Libertarian Paternalism and the "Yeah, Whatever" Heuristic

First of all, many thanks to Eugene for his kindness and generosity in supporting this discussion. While Richard Thaler and I have been working on the topic of libertarian paternalism for a long time, we continue to think of our project as a work-in-progress, and we are eager for suggestions and criticisms.

The basic idea is that private and public institutions might choose approaches that a) fully maintain freedom of choice (and are in that sense libertarian) but b) gently steer people's decisions in directions that will make their lives go better by their own lights (and are in that sense paternalistic).

In writing Nudge, Thaler and I have been much influenced by libertarian challenges to our earlier efforts. Many of our proposals operate as a kind "one-click paternalism," in the form of approaches that allow people to opt out at minimal burden or cost. Think, for example, of a default option for a cell phone setting or a rental car contract, which you can change with a click or a stroke of a pen.

We are hoping that in many domains, libertarian paternalism might be able to provide a real Third Way, one that goes beyond the mandates and bans often favored by the left and the simple enthusiasm for markets often favored by the right.

In the private sector, a poster child for libertarian paternalism is automatic enrollment in 401(k) plans. The idea is that when people start working, some percentage of their earnings automatically goes to savings -- but they can opt out if they want. Thaler is also a codesigner of the Save More Tomorrow plan, by which workers are asked if they want to enroll in a program that devotes some percentage of their future wage increases to savings. Both automatic enrollment and Save More Tomorrow have produced large changes in savings rates, and most workers are satisfied with the plans.

Of course a major impetus for libertarian paternalism is a series of empirical findings showing, not that people are "irrational," but that they are (in Thaler's term) quasi-rational, departing from rationality in predictable and specified ways. There's a ton of research on this question, but many of the proposals in Nudge rely on the immense power of default rules.

If a private company, or the government, offers something as the default, a lot of people will stick with it, even if a change is ridiculously simple to make. People often use what we call the "yeah, whatever" heuristic.

Why do defaults have such power? One reason involves inertia. People have a lot of things to think about, and especially when the choice is complicated, they're might well decide not to decide or to procrastinate. Another reason involves suggestion. When an option is described as a default, people often think, someone sensible thought that this is the way to go, and I might as well go along with what they thought.

Natural questions are: Who sets the default? Aren't they quasi-rational (or worse)? Why should we trust them? I'll turn to these questions soon. For now, the only point is that if we think creatively about the uses of default rules, we should be able to come up with many new possibilities for private and public institutions, which might be able to influence people's behavior without requiring anyone to do anything.

Libertarian Paternalism and Distrust of Government

Libertarian paternalists, or nudgers, want to preserve freedom of choice while also using default rules, disclosure strategies, and other aspects of the choice environment to incline people in good directions. Because human beings are subject to systematic errors, libertarian paternalists want to provide a little help.

It is natural to wonder: Why should we trust government? Isn't it subject to systematic errors as well? What about the public choice problem? Isn't libertarian paternalism just a new way to strengthen government's hand?

Part of the answer is that libertarian paternalists insist on freedom of choice, and in many contexts, they would reduce government coercion where it now exists. (See Nudge for more details.) Consider three quick examples:

1. Richard Thaler and I propose to increase freedom of contract between doctors and patients, allowing waiver of medical malpractice liability in an effort to promote liberty and to decrease the cost of health care.

2. Libertarian paternalists are highly sympathetic to the argument for school choice, adding only that steps should be taken to make sure that choices are real.

3. For the mortgage crisis, and for credit markets generally, libertarian paternalists reject bans and coercion and favor disclosure remedies.

Skeptics might object that if public officials are not trustworthy, the paternalistic part of libertarian paternalism is scary. It is true that libertarian paternalists want government to select sensible default rules for contract law, property law, prescription drugs, environmental law, and organ donation. But how can government dispense with default rules?

Short of anarchy, the legal system has to start somewhere; it has to specify what happens if people don't do anything. Legal entitlements don't come from the sky. You can't run free markets without basic rules of property, contract, and tort law, and those rules will operate as nudges, in the sense that they will incline people in certain directions. (Russell Korobkin of this very blog has done excellent theoretical and empirical work on this point.)

At a minimum, libertarian paternalists argue that where a government program is already in place, officials should preserve freedom of choice while also making good outcomes easy rather than hard. Consider the current prescription drug program for seniors.

Libertarian paternalists agree with President Bush that competition is a good idea in this domain. But the program is much too confusing; seniors are given too little help in choosing among twenty or more plans. Sometimes they blunder, just because of the complexity of the program. So long as government is going to have a prescription drug program, it should make it easy for seniors to provide relevant information about their situation and then to get a clear sense of what plan would be best for them.

Libertarian paternalists are not opposed to disclosure requirements. In environmental law and in credit markets, they think that disclosure is often helpful. For school loans, credit cards, and mortgages, Thaler and I propose a species of libertarian paternalism that we call RECAP: Record, Evaluate, and Compare Alternative Prices. The basic idea would be to avoid government mandates in favor of a disclosure requirement that would produce a simple, intelligible statement of existing fees. We think that RECAP would improve the operation of credit markets.

Maybe hard-line skeptics want to reject disclosure requirements altogether. But putting that possibility aside, it's hard to see how distrust of government leads to a rejection of libertarian paternalism a) when a government program is already in place, and the question is how to make it work as well as possible, or b) when (short of anarchy) government action is inevitable, as in the basic rules of contract, property, and tort law.

Social Nudges

Human beings are greatly influenced by the actual or apparent behavior of others. Consider just a few examples:

1. Federal judges on three-judge panels are much affected by the votes of their colleagues. Democratic appointees, sitting with two Republican appointees, show pretty conservative voting patterns. Republican appointees, sitting with two Democratic appointees, show pretty liberal voting patterns. Clinton appointees turn out to look a lot like Bush appointees on DRR panels. And in some areas of law, the political party of the president who appointed the two other judges on the panel is a better predictor of a judge's vote than the political party of the president who appointed that very judge (!).

2. Teenage girls who see that other teenagers are having children are far more likely to become pregnant themselves.

3. Ethnic identification is contagious. When relevant people start to identify in ethnic terms -- in clothing choices, rituals, attitudes -- "ethnification" can spread rapidly throughout a locality or a society.

4. Broadcasters have been found to mimic each other, producing otherwise inexplicable fads in radio and television.

These social nudges are best explained in two ways. First, the behavior of others conveys information about what is true or right or best. Often people lack entirely reliable information, and they base their choices on what others say or do. Second, the behavior of others imposes reputational pressure. If you want to keep people's good opinion, you might want to do what they do.

The four examples given above reflect both sets of influences. Reputational pressures are probably of special importance for (3). (For more detail, see Nudge.)

Social nudges can easily be enlisted by libertarian paternalists, who seek to alter behavior without imposing mandates of any kind. Having failed in various efforts to reduce littering on its highways, Texas adopted an inventive "Don't Mess With Texas" program, in which influential people, including Willie Nelson and players for the Dallas Cowboys, sent strong signals about appropriate behavior. The program has had large effects in reducing litter.

Or consider an intriguing recent experiment designed decrease energy use. In San Marcos, California, people were simply informed about whether they were above-average or below-average users of energy. In the following weeks, the above-average users significantly reduced their use of energy.

The less good news is that the below-average users actually increased their energy use. But a small tweak eliminated this effect. When they were given a happy emotikon, signalling social approval, the below-average users stayed well below average.

Of course there is reason to worry about government efforts in this vein. We could imagine programs that would violate neutrality requirements; consider efforts to promote certain religious practices or political convictions. And here as elsewhere, hard-line libertarians might just want government to stay out. But when government has a legitimate end, and wants to avoid a mandate, social nudges can serve as an immensely effective tool.

Give More Tomorrow and Choice Architecture

Libertarian paternalists and behavioral economists are enthusiastic about the Save More Tomorrow plan, by which employees agree that some portion of their future wage increases will go to savings. Save More Tomorrow helps overcome the two behavioral obstacles of loss aversion and inertia. The plan is making it more likely that many thousands of Americans will have more comfortable retirements.

Those of us who like Save More Tomorrow do not want to require private or public employers to offer the plan. But we hope that it will be made increasingly available as a nudge.

Richard Thaler and I think that it is possible to build on Save More Tomorrow. In Nudge, we observe that many people have strong charitable impulses, and they give less than they might because of inertia. Many of us decide, at one or another time, that we ought to give more, but we fail to do so because time passes and we focus on other things.

A Give More Tomorrow plan might help. The basic idea is to ask people whether they would like to donate a small amount to their favorite charities in the near future, and then agree to increase their donations every year. Such a plan might even be offered through the workplace, in which employers and employees might agree to devote a small percentage of future wage increases to charity. A pilot Give More Tomorrow experiment, conducted by Amy Bremen, has found some exceedingly promising results.

There is a larger point here. Often private and public institutions seek to alter behavior by changing material incentives (sometimes, in the case of government, at taxpayer expense). But the most effective approaches sometimes put material incentives to one side and change what Thaler and I call "choice architecture," which is the background against which people make their decisions. Good choice architects maintain liberty while also making it easy for us, and for what Lincoln called the "better angels" of our nature, to do what we would like to do.

A Real Third Way, Plus Some Responses

For a long time, the nation has been split between two types: old-style Democrats, favoring mandates and bans, and new(ish)-style Republicans, insisting that markets and free choice should be respected. Richard Thaler and I think that there is a way to avoid mandates and bans, and to respect free choice, while also helping people to make better decisions.

In short, we hope that libertarian paternalism might provide a real third way, one that recognizes the best in Hayek and Friedman while also noticing the work of Simon, Kahneman, and Tversky (and Thaler), which shows that human beings often choose poorly. Thus, for example, libertarian paternalism offers fresh ways of thinking about the mortgage crisis, credit card reform, savings for retirement, prescription drugs, health care, environmental law, and even marriage. In all these contexts, a few nudges could help a lot.

I'm most grateful for the many excellent comments and objections here; I've read them all with care. By way of conclusion, let me try to respond to just a few of the most prominent, with the hope of a continuing discussion.

1. Objection (made on the Becker-Posner blog as well): Libertarian paternalism is an oxymoron.

Answer: It is not. The approach is libertarian in the sense that it preserves freedom of choice. It is paternalistic in the sense that it tries to produce good outcomes for choosers. See, e.g., Save More Tomorrow.

2. Objection: Libertarian paternalism is paternalism is lamb's clothing.

Answer: Because libertarian paternalism preserves freedom of choice, it is different from standard paternalistic approaches. We favor "one-click paternalism," in the form of easy, simple opt-outs.

3. Objection: Libertarian paternalism is a tool of the left; it is the left's newest thing.

Answer: The tool (or tools) can be used by many different types. Many of our own proposals will be more popular with the right, eg school choice and medical malpractice waivers.

4. Objection: Who decides what choices are best?

Answer: The choice architect (private or public). Because choice architecture is inevitable, the "who decides" question is not a good one, at least for our purposes. Cafeterias have to be designed. Default rules have to be developed. Starting points are inevitable.

5. Objection: What about the public choice problem? Aren't public officials subject to the same heuristics and biases as everyone else, and pushed around by interest groups too?

Answer: Agreed, entirely. That's one reason this form of paternalism respects freedom. Wherever a program is in place, or inevitable, libertarian paternalism provides an appealing approach. Recall too that choice architecture, even by government, cannot easily be avoided, in the form of property law, contract law, and tort law. Existing law governing environmental protection, credit markets, labor law, and the family could be improved with a few nudges. Sure, government should privatize in some domains, and libertarian paternalists sometimes call for privatization, to increase freedom.

6. Objection: Libertarian paternalism starts us on a very slippery slope.

Answer: Not if the libertarian condition (easy opt-out) is respected. That should reduce the slipperiness by a lot.

7. Objection: In some domains, we need bans and coercion.

Answer: Sure, at least if third-party effects are serious. And we don't want to repeal the criminal law involving (say) murder and assault. But in most domains, freedom of choice should be the rule (in part for reasons that Hayek developed so powerfully).

8. Objection: Libertarian paternalism is an ugly and confusing term. Ugh!

Answer: Maybe. Probably. Originally we wanted to call the book Libertarian Paternalism, and no one wanted to publish that book. So we called it Nudge.

Thaler and I regard this as a continuing project, in some ways in its early stages, and we're aware of legitimate questions and of room for much more work on these topics. Many thanks to Eugene Volokh for hosting me and to all of you for your terrific comments and emails. We'll keep pondering these issues.