regimes.  This is why the Constitution is written in the way it was.  It’s why government is structured as it is.

Economics also has various forms.  Free market, classical, invisible hand, economics is sometimes messy.  But, it always works.  Can Behavioral economics make it work better, or faster?  In certain situations it might.   But, in every case, you give away freedom to achieve speed.  Plus, instead of the free market deciding, a core or central planner decides what is best for the market.  You are subject to the whims of a central planner.  It just depends on if the opportunity cost of less freedom, is worth the desired speed of outcome.  In the interest of caution, I’d prefer to cast my lot and future with the messy, but ultimately more efficient, invisible hand.

Thanks for the link Jesper Astrom.

• Tweet

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus