Influencing the masses

If you don’t live under a rock, you might have noticed that election season is upon us here in the United States. Interest is particularly high given that Americans of all stripes (and many others around the world) feel like the Bush Presidency has been a train wreck, to put it mildly. There are also many key issues at stake. In the coming weeks and months, Zeitgeist will explore as many of them as we can to help you understand everything in a nonpartisan way. I can’t speak for my coauthor, but I also intend to make an endorsement much closer to the election.

Over at IPE Journal, Dave (who’s really been on a roll lately) examines the idea of subconscious voter bias. It got me thinking about a related issue which has gotten a lot of buzz in recent years: behavioral economics. In a nutshell, behavioral economics challenges the fundamental notion of classical economics that individuals always act rationally (i.e. they are welfare-maximizing). The field incorporates insights from other disciplines such as psychology and neuroscience to paint a more accurate picture of how real humans make decisions, as opposed to the rational economic individual. Or to be clever, behavioral economists seek to replace Homo Economicus with Homo Sapiens (this link is a great overview paper if you have time to read it). Behavioral economists have identified all sorts of biases which characterize (or distort) the decision-making process. Of particular note are the status-quo bias and the importance of framing choices.

There are clear implications for public policy decisions, which is why I am so excited that Richard Thaler is informally advising Barack Obama’s campaign. He’s the coauthor of Nudge, which discusses the issue of bias in decision-making, and one of his central arguments is that governments can positively influence people’s behavior by acknowledging and compensating for these biases. The most famous example: people don’t save nearly enough money in their 401(k) plans, even though it is economically rational to do so in most cases and there are huge incentives (money for savings plans is tax-exempt.) One problem may be that the default option is not to divert any money into the 401(k). But if the government were to mandate that the default option is to save money, the thinking is that many more people would then make the ‘rational’ decision.

You’ve probably heard of this before: policy-making like this is often referred to as libertarian paternalism, whereby the government ‘helps’ you make the right decision, but you still have the option to choose however you want. I’m enthusiastic about the prospects of this: I think it’s an innovative idea that might help solve public policy problems like personal savings and obesity. However, not everyone is sold, and a principal argument is that the state cannot help us make the right decision, because it has access to less information than individuals.

I would also worry about potential abuse: if libertarian paternalism works successfully for less-controversial matters, what’s to stop it from being applied too widely? How do we correct the biases of individuals within government who decide where it is and is not appropriate to use such strategies? When does libertarian paternalism cross a line?

(Photo by Andrew Pescod)