27 July 2009

When Is It Okay to Nudge?

Policy makers are taking a hard look at so-called "soft paternalism" these days, i.e., the idea that people who are making the "wrong" choice can be guided to the right choice by changing the default option. Soft paternalism is a response to the deviation between predicted and observed behavior. For example, many people say that they want to save for retirement, but then fail to enroll in a retirement contribution program. Instead, they "choose" to contribute nothing, i.e., they do not change their retirement contribution from the default ("contribute nothing") to an alternative ("contribute x% per month").

Note that economists often assume that rational individuals will make the choice that they prefer and that suits them. When they observe low retirement contributions, they conclude that people PREFER low contributions. Psychologists, OTOH, claim that people are boundedly rational, i.e., they do not make calculations for every choice they face. In the past, "too low" retirement contributions would lead economists and psychologists to make different recommendations. Economists would accept the contributions as rational and optimal; psychologists would say that they are boundedly-rational and suboptimal. Their policy recommendations would also differ. Economists would recommend providing more information (for better choices); psychologists would recommend a mandatory minimum contribution. Soft paternalism strikes a compromise -- it changes the default contribution from zero, but it allows people to choose (optimally!) to change it back.

Soft paternalism has had some good success. On the pension side, more people are saving more money. In another example -- donating one's organs when dead -- the results are even more striking. In countries where people must check a box to agree to donate their organs, only 10-20 percent of people participate. When they must check a box to NOT donate, participation is 80-90 percent. Since it's not too hard to assume that people have similar tastes for donation, we can see that most of this difference arises from the default option.

Given the importance of retirement contributions, organ donation, etc., soft paternalism promises to bring a lot of benefits at low costs, and that's why we are going to see a lot more of it.

Are there any drawbacks to soft paternalism? I can only think of one: Say that the default has been x for many years, and I have "chosen" the default for many years. Now say that the default is changed to y. I may just "choose" y without looking at it. Put differently, I will pay less attention when I am looking at the default after 5-10 times than when I am looking at it for the first time. So, soft paternalism is a great idea for that first time I enroll in a retirement plan, but it needs to have many more flags if it is introduced to my retirement plan after 10 years...

Bottom Line: People are boundedly rational, and we have to be careful not to assume that they can process and choose among complicated (even simple!) options. Although we can improve things by changing the recommended option to an "expert's choice," we have to make sure that people know when such a choice has been made for them -- and then make it easy for them to change that choice.

6 comments:

Gayle said...

"Soft Paternalism"--a much nicer name for what we used to refer to in the direct marketing business as the "negative option" or, no response means you just bought it (like the old book-of-the-month clubs.)

I regularly use this approach in my work to streamline the approval chain. ("If I dont hear from you by (date) I will assume this final draft meets with your approval.")

The negative option works because people are more likely to take the path of least resistance, which is to do nothing (vs. take action.)

You are correct on the downside; you risk losing trust and goodwill if the choice (non-choice?) that one makes isn't obvious, transparent and easy to reverse. (Ever try to unsubscribe to a service you "requested" by means of deception? Were you ever angry to discover you unknowingly 'bought' a service plan you didn't want along with a product you bought?)

Done well, the negative option can create goodwill--offering the desired product/service/outcome along the "path of least resistance." One less thing to do, one less decision to have to make.

dWj said...

On the extensive margin this has some downside -- I'd also note some other costs with taking action -- but if "soft paternalism" is a substitute for "hard paternalism", I'm pretty sure it's better in every way.

"No response means you bought this book" is better than "we're going to force you to buy this book", but approaches it "response" has to consist of mailing back a book, insured, along with a receipt, and a notarized copy of your birth certificate, a five page essay on the nature of compulsion, and an original proof of Fermat's Last Theorem. If it creates a back door to more hard paternalism, that's something to be wary of, but otherwise, I'm way in favor.

SF said...

This helps me to think about two quite different topics I've been faced with recently that really have the same foundation - how to help people make a choice when there is evidence that one of those choices is the most likely to serve the situation best. Still, I wish there was another term for 'soft paternalism'.

EF said...

There is. The traditional term was 'being a mom.' ;-)

AMS said...

haha i like that term "mom". i've come across the term as "libertarian paternalism" and "architecture of choice", both from the guys who coined the term "nudge". (thaler econ and sunstein at uchicago).

Tom said...

The "change the option after 10 years" dilemma happened at my work.

When switching from one 401k provider to another, our HR dept changed the default investment option from a Money Market account to a Balanced Fund (stocks and bonds). Those of us with no elections, who had been happily contributing to a Money Market, were now contributing to a Balanced fund after the transition.

The transition happened in August 2008, one month before the market melt down.

I and at least a dozen coworkers smugly thought "thank god I'm in cash", while our latest contributions were sinking like a rock. Thankfully, the new default only applied to new money, contributed after the transition.

This Nudge business can make an ass out of u and me.

However, the damage had been done, and you gotta buy low, so I left everything alone.