The Perpetual Nudger

Richard Thaler, about whose “libertarian” paternalism I’ve written many times, is at it again. Thaler, in case you don’t know of him, is co-author (with Cass Sunstein) of Nudge: Improving Decisions About Health, Wealth, and Happiness. Thaler’s partnership with Sunstein should be enough to tell you that “libertarian” paternalism is about paternalism, not liberty. (My many essays about Thaler, Sunstein, and their works and minds are among the “related posts” at the bottom of this one.)

What’s Thaler up to now? It seems that he’s written a new book, Misbehaving: The Making of Behavioral Economics, from which he has drawn “Unless You Are Spock, Irrelevant Things Matter in Economic Behavior” (The New York Times, May 8, 2015). The article displays three of Thaler’s pet tricks:

He misrepresents classical microeconomics.

He assumes (implicitly) that everyone should make economic decisions from an omniscient, end-of-life perspective.

He substitutes his economic desiderata for the free choices of millions of persons.

Regarding Thaler’s misrepresentation of classical microeconomics, consider these passages from his article:

Economists [who adhere to traditional microeconomic theory] discount any factors that would not influence the thinking of a rational person. These things are supposedly irrelevant. But unfortunately for the theory, many supposedly irrelevant factors do matter.

Economists create this problem with their insistence on studying mythical creatures often known as Homo economicus. I prefer to call them “Econs”— highly intelligent beings that are capable of making the most complex of calculations but are totally lacking in emotions. Think of Mr. Spock in “Star Trek.” In a world of Econs, many things would in fact be irrelevant.

No Econ would buy a larger portion of whatever will be served for dinner on Tuesday because he happens to be hungry when shopping on Sunday. Your hunger on Sunday should be irrelevant in choosing the size of your meal for Tuesday. An Econ would not finish that huge meal on Tuesday, even though he is no longer hungry, just because he had paid for it. To an Econ, the price paid for an item in the past is not relevant in making the decision about how much of it to eat now.

An Econ would not expect a gift on the day of the year in which she happened to get married, or be born. What difference do these arbitrary dates make?…

Of course, most economists know that the people with whom they interact do not resemble Econs. In fact, in private moments, economists are often happy to admit that most of the people they know are clueless about economic matters. But for decades, this realization did not affect the way most economists did their work. They had a justification: markets. To defenders of economics orthodoxy, markets are thought to have magic powers.

This reads more like the confession of an Econ than an accurate description of the principles of microeconomics. Even in those benighted days when I learned the principles of “micro” — just a few years ahead of Thaler — it was understood that the assumption of rationality was an approximation of the tendency of individuals to try to make themselves better off by making choices that would do so, given their tastes and preferences and the information that they possess at the time or could obtain at a cost commensurate with the value of the decision at hand.

Yes, there are Econs, but they’re usually economists who also know full well that the mass of people don’t behave like Econs (as Thaler admits), and for whom the postulate of utter rationality is, as I’ve suggested, shorthand for an imprecise tendency. The fact that most human beings aren’t Econs doesn’t vitiate the essential truth of the traditional theory of choice. What seems to bother Thaler is that most people aren’t Econs; their tastes and preferences seem irrational to him, and it’s his (self-appointed) role in life to force them to make “correct” decisions (i.e., the decisions he would make).

I’ll say more about that. But I can’t let Thaler’s views about markets pass without comment. He continues:

There is a version of this magic market argument that I call the invisible hand wave…. Words and phrases such as high stakes, learning and arbitrage are thrown around to suggest some of the ways that markets can do their magic, but it is my claim that no one has ever finished making the argument with both hands remaining still.

Hand waving is required because there is nothing in the workings of markets that turns otherwise normal human beings into Econs. For example, if you choose the wrong career, select the wrong mortgage or fail to save for retirement, markets do not correct those failings. In fact, quite the opposite often happens. It is much easier to make money by catering to consumers’ biases than by trying to correct them.

This is a perverted description of the role of markets. And it betrays the peculiar vantage point from which Thaler views economic decision-making. Markets provide information, much of which reflects decisions already made by others. Markets, in other words, enable persons who are contemplating decisions to learn from the decisions of others — whether those others view their decisions as bad, good, or indifferent. But it’s up to persons who are contemplating decisions to take advantage of the information provide by markets. I’ve never known anyone to suggest that markets are antidote of sorts for choices already made.

Moreover, markets don’t merely “cater to consumers’ biases.” Markets enable businesses to shape consumers’ tastes and preferences by presenting them with information about the availability and advantages of new and improved products and services. Markets transmit information in two directions, not just from consumers to producers.

What about people who make “bad” choices, such as choosing the “wrong” career, selecting the “wrong” mortgage, or failing to save for retirement? That’s Thaler the Nudge talking. He wants to save people from such fates. While he’s at it, perhaps he can also save them from choosing the wrong spouse or the wrong number of children.

I say that because when Thaler writes about “wrong” choices in such matters, he writes as if people can and should make their minute-by-minute, hour-by-hour, day-by-day, week-by-week, and year-by-year decisions by reckoning (like an Econ) how those decisions will affect their “score” when they reach the finish line of life, or some other arbitrary point in time. What about all those points in between, don’t they count, too? And who knows when the finish line will arrive? Given such quandaries and uncertainties, how are the irrational masses supposed to cope? Well, they don’t — or so Thaler would like to believe. So it follows that Thaler must cope for them, but only when it comes to his pet projects (e.g., automatic enrollment in 401(k) plans). He’s silent about the myriad other decisions that real people face.

Why should Thaler care if X chooses the “wrong” career, takes a mortgage he can’t afford, doesn’t save “enough” for retirement, chooses the “wrong” spouse, or has “too many” children? It’s paternalistic thinking like Thaler’s that leads politicians to concoct programs that transfer the cost of bad choices from those who make them to those who are just trying to live their lives without making them. I expect that Thaler would respond by saying that government is already in the business of making such transfers, so the best thing is to reduce the need for them. No, the best thing is to make individuals responsible for the consequences of their choices, and let them — and others — learn from the consequences. The best thing is to dismantle the dependency-creating, handout-giving functions of government. And a behavioral economist like Thaler is just the kind of person who could mount a strong economic case against those functions — if he were of a mind to do so.

Thaler doesn’t seem to be of a mind to do so because what he really wants is for people to make the “right” decisions, by his lights. Why? Because he knows what’s best for all of us; for example:

Consider defined-contribution retirement plans like 401(k)’s. Econs would have no trouble figuring out how much to save for retirement and how to invest the money, but mere humans can find it quite tough. So knowledgeable employers have incorporated three [features] in their plan design: they automatically enroll employees (who can opt out), they automatically increase the saving rate every year, and they offer a sensible default investment choice like a target date fund. These features significantly improve the outcomes of plan participants…. [TEA: This assumes that everyone should care more about retirement income than about anything else, at the margin.]

These retirement plans also have a supposedly relevant factor: Contributions and capital appreciation are tax-sheltered until retirement. This tax break was created to induce people to save more….

[The authors of a recent study] conclude: “…Automatic enrollment or default policies that nudge individuals to save more could have larger impacts on national saving at lower social cost.”

Get it? One of the objectives of nudging people to participate in 401(k) plans is to raise the national saving rate. Anyone who’s passingly familiar with this blog knows that I often decry government policies that discourage saving, especially by imposing more taxes on high-earners, because such policies reduce saving and therefore reduce investment and economic growth. But saving should be a voluntary thing, and the national saving rate should emerge from voluntary decisions. It shouldn’t be dictated by those, like Thaler, who view a higher national saving rate as a holy grail, to be advanced by policies that effectively dictate the “choices” that people make. But that’s Thaler for you: Imposing his economic desiderata on others.

I learned one thing from Thaler’s article: He’s a quintessential Econ. Pot. Kettle. Black.

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Related reading: John Cochrane, “Homo Economicus or Homo Paleas?,” The Grumpy Economist, May 22, 2015 (In which Professor Cochrane reinforces some of my points and makes some others — all telling.)

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Politics and Prosperity

“Government is a disease masquerading as its own cure.”

The Perpetual Nudger

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