A cure for irrationality?

One of the most influential books on what behavioural economics means for public policy is probably Nudge by Richard Thaler and Cass Sunstein, which describes how people can be helped to make better decisions, crucially without removing their freedom of choice. Richard Thaler and Cass Sunstein went on to advise both UK and US governments. In the UK, a Government “Behavioural Insights” team was set up, and is so clearly influenced by Nudge that it usually goes by the name “Nudge Unit” – probably because journalists can’t help themselves when it comes to tired “nudge, nudge, wink, wink” jokes.

Many of the ideas in the Nudge book come down to changing the way decisions are presented. Change the canteen layout to place healthy fruit and vegetables at eye-level. Switch the default contribution rate on pension schemes to a rate that most savers would be happy with if they don’t get round to picking the rate themselves.

In some ways, these are the low-hanging fruit of faulty decision-making. It’s clear what would make people better off. It doesn’t cost much to change the way the decision is presented. There’s no removal of freedom of choice.

But what if you don’t know what will make people better off? What if the default option that works well for some people is entirely wrong for others? Economists Patrico Dalton and Sayantan Ghosal (Tillburg University and Warwick University) argue for a “soft libertarian” approach which involves policies that are designed to help people make better decisions for themselves. For example: cognitive behavioural therapy could help people overcome immediate emotions to make better decisions.

Sound a bit heavy-handed? I thought so too, but the authors have a point in that it does at least preserve freedom of choice. Set against this, the costs could be huge. And this type of solution is focused on particular aspects of decision-making such as self-control and procrastination problems. It can’t address other reasons why people make mistakes such as limited attention in reading the fine print of terms and conditions, or misperceptions of risk and probability.

Mainly because of costs, I can’t see this idea taking off. And “therapy unit” seems less conducive to journalistic puns.

The working paper is here.

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