Nudge Against the Fudge

Barack Obama is a "choice architect" aiming to implement "libertarian paternalism." He might not know that he is; he might embrace the practice without understanding the theory. It is adumbrated in the new book "Nudge" by two occasional and informal advisers to Obama, both of whom are former colleagues of his at the University of Chicago, Richard H. Thaler of the Graduate School of Business, and Cass R. Sunstein of the Law School.

Beginning this autumn, Sunstein, while retaining a connection with Chicago, will teach primarily at Harvard, an act of downward mobility that illustrates a central tenet of "Nudge," that even intelligent and analytical people often make foolish choices. Thaler and Sunstein correctly assume that people are busy, their lives are increasingly complicated and they have neither time nor inclination nor, often, the ability to think through even all important choices, from health care plans to retirement options. Therefore the framing of choices matters, particularly using the enormous power of the default option—the option that goes into effect if the chooser chooses not to make a choice.

For example, Obama advocates that where defined contribution savings plans such as 401(k)s are offered, there should be automatic—note well: not mandatory—enrollment by employers of new workers. Contributions to such plans are tax deductible, taxes are deferred on the accumulating money and often employers match part of the employees' contributions. What is at stake is, essentially, free money. Yet when an employee must affirmatively opt in, participation falls far below 100 percent. Obama's proposal would simply change the default option: Employees are in unless they choose to opt out, which they would be free to do.

Abundant evidence indicates that most would not, which would serve the national interest because Americans' savings rate is a disgrace. In fact, in 2005 it turned negative, and if insufficient saving persists, that inevitably will mean bigger government to provide for people who have not provided for themselves.

Such is the power of inertia in human behavior, and the tendency of individuals to emulate others' behavior, that there can be huge social consequences from the clever framing of the choices that nudgeable people—almost all of us—make. Choice architects understand that every choice is made in a context, and that contexts are not "neutral"—they inevitably encourage certain outcomes. Organizing the context can promote outcomes beneficial to choosers and, cumulatively, to society.

As the song says, little things mean a lot. Where you put the fruit or the fudge in a school cafeteria—apples first in the line? desserts in a separate line?—shapes children's diets, substantially increasing or decreasing consumption of particular items.

By a "nudge" Thaler and Sunstein mean a policy intervention into choice architecture that is easy and inexpensive to avoid and that alters people's behavior in a predictable way without forbidding any options or significantly changing an individual's economic incentives. "Putting the fruit at eye level counts as a nudge. Banning junk food does not."

Employers can creatively nudge by designing plans that synchronize employees' automatically increased savings with pay increases: Saving becomes less painful—less noticeable—because take-home pay does not decline.

Perhaps 60 percent of the close to 100,000 people on waiting lists to receive organs for transplants will die before receiving the donated organ they need. The largest obstacle to increased donations is the need to get the consent of members of the families of deceased persons who did not register prior consent. Solution? Better default rules. When people are issued driver's licenses, they could be required to click "yes" or "no" to consent. Or—a stronger default rule—they could be told that consent is presumed unless they click "no." Such framing of choices substantially increases participation in organ donation programs.

Some states enable compulsive gamblers to put themselves on lists of people banned from casinos. Think of Ulysses having himself lashed to the mast so that he cannot succumb to temptation by the Sirens.

Arguably the most cost-effective thing government does is nudge by disseminating information. Granted, some informational nudges are useless: "The Department of Homeland Security has raised the National Threat Advisory to Orange." (So? What if it were Chartreuse?) But governmental nudges about smoking and other health-related behavior have saved millions of lives. Suppose the mandatory stickers on new cars told prospective buyers not just the vehicles' miles per gallon but the cost of 10,000 miles of driving at the prevailing cost of a gallon?

Thaler and Sunstein say the premise of libertarian policy is that people should be generally free to do what they please. Paternalistic policy "tries to influence choices in a way that will make choosers better off, as judged by themselves." So "libertarian paternalism is a relatively weak, soft, and nonintrusive type of paternalism because choices are not blocked, fenced off, or significantly burdened."

Thaler and Sunstein stress that if "incentives and nudges replace requirements and bans, government will be both smaller and more modest." So nudges have the additional virtue of annoying those busybody, nanny-state liberals who, as the saying goes, do not care what people do as long as it is compulsory.