Libertarian Paternalism

A previous post dealt with Kahneman’s description of predictably non-rational behavior. In Nudge Cass Sunstein and Richard Thaler offered a proposal, based on Kahneman’s ideas, that they call “libertarian paternalism.” The idea is that choice architects, people setting up alternatives for other people to choose among, can and should take advantage of the predictable errors of the fast mind to nudge the chooser into making the choice the architects think he ought to make, the one they believe he would make if he were fully rational. It is paternalism because it is getting people to act as someone else thinks they ought, libertarian because it leaves the individual free to act in a different way.

As the authors point out, any time you are offering someone else choices, whether "you" are a government agency, an employer or a firm selling something, you are deciding in what form to make the offer hence engaging in choice architecture. If you are going to do it you ought to do it in a way designed to produce the result you want to produce — in their case, choices that result in the chooser better achieving his own goals.

The libertarian part of the proposal depends on leaving the individual free, at no significant cost, to make the choice you do not want him to make. But if you do not want him to make that choice it will be tempting to make it more and more difficult, to require him to fill out forms, file them in the right place, perhaps even neglect to tell him that forms exist to be filled out, that the alternatives you don't want him to choose are available. There is thus a serious slippery slope problem, making it possible for their arguments to be used as justification for actions far from libertarian. The point occurred to me when I read the book. It was reinforced by a real-world experience at about the same time.

When our daughter was in her first year at Oberlin the college sent us a bill, a list of charges and a total we were to pay. One of the items in the list, included without explanation, was ten dollars for the "Green Edge Fund." Being curious, I did an online search to find out what it was. It turned out that it was a fund to subsidize environmental projects by students. It had been voted in the previous year as an optional ten dollar per pupil payment.

"Optional" means that you don't have to pay. We sent in our check minus the ten dollars and I sent an email to the president of the College, pointing out that he was billing parents for money they did not owe. I received back an apologetic email from an administrator, explaining that the program was a new one and they had not yet gotten everything set up properly.

A month or so later I received a bill from the College for ten dollars. I wrote back to the office that sent the bill, pointing out that they had billed me, and all other parents, for ten dollars we did not owe, that rather than our owing them money they owed money to all of the parents who had paid the ten dollars. I also sent an email to the administrator. A few weeks later, I received second bill for ten dollars, shortly followed by an email from the administrator telling me that the matter had been taken care of and I could ignore the bill.

When we got our bill for the second semester it included a form for our daughter to sign and hand in during the first two weeks of the semester requesting a waiver of the charge for the Green Edge fund. The form contained a description of how the money would be used that most at the college would regard as fraudulent advertising if it were the product of, say, the phone company, since it was put as what would happen not what they hoped would happen. The bill did not include any mention of the fact that the college had, in the previous semester, charged parents about thirty thousand dollars that they did not owe, nor any offer of a refund to any parent who wanted it.

My wife went to Oberlin thirty-some years earlier and had had a similar experience. In her day it was a one dollar per student charge to support one of Ralph Nader's PIRGs.¹ A student could get out of it by going to the right office on the right day and telling them he didn't want to pay it. On further enquiry, we discovered that the student "donation" was still there, now increased to eight dollars. There did not seem to be any effort to inform parents or students that they had the option of not paying it, a fact of which most students were unaware.²

An optional charge where the default choice is to pay it is the sort of thing Sunstein and Thaler propose, a nudge in the direction of doing what those responsible believe that most of those nudged would want to do if they took the time to think about it. But the people constructing the choice architecture know what result they want to get, they believe they are doing good and so not constrained by what they themselves would consider proper principles of morality and honesty in a commercial context, so it is very easy for them to make the "wrong" choice more and more difficult and obscure until what is optional in theory becomes mandatory in practice.

Oberlin has always been—to quote historian Geoffrey Blodgett ’53—a “peculiar mix of scholarly ambition and stubborn moral idealism.” (From an Oberlin web page)

But not enough idealism to motivate the college to apologize to parents for billing them for money they did not owe and offer to give it back.³

Why It Might Not Work

Consider two firms, otherwise identical, with different default rules. Firm A tells its employees that it normally diverts 10% of their salary to a pension fund but will be happy to pay the money directly to the employee if he prefers. Firm B tells its employees that it normally pays them all of their salary but will be happy to divert 10% of the salary to a pension fund for any employee who prefers that option.

One might expect that in each firm about the same fraction of employees would choose each option, since the amount at stake is large enough to make the extra cost of filling out a request or stopping by the human resources office to reject the default trivial in comparison. According to Thaler and Sunstein, however, such default rules have quite a large effect: Many more employees will go with the pension plan in firm A than in firm B. Their explanation is that this is an example of a pattern of irrational choice, a preference for the status quo, as predicted by Kahneman.

When I discussed this issue with my daughter, she offered an explanation that makes the behavior rational. The cost of switching into or out of the pension plan is negligible but the cost of getting the information needed to decide whether to switch in or out is not. In this case as in many others, one cheap way of getting information is by observing what other people do. If, as seems plausible, the firm will have chosen as the default the option most of its employees prefer, the default rule is a signal of the choices of other employees, hence cheap evidence of what an employee who doesn't know which option is better should do. The employee rationally goes along with the default option unless he has some good reason to think the alternative is better.

If this analysis is correct, soft paternalism might not work for very long. Once it becomes clear that default rules are being chosen not by the employer to fit employee preferences but by the government to nudge employees into doing what the government thinks they should do, the argument for going along with the default breaks down.

Choosing Choice Architects

Some of these issues were hashed out some years ago on Cato Unbound in an exchange involving Richard Thaler, Glen Whitman, who is a libertarian critic of libertarian paternalism, and other posters. Thaler protested that what he was in favor of was "one-click" libertarian paternalism, meaning that it should, wherever possible, be costless to choose the disfavored alternative.⁴ But he recognized that other people might use the idea in less libertarian fashion. Which got me thinking... .

In other contexts, it is useful to shift the discussion from outcomes to mechanisms. It is straightforward to argue that transport firms ought not to engage in various monopolistic practices. To get from there to transport regulation requires some argument to show that the regulators will reduce such practices rather than increasing them, a hard argument to make given the history of the ICC and CAB. That moves us from the theory of optimal regulation to public choice theory, from what regulators should do to what they will do.

Suppose we apply that approach here. Thaler et. al. argue, convincingly, that one cannot avoid choice architecture, since individuals are making choices and some process is deciding how those choices are presented to them. We can, however, imagine different processes to make that decision, different ways of selecting our choice architects. We could, for example, leave firms free to decide for themselves whether automatic payment of part of an employee's wages into a retirement system is the default or we could have a government agency make the decision for them. Which will come closer to Thaler's goal of nudging individuals into making the choice that best serves their goals while leaving them free to make other choices at no significant additional cost?

It is tempting, at least for libertarians, to claim that the answer is obvious, that the firm has, for conventional economic reasons, an incentive to tailor what it produces to the desires of its customers and a similar incentive with regard to employees. Hence one might expect the firm to always produce the version of choice architecture, for both groups, that was optimal. But that is to ignore a central element of Thaler and Sunstein's argument, that since individuals are not perfectly rational a choice architect can take advantage of their irrationality to control, at least to some extent, their choices — including choices such as what firm to work for or what product to buy. The obvious tactic for a choice architect, including a private one, is to nudge individuals in the direction not of their interests but of the objectives of the architect. The withholding tax, to take the obvious example, has for the government that imposed it the dual advantage of getting tax money sooner and reducing the political costs of high taxes by making taxation less transparent.

The alternatives are choice architecture by the firm or by a government agency put in charge of implementing libertarian paternalism. The firm’s behavior, in choosing the default and a multitude of other things, will be judged by the employees it affects. The agency’s behavior will be judged by whether or not the outcome is what the officials in charge of it want.

And Again the Replication Crisis

What do the replication crisis and its lessons suggest about the subject of Nudge?  One of the most striking results Kahneman reported, relevant to Sunstein and Thaler’s claims of the strength of default rules in contexts such as their pension example, was a framing effect in organ donation:

A directive about organ donation in case of accidental death is noted on an individual’s driver license in many countries. The formulation of that directive is another case in which one frame is clearly superior to the other. Few people would argue that the decision of whether or not to donate one’s organs is unimportant, but there is strong evidence that most people make their choice thoughtlessly. The evidence comes from a comparison of organ donation rates in European countries, which reveals startling differences between neighboring and culturally similar countries. An article published in 2003 noted that the organ donation rate was close to 100% in Austria but only 12% in Germany, 86% in Sweden but only 4% in Denmark.

These enormous differences are a framing effect, which is caused by the format of the critical question. The high-donation countries have an opt-out form, where individuals who wish not to donate must check an appropriate box. Unless they take this simple action, they are considered willing donors. The low-contribution countries have an opt-in form: you must check a box to become a donor. That is all. The best single predictor of whether or not people will donate their organs is the designation of the default option that will be adopted without having to check a box. …

It was a striking result, but it turned out that it wasn’t true. Individuals in the high donation countries were simply presumed to consent to donation; there was no form they ever saw on which to check a box to opt out. Just as with the Oberlin PIRG, most people did not know that it was possible, with sufficient time and effort, to withdraw consent. The numbers Kahneman reported were not donation rates but rates of presumed consent. Donation in practice was based not on presumed consent but on the consent of the survivors of the deceased. Rates varied among countries but not with the striking differences Kahneman reported.

What about work since Nudge was published? “A Systematic Scoping Review of the Choice Architecture Movement: Toward Understanding When and Why Nudges Work” is a review of the experimental literature inspired by Nudge. It concludes that much of it is of low quality; “not a single study in our sample was mentioned to be preregistered.” So we don’t actually know either how effective choice architecture is in practice or, equally important, whether it has been more nearly Thaler’s "one-click" libertarian paternalism or Oberlin’s funding model for optional donations.

1. Public Interest Research Group.

2. According to a 2013 letter in The Oberlin Review arguing against reauthorizing the program, “by a margin of 74 percent to 26 percent, students are not aware of this funding structure. Further, only 13 percent of students know that they can receive a reimbursement for the mandatory $8 donation.” The argument apparently succeeded. As best I can tell from articles in the Oberlin Review, the automatic $8 per student charge was abolished by the student senate in 2013 (Oberlin Review, 2013). The Green-edge fund, however, appears to be still functioning.

3. Our interaction with the Green Edge Fund was in 2008; the fund seems to have existed at least as early as 2006. Assuming, as seems likely, that in prior years as in 2008 Oberlin was charging for it without explanation and that it never offered a refund thereafter, it ended up retaining more than a hundred thousand dollars of fraudulently obtained money.

4. After Oberlin started notifying parents that the contribution to the Green Edge Fund was optional it still required some time and effort by the student to get out of it. The one-click approach would have been a check box on the tuition bill for declining to donate.