Revealing Revealed Preferences

I wish I had as much money as Thaler. Presumably, among the reasons I don’t are because I neither save enough nor work hard enough. I take my boys to Phillies games, costing money and time, among other diversions that thwart my stated goal of being rich. Would I be better off if someone nudged me to save more money and to spend more time working by making it more difficult to watch these sporting events, such as the Phillies kindly did for most of my adult life or the 76ers’ current attempts to make me more productive?

Thaler and the other libertarian paternalists repeatedly emphasize that they want to make people better off as judged by themselves. If I say I want to be rich, but then fail to do things that are likely to lead to that outcome, does that mean that I need to be nudged or does it mean that my stated goal was a highly conditional statement (shorthand for “I want to be rich as long as it means I don’t have to work very hard or give up any consumption in the short term, otherwise I would rather continue doing what I’m doing perhaps while wearing a monocle and a top hat”)? Whether a nudge makes someone better off as judged by himself depends crucially on whether we think actions or words better reflect the person’s subjective judgment.

That question — should we believe actions or words? — is not one that admits an easy answer using the tools of an economist, unless that economist is willing to abandon the subjective valuation perspective and simply impose some kind of external judgment (of course people want to save more, get more education, be thinner, procrastinate less …). The libertarian paternalists might respond by saying that they are not only relying on people’s words but also on the fact that people do freely enter into pre-commitment devices to better align their actions with their stated goals. Great, then what’s the problem? The market then is already satisfying these demands for those who want them. If Thaler and the others think they can improve the market, cash in on that insight.

Why do libertarian libertarians privilege the revealed preferences of actions over stated preferences? For many it comes down to the fact that people bear the costs of their actions, something that doesn’t happen for preferences that are merely stated. Yes, we should internalize externalities if necessary through public policy, but many of the new paternalists (though not necessarily Thaler) are too quick to define well internalized effects as externalities to justify their interventions, whether it be a nudge or a shove. The fact that paternalists use externality arguments to justify smoking bans in restaurants, cases where the owner already has every incentive to internalize the negative consequences of smoking in his establishment, suggest that many of them are not above keeping their motives oblique. Or, if necessary, just invent internalities as a way to justify substituting your own favored outcomes for those that naturally arise.

Thaler does deserve credit, as he points out, for using Nudge to advocate a softening of paternalistic public policies such as re-designing the way fuel efficiency information is imparted to car buyers, as opposed to simply mandating higher fuel standards. Such an approach has the benefit of educating consumers about what is in their own best interest without restricting choice. This approach is so sensible that one wonders why car manufacturers themselves have never figured out the value of advertising fuel efficiency in such a salient way.

In some ways, Thaler’s critics are probably projecting the sins of the paternalist paternalists onto him. Thaler’s nudges are generally premised on the assumption that opt-out costs will be trivial. If we have to have a default rule anyway, why not pick the one that makes people best off, and for those with different preferences, they can simply opt out? Under that premise, Thaler is completely reasonable in suggesting that we should not fear when nudges move from private choices to public policies.

As a practical matter, however, most paternalism is not accompanied with these costless opt out provisions in real world public policy. When it is, and large numbers of people do actually opt out, undercutting the policy goals of the paternalists, a common impulse is to foreclose the possibility of opting out. In my previous comment, I painted national Prohibition as following exactly this pattern. Similar stories can be offered regarding more recent smoking bans and a host of other paternalistic interventions. Beyond simply asserting that their suggestions are default rules, leaving people free to make different decisions, perhaps the libertarian paternalists can spend some time discussing how the opt-outs can be preserved in the face of these tendencies.[1]

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[1] I didn’t know we could use footnotes in this forum, but Shane did it, and I am the law professor here. Economists have an unfortunate tendency of assuming that you can simply implement a policy with all of the important academic nuances intact without worrying about how the policy will interact with other legal and political forces. For example, it’s common to hear in economics workshops that a solution to problem X would involve “contracting for a bond with various penalty clauses to align incentives blah blah blah.” When I was just an economist, I thought such claims were completely sensible. However, after spending some time in law school, I started replying to the other economists, “OK, and how exactly would you do that given contract law issue Y and tax consequence Z, etc.” Anyway, I think the libertarian paternalists who have moved beyond academic musings to influence real policy have a responsibility to address practical questions like this.

Also from This Issue

Lead Essay

  • The Rise of the New Paternalism by Glen Whitman

    In his lead essay, Glen Whitman argues that “soft” or “libertarian” paternalism lends itself to ever more intrusive regulations in a variety of ways. Some of these are due to the very cognitive biases that advocates of soft paternalism have identified in their own research. For example, behavioral economists note that people exhibit extremeness aversion – a phenomenon in which they avoid what appear to be extreme positions. Yet introducing some amount of paternalism will make more paternalism, rather than less, appear to be the plausible middle ground. The dividing line between “soft” and “hard” paternalism is difficult to find, and Whitman offers many reasons why policymakers will tend toward more and more intrusive paternalism over time.

Response Essays

  • Fear of Falling by Richard Thaler

    Richard Thaler argues that libertarian paternalism does not face any of the dangers that Glen Whitman suggests. Given that policymakers and administrators are commonly forced to set up default rules anyway, it only makes sense to set these up in ways that help the governed individuals to realize their true goals. Given that the problem of choice architecture is unavoidable, Thaler argues that this is a reasonable, mainstream solution.

  • The Dangers of Letting Someone Else Decide by Jonathan Klick

    Jonathan Klick argues that not only is the slippery slope real, but a host of other difficulties lie ahead for libertarian paternalists. While we might find academic behavioral economists sensible regulators, in reality regulations are made by lobbyists and Congressional staffers, whose incentives don’t necessarily lie in the direction of good policy. In the long term, too, allowing people to shift the burden of decision to others will habituate people to not deciding – and stunt their abilities.

  • Of Frogs and Men by Shane Frederick

    Shane Frederick explores some of the unanswered questions of soft paternalism. He admits that Whitman is right to doubt whether we can postulate a given preference set as the “true” one for all time, for a given individual, and by implication for a given society. Still, he argues, this doesn’t mean we must refrain from all opinions about the behavior of others. Why not express such opinions in our choice architecture, if they are sincerely held and not terribly hard to opt out of?

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