Paternalism and public policy
Problems associated with bounded rationality and bounded self-control have led many behavioural economists to conclude that the state’s policy makers should try to put in place policies which help individuals make more rational choices.
The use of rules of thumb and the tendency for decisions which maintain the status quo, has led many behavioural economists to propose ways to reduce these reasoning shortcuts to help individuals improve the effectiveness of their individual decision making. In their ground-breaking work, Nudge, Richard Thaler and Cass Sunstein1 suggest that even small changes to individual’s ‘choice architecture’ – the context in which they make the choice – can help individuals make better choices. ‘Nudges’ might include placing healthier food at eye-level in supermarkets, or setting default decisions in favour of ‘good’ behaviour rather than ‘bad’ behaviour.
Behavioural economists argue that small nudges can point people towards making more rational decisions. This has often been described as ‘soft paternalism’, ‘new paternalism’ or ‘liberal paternalism’. In other words, a team of dispassionate policy-makers may be able to ‘steer’ individuals towards making more optimal decisions. This is because they can solve some of the problems associated with bounded rationality – namely, they have more time on their hands to think about ‘good’ choices, have ‘more information’ to base their choice on, and do not rely on simple heuristics.
For example, more beneficial ‘rules’ can be created by policy-makers, which can counteract the negative effect of heuristics, such as rule of thumb decisions. For example, if the rule of thumb for potential savers is ‘I’ll start saving next year’, then an ‘opt-out’ save-as-you-earn policy is better than an ‘opt-in’ one. So, employers could be forced to transfer some income to a savings scheme for the employee, which would operate unless the individual actively opted out. This kind of strategy would seem to uphold the individual’s right to choose, while creating a better outcome than the individual would have gained if left to their own default ‘no-save’ decision.
Mandated choice forces adults to make a decision about something, such as saving for retirement, or donating organs. A mandated choice is ‘stronger’ than a ‘nudge’. While individuals may be free to state which option they choose, they are not free to ignore the question, or avoiding answering it. Governments and authorities have been quick to adopt some of the ideas proposed by the behavioural economists.
The housing market
For example, in the USA, following the sub-prime housing crash, individuals can be forced to accept financial counselling and cannot opt out. Similarly, in 2013, New York Mayor Michael Bloomberg took away the choice of consuming soft drinks larger than 16 ounces.
The energy market
In the UK, energy suppliers are now required to inform customers when their ‘fixed’ rate energy contracts are coming to an end so that they can make a more rational choice regarding the next contract they take out. Up to that point, customers were defaulted to what is called a standard rate variable tariff (SVT) which, in most cases, was higher than the rate they would have got in the open market.
Read more on the energy price cap.
Legislators can impose time lags between the initial enquiry regarding a complex product which might contain hidden risks, such as a mortgage, and the decision to go ahead with the transaction. Mandated delays are also called deliberation tools as they force individuals to think more deeply about the impact of a decision, and hence reveal their deep (rather than superficial) preferences – such as for healthy food rather than for junk food. This could take the form of an imposed delay before the purchase, or a cooling off period after the purchase.
Given what behavioural economists have suggested about status quo bias and inertia, cooling-off periods are more likely to be the favour of the seller as once the contract has been signed, the probability of a change of mind will fall.
Creating a default which favours ‘good’ over ‘bad’ choices enables policy makers to manipulate decisions to help individuals make more rational choices. Defaults are said to work best (Sunstein, 2013) when the individual has no particular preference. For example, if individuals have no particular preference about whether they have drinks sweetened with natural, calorific, sugars or artificial sweeteners, then the default option could be switched to the no-sugar option. Similarly, a café could be forced to switch its default option for milk to ‘skinny’ rather than, as is usually the case, the ‘full fat’ option.
Since the publication of Nudge, governments around the world have sought ways to implement the ideas behind behavioural economics. In the US, the appointment in 2009 of one of behavioural economics founding fathers, Cass Sunstein, as head of the White House Office of Information and Regulatory Affairs (the so-called Regulation Czar) is evidence of the popularity of employing the techniques of behavioural economics in public policy.
New York Mayor Bloomberg has been an active advocate of state involvement into behavioural design programmes in a whole range of areas, from fitness to road safety.
See City Lab video
The UK’s Nudge Unit
The UK’s nudge unit (the Cabinet Office’s Behavioural Insights Team) was set up in 2010 to test and implement public policy based on the theories of behavioural economics – especially the idea of behaviour nudging. Using the principles of experimentation, several projects were instigated to help improve the performance of government departments and schemes, including one experiment with job centres. Based on their trials the nudge unit recommended a change to how job seekers were dealt with (i.e. a change to the choice architecture), including meeting an advisor on their first visit, and creating a plan for their next two week period (which would stimulate System 2 thinking and reduce various biases shaping jobseekers views on the likelihood of obtaining work). The effect was that, after around 3 months the group that were subject to the new system were some 20% less likely to be claiming benefits compared with the control group.
In the UK, collaboration between Warwick Business School and the Design Council to create the Behavioural Design Lab is one example of ongoing research into the practical application of behavioural psychology to public policy.
Of course, critics argue that behavioural economics has been somewhat ‘over-hyped’ and should not be seen as providing a replacement for more traditional policy interventions, including taxes and subsidies.