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Wednesday, April 23, 2008

Stumble, Predict, Nudge: Amir & Lobel on Rationality and Policy

To stumble is human. Finding patterns of such stumbling and designing systems that can prevent common behavioral failures is increasingly an area of study of the legal community – asking how can policy implement insights from new social science research. In a forthcoming review essay in the Columbia Law Review, On Amir and I consider the promise, as well as challenges, of such implementation. In Stumble, Predict, Nudge: How Behavioral Economics Informs Law and Policy, we explore two new books which bring together some of the most significant and interesting new research on human fallibility and will prove extremely valuable to such efforts.

 

DAN ARIELY’S, PREDICTABLY IRRATIONAL: THE HIDDEN FORCES THAT SHAPE OUR DECISIONS (HARPERCOLLINS, 2008) is rich with concrete examples on how individuals make systematically poor decisions. Ariely’s case studies are all highly relevant to our daily lives. For example, in a series of experiments, Ariely finds new twists on the well-established placebo effect. He shows a placebo effect of the price of drugs, and consequently, the relative ineffectiveness of an equivalent, but marked down, or “on sale”, drug. In other sets of experiments, Ariely examines why the average person allows herself to steal office supplies or communal food, but would not steal the equivalent value of the items in cash. Dan Ariely, the Alfred P. Sloan Professor of Behavioral Economics at MIT’s Sloan School of Management, as well a founding member of the Center for Advanced Hindsight, presents in the book not only the latest social science research on the various forces that drive irrational decision-making in predictable patterns but also attempts to outline the systematic causes of such erroneous judgments and decision-making, opening the door to potential remedies of these failings. The research suggests for example that signing an honor code can bring forth awareness, or prime, individual standards of honesty and can curb subsequent dishonesty. The concrete examples as well as the broader processes analyzed in the book are thought-provoking and relevant to most any field of law.

RICHARD THALER & CASS SUNSTEIN’S, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS (YALE UNIVERSITY PRESS 2008) USES the insights of behavioral economics in order to develop both an overarching theory of the role of government and a myriad of practical solutions to core regulatory problems. Thaler and Sunstein argue that if behavioral economics teaches us that people do not always act in their best interest, then policymakers must rethink the tools of regulatory command to effectively change behavior. Nudge thus urges policymakers to design policies that improve people’s well-being through “gentle nudges” rather than paternalistic or coercive measures. Nudge builds on previous work in which Sunstein and Thaler argue that “libertarian paternalism” is not an oxymoron.

 Our review essay examines both the conceptual implication that follow from adopting the field of behavioral economics into policy, including the balance between legal and non-legal control mechanisms and the boundaries between “liberal paternalism” and over-coercive solutions, as well as  some of the books’ concrete policy suggestions. The essay warns against over claiming the ability to “improve decisions,” as reads the subtitle of Nudge, simply through identifying behavioral biases. The observations that people make imperfect decisions are well established in both books. The failures described consist of a broad range of behaviors and different underlying mechanisms. Individuals have limited information, are limited in their capacity to process large quantities of data, have limited attention span, calculation capacities, and memory resources. And perhaps most distinctly, they are limited in their willpower and emotional capacities. All of these fallibilities come into play in the cases examined by Ariely, Sunstein, and Thaler but the correction mechanisms in response to each vary significantly. The review essay will highlight the biases described in the books as caused by different mechanisms, including over- and under-usage of cognitive processes. Therefore, the prescriptive nature following these findings must be cautious and narrowly tailored to address each behavioral bias. We argue that Thaler and Sunstein at times overestimate the ability of choice architecture to solve the social problems with which they are concerned. We also inquire into the notion of “debiasing” and “libertarian paternalism.” The review contemplates whether there can indeed be a line between libertarian and non-libertarian paternalism and whether the involvement of government in correcting behavioral biases creates a slippery slope of more profound intervention in people’s liberties and choices.

We welcome your thoughts!

Posted by Orly Lobel on April 23, 2008 at 04:04 PM in Orly Lobel | Permalink

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Why do you feel the need to improve other people's decision-making skills and expand their limited information base? Maybe they are happiest doing things exactly the way they do them.

Posted by: Anthony D'Amato | Apr 24, 2008 3:04:50 AM

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