Sunday, April 25, 2010

Choosing Choice Architects

Some time back, I had a post discussing Nudges, an interesting book by Richard Thaler and Cass Sunstein arguing for what they call libertarian paternalism. As I pointed out there, one problem with the proposal is that it is easy to convert libertarian paternalism—presenting alternatives to people in a way designed to get them to choose the one that they would choose if they were acting in a fully rational way in pursuit of their existing objectives—into ordinary paternalism, choosing for them. All the choice architect has to do is to raise the cost, in time, money, convenience, and/or information, of choosing the alternative that he believes the chooser doesn't really want to choose—or that the architect himself doesn't want chosen. And I offered a real world example, in a private context, of just that happening—twice.

Some of these issues have recently been hashed out on Cato Unbound in an exchange involving Thaler, Glenn Whitman, who is a libertarian critic of libertarian paternalism, and other posters. Thaler protests that what he is in favor of is "one-click" libertarian paternalism—meaning that it should, wherever possible, be costless to choose the disfavored alternative. But he recognizes that other people might use the idea in less libertarian fashion. Which got me thinking... .

In other contexts, it is useful to shift the discussion from outcomes to mechanisms. It is straightforward to argue that transport firms ought not to engage in various monopolistic practices. To get from there to transport regulation requires some argument to show that the regulators will reduce such practices rather than increasing them—hard to manage, given the empirical evidence provided by the history of the ICC and CAB. Looking at it that way moves us from the theory of optimal regulation to public choice theory, from what regulators should do to what they will do.

Suppose we apply that approach here. Thaler et. al. argue, convincingly, that one cannot avoid choice architecture, since individuals are making choices and some process is deciding how those choices are presented to them. We can, however, imagine different processes to make that decision, different ways of selecting our choice architects. We could, for example, leave firms free to decide for themselves whether automatic payment of part of an employee's wages into a retirement system is the default, with the option of choosing to get all the money immediately, or whether the latter is the default and the former the option. Or we could have a government agency make the decision for them. In choosing between those alternatives, one obvious question is which will come closer to Thaler's goal of nudging individuals into making the choice that bests serves their goals, while leaving them free to make other choices at no significant additional cost.

It's tempting, at least for libertarians, to claim that the answer is obvious, that the firm has, for conventional economic reasons, an incentive to tailor what it produces to the desires of its customers, and a similar incentive with regard to employees. Hence one might expect the firm to always produce the version of choice architecture, for both groups, that was optimal.

But that is to ignore a central element of Thaler and Sunstein's argument, that since individuals are not perfectly rational, a choice architect can take advantage of their irrationality to control, at least to some extent, their choices—including choices such as what firm to work for or what product to buy. The obvious tactic for a choice architect, including a private one, is to nudge individuals in the direction not of their interests but of the objectives of the architect.

Which brought me to something else I had been thinking about, not libertarian paternalism but the technology of making firms work. There are some I deal with—the lumberyard where I get material for carpentry projects is one example—which feel like happy places. Employees are friendly to customers and each other, and it does not feel synthetic. Asked for advice, they give it, even when not in their immediate interest; I am thinking now of a camera store which, when I asked them what scanner I should buy to turn slides into digital photos, told me I would be better off sending the slides to a service, not theirs, that would scan them for me.

I have never run a firm and would probably not be good at it, but presumably some people who do run firms know how to do it in a way that results in the people involved acting in a way that takes account of the interests of both customers and fellow employees. And I think that, to a considerable extent, customers and employees can recognize firms that work that way, despite the attempts of firms that don't to pretend they do.

I would prefer, as customer or employee, having my choices architected by those people to having it done by a government agency.


William B Swift said...

I thought it interesting that your reservations about their argument is similar to mine on Nozick's in "Anarchy, State, and Utopia". It is far to easy to extend his argument for the minimal state - externalities and risk - to advance almost any government program. (Or so my memory goes, I read it more than 20 years ago and my memory is a bit hazy on the details of his argument.)

Anonymous said...

I've seen firms like that, too, and I enjoy working with them. But do you know of any large firms like that? In reality, the attraction of patronizing such a firm doesn't seem to be enough incentive to outweigh, say, Wal-Mart prices. The result is a pan-local monopoly, reinforced by economies of scale, in which a firm like you describe would have a hard time starting or surviving.

I guess the theory of libertarian paternalism (and I agree, it offers a lot of temptations to regulators) is that one would rather have the choice-architects be at least theoretically working in the public interest and accountable to the public than have them openly working only for their own interest. I don't have a lot of faith in either approach....

Doc Merlin said...

If people are irrational then the people making the nudges are likely to make errors in their judgements, this leading to the creation of systematic irrationality in the populace.

Anonymous said...

Given that mistakes are inevitable, it would be better if the mistakes were random rather than everyone making the same mistake. In other words, rather than trying to nudge people into the correct choice (which may not be correct), better to randomize the selection bias.

Lo Statuz said...

When paternalism is discussed, the paternalists are usually seen as altruists, though possibly misguided, and perhaps with cognitive biases. I say paternalists are consumers. The good they want to consume is meddling, that is, the pleasure of interfering in the lives of others for the putative good of those others. Lots of people consume meddling via computer games like The Sims, but for some consumers, virtual meddling is just not enough. There's room for entrepreneurs to invent new ways to satisfy those consumers more efficiently, without all the public choice issues associated with government-produced meddling.

Jonathan said...

I scan my own negatives and slides and get good results, having had much worse results from giving them to a shop.

However, home scanning is very time-consuming. If you can find a shop that provides good quality, it will save you a lot of time.

Anonymous said...

"Amit"'s post is comment spam.

The Mad Bomber said...

It is inaccurate to say that the market amounts to "choice architecture" in the same vein as government. The central planning of Big Brother is in no way analogous to the coordinative outcomes of the market.