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The wisdom of Tim Harford
Libertarian paternalism is the brainchild of Profs Thaler and Sunstein, but nudging is not. Nudging is good architecture, good design or good marketing and most nudges have been invented by private sector companies. Prof Thaler’s best policy idea – a pension plan called Save More Tomorrow – was tried by a manufacturing company rather than a government.
Effective nudges are so common in the private sector that politicians should be asking themselves why.
Here is more.
Posted by Tyler Cowen on August 23, 2008 at 07:23 PM in Economics | Permalink
Comments
When did the FT put up a registration wall? Since I don't want to, I have to guess what's the point (the wisdom) that nudges are ONLY good when they are private?
Posted by: odograph at Aug 23, 2008 8:27:29 PM
Remove the last bit of the URL after "html" and it takes you to the full article.
Posted by: senderista at Aug 23, 2008 9:29:44 PM
See my review of Thaler and Sunstein at:
http://www.cato.org/pubs/regulation/regulation_currentissue.html
Scroll down and click on the book review.
Posted by: David R. Henderson at Aug 23, 2008 11:00:08 PM
Governments are lousy at nudging- when the nudge doesn't work (which is usually the case), they whack you over the head.
Posted by: Yancey Ward at Aug 24, 2008 12:04:42 AM
senderista thanks for the tip
Posted by: Peter K at Aug 24, 2008 3:09:03 AM
"Nudging" sounds like a nice idea in theory. It may even be a good idea for big things like pension provision.
But in practice, it doesn't seem to work so well. Like this attempt to reduce our salt intake in fish'n'chip shops by distributing salt-shakers with only one small hole.
In real life, some people are just shaking it for longer, others are getting annoyed, others are simply unscrewing the tops and dumping even more salt on than before.
Meanwhile, the actual health benefit from reducing salt is debatable, and the meal basically consists of a enormous lump of saturated fat anyway.
In practice, I see "nudges" becoming giant, unpleasant, heavy-handed shoves with just a new excuse behind them.
Posted by: TheophileEscargot at Aug 24, 2008 3:25:33 AM
Thanks senderista. Now that I see the paper it seems a strange combination of bald assertions ("most" bad decision are made in government) and then circular arguments branching from there.
The US has sought balance between the public and the private for centuries (the UK even longer). I think we've done best when we approached that way.
Lefties who demonize business and rightists who demonize government don't really help us there.
What we should be looking for are loose frameworks that help us find moderate solutions, without a heavy hand, and allowing for normal (human) foolish decisions inside and outside of government.
The Behavioral Economic research this "nudge" stuff is drawn from shows that we are not perfect, but we are human, and sometimes differing for the Rational Actor model in charming ways.
Most of us are more cooperative than we have to be, for instance ..
Posted by: odograph at Aug 24, 2008 5:47:08 AM
The basic principle of Nudge is surely significant and inarguable. Governments should always try to use voluntary means to achieve their ends before resorting to less efficient and less libertarian solutions - ie those involving compulsion, threat of punishment or significant public expenditure. At the moment, governments tend to default to expenditure or legislation without giving a moment's thought to what can be achieved by Nudging.
A simple fact I mentioned in the Spectator this week. VAS road signs (which flash your speed at you if you are breaking the speed limit) cost perhaps 95% less than a speed camera to run but prevent double the number of accidents. And yet for years the assumption of government was that the best way to improve driving was by threatening to punish people.
I don't agree with Harford's assertion that markets are always good at Nudging. Most of them seem far more eager to run flashy advertising than to seek behavioural solutions. In some ways I am very grateful for this - I work in advertising - but I find it intellectually frustrating nevertheless.
Posted by: Rory Sutherland at Aug 24, 2008 7:19:34 AM
The basic principle of Nudge is surely significant and inarguable. Governments should always try to use voluntary means to achieve their ends before resorting to less efficient and less libertarian solutions - ie those involving compulsion, threat of punishment or significant public expenditure. At the moment, governments tend to default to expenditure or legislation without giving a moment's thought to what can be achieved by Nudging.
VW introduced a new 50-state diesel Jetta recently. It costs about the same as a Prius, while being smaller, requiring more expensive fuel, and getting lower mileage.
It is also getting a $1,300 Federal Income Tax Credit. The Prius has gotten equally stupid tax benefits.
I there any way we can nudge these things without such public expenditure? Or, at these fuel prices, do we even need to?
Posted by: odograph at Aug 24, 2008 8:04:17 AM
Note: some have suggested that all cars simply be required to display MPG since last fill-up, and that this would be enough to nudge the market.
Posted by: odograph at Aug 24, 2008 8:06:32 AM
Here is a nudge that government could do and no one else could:
Put a tax on oil at the pumphead or the shipping port. Put all the tax money into a central fund and distribute it monthly to taxpayers.
The tax could start small, say at $20/barrel, and gradually rise to a more reasonable $100/barrel. Businesses that use oil would pass their extra costs on to consumers. But consumers would have the money to spend as they liked, and would probably prefer to directly conserve gasoline etc when they could, and would prefer products that were produced with less oil.
Keep it simple. 170 million voters, each of them gets 1 part in 170 million of the pot. This redistributes money to people who use less oil, which is as it should be. It penalizes single parents, legal and illegal aliens, and people with large families. Too bad, maybe we can palliate those problems some other way.
All of the money should be redistributed, so that it would take funding to run it. Not a lot of funding, but it's easier to defend the program from revenue raids when all the money is distributed than when only most of it is.
Oversimplifying the situation, say that you use 40 gallons of gasoline a month, and that gasoline costs you $320. But the government deposits $200 in your bank account. You haven't been directly hurt by the extra tax on gasoline, you can spend the government money at the pump and nothing has changed. But every gallon of gas you save, puts $8 in your pocket. You have an incentive to conserve gasoline no matter how little you use.
But say that you use 200 gallons of gasoline a month. That costs you $1600 and you only get $200 from the government. Your money is given to people who use less, and you have a big incentive to conserve gas. It's hard on you, as it ought to be. You are the problem.
Posted by: J Thomas at Aug 24, 2008 10:39:14 AM
Profs Thaler and Sunstein talk about nudging people into 401 Ks. This is seen as a good thing. But many small firms in this country offer awful 401 k plans. High fee plans with few good options sold to employers who lack the skill or training to understand what they are doing or the cost structure of such plans.
Yet the government, which will nudge you into employer plans, does very little to monitor these plans. We lack effective legislation which requires full and open disclosure. Investment firms are allowed to shield or finesse their fees in such a way that, I think, a majority of people cannot really understand. So this new nudging plan encourages more participation into 401 k plans, as if that is an objectively good thing, but does nothing to assure that the plans are effective at actually helping you retire. Government has a role in helping to keep people informed and thus encouraging free exchanges. But using the power of government to nudge people into 401 K plans while making it very difficult for people to get away (short of getting a new job) from very bad plans that some employers offer.
Posted by: DanC at Aug 25, 2008 9:09:34 AM
DanC: Yet the government, which will nudge you into employer plans, does very little to monitor these plans. We lack effective legislation which requires full and open disclosure. Investment firms are allowed to shield or finesse their fees in such a way that, I think, a majority of people cannot really understand.If I remember correctly, the book does include requirements for clear reporting of fees associated with 401k's (and many other fincial services). It is possible their discussion of clear disclosure requirements was limited to other financial services, but even then it isn't a big step to tack on the same requirement to any 401k regulation.
Posted by: Levi at Aug 25, 2008 12:18:27 PM
"VW introduced a new 50-state diesel Jetta recently. It costs about the same as a Prius, while being smaller, requiring more expensive fuel, and getting lower mileage.
"It is also getting a $1,300 Federal Income Tax Credit. The Prius has gotten equally stupid tax benefits."
It seems to me foolish to pay people a tax credit to buy a new car. The car it replaces may not be all that bad. The subsidy may go to people who drive very little. The manufacture of a new car patently imposes environmental costs.
But what of the Nudge-based solutions?
One interesting idea - here sitting under the category of Feedback - is to encourage Insurance companies to offer alternative tracker-based policies where you pay your insurance by the mile. Anything which shifts the costs of car ownership away from annual fixed sums and towards per-mile costs would be an example of better feedback (ie you pay the cost of the journey at the time you make the journey).
Here in the UK Norwich Union offers something of this kind. There is a prediction that, if universal, these policies would reduce annual car mileage by 10% and make other forms of transportation (eg trains) relatively more attractive. If city driving is charged at a higher rate (per mile it should be, as the odds of an accident are vastly higher) then this may also help reduce congestion.
http://www.guardian.co.uk/money/2006/oct/14/motorinsurance.insurance has more on this.
One interesting detail is that this makes possible a policy for young people where the insurance cost per mile is tolerably cheap for young people if they are driving during the day but astronomically high late at night.
Posted by: Rory Sutherland at Aug 25, 2008 2:01:08 PM
To Levi
My concern is that clarity is needed more then nudging. But while no politician will find much political opposition to nudging people to greater retirement savings, special interest have and will fight attempts to simplify and improve the current retirement system. Nudging against inertia is no big deal. Forcing businesses to change the way they make profits, very difficult. Doing the nudge, without first fixing problems, does little to help average investors but will increase profits for some who sell these products. And I think society gets a bigger bang from reform then nudging.
For me it is related to claiming success if you send more people to college. But does society benefit from this or should some have been encouraged to go into skilled trades etc.? Or claiming that increasing home ownership is a universal good, even if it leads to financial ruin for some marginal players.
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Posted by: 環保袋 at Dec 9, 2008 2:43:07 AM
I mentioned in the Spectator this week. VAS road signs cost perhaps 95% less than a speed camera to run but prevent double the number of accidents. And yet for years the assumption of government was that the best way to improve driving was by threatening to punish people.
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