Sunday, January 18, 2009

Rationality, Nudges and Slippery Slopes

In order to explain and defend the economic approach to human behavior one must justify the assumption that individuals are rational, that they tend to take the actions that best achieve their objectives. One argument I have long made is that, while rational behavior is not a complete description of how humans act, it describes the predictable part of their action. In most situations there is one correct way of acting to achieve an objective and lots of incorrect ways someone could act. Unless one has a theory of what particular mistake someone is going to make, the best approach is to treat the mistakes as random error, to predict his behavior on the assumption he is rational while realizing that the prediction will sometimes be wrong.

So far as I know, neither Cass Sunstein nor Richard Thaler ever read either of the books in which I made that argument. But their recent book Nudges offers a rebuttal. Using evidence from behavioral economics, they argue that irrational action is not merely random error. There are patterns to it, predictable ways in which individuals act that are inconsistent with the economist's assumption of rationality. Thaler and Sunstein propose that those setting up alternatives for someone else to choose among—"choice architects" in their terminology—can and should take advantage of those patterns to nudge the chooser into making the choice they think he ought to make, the choice he would make if he were fully rational. This is the approach that I described in an earlier post as "soft paternalism" and that has been described elsewhere as "libertarian paternalism." It is paternalism because it is getting people to act as someone else thinks they ought, libertarian because it leaves the individual free to act in a different way if he wants to—a nudge, not a compulsion.

The argument as stated is persuasive and interesting. As the authors point out, any time you are offering someone else choices—whether "you" are a government agency, an employer, or a firm selling something—you are necessarily deciding in what form to make the offer, hence engaging in choice architecture. If you are going to do it, you ought to know what you are doing and do it in a way designed to produce the result you want to produce—in their case, choices that result in the chooser better achieving his own goals.

The libertarian part of the proposal depends on leaving the individual free, at no significant cost, to make the choice you don't want him to make. But if you don't want him to make that choice, it will be tempting to make it more and more difficult—to require him to fill out forms, file them in the right place, perhaps even to neglect to tell him that forms exist to be filled out, that the alternatives you don't want him to choose are available. There is thus a serious slippery slope problem, making it possible for libertarian paternalism to be used as the justification for government actions that end up as paternalism, or compulsion for other purposes, that is far from libertarian. The point occurred to me when I read the book. It was reinforced by a real world experience at about the same time.

It was the beginning of my daughter's first year at college and the college sent us a bill, a list of charges and a total we were to pay. One of the items in the list, included without explanation, was ten dollars for the "Green Edge Fund." Being curious, I did an online search to find out what it was. It turned out that it was a fund to subsidize environmental projects by students. It had been voted in the previous year—as an optional ten dollar per pupil payment.

"Optional" means that you don't have to pay. We sent in our check minus the ten dollars and I sent an email to the president of the College, pointing out that he was billing parents for money they did not owe. I received back an apologetic email from an administrator, explaining that the program was a new one and they had not yet gotten everything set up properly.

A month or so later I received a bill from the College for ten dollars. I wrote back to the office that sent the bill, pointing out that they had billed me, and all other parents, for ten dollars we didn't owe, that rather than my owing them money they owed money to all of the parents who had paid the ten dollars. I also sent an email to the administrator. A few weeks later, I received second bill for ten dollars—shortly followed by an email from the administrator telling me that the matter had been taken care of and I could ignore the bill.

Recently we got our bill for the second semester. It included a form for our daughter to sign and hand in during the first two weeks of the semester requesting a waiver of the charge for the Green Edge fund. The form contained a description of the fund—put in terms of how the money would be used, not how they hoped it would be used—that I suspect most students and faculty at the college would regard as fraudulent advertising if it were the product of, say, the phone company.

The bill did not include any mention of the fact that the College had, in the previous semester, charged parents for some tens of thousands of dollars that they did not owe, nor any offer of a refund to any parent who wanted it.

As it happened, my wife went to the same college thirty-some years earlier—and had had a similar experience. In her day it was a one dollar per student charge to support one of Ralph Nader's PIRGs. A student could get out of it by going to the right office on the right day and telling them he didn't want to pay it. On further enquiry, we discovered that the one dollar per student "donation" was still there, although there did not seem to be any effort to inform parents or students that they had the option of not paying it.

An optional charge where the default choice is to pay it is the sort of thing Sunstein and Thaler propose, a nudge in the direction of doing what those responsible believe, possibly correctly, that most of those nudged would want to do if they took the time to think about it. But the people constructing the choice architecture know what result they want to get, they believe they are doing good and so not constrained by what they themselves would consider proper principles of morality and honesty in a commercial context, so it is very easy to make the "wrong" choice more and more difficult and obscure until what is optional in theory becomes mandatory in practice.


Anonymous said...

This reminds me of how restaurants may offer you a large menu of options, but will also construct their menus so that you are more likely to choose the more profitable items.

Thaler and Sunstein want the government to engineer more desirable outcomes, but are sensitive to libertarian criticisms; in particular, they do not want a coercive government that simply forces citizens to behave in the "correct" way.

I think their suggested compromise highlights a weakness in the common libertarian conception of freedom, which places a lot of weight on explicit coercion, and suggests that only the government (and not private market actors) can truly *restrict* freedom. When we talk about freedom, we should talk about the freedom of X from Y to do Z, but instead there is a tendency to ignore Z entirely, and therefore to only consider cases where Y is the government (which has the legitimate threat of force as its disposal).

I believe that this libertarian-ish framework is a flawed way of thinking about freedom, but Sunstein/Thaler exploit it to propose a vision of active liberal government that should be compatible with libertarian free-market views.

Anonymous said...

Despite the slippery slope argument, which is as sound as slippery slope arguments get, I think Sunstein/Thaler make a significant contribution to the discourse by recognizing that for the most part, choice is inevitable.

At some point, in private and public life, we have to choose: the restaurant menu, the retirement account, the tax deduction. Even if the choice architect declines to select a default and the choice must be made consciously, the framing of the options WILL have an effect.

The slippery slope issue, basically, has always existed and always will because choices must be framed. If anything, Nudge shows us how the framing can be made less coercive, and helps us identify when a choice architect is clearly trying to get us to do something. At least we are now aware that we're affected by framing, and can fight back.

Chris Bogart said...

This is a bit of a digression from your post topic, but your mention of human rationality makes me think you might like the book
I've just been reading, John Anderson's "The Adaptive Character of Thought". (I hear he has newer books out that are better, though). He's a cognitive psychologist who tries to model human behavior on cognitive tasks by assuming that they do things the most rational way possible, given the resource constraints of the human brain. And that the choices we think of as irrational often turn out to be an optimal balance between cost of processing time/effort and cost of making a suboptimal choice.

This is a big deal for cognitive psychologists, because it means they can attempt to build accurate models of human behavior, working backwards from the assumption of optimality, without being held up waiting while the physiologists muck about trying to figure out how the brain actually works.

Anonymous said...

In most situations there is one correct way of acting to achieve an objective and lots of incorrect ways someone could act.

I'm not really sure what you mean by "correct" here. But if you're discussion optimal solutions to game theoretic problems, then it often the case that mixed strategies are optimal solutions. For games where this is the case, "rational" behaviour is exactly unpredictable. I suspect that most of the intractable economic "games" we play have solution strategies which are extremely mixed.

Anonymous said...

There's nothing wrong with the libertarian conception of freedom. What their "compromise" suggests is that they think they know better than private individuals where their interests lies, and that they and not those individuals should make decisions on moral matters. This is paternalism in a new guise, and is unimpressive as far as it goes. One has the freedom to do something, on the understanding that they cannot coerce someone else to provide them with the means to do so... also libertarians do not believe only the government can restrict freedom. Common criminals can too. The response to both is the same.

Anonymous said...

I don't see that this is a slippery slope at all. Slippery slope implies small steps through gray area to an undesirable result. But your example is of a clear bright line being crossed. As soon as the fee is compulsory, or a nuisance to avoid, it is clearly and obviously no longer a nudge.

Unknown said...

Using devious or manipulative strategies to 'nudge' someone into a choice they might otherwise not make sounds a lot like fraud to me. Your university fee experience is a case in point.

To say that some people make 'irrational' choices when you deny them the opportunity [or information] to make a rational choice is specious at best.

Michael Kolczynski said...

You must really be about "the principal of matter." I don't know how long it took you to correspond with them, but I suspect you may have been out more than ten dollars taking them time to do so! Talk about a rock and a hard place!

Either pay the 10 dollars or pay over 10 dollars in opportunity costs.

Scott said...

FWIW, I seem to recall Sunstein being very clear that one of the first "nudges" he wanted to make was abandoning the default "at will" employment in favor of a default employment contract larded down with whatever employer restrictions he thought were worthwhile at the time. (I've only heard Sunstein on this topic, not Thaler.)

This seems to highlight a neglected aspect of the libertarian-paternalism argument: an explicit rejection of Burkean/Hayekian social learning. Sunstein and Thaler talk as if they think that the two options are 1) government determines default choices based on X. and 2) default choices are entirely arbitrary.

A third choice, of course, is that default choices themselves evolve within the context of voluntary human activity, with better ones being systematically selected over poorer ones, and humans acquiring a bit of accumulated "social" wisdom by observing the existing defaults. In this environment, government imposition of a new default is more likely to do harm than good.

Charles Collom said...

As I read the post, what struck me was the possibility of 10,000 small fees each of which take 2-5 pages of opt-out paperwork.

The first thing that comes to mind is the cottage industry of opt-out agents that will spring up: Fill out this one form online and we'll do the rest. The user data is then automagically reproduced on the relevant forms and submitted.

So, as either the number of fees and/or the cost of the fees increases the desire to opt out will increase; this can only be directly countered by making the cost of opt-out higher. As the fee-payers and fee-leviers lock into battle, the opt-out agents stand to gain.

Charles Collom said...

@ Alewbel...
The "nuisance" value of an act is different for every person. Setting aside the obvious difference in return (in investing 30 minutes to fill out and submit opt-out papers) between an executive who bills out at $500/hr and an 18 year old who makes minimum wage at Das Kafe Haus there are other considerations. People with developmental or physical disabilities will be put at a potentially serious disadvantage. (Remedied, no doubt, not by making the process easier for everyone, just by giving certain people special help. Another sticky wicket emerges.)

Anonymous said...

how can I nudge the world
if I can't nudge myself

Mike Huben said...

What a load of sophistry.

You may only need to "nudge" a few cattle to send the whole herd to the slaughterhouse. Then you can lie to yourself that you didn't manipulate them because you didn't use outright coercion and because there was some form of "escape" available to them. Not to mention that your strategy was part of a long term tactics that didn't allow more than a fraction of the cows to escape.

"Rationality" is another load of bollocks: what is really meant is rationality based on the values of the paternalist framers, which may not be the values of the choosers. Perhaps the optimal "fully rational" solution might be to kill the framer.

Nor is there a reason to worry about "slippery slopes": the usual practice is simply to bundle such extra charges. The only times they are made voluntary are when there are political or legal reasons why they cannot simply be bundled. Such as the checkoff to donate a dollar to the presidential campaign fund on the 1040 form.

Using a dichotomy between rational and irrational is also misleading: human thinking is heuristic, and logical (or economic) rationality is one of the many tools used heuristically. I recommend my
Distrust in logic and
Skepticism of Rationality.

Libertarians lie to themselves enough by framing without adding this too.

Jacob said...

"In most situations there is one correct way of acting to achieve an objective and lots of incorrect ways someone could act."

If it is libertarianism you preach, then this is a very strange statement. Surely, as a libertarian, you must also be a relativist. Why else would free choice in all matters be called for?

If you know the "correct" way of doing something, then should that way not be advocated? Who could argue with the fact that humans are complicated beings, and that their problems always exist in a complicated and relative context?

Just another example of how libertarianism makes no sense in a complicated world...

Tuco said...

I was charged a 3.50GBP 'cover charge' on my restaurant bill earlier this evening. I was so miffed by it I didn't leave a tip. If a significant portion of the other diners do this (fat chance though, it was a pizza place across from Charing X station in central London) then it should provide the waiting staff with an incentive to provide negative feedback to the management to scrap this charge.

But that probably will not happen unless a significant portion of the other diners have the same sense of moral outrage (and small wallet) as me.

Perhaps that is why in the second year there was a opt out for the Green Fund provided by the school's administration. A significant portion of the bill payers had protested as you did and the management of the school had then given negative feedback to the administrators.

I guess that means that there must be some percentage of individuals who consume a good/service (served pizza's or university educations) who need to complain for the providers of that good/service to amend their pricing systems.

Estimating that for a given provision of good/service would certainly be fascinating, but difficult. How exactly would one figure out the percentage of patrons that must complain of pricing system in central London pizza restaurants for the management amend their ways? How would this compare to similar restaurants in New York? Paris? Shanghai?

Anonymous said...

Interesting read! Thanks..

Daveon said...

I made very similar arguments to you on the nature of advertising and the impact on the concept of "choice" in economic decisions and you, to say the least, dismissive.

Glad to see that you're considering this.

A more pertinent example to review is how financial products are sold and marketed and how that applies to the current situation we find ourselves in.

Scott said...

-->If you know the "correct" way of doing something, then should that way not be advocated? Who could argue with the fact that humans are complicated beings, and that their problems always exist in a complicated and relative context?

Just another example of how libertarianism makes no sense in a complicated world...<--

I think of it this way: On a grocery shopping trip there is basically one collection of items (or at most a handful given substitutes) which would maximize my utility given my utility function. For a variety or reasons, including ignorance, forgetfulness, the limitation of human imagination, etc), I am unlikely to buy that exact collection of items.

Traditionally economists would treat the way my actual behavior differs from my ideal behavior as random noise, as they lacked a theory of how I would make my mistakes. Thaler and Sunstein are positing a theory of how I would make systematic mistakes, and suggest a way to improve my decisions over time.

Scott said...
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Scott said...

-->Nor is there a reason to worry about "slippery slopes": the usual practice is simply to bundle such extra charges. The only times they are made voluntary are when there are political or legal reasons why they cannot simply be bundled.<--

Mike, the whole point behind "libertarian paternalism" is that the individual gets to make his own choice. Bundling and making them involuntary violates the libertarian paternalism constraint, and, is, thus, not what is being discussed.

Anonymous said...

There is a cost analysis to be done here I think David. My wife goes nuts about these things, and can spend many, many hours tracking down the right person and form and so forth to cancel these sorts of charges. (Look at a phone bill if you want to see this in spades.)

I often point out to her that spending fifteen hours to save ten dollars means she values her time at 67 cents an hour. However, there is an additional benefit of satiating your rage, I suppose beyond the pecuniary reward.

Adding red tape is simply a matter of raising the cost of one alternative over another, (all costs considered), so this is more like a pricing architecture than a choice architecture.

Steve_Roberts said...

Scott: "For a variety or reasons, including ignorance, forgetfulness, the limitation of human imagination, etc), I am unlikely to buy that exact collection of items."

The point is that no-one can determine what that exact collection of items is. The idea that a government agent can know the exact collections is laughable, the idea that they know a better approximation than you is equally absurd, and the idea that your life would be improved by having your choices compromised - even if there is no actual coercion - is to me repugnant. It is actually about your adulthood in that you decide for yourself, the sakme feelings that make us feel subliminal advertising is wrong should alert us to the wrong in nudging and the contradiction in the slogan - it is not a term - 'paternalist libertarianism' or was it 'libertarian paternalism' or whatever.

Jacob said...

So-called paternalistic philosophies, such as social democracy, does not try to decide what is best for an individual in a specific situation. That would be absurd. Juxtaposing libertarianism with paternalism like this does not work, because neither of the philosophies seeks to guide detailed choices.

The discussion about individual choices in a political context with respect to details like those described in the post is therefore misguided and irrelevant.

In social democracy, the goal is to find a balance between "paternalism" and free choice, so that the maximum utility can be achieved for society as a whole while retaining liberty. Hence, just like Thaler and Sunstein, one must try to come as close as possible to a working theory using as much data as possible. The theory, however, must be applied to the collective, and not the individual.

For instance, it is rather easy to come to the conclusion that mandating the usage of seat belts in cars is beneficial for society as a whole. If that is not mandated, large costs and human tragedies will occur, whereas little can be gained in not mandating it.

Trying to come up with a "correct" solution is indeed a slippery slope, much more so when it is applied to the individual, as opposed to a collective.

Anonymous said...

They hadn't gotten around to explaining that the $10 is optional. That's a good one. Since these people are supposed to be the intellectual elite, they should notice that omitting the explanation of optionality is a fraud.

The people in charge of educating your daughter attempt to pick your pocket. It's insulting, and should give you some qualms about whether these are the right people to do the job.

This "choice engineering" thing sounds basically dishonest. It gives the "planner" a chance to have it both ways. He can claim he didn't impose anything on anyone. He then makes people pay in terms of time, exasperation, and requirement of carefully jumping through difficult hoops, in order to avoid the "optional" payment. The planner gives you the option of wasting $20 of your own time, in order to avoid his fee of $10.

Gary McGath said...

What that college was doing was simply fraudulent billing. There's no "slippery slope" about such a practice, just outright dishonesty.

Anonymous said...

Is it irrationality or inexperience?

Tim Harford addresses the issue of irrational behavior in his book, "The Logic of Life: The Rational Economics of an Irrational World". He argues that the case for irrational behavior is overstated, because experiments that show irrational behavior to be common invariably place people in novel situations. Experiments that deal with people in contexts for which they have extensive experience, on the other hand, show very rational behavior.

Harford gives several examples where optimal choice would seem to require computational abilities beyond normal human capacity, and yet with experience people develop intuitions that give near-optimal behavior.

In particular, Harford discusses one very successful professional poker player who got there by applying game theory and computer analysis extensively to come up with an optimal playing strategy. He found that professional poker players were already using pretty close to optimal playing strategies, arrived at by experience and intuition.

Thomas Lindgren said...

"Nudge" seems like a fairly flimsy excuse for sticking the collective nose in everyone's business (any bets on how long the lofty principles of when to nudge would last?)

But for the sake of argument: what is a suitable choice architecture for government officials to minimize waste, corruption, spending increases, while hopefully optimizing proposed outcomes?

Anonymous said...
This comment has been removed by a blog administrator.
Henry Troup said...

David, you may find this Risks item relevant to the topic:

Normal Accidents and Black Swans

It references an item by someone else on rational predicability: "The dimensions Taleb identifies are nature of the probability
distribution (thin-tailed versus heavy or unknown tails) and complexity of
the cost, particularly the sensitivity of the cost of finding yourself in a
particular state for small variations in that state. Taleb's 4th quadrant
is characterized by systems in which rare events dominate the total cost."

Anonymous said...

... while rational behavior is not a complete description of how humans act, it describes the predictable part of their action.... Unless one has a theory of what particular mistake someone is going to make, the best approach is to treat the mistakes as random error, to predict his behavior on the assumption he is rational while realizing that the prediction will sometimes be wrong.Dan Ariely, in Predictably Irrational, disagrees: not only does people's actual behavior diverge from what the "rational consumer" model would predict, but it diverges in consistent, predictable ways. IIRC, each chapter of the book addresses a different type of consistent "irrationality". He mentions once or twice the sort of "choice management" that Thaler and Sunstein seem to favor (I haven't read Nudges yet), but it's not a central point of his book.

I too have some problems with the idea of government doing this sort of "choice management" to nudge people in the "right" direction, but let's face it: corporations (and, as David points out, Universities) have been doing it to customers and employees for many years, teachers have been doing it with their students for even longer, and I imagine that particularly psychology-savvy individuals have been doing it with their friends and lovers for longer still. Why should government be left out of the party? :-)