You know what really gets an economist excited? Models.
Not these kind. Well, I’m sure some economists like these models.
Ah, that’s better.
Models are a tool to easily reference and generalize the world around us. However, this may come as a surprise to some of you, so sit down. Our world is messier than simple supply and demand graphs and perfect rationality. We make mistakes when weighing the costs and benefits of our decisions. We are overconfident. Our memories are tricky. Sometimes, friends tell us we are acting irrationally. Behavioral economics looks into these nuances, while showing the shortcomings of traditional economic models.
Knowing this, what do we do from here?
The 2017 Economics Nobel Prize winner, Richard Thaler, has a few suggestions. First off, congratulations to him for winning the Nobel Prize for his contributions to behavioral economics. Thaler has always been intrigued by the messiness of human behavior and has thought of different ways to nudge people into making better decisions. He wrote about this and other ways we are steered in the real world in his best-selling book “Nudge” with Cass Sunstein.
A nudge is an attempt to influence people’s decisions without forcing them outright. It’s actually a weaker influence than that, because it’s differentiated from economic incentives. We see this when we’re given information on the damage smoking does to our lungs on boxes of cigarettes. We also see nudges in the way choices are presented to us, coined by Thaler as “choice architecture”. One of the easiest places to see choice architecture is at the grocery store.
The second you walk into a grocery store, you’re bombarded with nudges. With Halloween around the corner, it is no coincidence the Reese’s candy bags (now sold at 2 for $5) are right at the front door. The positioning of all food and advertisements in a grocery store is designed to influence the choices you make. It’s not that the grocery store is forcing you to buy Halloween candy, but the framing of the store certainly impacts your decision.
This isn’t to say that these nudges are necessarily bad. Maybe Kevin wouldn’t have remembered it was Halloween if it wasn’t for the strategic placement of the Reese’s Pieces. Or maybe he loves Reese’s candy bags and would rather just enjoy them while ignoring the desperate trick or treaters ringing his doorbell on Halloween. In any case, how far should these nudges go?
Thaler thought, if this can happen in a grocery store, why can’t this happen in government? It already has.
Why do you think we have nutrition facts? The goal isn’t just to inform us of how many carbs are in our Lucky Charms. Government is hoping by showing us how much junk Lucky Charms is putting into our system that we’ll decide to maybe eat less in favor of carrots. What they don’t know is that carrots aren’t magically delicious.
Thaler and Sunstein call this method of governance “libertarian paternalism.” It is libertarian in that we still have the freedom of choice, but paternalistic in that they still encourage us to make “better” decisions.
Okay, so I want to include some push back on Thaler’s ideas, because this is a fairly controversial field in economics. Some people have gone so far as calling behavioral economics a “bullshit science.”
Some people much smarter than I see the messiness of people and the idea of libertarian paternalism and respond with something along the lines of:
Fair. People are irrational and our models aren’t perfect fits for a human society. We need to remember to keep humans in our models. However, your model of human imperfections isn’t big enough. What about the irrational decisions of the nudgers? How can you claim humans are fallible and then talk about the infallibility of those who are making decisions in nudgery? Yeah, I said it…nudgery. Also, how do we even begin to determine what is best for every individual of the world, especially without consulting the individuals first?
To say that people act irrationally is to assume some perfect rational man exists. We do not know the context behind every decision. Maybe you think that James shouldn’t drink so much Pepsi that he single-handedly keeps them in business. However, you have no right to claim what the rational action would be, or to nudge him by calling him out in a blog post.
These are all fair critiques of Thaler’s model that still haven’t been satisfactorily answered. Maybe a future Nobel Prize winner will answer them. However, Thaler has certainly changed the landscape of economic studies for better or for worse. He’s woken up the mainstream of the economics discipline to the idea that maybe models can’t be used to predict everything perfectly, which should be applauded. But, behavioral economists need to make sure their nuanced models don’t get too big for their paternalistic britches.