Julian Le Grand, “Future Imperfect: Behavioral Economics and Government Paternalism.” Review of Behavioral Economics 5: 281–290, 2018.
• Nudges and even stronger government interventions are often justified on the grounds of allowing long-run, more considered or "truer" individual preferences to assert themselves. But there are problems with identifying and privileging any one set of preferences. This article offers two justifications for paternalistic interventions that do not rely on identifying true or long-run preferences.
• The defense of paternalism offered here applies (as is usually the case in economics) to means-related paternalism, not ends-related. People's goals are taken as given (and, implicitly, rational); can policies be designed to empower people to better achieve those goals?
• What if the government sees people engaging in an activity like smoking that the government believes will have future costs for smokers that with a high probability will more than compensate (in terms of the smokers' own values) for the increased value they enjoy from smoking now?
• The government might reasonably want to dissuade such smoking, but why would smokers make such a mistake? Maybe they lack information, so there is much to be said for ensuring that accurate information is readily available – but this is not the same as justifying a smoking tax or ban. Maybe smokers use a different discount rate than does the government in comparing current with future costs and benefits – again, this difference should not license coercive interventions by the government.
• But maybe (drawing upon Le Grand's 2015 book with Bill New) the problem is that smokers suffer from one or more "reasoning failures": "limited technical ability, limited experience or imagination, limited willpower and limited objectivity [p. 286]." In particular, can a young smoker imagine a realistic portrayal of herself as a 65-year old? The failure of imagination is not a problem of too little information about the health risks of smoking; rather, it is a lack of knowledge of how the well-being of future selves will be affected by current smoking. A paternalistic policy can be justified not only on the basis of better knowledge of true or more-considered preferences, but on a better understanding of health effects on well-being.
• A second defense of paternalistic interventions might be to consider how a person's future selves might contract with current selves to influence current decision making. Government could serve as a stand-in for those underrepresented future selves. Now the justification for a paternalistic intervention is market failure, in that future selves generally are unable to participate in market transactions that nevertheless implicate their interests.
• Le Grand adapts an example from a 2018 book by Robert Sugden. A young person inherits from an uncle a wine collection, though she has little interest in wine, and does not place much value on her inheritance. But her father suspects that in a few years the young person will feel differently. So he could offer her a low price for the wine today (which she will accept), and after a few years, offer to sell it back to her at a higher price. If the father was right, she will agree to both transactions, and everyone is happy.
• For goods which, unlike wine, cannot be transferred, the government could arrange a similar (though not voluntary?) deal, by subsidizing smoking avoidance today, with the subsidy repaid by taxes in the future on the now older non-smokers. But does this "contractarian approach" avoid the identification of a true or long-term preference? Le Grand thinks that it does not, as the (imposed) subsidy is designed to override the young person's current preferences.
George Loewenstein and Nick Chater, “Putting Nudges in Perspective.” Behavioural Public Policy 1(1): 26-53, 2017
• Nudging is popular, but perhaps its unintended consequences are worrisome; perhaps, for instance, nudges have crowded out better policies.
• The standard nudge involves a response to a problem that itself is a result of a behavioral issue, a rationality shortfall. But there is no reason that the best type of policy response – whether traditional, behavioral, or a hybrid – should match the condition that gives rise to the problem. Some rationality shortfalls might best be handled with taxes or regulations, not nudges…
• …though behavioral ideas can help package those taxes or regulations in ways that can maximize their impact.
• One important area of concern involves how to counter the nudging undertaken by profit-maximizing firms, often aimed at taking advantage of consumer rationality shortfalls.
• Many social problems can’t be explained by behavioral issues that should be roughly constant over time and in different areas. These problems perhaps require a structural response, not a nudge. The recent increase in obesity cannot really be due to an increase in present bias; nor will it be fixed by better placement of healthy products in stores.
• Don’t let nudges distract you from seeking more comprehensive solutions. Loewenstein and Chater go on to examine three policy areas from their "perspective."
• Smoking: externalities, internalities, and depredations by sellers all motivate policy responses. Those responses include high taxes, advertising and marketing controls, product placement controls, graphic warnings, public smoking bans – and the combination is effective.
• Obesity: internalities, budgetary externalities, and the behavior of those profit-motivated sellers provoke policy responses. The main response is of the “traditional economics” variety, information provision, and it is not very helpful for what is after all a structural problem, not a big change in behavioral biases or time discounting. Perhaps bans on non-linear pricing are called for?
• Retirement Savings: Internalities, and the behavior of firms like payday loan companies, exacerbate the extreme savings shortfalls that exist. Successful interventions have been behavioral, especially defaults and automatic escalation of savings. Tax breaks are not very helpful, but much more needs to be done.
• Consider big issues, such as inequality, climate change,and employment overhauls: all of these problems need traditional economic responses,and perhaps some hard paternalism – but there still are plenty of contributions that behavioral science can make.
Professor Thaler responds with “Much Ado About Nudging,” on the Behavioural Public Policy Blog, June 2, 2017
• No one really believes that nudges are a panacea. In Nudge, we just want to inform policy with behavioral insights.
• Likewise, everyone agrees that present bias is not the sole cause of obesity.
• Don’t undersell the cumulative impact of many small behavioral interventions, including when applied to big problems like climate change.
“My own approach to thinking about such problems is to conduct what I call a ‘choice architecture audit’, the goal of which is to find the most critical decisions various actors have to make, as well as the potential levers (behavioral and economic) that policy makers can use to improve outcomes.”
• There is much to be said for nudging (soft paternalism) over hard paternalism when it comes to dealing with internalities. Either type of policy will push some subset of people in an inappropriate direction: how hard do we want that push to be?
• We know bureaucrats are biased and often mistaken: do we want them to be hard or soft paternalists?
Julie Moschion and Nattavudh Powdthavee, “The Welfare Implications of
Addictive Substances: A Longitudinal Study of Life Satisfaction of Drug
Users.” Journal of Economic Behavior & Organization 146: 206-221, February 2018. [This outline is based on the pre-publication version, pdf available here.]
• People in general seem to have difficulty in predicting what will make them happy.
• It may be that drug users mispredict the utility that they will get from drugs, in contrast to the rational addiction approach.
So, the authors look to see if people who start to use drugs sometime in the previous six months are happier or less happy. If they are less happy, then this suggests (but by no means proves) that drug use is not rational, but results from mispredictions of the hedonic payoff from drug use.
• Mispredictions of future utilities might stem from focusing illusions or projection biases. If you are feeling blue today, focusing illusions and projection biases might tilt you, excessively, in the direction of drug use.
• A higher future price of the addictive good lowers current utility for rational addicts, but increases it for mispredicting addicts, even though both “types” of addicts respond to the future price increase by decreasing current consumption.
• Some (but not all) previous work has found that higher cigarette taxes or public smoking bans have been associated with increased subjective well-being for (predicted) smokers. [Even sure-fire evidence that ex-smokers are happier than they were when they were smoking does not undermine rational addiction theory: rational addicts know that they will be happier if they give up smoking, they just find the costs of quitting to be too high to justify the transition.]
• The longitudinal, bi-annual data comes from a housing insecure Australian population, 2011-2014, with n exceeding 1,100.
The life-satisfaction question is of the 0-to-10-scale, “all things considered” variety. This is the dependent variable, while the main independent variables concern past, current, and future substance use.
This sample is more than four times as likely to smoke as the average Australian – but is less likely to engage in heavy drinking.
• The data reveal that daily smoking is quite persistent over six-month periods, and relatively easy to initiate.
Weekly illegal drug use is not very persistent, though cannabis consumption is quite persistent.
• Lower life satisfaction seems to precede daily smoking, daily pot use, and weekly illegal drug use, with the illegal drug use result being most robust.
Current (high) consumption of any of the substances, including alcohol, seems to lower current happiness. Weekly street drug use is similar to getting a divorce, in terms of life satisfaction.
The negative effects of illegal drugs tend to be worse for women and for the less educated.
Cass R. Sunstein, “People Prefer System 2 Nudges (Kind Of),” July 19, 2016. Duke Law Journal, Vol. 66, 2016. [The outline here is based on an earlier version, that of February 19, 2016.]
• In Kahneman’s terminology, System 1 is the automatic, intuitive part of our decision making, whereas System 2 represents our more considered (though not necessarily better) thoughts.
• Some types of nudges, such as graphic labels on cigarette packages or the selection of defaults, tend to be aimed at affecting System 1 responses. Other nudges, such as the provision of better information on nutrition, engage with System 2. System 2 nudges help people “exercise their own agency [p. 5],” that is, make better considered decisions.
• Sunstein arranges for a survey to be administered to seven groups of Americans, with more than 400 people in each group; they are paid for their participation.
• The participants are presented with four issues -- savings, smoking, clean energy, water -- and two alternative approaches, one System 1 nudge and one System 2 nudge, for each of the issues. The majority tends to prefer System 2 nudges, but a sizeable minority feels the other way. Democrats seem slightly more likely than Republicans to support System 1 nudges.
• If told that the System 1 nudge is significantly more effective, about 12% of folks switch to preferring the System 1 nudge; precise quantitative evidence of superior effectiveness does not seem to increase any further the attractiveness of System 1 nudges. When folks are told that System 2 nudges are more effective, that information has no effect on overall preferences between the options.
• Sunstein also explores a second set of three, more ideologically charged issues: voter registration, childhood obesity, and abortion. For voter registration and anti-obesity, a majority favor System 1 nudges. For dissuading abortions, most people prefer System 2 nudges, even when System 1 (show fetus photos) is said to be more effective.
• Alternatively, some people like System 1 nudges, even when they are told that those nudges are less effective. It seems that when people feel strongly about an issue, they support System 1 nudges that push their side of the issue.
• Sunstein makes a meta-observation, that perhaps our brain's System 1 likes System 2 nudges, but sometimes System 2 overrides that preference. Note that often System 1 nudges are fairly easy to implement, such as by setting a default, for instance.
George Loewenstein, Cass R. Sunstein, and Russell Golman, “Disclosure: Psychology Changes Everything.” Annual Review of Economics 6: 391–419, 2014 (pdf).
• A good deal of information is disclosed through government mandate, and much of this information would not be disclosed in the absence of the mandate. The information would not be disclosed perhaps because it would not benefit sellers, or because information has a public good aspect that lowers the incentive for any single private entity to produce and disseminate the information.
• Mandated disclosures involve some subtle costs, such as the time they take for consumers to read them, the subsequent loss of attention to other pieces of information, and even the emotional costs associated with graphic warnings, for instance.
• Mandated disclosures tend to occur when there are significant gaps in the information known to sellers and that known to buyers, and when the informational disadvantage threatens the interests of consumers. Disclosure also can be used to help consumers overcome their own departures from rational decision making: perhaps “behavioral market failures” provide a rationale for policies to limit internalities.
• Some information – such as a physician’s assertion that a certain treatment is needed – is not verifiable, and hence problems connected with this information cannot be solved simply through disclosure. But physicians might be required to disclose their interests (such as receiving royalties from the recommended treatment) if those interests are not fully aligned with patient interests.
• Disclosure of conflicting incentives does not fix every problem. The disclosing agent might view the disclosure as allowing for carte blanche, for any sort of self-interested advice. The recipient (principal) might feel compelled to follow the advice, to avoid the inference that the advice giver is viewed as untrustworthy.
• The technology of disclosure – who makes it, when, and what effort is made to render it noticeable – helps to determine its impact.
• Sellers have little reason to put effort into those dimensions of a good that potential consumers do not pay attention to. A producer of a less deadly cigarette might not want to disclose its relative safety, because to do so might make the fatal consequences of smoking more salient.
• Warning labels don’t seem to accomplish much; more generally, see Omri Ben-Shahar and Carl E. Schneider, More Than You Wanted to Know: The Failure of Mandated Disclosure, Princeton U. P., 2014.
• The absence of information should best be met, perhaps, by assuming the worst, as otherwise the information would have been provided. But people often do not draw this inference, even when it is rational to do so. This presents a potential rationale for mandating disclosure.
• Sometimes we want to be ignorant, sometimes information can lower our utility – a tendency that motivated the May, 2015 on-air radio killing of a young rabbit in Denmark.
• The tell-tale heart effect: mandated disclosure might cause producers to up their game, even if no consumers pay attention. Revelation of calorie counts might lead to lower calorie offerings, even if consumers do not respond to the calorie information. Maybe producers suffer from a spotlight effect, a belief that people are observing their disclosures more closely than really is the case.
• Simplified information, like restaurant health grades, is often more valuable to consumers than is more finely grained information.
• Comparative information – how does my energy use stack up against my neighbors? – might be more influential on energy usage than other types of usage disclosures. But the potential for perverse outcomes exists, too.
• Personal policies for information disclosure or non-disclosure on social media, for example, do not seem to be fully rational.
Adam Oliver, “Nudging, Shoving, and Budging: Behavioural Economic-Informed Policy.” Public Administration, 2015; doi: 10.1111/padm.12165.
• There is no accepted definition of libertarian paternalism or nudges. As a result, many policies are described to be behavioral despite having little claim to that moniker. You should worry about being pro-nudge, because the nudgers might go way beyond what you think you are signing up for.
• Oliver claims nudges should present “no” burden on the rationals while attempting to correct an internality.
• Loss aversion is not something you choose, but something you are, like a White Sox fan [Okay, the White Sox are not actually mentioned in the article.]
• Libertarian paternalism concerns internalities, respects liberty, and employs behavioral means. The British Behavioural Insights Team goes beyond nudging: sometimes it addresses externalities, as with organ donation. Having teenagers mentor toddlers to reduce teen pregnancy is not an obvious behavioural policy, nor is the provision of information about the drinking habits of one’s peers.
• Straight out paternalism, without the libertarian adjective, is a “shove”; smoking bans are shoves.
• A “budge” is a behaviorally informed regulatory intervention, designed to counter the misleading nonsense thrown up by profit-seeking corporations, like the payments made by candy makers to grocery stores for check-out line product placement.
• Maybe it is the opportunity to choose, and not the utility derived from the choices, that is the real measure of welfare.
Alberto Alemanno, “Nudging Healthier Lifestyles: Informing the Non-communicable Diseases Agenda with Behavioural Insights.” Chapter 14 in A. Alemanno and A. Garde, eds., Regulating Lifestyle Risks: The EU, Alcohol, Tobacco and Unhealthy Diets, Cambridge University Press, 2015.
• The European section of the World Health Organization has begun an initiative to combat “lifestyle” non-communicable diseases: those associated with tobacco, alcohol, and goods high in salt, sugar, and fat.
• Regulations that commonly are applied to lifestyle goods include mandatory information disclosure; marketing limitations; taxes and other devices to reduce availability.
• Behavioral economics-style nudges fit well with lifestyle issues. They tend to be low cost and preserve individual choice. Lifestyle nudges might include disclosure rules; default settings; and, simplification. For instance, the extremely graphic photos required on cigarette packs, and nutrition fact panels, are nudges of a sort.
• The European Union (oddly) is requiring that cigarette packs not disclose tar, nicotine, and carbon monoxide content. The rationale is that such information might lead smokers to think that some cigarettes are less harmful than others. (There is some evidence that consumers smoke low tar and nicotine cigarettes more intensely, undoing any relative health benefits.)
• Thaler and Sunstein’s “publicity principle” (borrowed from John Rawls, building on Kant) is that governmental nudges must be supportable if everyone is informed about them. If people will be upset if they were misled, even if the misleading resulted in better choices for them, then the misleading is wrong.
• Much of the evidence for nudges comes from the laboratory, and might not work in the real world. Or, a nudge might work at first, but then become less effective over time. Notice that marketing experts think that nudges work, however.
M. Ryan Calo, “Code, Nudge, or Notice?” University of Washington School
of Law Research Paper, February 7, 2013.
• Code (including physical and virtual architecture), nudges, and information disclosure (notice) can be alternatives to formal law. They can alter behavior, but they might not include the procedural safeguards, nor the transparency, that commonly accompany law. Some nudges, for instance, can be invisible and unknown to the public. Like placebos, they might even lose their effectiveness if they were known.
• Consider driving. Speed bumps are a type of “code; visual illusions like those lines on Lake Shore Drive are a type of nudge; and, “kids at play” signs are a species of notice.
• If code precludes violations, then the potentially beneficent role of civil disobedience is undermined. Code makes some types of legal activity impossible; for instance, some fair uses of copyrighted material are ruled out by Digital Rights Management techniques.
• Calo invokes a rather singular definition of “nudges,” such that they necessarily take advantage of decision-making biases (such as the status quo bias) to push people in a preferred (by whom?) direction. Code rebiases, as opposed to debiases.
• Does frequent nudging lead to infantilization?
• Notice works where informed decision making works (and informing works, too). Some scholars take a very negative view of mandated information disclosure, on the grounds that it is frequently ineffective and even counterproductive.
• Are extremely graphic cigarette warnings a case of information provision (notice), or nudge? The answer might determine the constitutionality of mandates for such warnings.
Michael A. Sayette, George Loewenstein, Kasey M. Griffin, and Jessica J. Black, “Exploring the Cold-to-Hot Empathy Gap in Smokers.” Psychological Science 19: 926-932, 2008.
• The cold-to-hot empathy gap is the notion that people (when in the cold state) underestimate the extent to which visceral factors will impact their future decisions (made in the hot state).
• The experimental set-up: smokers know that at the next gathering they will be in a craving state. They are asked to precommit to a willingness to pay (wtp) to accept craving (in the form of delayed access to a smoke). Some participants are asked for this wtp when they are craving, and others are asked when they aren’t.
• In session 2, now with everyone in the hot state (craving), they are given a chance to revise their wtp.
• Results: people in the cold state in the first session revise upward their wtp in the second session: they seem to suffer from a cold-to-hot empathy gap. The cold group also seems to underpredict the depth of their future cravings.
Gary S. Becker, Michael Grossman and Kevin Murphy, “Rational Addiction and the Effect of Price on Consumption [pdf].” American Economic Review 237-241, May 1991.
• This paper provides a capsule summary of what might be considered the non-behavioral model of addiction, the approach to addictive behavior based on full-on standard rational economic choice; the original, fuller treatment is Becker and Murphy (1988). (A still earlier precursor is Stigler and Becker (1977), "De Gustibus Non Est Disputandum.")
• A consumer's preferences can be described by the utility function U(t) = u[c(t), S(t), y(t)], where y is a non-addictive good, c is an addictive good, and S is the stock of addictive capital; t represents the time period. c(t), therefore, is consumption of the addictive good in time period t.
• Reinforcement: the higher the stock of addictive capital, the higher the current consumption of the addictive good. The stock of addictive capital S comprises past consumption of the addictive good, though this stock depreciates at a constant per period rate, so if someone chooses to go cold turkey, S would wither away over time.
• Rationality here, as elsewhere, means having fixed, forward-looking preferences.
• There exists a low-consumption, unstable steady state, as well as a high-consumption (addicted), stable steady state. At a steady state, each period's chosen (optimal) consumption of the addictive good (c) equals the depreciation in S, so that the next period, the consumer wakes up with an unchanged stock of addictive capital -- and hence once again chooses the same consumption c, and so on.
• Implications: long-run elasticities are greater in magnitude than short-run elasticities; current consumption responds to anticipated future price changes; past, current, and future consumption are mutually complementary. These implications can be tested, and the tests (generally on legal addictive behaviors such as smoking) tend to support rational addiction as opposed to myopic (non-forward-looking) behavior.
• The government cannot help rational addicts by making it harder for them to procure their drug of choice. They freely chose to become addicted, knowing the consequences of their behavior. If they had to do it all over again, they would make the same choices. Addicts might not be very happy, but their other choices were even less palatable to them than was becoming an addict. They probably have high discount rates, however, as the future costs of current consumption of the addictive good did not weigh heavily in their decisions.
Xavier Giné, Dean Karlan, and Jonathan Zinman, “Put Your Money Where Your Butt Is: A Commitment Savings Account for Smoking Cessation.” American Economic Journal: Applied Economics 2(4): 213-235, January 2010.
• Likely heavy smokers were randomly chosen to be offered a “Committed Action to Reduce and End Smoking” (CARES) savings account. After six months, a urine test was given to indicate whether the saver had given up smoking. A failed test meant that the money in the account was forfeited. A second treatment involved giving smokers aversive cue cards as opposed to the opportunity to open a CARES account.
• CARES accounts were accompanied by weekly visits from a bank employee to collect additional deposits. Participants were urged to save the money they otherwise would have spent on cigarettes. The deposit collection seemed to be important for getting people to take up CARES.
• Only eleven percent (a total of 83) smokers offered CARES signed up. Smokers randomly offered CARES were a bit more likely to pass a second, surprise urine test after one year. (That is, most did not quit smoking, but quit rates were about 1/3 higher than for smokers not offered CARES.) The cue cards didn’t help induce smoking cessation, though almost everyone who was offered the cards took them.
• About 2/3 of CARES clients lost their deposits by failing the urine test. They tended to have lower deposits, though, and may have cut down on their smoking (and spending on smoking), even if they didn’t quit. Is it ethical to offer relatively poor people a commitment savings account in the fore-knowledge that many of them will end up unable to collect their savings?
