Gen­tle nudge

Per­haps it’s politi­cians, not us con­sumers, who could ben­e­fit from ‘choice ar­chi­tec­ture’ Ryan Bourne

The Daily Telegraph - Business - - Front Page - Ryan Bourne holds the R Evan Scharf Chair for the Pub­lic Un­der­stand­ing of Eco­nomics at the Cato In­sti­tute

Imag­ine a school can­teen. There’s a full ar­ray of food on sale, from healthy sal­ads through to choco­late fudge brown­ies. But the can­teen de­lib­er­ately puts the sal­ads in the chil­dren’s eye-line at the front of the counter. Econ­o­mists de­scribe such a choice as a “nudge”. Be­havioural ev­i­dence sug­gests food placed here is more likely to be pur­chased. The can­teen is en­cour­ag­ing healthy eat­ing with this in­for­ma­tion, but with­out co­er­cion. The chil­dren are, af­ter all, still free to buy choco­late fudge brown­ies, should they wish.

Richard Thaler, this week’s No­bel Eco­nomics Prize win­ner, has made a ca­reer ob­serv­ing how hu­mans de­vi­ate from per­fect ra­tio­nal­ity and how ap­ply­ing “nudges” can al­ter eco­nomic de­ci­sion­mak­ing. He has pre­sented com­pelling ev­i­dence that hu­mans tend to be bi­ased to­wards the sta­tus quo, value things more when we al­ready own them and are in­flu­enced by the fram­ing of de­ci­sions.

Nudgers aim to al­ter our “choice ar­chi­tec­ture” to in­flu­ence de­ci­sions but with­out re­strict­ing our free­dom to choose. The UK Govern­ment has a whole unit work­ing on this. The new pol­icy of auto-en­rol­ment in com­pany pen­sions, re­quir­ing an ac­tive opt-out, is a “nudge” at­tempt­ing to help peo­ple meet their stated de­sire for more sav­ing to­wards retirement. Par­tic­i­pa­tion in work­place pen­sions has in­creased by 37 per­cent­age points since it was in­tro­duced. Pro­vided they are based on good ev­i­dence, do not use heavy-handed bans or change the pay­offs to choices, Thaler ad­vo­cates such nudges as a form of “lib­er­tar­ian pa­ter­nal­ism” – guid­ance in de­ci­sion-mak­ing, which does not re­strain in­di­vid­ual free will.

But the con­cept is con­tro­ver­sial among econ­o­mists. Just be­cause some in­di­vid­u­als are not ra­tio­nal does not mean reg­u­la­tors and politi­cians have bet­ter in­for­ma­tion on their cir­cum­stances or pref­er­ences. Some now auto-en­rolled in pen­sion schemes, for ex­am­ple, would need and pre­fer more cash to­day, but the same bias to­wards in­er­tia pre­vents them from opt­ing out. In many mar­kets reg­u­lar feed­back, re­peat de­ci­sions and com­pe­ti­tion al­low peo­ple to ful­fil their pref­er­ences whilst over­com­ing in­di­vid­ual-level bi­ases. Reg­u­la­tors and politi­cians have their own mo­ti­va­tions, too, and can be prone to group­think and cap­ture by vested in­ter­ests. The lines between nudg­ing and shov­ing are quite of­ten blurry. Auto-en­rol­ment might be a nudge for the em­ployee, but it seems one hell of a shove to obliged em­ploy­ers threat­ened with fines for non-com­pli­ance.

The main is­sue with be­havioural eco­nomics, though, is that we ap­pear to be ap­ply­ing its in­sights to the wrong tar­get group. The book

Nudge has a whole chap­ter ex­plain­ing the con­di­tions un­der which they are likely to be ef­fec­tive: when the con­se­quences of choices are de­layed, choices are dif­fi­cult, the choice is made in­fre­quently, and when it is dif­fi­cult to pre­dict how the choice might af­fect our lives. Th­ese seem to ap­ply most aptly to de­ci­sions politi­cians and reg­u­la­tors make all the time on our be­half.

Yes, in­di­vid­u­als have their bi­ases. But politi­cians do too. They put the sta­tus quo on a pedestal, suf­fer group­think, seek to bribe the elec­torate, have a bias for bud­get deficits, con­tin­u­ously com­pli­cate the tax sys­tem and grow the size and scope of govern­ment. Ab­sent a con­sti­tu­tion that con­strains them, why not change the “choice ar­chi­tec­ture” they face?

We could, for ex­am­ple, make manda­tory five-year sun­set clauses the de­fault on new reg­u­la­tions to try to curb the growth of the reg­u­la­tory state. Politi­cians would have to rub­ber-stamp the con­tin­u­a­tion of each reg­u­la­tion, en­abling them to as­sess and re­flect on their ef­fec­tive­ness. The same con­cept could be ap­plied to all repa­tri­ated EU law.

The op­por­tu­ni­ties to ap­ply this think­ing are end­less. To de­ter crony­ism, large po­lit­i­cal do­na­tions could be anonymised through a cen­tral clear­ing house, leav­ing com­plete free­dom to do­nate to a party but damp­en­ing the in­cen­tive for politi­cians to ap­pease spe­cific donor in­ter­ests. An op­tion for politi­cians’ salaries to be tied to eco­nomic growth as de­fault could be added to their con­tracts too, with the free­dom for them to “opt out” and main­tain cur­rent ar­range­ments should they wish to sig­nal their lack of faith in their own poli­cies.

On the spend­ing side, zero-based bud­get­ing should be the norm in any com­pre­hen­sive spend­ing re­view. Any new pol­icy that raises net spend­ing above a thresh­old amount should trig­ger an OBR anal­y­sis on how much it will add to na­tional debt over the com­ing 30 years, which must be read out by the rel­e­vant min­is­ter in Par­lia­ment. “Tax trig­ger laws” could be passed too, mean­ing when rev­enue is much stronger than ex­pected, the de­fault would be to cut tax rates so rev­enues are sim­ply main­tained to meet govern­ment spend­ing. This would de­ter the per­ceived “wind­fall” ef­fects the Trea­sury can ob­tain from growth be­fore bud­gets, of­ten used to bribe the elec­torate, and would high­light the trade-off between spend­ing and taxes.

De­spite Thaler’s in­ter­est­ing work, his­tory sug­gests bad govern­ment pol­icy can be far more dam­ag­ing to our wel­fare than in­di­vid­u­als’ bi­ases. So why not ap­ply the in­sights of Nudge where it is most needed, and frame politi­cians’ choices to en­cour­age the salad diet for govern­ment?

‘Bad pol­icy can be far more dam­ag­ing than in­di­vid­u­als’ bi­ases’

Ryan Bourne

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