Nudge, Policy, and the Endowment Effect
“Nudging” is a great idea. We should start by ending existing hard paternalism in favor of gentle (or even subliminal) persuasion. Instead of prohibiting drugs, we should allow anyone who wants to use currently illegal drugs to go to a government website to request an Authorized Narcotics User Card. Instead of requiring everyone to pay Social Security taxes to provide for their retirement, we should allow people to opt out of the system if they write a one-page essay explaining why they prefer to handle their retirement on their own. Analogous opt-out rules should be devised for government health care programs, worker protection laws, consumer protection laws, and so on.
Of course, you might want to tweak these proposals a tad. But if you really believe in the effectiveness of “nudging,” such policies deserve serious consideration. Why then do almost all real-world nudge proposals involve tacking new soft paternalism onto existing hard paternalism? The endowment effect – humans’ tendency to value our stuff because it’s our stuff.
How so? Behavioral economists, like most people, think of existing hard paternalism as “their policies.” We own these policies, they’re ours, and we’re not going to casually toss them aside just because we’ve found a cheaper, more humane alternative like nudging. Behavioral economists’ sense of policy ownership is so strong that the thought of replacing existing paternalism scarcely comes to mind. As a result, they ignore the revolutionary implications of their own insight, and dwell on moving the salad bar to the front of the cafeteria.
I believe in behavioral economics. But behavioral economists deeply disappoint me. They ought to be paragons of rationality – to puritanically avoid the foibles they so ably document. In practice, however, behavioral economists are all too human. They use nudge to rationalize a little extra paternalism, when they ought to use their insight to systematically rethink paternalism from the ground up.
That’s what I would have told Maxim Lott.