libertarian paternalism

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pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein


Al Roth, Albert Einstein, asset allocation, availability heuristic, call centre, Cass Sunstein, choice architecture, continuous integration, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, endowment effect, equity premium, feminist movement, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta analysis, meta-analysis, Milgram experiment, pension reform, presumed consent, profit maximization, rent-seeking, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Saturday Night Live, school choice, school vouchers, transaction costs, Vanguard fund, Zipcar

This makes it clear why leaving ballot design to politicians is an obviously bad idea, whereas letting politicians hire experts to help pick sensible default options for Medicare participants is probably a good idea (especially if politicians have to report donations from insurance companies). Why Stop at Libertarian Paternalism? We hope that conservatives, moderates, liberals, self-identified libertarians, and many others might be able to endorse libertarian paternalism. So far we have emphasized the criticisms of certain conservatives and the most ardent libertarians. A different set of objections can be expected from the opposite direction. Enthusiastic paternalists might well feel emboldened by evidence of Human frailties. So emboldened, they might urge that in many domains, nudging and libertarian paternalism are much too modest and cautious. If we want to protect people, why not go further? In some circumstances, wouldn’t people’s lives go best if we took away freedom of choice?

As we will see, these principles (and many more) can be applied in both the private and public sectors, and there is much room for going beyond what is now being done. A New Path We shall have a great deal to say about private nudges. But many of the most important applications of libertarian paternalism are for government, and we will offer a number of recommendations for public policy and law. Our hope is that that those recommendations might appeal to both sides of the political divide. Indeed, we believe that the policies suggested by libertarian paternalism can be embraced by Republicans and Democrats alike. A central reason is that many of those policies cost little or nothing; they impose no burden on taxpayers at all. Many Republicans are now seeking to go beyond simple opposition to government action. As the experience with Hurricane Katrina showed, government is often required to act, for it is the only means by which the necessary resources can be mustered, organized, and deployed.

But in many domains, Democrats have come to agree that freedom of choice is a good and even 13 14 INTRODUCTION indispensable foundation for public policy. There is a real basis here for crossing partisan divides. Libertarian paternalism, we think, is a promising foundation for bipartisanship. In many domains, including environmental protection, family law, and school choice, we will be arguing that better governance requires less in the way of government coercion and constraint, and more in the way of freedom to choose. If incentives and nudges replace requirements and bans, government will be both smaller and more modest. So, to be clear: we are not for bigger government, just for better governance. Actually we have evidence that our optimism (which we admit may be a bias) is more than just rosy thinking. Libertarian paternalism with respect to savings, discussed in Chapter 6, has received enthusiastic and widespread bipartisan support in Congress, including from current and former conservative Republican senators such as Robert Bennett (Utah) and Rick Santorum (Pa.) and liberal Democrats such as Rahm Emanuel of Illinois.


pages: 168 words: 46,194

Why Nudge?: The Politics of Libertarian Paternalism by Cass R. Sunstein


Affordable Care Act / Obamacare, Andrei Shleifer, availability heuristic, Cass Sunstein, choice architecture, clean water, Daniel Kahneman / Amos Tversky, Edward Glaeser, endowment effect, energy security, framing effect, invisible hand, late fees, libertarian paternalism, loss aversion, nudge unit, randomized controlled trial, Richard Thaler

In that respect, soft paternalism might be compatible with the Harm Principle, though we will see some serious complexities on that count. A jail sentence and a fine count as hard paternalism, whereas a disclosure policy, a warning, and a default rule count as soft or libertarian paternalism. Some forms of paternalism impose material costs, such as fines, on people’s choices in order to improve their welfare. Other forms impose affective or psychic costs, as in the case of graphic health warnings, which might be designed to frighten people. Behavioral economists have generally favored soft rather than hard paternalism.48 Means paternalism can be hard or soft, and the same is true of ends paternalism. My topic here extends far beyond libertarian paternalism and nudges, understood as approaches that affect choices without coercion, but it is important to see that nudges generally fall in the categories of means paternalism and soft paternalism.

(Of course, requirements and material costs are imposed in these cases, and those requirements and costs deserve attention; the question I am exploring here is whether they are imposed on end users, such as workers and consumers.) We can understand soft paternalism, thus defined, as including nudges, and I will use the terms interchangeably here. In a careful and illuminating book, one that is sharply critical of paternalism in any form, Riccardo Rebonato offers a provocative and different definition of libertarian paternalism, or nudges: Libertarian paternalism is the set of interventions aimed at overcoming the unavoidable cognitive biases and decisional inadequacies of an individual by exploiting them in such a way as to influence her decisions (in an easily reversible manner) towards choices that she herself would make if she had at her disposal unlimited time and information, and the analytic abilities of a rational decision-maker (more precisely, of Homo Economicus).9 This definition is useful, but it is imprecise in three respects.

ECON. 1639 (2009). For a vigorous suggestion that soft paternalism will impede learning, see Joshua D. Wright & Douglas H. Ginsburg, Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty, 106 NW. U. L. REV. 1033 (2012); on the underlying issues, see Bruce Ian Carlin et al., Libertarian Paternalism, Information Production, and Financial Decision-Making (June 6, 2012) (unpublished manuscript), 6. MILL, supra note 2. 7. Id. 8. Id. 9. Id. 10. See JOHN Stuart Mill, Utilitarianism (1861), for a version of this argument. Related discussion can be found in Edward L. Glaeser, Paternalism and Psychology, 73 U. Chi. L. Rev. 133 135–42 (2006), which emphasizes the ability of those in the private sector to balance relevant values and to incorporate new information. 11.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler


Albert Einstein, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, More Guns, Less Crime, mortgage debt, Nash equilibrium, Nate Silver, New Journalism, nudge unit, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Walter Mischel

Are there ways to make it easier for people to make what they will deem to be good decisions, both before and after the fact, without explicitly forcing anyone to do anything? In other words, what can we achieve by limiting ourselves to libertarian paternalism? We knew that the phrase “libertarian paternalism” would raise some hackles. It is not just at the University of Chicago that people dislike the term “paternalism”; many object to the government, or anyone else for that matter, telling them what to do, and that is what the term normally means. The phrase “libertarian paternalism” is a mouthful, and it does sound like an oxymoron. But it is not; at least not the way we define the terms. By paternalism, we mean trying to help people achieve their own goals. If someone asks how to get to the nearest subway station and you give her accurate directions, you are acting as a paternalist in our usage.

Peter Diamond happened to be serving as president-elect of the American Economic Association in 2002 and was in charge of organizing the annual meeting, to be held in January of 2003. Peter was an early fan of and contributor to behavioral economics, and he took the opportunity to organize a few sessions at the meeting on behavioral topics and invited a session on paternalism. Cass and I wrote a short paper that introduced the idea of libertarian paternalism. With the five published pages we were allotted, Cass was barely getting warmed up, so he took that piece and developed it into a proper law review article, over forty pages. We called it “Libertarian Paternalism Is Not an Oxymoron.” When I printed a draft of the law review version of the paper it looked quite long to me. One day I asked Cass whether he thought there might be a book in it. It would be an understatement to say that Cass loved the idea. There is nothing Cass relishes more than writing a book.

., 316 Laibson, David, 110, 183, 315n, 353 Lamont, Owen, 244, 250 law and economics, 257–69 law of large numbers, 194–95 law of one price, 237–39, 244, 247, 248, 250, 348 learning critique of behavioral economics, 49–51, 153 Leclerc, France, 257 Lee, Charles, 239 closed-end fund paper of, 240–43, 244 Leno, Jay, 134 Lester, Richard, 44–45 Letwin, Oliver, 331 Levitt, Steven, 354 Lewin, Kurt, 338, 340 liar loans, 252 Liberal Democrats, U.K., 332 libertarian paternalism, 322, 323–25 “Libertarian Paternalism Is Not an Oxymoron” (Sunstein and Thaler), 323–25 Lichtenstein, Sarah, 36, 48 life, value of, see value of a life life-cycle hypothesis, 95–96, 97, 98, 106, 164 “Life You Save May Be Your Own, The” (Schelling), 12–13, 14 limits of arbitrage, 249, 288, 349 Lintner, John, 166, 226, 229 Liquid Assets (Ashenfelter), 68 List, The, 10, 20–21, 24, 25, 31, 33, 36, 39, 43, 58, 68, 303, 347 List, John, 354 lives, statistical vs. identified, 13 loans, for automobiles, 121–23 Loewenstein, George, 88, 111, 176, 180–81, 362 in Behavioral Economics Roundtable, 181 effort project of, 199–201 paternalism and, 323 London, 248 Long Term Capital Management (LTCM), 249, 251 loss aversion, 33–34, 52, 58–59, 154, 261 dividends and, 166 of managers, 187–89, 190 myopic, 195, 198 Lott, John, 265–66 Lovallo, Dan, 186, 187 Lowenstein, Roger, xv–xvi, 12 LSV Asset Management, 228 Lucas, Robert, 159 Luck, Andrew, 289 MacArthur Foundation, 184 Machiguenga people, 364 Machlup, Fritz, 45 macroeconomics: behavioral, 349–52 rational expectations in, 209 Macy’s, 62, 63 Madrian, Brigitte, 315–17 Magliozzi, Ray, 32 Magliozzi, Tom, 32–33 Major League Baseball, 282 “make it easy” mantra, 337–38, 339–40 Malkiel, Burton, 242 managers: growth, 214–15 gut instinct and, 293 loss aversion of, 187–89, 190 risk aversion of, 190–91 value, 214–15 mandated choice, 328–29 marginal, definition of, 27 marginal analysis, 44 marginal propensity to consume (MPC), 94–95, 98 markets, in equilibrium, 44, 131, 150, 207 Markowitz, Harry, 208 marshmallow experiment, 100–101, 102n, 178, 314 Marwell, Gerald, 145 Mas, Alexandre, 372 Massey, Cade, 194, 278–79, 282, 289 Matthew effect, 296n McCoy, Mike, 281–82 McDonald’s, 312 McIntosh, Donald, 103 mean reversion, 222–23 Mechanical Turk (Amazon), 127 Meckling, William, 41, 105 Mehra, Raj, 191 mental accounting, 54, 55, 98, 115, 116, 118, 257 bargains and rip-offs, 57–63 budgeting, 74–79 and equity premium puzzle, 198 on game show, 296–301, 297 getting behind in, 80–84 house money effect, 81–82, 83–84, 193n of savings, 310 sunk costs, 21, 52, 64–73 “two-pocket,” 81–82 Merton, Robert K., 296n “Methodology of Positive Economics, The” (Friedman), 45–46 Mian, Atif, 78 Miljoenenjacht, see Deal or No Deal Miller, Merton, 159, 167–68, 206, 208 annoyed at closed-end fund paper, 242–43, 244, 259 irrelevance theorem of, 164–65, 166–67 Nobel Prize won by, 164 Thaler’s appointment at University of Chicago, reaction to, 255, 256 Minnesota, 335 Mischel, Walter, 100–101, 102, 103, 178, 314 mispricing, 225 models: beta–delta, 110 of homo economicus, 4–5, 6–7, 8–9, 23–24, 180 imprecision of, 23–24 optimization-based, 5–6, 8, 27, 43, 207 Modigliani, Franco: consumption function of, 94, 95–96, 97, 98, 309 irrelevance theorem of, 164–65 Nobel Prize won by, 163–64 Moore, Michael, 122 More Guns, Less Crime (Lott), 265 Morgenstern, Oskar, 29 mortgage brokers, 77–78 mortgages, 7, 77–79, 252, 345 mugs, 153, 155, 263, 264–66, 264 Mullainathan, Sendhil, 58n, 183–84, 366 Mulligan, Casey, 321–22 Murray, Bill, 49–50 mutual fund portfolios, 84 mutual funds, 242 myopic loss aversion, 195, 198 Nagel, Rosemarie, 212 naïve agents, 110–11 Nalebuff, Barry, 170 narrow framing, 185–91 and effort project, 201 NASDAQ, 250, 252 Nash, John, 212 Nash equilibrium, 212, 213n, 367 National Bureau of Economic Research (NBER), 35, 236, 244, 349 National Football League, 139n draft in, 11, 277–91, 281, 283, 285, 286 rookie salaries in, 283 salary cap in, 282–83 surplus value of players in, 285–86, 285, 286, 288 National Public Radio, 32, 305 naturally occurring experiments, 8 NESTA, 343 Net Asset Value (NAV) fund, 238–39, 241 Netherlands, 248, 296–301 neuro-economics, 177, 182 New Contrarian Investment Strategy, The (Dreman), 221–22 New Orleans Saints, 279 New York, 137 New Yorker, 90–91, 91, 92 New York Stock Exchange, 223, 226, 232, 248 New York Times, 292, 327, 328 New York Times Magazine, xv–xvi, 12 Next Restaurant, 138–39 NFL draft, 11, 277–91, 281, 283, 285, 286, 295 Nick (game show contestant), 304–5 Nielsen SoundScan, 135 Nixon, Richard, 363 Nobel, Alfred, 23n Nobel Prize, 23, 40, 207 no free lunch principle, 206, 207, 222, 225, 226n, 227, 230, 233–36, 234, 236, 251, 255 noise traders, 240–42, 247, 251 nomenclature, importance of, 328–29 Norman, Don, 326 normative theories, 25–27 “Note on the Measurement of Utility, A” (Samuelson), 89–94 no trade theorem, 217 Nudge (Thaler and Sunstein), 325–26, 330, 331–32, 333, 335, 345 nudges, nudging, 325–29, 359 number game, 211–14, 213 Obama, Barack, 22 occupations, dangerous, 14–15 Odean, Terry, 184 O’Donnell, Gus, 332–33 O’Donoghue, Ted, 110, 323 Odysseus, 99–100, 101 Office of Information and Regulatory Affairs (OIRA), 343–44 Office of Management and Budget, 343 offices, 270–76, 278 “one-click” interventions, 341–42 open-end funds, 238 opportunity costs, 17, 18, 57–58, 59, 73 of poor people, 58n optimal paternalism, 323 optimization, 5–6, 8, 27, 43, 161, 207, 365 Oreo experiment, 100–101, 102n, 178, 314 organizations, theory of, 105, 109 organs: donations of, 327–28 markets for, 130 Osborne, George, 331 Oullier, Olivier, 333 outside view, inside view vs., 186–87 overconfidence, 6, 52, 124, 355 and high trading volume in finance markets, 217–18 in NFL draft, 280, 295 overreaction: in financial markets, 219–20, 222–24, 225–29 generalized, 223–24 to sense of humor, 218, 219, 223 value stocks and, 225–29 Oxford Handbook of Behavioral Economics and the Law, 269 Palm and 3Com, 244–49, 246, 250, 348 paradigms, 167–68, 169–70 Pareto, Vilfredo, 93 parking tickets, 260 passions, 7, 88, 103 paternalism, 269, 322 dislike of term, 324 libertarian, 322, 323–25 path dependence, 298–300 “pay as you earn” system, 335 payment depreciation, 67 Pearl Harbor, Japanese bombing of, 232 P/E effect, 219–20, 222–23, 233, 235 pensions, 9, 198, 241, 320, 357–58 permanent income hypothesis, 95 Peter Principle, 293 pharmaceutical companies, 189–90 Pigou, Arthur, 88, 90 plane tickets, 138 planner-doer model, 104–10 Plott, Charlie, 40, 41, 48, 49, 148, 149, 177, 181 poker, 80, 81–82, 99 poor, 58n Posner, Richard, 259–61, 266 Post, Thierry, 296 poverty, decision making and, 371 Power, Samantha, 330 “Power of Suggestion, The” (Madrian and Shea), 315 practice, 50 predictable errors, 23–24 preferences: change in, 102–3 revealed, 86 well-defined, 48–49 pregnancy, teenage, 342 Prelec, Drazen, 179 Prescott, Edward, 191, 192 present bias (hyperbolic discounting), 91–92, 110, 227n and NFL draft, 280, 287 savings and, 314 presumed consent, in organ donations, 328–29 price controls, 363 price/earnings ratio (P/E), 219–20, 222–23, 233, 235 prices: buying vs. selling, 17, 18–19, 20, 21 rationality of, 206, 222, 230–33, 231, 237, 251–52 variability of stock, 230–33, 231, 367 price-to-rental ratios, 252 principal-agent model, 105–9, 291 Prisoner’s Dilemma, 143–44, 145, 301–5, 302 “Problem of Social Cost, The” (Coase), 263–64 profit maximization, 27, 30 promotional pricing strategy, 62n prompted choice (in organ donation), 327–29 prospect theory, 25–28, 295, 353 acceptance of, 38–39 and “as if” critique of behavioral economics, 46 and consumer choice, 55 and equity premium puzzle, 198 expected utility theory vs., 29 surveys used in experiments of, 38 psychological accounting, see mental accounting “Psychology and Economics Conference Handbook,” 163 “Psychology and Savings Policies” (Thaler), 310–13 Ptolemaic astronomy, 169–70 public goods, 144–45 Public Goods Game, 144–46 Punishment Game, 141–43, 146 Pythagorean theorem, 25–27 qualified default investment alternatives, 316 quantitative analysis, 293 Quarterly Journal of Economics, 197, 201 quasi-hyperbolic discounting, 91–92 quilt, 57, 59, 61, 65 Rabin, Matthew, 110, 181–83, 353 paternalism and, 323 racetracks, 80–81, 174–75 Radiolab, 305 randomized control trials (RCTs), 8, 338–43, 344, 371 in education, 353–54 Random Walk Down Walk Street, A (Malkiel), 242 rational expectations, 98, 191 in macroeconomics, 209 rational forecasts, 230–31 rationality: bounded, 23–24, 29, 162 Chicago debate on, 159–63, 167–68, 169, 170, 205 READY4K!


pages: 339 words: 105,938

The Skeptical Economist: Revealing the Ethics Inside Economics by Jonathan Aldred


airport security, Berlin Wall, carbon footprint, citizen journalism, clean water, cognitive dissonance, congestion charging, correlation does not imply causation, Diane Coyle, experimental subject, Fall of the Berlin Wall, first-past-the-post, framing effect, greed is good, happiness index / gross national happiness, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, labour market flexibility, laissez-faire capitalism, libertarian paternalism, new economy, pension reform, positional goods, Ralph Waldo Emerson, RAND corporation, risk tolerance, school choice, spectrum auction, trade liberalization, ultimatum game

15 He concludes that ‘democracies fall short because voters get the foolish policies they ask for’.16 But rather than dismissal, seeking a compromise between democracy and science would seem to be a better way forward. Libertarian paternalism is one currently fashionable attempt at this compromise.17 In practice, it means trying to steer a person’s decision making in the right direction, rather than restricting free choices directly or banning some choices altogether. For example, in deciding whether to enter a pension scheme, libertarian paternalists argue that we should have to ‘opt out’ rather than ‘opt in’, so that mere inertia does not prevent us from making choices which bring important long-term benefits. Libertarian paternalists often use this example as an ideal illustration of their philosophy in practice, and see it as influencing government policy. But if this is a leading achievement of libertarian paternalism, it is tempting to conclude that it tells us little we did not already know.

But if this is a leading achievement of libertarian paternalism, it is tempting to conclude that it tells us little we did not already know. Libertarian paternalism is good as far as it goes, but that is not very far. By trying to reconcile the irreconcilable — that is, combine libertarianism with paternalism — economists and policy makers end up with a minimalist ethics, which answers few practical questions. The ethical heavy lifting, deciding when to interfere to influence individual decisions, and when to ban some choices altogether (such as driving a car without a seat belt), is done elsewhere. And the minimalist strategy does not ensure that the ethics is uncontroversial or explicit. Libertarian paternalists borrow various assumptions from economics, such as consequentialism (outcomes are judged solely by their consequences), and the claim that consequences can be quantified in terms of money.

Land Economics 73: 492-507 Index ability to pay 87 absolute consumption 58-59 accountability 199, 205-206, 230 see also audit culture adaptation 23-24, 25, 237 and increasing happiness 66-67, 98, 140-141 to economic growth 55-57, 61-62 addictive consumption 22-24, 98 advertising brand recognition 16 consumer sovereignty 19-21 increased choice 41 restricting 236-237 affluenza 3, 235-238 altruism see unselfish behaviour animal lives 160 Aristotle 134, 135 audit culture 192-198, 202, 204-205 availability 15-16, 122 babies, markets in 181, 209 Baumol’s cost disease 68-74, 78, 237-238 affordability of personal services 74-77, 191 Baumol, William 68, 75, 76, 77 Bayesianism 164-166, 178, 224-225 Bayes, Thomas 164 Becker, Gary 27, 34 behavioural economics 26, 232-233, 234 belief 13 benefit transfer 157 Bentham, Jeremy 120-121, 130-131, 135 best practice 201, 202 Bewley, Truman 229 biodiversity 160 black box economics 1-2, 4 Blanchard, Oliver 48 Blinder, Alan 232 blood donation 33, 197, 217 body shape and weight 42 brand recognition 16, 21 Breyer, Stephen 156 Broome, John 154 Bush, George W. administration 146, 153, 156 capital investment 168 capital punishment 215-216 Caplan, Bryan 226-227 carbon trading markets 222, 223 cars advertising 20 ownership 42-43, 63 catastrophe, precautionary principle 173 charitable giving 27, 28, 33-34 choice 25-26 costs to consumers 39, 191 economic analysis 12-14, 25-26, 43-44 increasing options 39-43, 182-184, 192 inequalities of 43, 189-190, 209-210 ofjobs 101-102 psychologist analysis 14-19 in public services 184-186, 188-192, 205 rational 11-12, 21, 28, 164-165 see also decision making choice advisers 191 citizen’s income 97 citizens’ juries 214, 215 climate change 2, 21, 146, 147-151, 159, 218 precautionary principle 173 valuing the future 161, 162 commodification 179-181, 206-216 alternatives to CBA 213-216 limits to monetary valuation 216-219 meaning of monetary valuation 207-210 rational decision making 211-213 commuters 56, 57 compensation argument for rates of pay 99-103, 105 competitive consumption 24-25, 57-62, 62-63 congestion 60-61 consumers 11-45 addictive consumption 22-24, 98 choice in public services 182-192 competitive consumption 24-25, 57-62, 62-63 preference satisfaction 37-43 rational choice 11-12 self-interest 26-36 shopping 12-19 sovereignty myth 19-22, 25, 156, 158, 225 consumption future 168 see also consumers context-specific valuation of risk 157-158 contingent valuation surveys 152, 157 contracts 203-204 contribution argument for rates of pay 103-108 coordination problem 63 cost-benefit analysis (CBA) 145-178 alternatives to 173-174, 213-216 best practice 201, 202 climate change 2, 146, 147-151, 159 determining preferences 39 of emotions 30-31 limits to monetary quantification 175-178 valuing the future 161-173 valuing human life 147-148, 151-160, 209 valuing nature 160-161 Coyle, Diane 2 cream-skimming 189-190, 210 cultural differences in perception of happiness 118-120 cultural value 207 Damasio, Antonio 44 decision making 174, 175, 176-177, 211-214 see also cost-benefit analysis (CBA) declining discount rates 169-170 democracy and accountability 199, 206, 230 and CBA 172-173, 176-177, 214 economics as 225, 227-228 valuing life 158-159 see also politics deserving what we earn 99-109 desire 13 Dickens, Charles 138 digital TV 41, 42 diminishing marginal utility 95, 158-159 disappointment 41 discounting 149, 166-173, 176, 178, 226, 234 doctors 2, 70, 91, 106-107 decisions on behalf of patients 186-187 drugs 128 earnings 79-80 differences in 99-109 personal services sector 70-71 see also performance-related pay (PRP); taxation economic growth 47-78, 168, 170 adaptation to 55-57, 61-62 affordability of personal services 74-77 alternative form of 236-238 and consumer sovereignty 21-22 and happiness 48-55, 61-62, 66-68, 141-142 meaning and measurement of 64-66 rivalry 57-62, 62-63 self-help 62-64 and taxation 88, 89 and work 235-236 see also Baumol’s cost disease economic imperialism 180, 222-223, 233 ecosystem services 160-161 education as a positional good 60-61, 190 reflected in pay 100, 105, 106 to enable pursuit of a good life 136, 236 education services 69, 237-238 choices 185-186 goals 202 inequality 189 supply and demand 190 efficiency 4-6, 8, 177 personal services 75, 191 taxation 93, 94, 95-98, 111-112, 237 effort 108 Ellsberg Paradox 164-165 emotions and choosing public services 185 and complex choices 40-41, 42 and monetary incentives 197 and prediction of satisfaction 16 and self-interest 30-31 employment 48, 53, 142, 235-236 Environmental Protection Agency (US) (EPA) 151 ethics 7-9, 224-228, 239 consumers 34-36, 37-38, 44 desert 108 and efficiency 5-6, 112 impartiality across generations 166-167, 171-172 limits to monetary valuation 216-219 monetary value for human life 150, 159-160 personal 138 principled disagreement 201-202 for public policy 133-139, 140-141, 142, 177, 234 view of discount rates 170-171 Experience Machine 127 Experience Sampling Method 123,124 fairness and efficiency 94-98 framing effects 14-15, 16, 18, 197 Frank, Robert 56 Freakonomics 1, 31-32, 34, 233 free trade 5-6 Friedman, Milton 7 future generations, discounting 166-167, 168-169, 171-172 future outcomes discounting 149, 166-173 precautionary principle 173-174 see also probabilities gambling games 164 game theory 222, 233 goals happiness 125, 126, 129-133 monetary incentives 200-201 for public services 199, 201-202 self interest 17, 37 Goodhart’s Law 141, 192, 194, 202, 223-224 governments auditing public services 203-204 consumer sovereignty 30, 38, 186 economic growth 47-48, 49, 68 Greatest Happiness principle 137-138 policy and CBA 150, 154, 157, 160, 172-173, 175, 215-216 policy for maximizing happiness 141-143 rights of ownership 81-82, 84-85 setting priorities 210 trust in 230-231 Greatest Happiness principle 127-133, 136-138 growth paths 65, 66 guilt 27, 28, 30-31 habitat destruction 160 Hahn, Robert 163 happiness 113-143 adaptation to material improvement 55-57 defining 114-116, 120-121, 134 and economic growth 48-55, 61-62, 66-68 maximized through extending choice 183 maximized through pay incentives 109 maximized through taxation 94-98 measurement of 53-54, 116-126, 139-140, 141, 224 philosophy of 126-133 and public ethics 133-139 as public policy 140-143 of service providers 191 happiness economics 50-55, 64, 78, 115, 122 alternative form of economic growth 236-237 and politics 137-138, 141-143 happiness treadmill 23, 24, 55 see also satisfaction treadmill Harrod, Sir Roy 59 Hayeck, Friedrich von 27-28 health insurance (US) 189-190 health services 69, 71-72, 237-238 difficulty in choosing 184-185 inequality in 189-190 productivity improvements 70, 74 see also doctors Heckman, James 188 higher pleasures 130-131, 135-136 Hirsch, Fred 59, 63 holiday entitlements 58, 59 holidays 17 Homo economicus 27, 29-36, 44, 111,178 and behavioural economics 232 determining preferences 39 location in brain 225-226 self-fulfilling assumption 224 service providers 187 and trust 230-231 useful context for 222-223 hours of work 91-92, 105, 108 House of Lords (UK) report on climate change 148, 150 human life discounting 168 monetary value of 21, 147-148, 151-160, 207-208 Quality-Adjusted Life Years 176 Hume, David 129 identity 24-25, 42, 154 ignorance 162 incentive to work 89-92, 104, 109 and tax 109-112 see also audit culture; monetary incentives income adaptation to 23-24 and happiness 52-54 relative 57-58, 59-60, 62 see also earnings; taxation income effect 91, 92 income tax see taxation inconspicuous consumption 59 inefficiency see efficiency inequality acceptability of 79-80 and choice in public services 188-190, 209-210 effect on happiness 54 rates of pay 99-109 information for consumers advertising 19-20 complexity in public services 184-185 inheritance 81, 86, 99 genetic 101, 108 in-kind valuations 213—214 intellectual diversity 229 interest rates 167—168, 169 Intergovernmental Panel on Climate Change (IPCC) 147-148, 158 internet 43 interpersonal utility comparisons 49-50 Israeli day-care centres study 32 Japan, economic growth and happiness 52 Jefferson, Thomas 130 Jevons, William Stanley 49 job centre case workers 188, 202 Kahneman, Daniel 25-26, 124 objective happiness 114, 121, 125, 126 Peak-End evaluations 17, 122, 125 Keynes, John Maynard 6, 177, 235 Kyoto Protocol 146, 148 labour costs see Baumol’s cost disease labour market 5, 72, 142 language 87, 239 and reporting happiness 116-117, 118-119 law-breakers 34-35 Layard, Richard 121, 126, 137 alternative form of economic growth 236-237 Greatest Happiness principle 129-130, 132-133 happiness drugs 128 Le Grand, Julian 184, 186, 187, 188-189, 195-198 libertarianism view of taxation 82, 84, 86 widening choice 183, 205 libertarian paternalism 227-228 life expectancy 54 limited edition products 60 Locke, John 84 lost wallets 27, 28, 30 love 27, 208 luck and responsibility 105-106 marginal tax rates 96-97 market imperfections 218 market prices 33, 107 market rates of pay 99 compensation argument 100-101, 102, 103 contribution argument 103, 104, 106-107 putting a value on human life 147-148, 152-155 mental illness 3, 42, 54 Mill, John Stuart 130-131, 135-136, 183 mobile phone spectrum auctions 222 monetary incentives 30, 31-33, 195-198, 217 public services 200-201 see also performance-related pay (PRP) monetary quantification see commodification; cost benefit analysis (CBA) money corrosive effects of 209 see also monetary incentives mood 121-122, 125 moral convictions 217 motivation intrinsic 33, 195, 197, 200-201 public service staff 186-188, 191-198, 199, 200-201, 206 see also self-interest; status seeking national product 64-65, 70 natural talents 99, 101, 102, 105 nature ownership rights 210 putting a value on 160-161, 208, 213-214 neuroscience 50, 115-116, 117-118, 225-226 news media current perceptions of economics 6-7 doctrine of self-interest 34 silence on Baumol’s cost disease 68-69, 77 Nietzche, Friedrich Wilhelm 119 non-economic impacts 7 non-renewable resources 168 Nozick, Robert 127 Nussbaum, Martha 131 objective happiness 114, 121, 125, 126, 127 objective list theories 134-136 optimal tax theory 95-98 optimization 233 options 13-16 increasing 39-43, 182-184, 192 ownership principle 80-87, 218 pay see earnings; performance-related pay (PRP) Peak-End evaluation 17-18, 122, 125-126 perceived happiness 140 perfect preferences 37-39, 43, 135-136 performance-related pay (PRP) 33, 193-194, 195-198, 200, 237 performative contradiction 231 performative economics 223-224 personal services 69-77, 237-238 Peter the plumber 92-93 pleasure 22-23, 130-131, 134, 135 policy entrepreneurs 1-2 political economics 230-231, 233 political forums 214, 215 politics democracy and CBA 172-173, 177, 215 and happiness economics 137-138, 141-143 poll taxes 93-94 positional goods 59-61, 63, 190, 236, 237 post-tax distribution 85—86, 87, 98 precautionary principle 173—174 preferences 13, 14, 135—136, 225 and advertising 19—20 of future generations 168-169 pure time 166-167, 172 revealed by choices 21, 64 risk 156, 159, 176 satisfaction 37-43 pre-tax economic activity 92-93, 94 pre-tax income 80-84 pricelessness 209, 210 principled disagreement 201-202 priorities audit culture 193, 202 government policy 38, 50, 141,142 private property 80-81 probabilities 150, 154, 155, 161-162, 164-166 productivity 65-66 high earners 96-97 personal services 70-72, 73-74, 75-76 and taxation 88, 89, 90 progressive tax systems 96, 97 psychological well-being (PWB) 134-135 psychology 14-19 see also behavioural economics public opinion 214 public perception of risk 153, 155-156 public service ethos 194, 199-201, 205, 210,219 public services 68, 74-75, 180 affordability 74-77, 237-238 and attitudes to taxation 110-111 audit culture 192-198 complexity and importance 184-185 distinctiveness of 198-206, 216-217 ensuring real choice 188-192 implications of choices for others 185-186 motivation of service providers 186-188, 191-198, 199, 200-201, 206 trust 203-206 widening choice 182-184 see also Baumol’s cost disease pure time preference 166-167, 172 qualitative factors 163 Quality-Adjusted Life Years 174 quality of life 3, 236 measurement of 49-50, 50-55 and public ethics 135-139 quantifying the unquantifiable 162-166 targets 193 Ramsey, Frank 167 rational choice 11-12, 21, 28, 164-165 see also decision making Rawls, John 99, 101, 102 redistribution 86, 88, 92-94 maximization of happiness 95-98 Rees, Bill 232 regret 41, 42 relationships, putting a value on 208 relative consumption 58-59, 61 relative income 57-58, 59-60, 62 research objectives and methods 228-230 responsibility 41, 100, 105 rights 82, 83, 181, 210, 218 rigour in research methods 229 risk monetary value of 21, 151-158, 178, 211 versus uncertainty 161-166 rivalry 24-25, 57-62, 62-63, 237 and increasing happiness 66-67, 98 sacrifice 196 satisfaction treadmill 125, 126, 140 see also happiness treadmill scarcity 59-61, 106-107 science and economics 1, 8, 50, 224, 225,227, 228-230 Greatest Happiness principle 131-133 see also neuroscience self-control 18-19 self-help 62-64 self-interest 12, 13, 17-19, 26-36 and consumer sovereignty 21-22 politicians and economists 230-231 public service providers 187, 188 self-fulfilling assumptions of 31-34, 223 self-reported happiness see surveys, happiness Sen, Amartya 132, 136, 234 Shaw, George Bernard 208, 210 shopping 11, 12 addiction and compulsion 22-26 economist perspective 12-14 psychologist perspective 14-19 smiley-face sampling 124, 130 smiling 119-120 Smith, Adam 6 smoking 18-19, 132, 135 spare capacity in public services 190 standard of living 48 state benefits 85-86 statistical lives 151-152, 154, 207-208 status anxiety 24-25 status seeking 58-61, 62-63, 236 Stern Review 148-149, 150, 166 substitution effect 91, 92, 96 subtractive method 117 supply and demand in public services 189, 190 rates of pay 100, 101, 105, 106 surveys 214 contingent valuation 152, 157 happiness 53-54, 114-115, 116-117, 118-124, 130, 137 public services users 182 sustainability 171 sustainable development 173 Sutton, Willie 34 targets see audit culture taxation 76, 79-98 cigarettes 132 effect on work 88-92 evasion 35 incentive to work 109-112 ownership principle 80-87 redistribution 86, 88, 92-94 to maximize happiness 94-98, 237-238 teachers 70 team working 193, 194 technical innovation 65, 70, 73-74 theory and self-fulfillment 223-224 Titmuss, Richard 33 trade-offs 13 complex choices 40-41 economic growth 63-64 life 160, 211 taxation 94, 95, 97 The Truman Show 127 trust 203-206, 230-231 TWA Flight 800 163 ultimatum game 29, 33-34 uncertainty and the precautionary principle 173 and risk 161-166 unselfish behaviour 27-28, 29 reaction to manipulation 31-32 service providers 187-188 utilitarianism 120-121, 126-133, 135,136,138-139, 183 Uttal, William 117 value judgements see ethics value for money 212 veto economics 2-3, 6, 227 Viscusi, Kip 153 volunteers 195 wage differentials 152-153, 157 Weitzman, Martin 169 work and employment 235-236 hours of 91-92, 105, 108 see also incentive to work worker inputs and outputs 104-105 Table of Contents Contents Acknowledgements Chapter One - Introduction: Ethical Economics?


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The Precariat: The New Dangerous Class by Guy Standing


8-hour work day, banking crisis, barriers to entry, Bertrand Russell: In Praise of Idleness, call centre, Cass Sunstein, centre right, collective bargaining, corporate governance, crony capitalism, deindustrialization, deskilling, fear of failure, full employment, hiring and firing, Honoré de Balzac, housing crisis, illegal immigration, immigration reform, income inequality, labour market flexibility, labour mobility, land reform, libertarian paternalism, low skilled workers, lump of labour, marginal employment, Mark Zuckerberg, means of production, mini-job, moral hazard, Naomi Klein, nudge unit, pensions crisis, placebo effect, post-industrial society, precariat, presumed consent, quantitative easing, remote working, rent-seeking, Richard Thaler, rising living standards, Ronald Coase, Ronald Reagan, science of happiness, shareholder value, Silicon Valley, The Market for Lemons, The Nature of the Firm, The Spirit Level, Tobin tax, transaction costs, universal basic income, unpaid internship, winner-take-all economy, working poor, working-age population, young professional

It risks turning professionals into walking wounded and tipping them in a precariat direction. Why risk being humiliated online by being rigorous? Give them what they want! This is an illusion of empowerment that degrades responsibility and professionalism. Soon, everybody will be rating everybody else. The state as libertarian paternalist A new perspective on social and economic policy is behavioural economics, which has produced libertarian paternalism. Nudge, an influential book by Cass Sunstein and Richard Thaler (2008), two Chicago-based advisers and friends of Barack Obama, was premised on the idea that people have too much information and so make irrational decisions. People must be steered, or nudged, to make A POLITICS OF INFERNO 139 the decisions that are in their best interest. The authors do not attribute the idea to Bentham but say the state should create ‘an architecture of choice’.

One of its authors said, ‘If you are 140 THE PRECARIAT making life too comfortable at home, why would they get a job?’ At least that recognised that jobs were not attractive in themselves. But here was the state indulging in paternalistic steering while contributing to the demonisation of part of the precariat. They cannot work out how to behave themselves! One could give many examples of the use of behavioural economics and libertarian paternalism to bear on the lives of the precariat, notably through clever use of ‘opt-out’ rules, making it hard to opt out and almost obligatory to ‘opt in’. The new buzz word is ‘conditionality’. There has been a remarkable growth of conditional cash transfer schemes or CCTs. The leading examples have been in Latin America, led by the Progresa scheme (now Oportunidades) in Mexico and Brazil’s Bolsa Familia, which by 2010 was reaching over 50 million people.

Hedonistic happiness through play and ‘pleasure’ eventually induces addiction and intolerance of anything other than pleasure, a point brought out by behavioural biologist Paul Martin in his book Sex, Drugs and Chocolate: The Science of Pleasure (2009). Satisfaction is contentment with life in general and with one’s relationships. However, making a fetish of happiness is not a prescription for civilised society. The precariat must beware of the modern equivalent of a bread-and-circuses existence being offered by the state through pseudo-science and nudging. The therapy state While they set out to make people happy, libertarian paternalism and the utilitarianism underlying it have unleashed a cult of therapy, mirroring what happened in the period of mass insecurity at the end of the nineteenth century 142 THE PRECARIAT (Standing, 2009: 235–8). The hegemonic instrument in today’s equivalent is cognitive behavioural therapy (CBT), which originated in the United States but which is globalising with indecent commercial speed.


pages: 387 words: 120,155

Inside the Nudge Unit: How Small Changes Can Make a Big Difference by David Halpern


Affordable Care Act / Obamacare, availability heuristic, carbon footprint, Cass Sunstein, centre right, choice architecture, cognitive dissonance, collaborative consumption, correlation does not imply causation, Daniel Kahneman / Amos Tversky, endowment effect, happiness index / gross national happiness, hindsight bias, illegal immigration, job satisfaction, Kickstarter, libertarian paternalism, market design, meta analysis, meta-analysis, Milgram experiment, nudge unit, peer-to-peer lending, pension reform, presumed consent, quantitative easing, randomized controlled trial, Richard Feynman, Richard Thaler, Ronald Reagan, Rory Sutherland, Simon Kuznets, skunkworks, the built environment, theory of mind, traffic fines, World Values Survey

Still, we did not abandon the approach completely. Within particular domains, such as encouraging giving up smoking, the role of behaviour was palpably obvious and clearly made the case for some behavioural and psychological thinking. The thinking in the PMSU paper also had another specific impact, which was on pensions policy. One of the papers quoted – and highlighted by Kahneman when he came in – was an early piece on ‘libertarian paternalism’ documenting the powerful impacts of defaults. At that time we had a big review running on pensions, led by an outsider named Adair Turner. I thought the paper on the impacts of defaults so important to the review that I printed off a copy and sent it to Adair and the review team, with a scribbled note along the lines of ‘I think this is probably the most important and interesting paper that you are going to read on pensions’.

PRIME MINISTER CAMERON AND DEPUTY PRIME MINISTER CLEGG, THE COALITION AGREEMENT, 2010 Five years after the ill-fated PMSU review, and on the other side of the Atlantic, there was a major breakthrough in the application of behavioural science to policy. When Richard Thaler, a Chicago economist, and Cass Sunstein, a Harvard academic lawyer, first wrote their book, it was intended to be called Libertarian Paternalism, just like the paper on which it drew heavily. Fortunately for them, and for the rest of us, a prospective publisher suggested an alternative title, Nudge, under which it was published in 2008fn1. It makes you wonder how many other great ideas are buried under the weight of an academic title. As we saw in the previous chapter, many of the ideas and literature that the book drew on were already well known in the psychological literature, and some like Robert Cialdini had helped to spread the ideas more widely.

The politicos didn’t mind that I had worked closely with Blair, since the Cameron team quite admired him – and the three elections he won. It also helped that the Liberal Democrats, the junior partner in the Coalition, were also rather taken with the nudge approach. The two key advisers to the Lib Dem Deputy Prime Minister Nick Clegg – Richard Reeves and Polly Mackenzie – both liked the liberal aspects of ‘libertarian paternalism’, and also the empiricism associated with the approach. The wheels of the civil service had already started to turn, seeking to interpret what it was that the new government wanted – or at least a compromise between what the new government wanted and what the civil service thought would be a good idea. The higher rungs of the Cabinet Office had even started to identify people and a nascent team.


pages: 361 words: 81,068

The Internet Is Not the Answer by Andrew Keen


3D printing, A Declaration of the Independence of Cyberspace, Airbnb, AltaVista, Andrew Keen, augmented reality, Bay Area Rapid Transit, Berlin Wall, bitcoin, Black Swan, Burning Man, Cass Sunstein, citizen journalism, Clayton Christensen, clean water, cloud computing, collective bargaining, Colonization of Mars, computer age, connected car, cuban missile crisis, David Brooks, disintermediation, Downton Abbey, Edward Snowden, Elon Musk, Erik Brynjolfsson, Fall of the Berlin Wall, Filter Bubble, Francis Fukuyama: the end of history, Frank Gehry, Frederick Winslow Taylor, frictionless, full employment, future of work, gig economy, global village, Google bus, Google Glasses, Hacker Ethic, happiness index / gross national happiness, income inequality, index card, informal economy, information trail, Innovator's Dilemma, Internet of things, Isaac Newton, Jaron Lanier, Jeff Bezos, job automation, Joseph Schumpeter, Julian Assange, Kevin Kelly, Kickstarter, Kodak vs Instagram, Lean Startup, libertarian paternalism, Lyft, Mark Zuckerberg, Marshall McLuhan, Martin Wolf, move fast and break things, Nate Silver, Network effects, new economy, Nicholas Carr, nonsequential writing, Norbert Wiener, Occupy movement, packet switching, PageRank, Paul Graham, Peter Thiel, Plutocrats, plutocrats, Potemkin village, precariat, pre–internet, RAND corporation, Ray Kurzweil, ride hailing / ride sharing, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Skype, smart cities, Snapchat, social web, South of Market, San Francisco, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, TaskRabbit, Ted Nelson, telemarketer, the medium is the message, Thomas L Friedman, Tyler Cowen: Great Stagnation, Uber for X, urban planning, Vannevar Bush, Whole Earth Catalog, WikiLeaks, winner-take-all economy, working poor, Y Combinator

Web 2.0 companies like Facebook, YouTube, and Instagram have reassembled the Bentham brothers’ eighteenth-century Panopticon as data factories. Bentham’s utilitarianism, that bizarre project to quantify every aspect of the human condition, has reappeared in the guise of the quantified-self movement. Even the nineteenth-century debate between Bentham’s utilitarianism and John Stuart Mill’s liberalism over individual rights has reappeared in what Harvard Law School’s Cass Sunstein calls “the politics of libertarian paternalism”—a struggle between “Millville” and “Benthamville” about the role of “nudge” in a world where the government, through partnerships with companies like Acxiom and Palantir, has more and more data on us all25 and Internet companies like Facebook and OkCupid run secretive experiments designed to control our mood. Nick Cohen describes the “cool capitalism” of the networked age as our “borderless future.”26 But while Paul Baran, Vint Cerf, and Tim Berners-Lee consciously designed the Internet to be without a center, that distributed architecture hasn’t been extended to the all-important realms of money or power.

,” Guardian, March 24, 2014. 18 On the impracticality of this law, see, for example, this rather self-serving piece by Google’s legal czar David Drummond: “We Need to Talk About the Right to Be Forgotten,” Guardian, July 10, 2014. 19 Roger Cohen, “The Past in Our Future,” New York Times, November 27, 2013. 20 Jonathan Freedland, “From Memory to Sexuality, the Digital Age Is Changing Us Completely,” Guardian, June 21, 2013. 21 Mark Lilla, “The Truth About Our Libertarian Age,” New Republic, June 17, 2014. 22 Ibid. 23 Douglas Rushkoff, Present Shock: When Everything Happens Now (New York: Current, 2014), p. 9. 24 Mic Wright, “Is ‘Shadow’ the Creepiest Startup Ever? No, CIA Investment Palantir Owns That Crown,” Telegraph, September 21, 2013. 25 Cass R. Sunstein, Why Nudge: The Politics of Libertarian Paternalism (New Haven, CT: Yale University Press, 2014), p. 116. 26 Cohen, “Beware the Lure of Mark Zuckerberg’s Cool Capitalism.” 27 28 John Naughton, “Amazon’s History Should Teach Us to Beware ‘Friendly’ Internet Giants,” Guardian, February 22, 2014. 29 Richard Sennett, “Real Progressives Believe in Breaking Up Google,” Financial Times, June 28, 2013. 30 Ibid. 31 Rebecca Solnit, “Who Will Stop Google?


pages: 397 words: 109,631

Mindware: Tools for Smart Thinking by Richard E. Nisbett


affirmative action, Albert Einstein, availability heuristic, big-box store, Cass Sunstein, choice architecture, cognitive dissonance, correlation coefficient, correlation does not imply causation, cosmological constant, Daniel Kahneman / Amos Tversky, dark matter, endowment effect, experimental subject, feminist movement, fundamental attribution error, glass ceiling, Henri Poincaré, Isaac Newton, job satisfaction, lake wobegon effect, libertarian paternalism, loss aversion, low skilled workers, Menlo Park, meta analysis, meta-analysis, quantitative easing, Richard Thaler, Ronald Reagan, Socratic dialogue, Steve Jobs, Steven Levy, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, William of Occam, Zipcar

This hybrid seeks to overturn traditional descriptive and prescriptive theories of choice. And behavioral economists are beginning to move into the business of helping people to make choices. They’re not only telling you how to make choices, they’re engineering the world so that you make choices they believe to be optimal. If this sounds Orwellian, it really isn’t. The tongue-in-cheek name that some behavioral economists use to describe their enterprise is “libertarian paternalism.” These economists will tell you how to make choices and arrange the world so that you’ll be likely to make good ones. But they’re not forcing you. You can always choose to ignore the choices they steer you toward making. As you might expect, the entry of psychologists onto the economic scene has brought along some of the basic assumptions discussed in the previous chapters. These include the contention that we don’t always know why we make the choices that we make, and that our choices, like other behaviors, are not always fully rational.

Some ways of structuring decisions result in better outcomes for individuals and for society than other ways of structuring decisions. No one is hurt by opt-out procedures for things like organ donation; no coercion is involved because people who wish not to have their organs harvested are free to decline. The deliberate design of decision frameworks that function for individual and collective good has been called “libertarian paternalism” by Thaler and Sunstein.8 The difference between choice architectures that foster the right choices and those that don’t can be subtle—at least to people who are unfamiliar with the power of loss aversion and consequent status quo bias. In a “defined contribution” retirement plan, an employer pays a fixed amount of money into a savings plan equal to some fraction of what the employee puts into the plan.


pages: 654 words: 191,864

Thinking, Fast and Slow by Daniel Kahneman


Albert Einstein, Atul Gawande, availability heuristic, Black Swan, Cass Sunstein, Checklist Manifesto, choice architecture, cognitive bias, complexity theory, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, delayed gratification, demand response, endowment effect, experimental economics, experimental subject, Exxon Valdez, feminist movement, framing effect, hindsight bias, index card, job satisfaction, John von Neumann, libertarian paternalism, loss aversion, medical residency, mental accounting, meta analysis, meta-analysis, nudge unit, pattern recognition, pre–internet, price anchoring, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, Ronald Reagan, The Chicago School, The Wisdom of Crowds, transaction costs, union organizing, Walter Mischel, Yom Kippur War

In 2008 the economist Richard Thaler and the jurist Cass Sunstein teamed up to write a book, Nudge, which quickly became an international bestseller and the bible of behavioral economics. Their book introduced several new words into the language, including Econs and Humans. It also presented a set of solutions to the dilemma of how to help people make good decisions without curtailing their freedom. Thaler and Sunstein advocate a position of libertarian paternalism, in which the state and other institutions are allowed to nudge people to make decisions that serve their own long-term interests. The designation of joining a pension plan as the default option is an example of a nudge. It is difficult to argue that anyone’s freedom is diminished by being automatically enrolled in the plan, when they merely have to check a box to opt out. As we saw earlier, the framing of the individual’s decision—Thaler and Sunstein call it choice architecture—has a huge effect on the outcome.

In contrast, the recommendations of Nudge require firms to offer contracts that are sufficiently simple to be read and understood by Human customers. It is a good sign that some of these recommendations have encountered significant opposition from firms whose profits might suffer if their customers were better informed. A world in which firms compete by offering better products is preferable to one in which the winner is the firm that is best at obfuscation. A remarkable feature of libertarian paternalism is its appeal across a broad political spectrum. The flagship example of behavioral policy, called Save More Tomorrow, was sponsored in Congress by an unusual coalition that included extreme conservatives as well as liberals. Save More Tomorrow is a financial plan that firms can offer their employees. Those who sign on allow the employer to increa Syers liberalse their contribution to their saving plan by a fixed proportion whenever they receive a raise.

It avoids the resistance to an immediate loss by requiring no immediate change; by tying increased saving to pay raises, it turns losses into foregone gains, which are much easier to bear; and the feature of automaticity aligns the laziness of System 2 with the long-term interests of the workers. All this, of course, without compelling anyone to do anything he does not wish to do and without any misdirection or artifice. The appeal of libertarian paternalism has been recognized in many countries, including the UK and South Korea, and by politicians of many stripes, including Tories and the Democratic administration of President Obama. Indeed, Britain’s government has created a new small unit whose mission is to apply the principles of behavioral science to help the government better accomplish its goals. The official name for this group is the Behavioural Insight Team, but it is known both in and out of government simply as the Nudge Unit.


pages: 272 words: 64,626

Eat People: And Other Unapologetic Rules for Game-Changing Entrepreneurs by Andy Kessler


23andMe, Andy Kessler, bank run, barriers to entry, Berlin Wall, British Empire, business process, California gold rush, carbon footprint, Cass Sunstein, cloud computing, collateralized debt obligation, collective bargaining, computer age, disintermediation, Eugene Fama: efficient market hypothesis, fiat currency, Firefox, Fractional reserve banking, George Gilder, Gordon Gekko, greed is good, income inequality, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, Joseph Schumpeter, knowledge economy, knowledge worker, libertarian paternalism, low skilled workers, Mark Zuckerberg, McMansion, Netflix Prize, packet switching, personalized medicine,, prediction markets, pre–internet, profit motive, race to the bottom, Richard Thaler, risk tolerance, risk-adjusted returns, Silicon Valley, six sigma, Skype, social graph, Steve Jobs, The Wealth of Nations by Adam Smith, transcontinental railway, transfer pricing, Yogi Berra

But so do your parents and your priest or rabbi and certainly your boss. It makes sense. Who has any idea how to confront situations unless there is some anchor of honesty or morality or self-interest or just kindness that influences what we do? Entire wings of psychology departments exist to study this stuff. And now so do businesses and society. Richard Thaler and Cass Sunstein wrote Nudge, a book about how governments can act with “libertarian paternalism” to influence people’s behavior, to nudge them away from making poor decisions. Of course, who decides what is right or wrong, good or bad? Andrew Ferguson wrote an April 2010 piece in The Weekly Standard aptly titled “Nudge Nudge, Wink Wink,” pointing out that many of the favorite behavioral economics studies are done by grad students observing paid volunteer undergraduates doing trivial tasks, and arguing that this is hardly a basis for making largescale policy recommendations for a better society.


pages: 281 words: 95,852

The Googlization of Everything: by Siva Vaidhyanathan


1960s counterculture, AltaVista, barriers to entry, Berlin Wall, borderless world, Burning Man, Cass Sunstein, choice architecture, cloud computing, computer age, corporate social responsibility, correlation does not imply causation, data acquisition, death of newspapers, don't be evil, Firefox, Francis Fukuyama: the end of history, full text search, global village, Google Earth, Howard Rheingold, informal economy, information retrieval, Joseph Schumpeter, Kevin Kelly, knowledge worker, libertarian paternalism, market fundamentalism, Marshall McLuhan, means of production, Mikhail Gorbachev, Naomi Klein, Network effects, new economy, Nicholas Carr, PageRank, pirate software, Ray Kurzweil, Richard Thaler, Ronald Reagan, side project, Silicon Valley, Silicon Valley ideology, single-payer health, Skype, social web, Steven Levy, Stewart Brand, technoutopianism, The Nature of the Firm, The Structural Transformation of the Public Sphere, Thorstein Veblen, urban decay, web application

The default setting of automatic enrollment, Thaler and Sunstein explain, helped employees overcome the “inertia” caused by business, distraction, and forgetfulness.9 That choice architecture could have such an important effect on so many human behaviors without overt coercion or even elaborate incentives convinced Thaler and Sunstein that taking advantage of it can accomplish many important public-policy goals without significant cost to either the state or private firms. They call this approach “libertarian paternalism.” If a system is designed to privilege a particular choice, they observe, people will tend to choose that option more than the alternatives, even though they have an entirely free choice. “There is no such thing as a ‘neutral’ design.”10 It’s clear that Google understands the power of choice architecture. It’s in the company’s interest to set all user-preference defaults to collect the THE GOOGL I ZAT I ON OF US 89 greatest quantity of usable data in the most contexts.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan


affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional

We have good evidence that human decision making is prone to certain kinds of errors, such as underestimating risk or planning poorly for the future. As a practical matter, those mistakes often do spill over to affect the rest of us, as we saw in the real estate collapse and the accompanying mortgage mess. And there is a range of views in between (e.g., you’re allowed to sniff glue and roll down the steps but only while wearing a helmet). One intriguing and practical middle ground is the notion of “libertarian paternalism,” which was advanced in an influential book called Nudge by Richard Thaler, a professor of behavioral science and economics at the University of Chicago, and Cass Sunstein, a Harvard Law School professor now serving in the Obama administration. The idea behind benign paternalism is that individuals do make systematic errors of judgment, but society should not force you to change your behavior (that’s the libertarian part); instead, we should merely point you in the right direction (that’s the paternalism part).


pages: 494 words: 116,739

Geek Heresy: Rescuing Social Change From the Cult of Technology by Kentaro Toyama


Albert Einstein, Berlin Wall, Bernie Madoff, blood diamonds, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cognitive dissonance, computer vision, conceptual framework, delayed gratification, Edward Glaeser,, epigenetics, Erik Brynjolfsson, Francis Fukuyama: the end of history, fundamental attribution error, germ theory of disease, global village, Hans Rosling, happiness index / gross national happiness, income inequality, invention of the printing press, invisible hand, Isaac Newton, Khan Academy, Kibera, knowledge worker, libertarian paternalism, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, means of production, microcredit, mobile money, Nicholas Carr, North Sea oil, pattern recognition, Peter Singer: altruism, Peter Thiel, post-industrial society, randomized controlled trial, rent-seeking, RFID, Richard Florida, Richard Thaler, school vouchers, self-driving car, Silicon Valley, Simon Kuznets, Steve Jobs, Steven Pinker, technoutopianism, The Fortune at the Bottom of the Pyramid, Upton Sinclair, Walter Mischel, War on Poverty, winner-take-all economy, World Values Survey, Y2K

No such single study is a problem in itself – the problem is that such studies are increasingly prioritized (because they’re easier and cheaper to run) over studies of slower-changing, internal traits and are becoming disproportionately influential in policy. 16.For the canonical exposition of behavioral economics’ “nudges,” see Thaler and Sunstein (2008), who popularized the term. Their notion of “libertarian paternalism” is among the gentlest conceptions of manipulation, and most of their ideas are undoubtedly worth implementing. But is that all we’re going to ask of ourselves? Can’t we go beyond nudging one another? 17.Psychologists’ notions of personality development differ from the “personality development” that I have encountered in some social change efforts, especially outside of the United States.


pages: 384 words: 118,572

The Confidence Game: The Psychology of the Con and Why We Fall for It Every Time by Maria Konnikova


attribution theory, Bernie Madoff, British Empire, Cass Sunstein, cognitive dissonance, Daniel Kahneman / Amos Tversky, endowment effect, epigenetics, hindsight bias, lake wobegon effect, libertarian paternalism, Milgram experiment, placebo effect, Ponzi scheme, publish or perish, Richard Thaler, risk tolerance, side project, Skype, Steven Pinker, the scientific method, tulip mania, Walter Mischel

The psychology of why nudges work forms the entire basis of a confidence artist’s soft power. Just as a grifter never coerces in any observable way, a nudge never actually forces one behavior or forbids another—a smoking ban is not a nudge but a policy regulation—but rather changes the nature of the choice itself. That is, you influence a decision by changing how, precisely, that decision is presented. Thaler and Sunstein explain their reasoning in terms of a seeming oxymoron: libertarian paternalism. The environment affects our choices no matter what, the argument goes, so why not make sure it’s doing so for the better? Or, in the case of the con artist, for the worse? The order effect is the tip of a very large iceberg that includes things like position effects—where something is located physically. Con artists manipulate this all the time by placing objects or people they want you to gravitate toward in more privileged positions.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox


Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, invisible hand, Isaac Newton, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, New Journalism, Nikolai Kondratiev, Paul Lévy, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, volatility smile, Yogi Berra

“We’ve accepted the argument of behavioralists like Dick Thaler that people do dumb things,” said William Niskanen, a former Chicago student of Milton Friedman and chairman of the Cato Institute, the libertarian Washington think tank.14 Thaler joined forces with Chicago law professor Cass Sunstein to apply his ideas beyond retirement savings. They dubbed their guided approach to choice “libertarian paternalism,” and showed how it could improve lending regulation, Medicare prescription plans, public schools, and marriage.15 Just as the law and economics movement that emerged from Chicago gave intellectual backing to the great deregulation of the 1970s through the 1990s, Sunstein became a leading proponent of a new behavioral law and economics movement that aimed to guide a rethink of law and regulation.16 Sunstein’s friend Barack Obama, a former part-time Chicago law professor, put together a presidential campaign platform replete with behaviorist ideas—and appointed Sunstein as his regulation czar after he was elected.


pages: 1,351 words: 385,579

The Better Angels of Our Nature: Why Violence Has Declined by Steven Pinker


1960s counterculture, affirmative action, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, availability heuristic, Berlin Wall, Bonfire of the Vanities, British Empire, Broken windows theory, California gold rush, Cass Sunstein, citation needed, clean water, cognitive dissonance, colonial rule, Columbine, computer age, conceptual framework, correlation coefficient, correlation does not imply causation, crack epidemic, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, demographic transition, desegregation, Doomsday Clock, Douglas Hofstadter, Edward Glaeser,, European colonialism, experimental subject, facts on the ground, failed state, first-past-the-post, Flynn Effect, food miles, Francis Fukuyama: the end of history, fudge factor, full employment, ghettoisation, Gini coefficient, global village, Henri Poincaré, impulse control, income inequality, informal economy, invention of the printing press, Isaac Newton, lake wobegon effect, libertarian paternalism, loss aversion, Marshall McLuhan, McMansion, means of production, mental accounting, meta analysis, meta-analysis, Mikhail Gorbachev, mutually assured destruction, open economy, Peace of Westphalia, Peter Singer: altruism, QWERTY keyboard, race to the bottom, Ralph Waldo Emerson, random walk, Republic of Letters, Richard Thaler, Ronald Reagan, Rosa Parks, Saturday Night Live, security theater, Skype, Slavoj Žižek, South China Sea, statistical model, stem cell, Steven Levy, Steven Pinker, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, theory of mind, transatlantic slave trade, transatlantic slave trade, Turing machine, ultimatum game, uranium enrichment, V2 rocket, Walter Mischel, WikiLeaks, women in the workforce

Much of what looks like a lack of self-control in the modern world may consist of using a discounting rate that was wired into our nervous systems in the iffy world of our pre-state ancestors, when people died much younger and had no institutions that could parlay savings now into returns years later.76 Economists have noted that when people are left to their own devices, they save far too little for their retirement, as if they expect to die in a few years.77 That is the basis for the “libertarian paternalism” of Richard Thaler, Cass Sunstein, and other behavioral economists, in which the government would, with people’s consent, tilt the playing field between their current and future selves.78 One example is setting an optimal retirement savings plan as the default, which employees would have to opt out of, rather than as a selection they would have to opt into. Another is to shift the burden of sales taxes onto the least healthy foods.

Burnout and fatigue from excess empathy: Batson et al., 2005a. 74. Lebanon war as a lapse of self-control: Mueller & Lustick, 2008. 75. The logic of self-control: Ainslie, 2001; Daly & Wilson, 2000; Kirby & Herrnstein, 1995; Schelling, 1978, 1984, 2006. 76. Ancestral versus modern discounting rates: Daly & Wilson, 1983, 2000, 2005; Wilson & Daly, 1997. 77. Myopic retirement planning: Akerlof, 1984; Frank, 1988. 78. Libertarian paternalism: Thaler & Sunstein, 2008. 79. Myopic discounting: Ainslie, 2001; Kirby & Herrnstein, 1995. 80. Hyperbolic discounting: Ainslie, 2001; Kirby & Herrnstein, 1995. 81. Hyperbolic discounting as composite of two mechanisms: Pinker, 1997, p. 396; Laibson, 1997. 82. Two selves: Schelling, 1984, p. 58. 83. Hot and cool brain systems: Metcalfe & Mischel, 1999. 84. Limbic grasshopper and frontal lobe ant: McClure, Laibson, Loewenstein, & Cohen, 2004. 85.