The New Paternalism
An economist and a legal scholar argue that policy makers should nudge people into making good decisions
By EVAN R. GOLDSTEIN
"You see that?" Richard H. Thaler asks as we ride down picturesque Lake Shore Drive in Chicago. Thaler knows the route well. He travels it every day on his commute home from the University of Chicago Graduate School of Business, where he is a professor of behavioral science and economics. At the moment, he is excitedly jabbing his finger toward an approaching curve in the road, telling me that it is the scene of numerous accidents caused by drivers who fail to sufficiently reduce their speed. Then he directs my attention to a grid of lines that appear on the road ahead of us: Evenly spaced at first, as we near the apex of the curve, the lines begin to bunch closer together, which makes us feel like we are speeding up.
As Thaler taps the brakes and gently steers into the bend, he explains how the tightly spaced lines trigger an instinct that causes drivers to slow down. With evident glee, he notes that Chicago is effectively exploiting — to society's benefit — one of the many ways in which human perception is flawed. Or, as Thaler puts it, drivers are being "nudged" toward safety.
What does a peculiar pattern on the road have to do with fixing the nation's health-care woes, protecting the environment, resolving the thorny issue of gay marriage, and increasing donations to charity? Everything, according to Thaler and Cass R. Sunstein, a professor of law and political science at the University of Chicago. They are authors of a new book, Nudge: Improving Decisions About Health, Wealth, and Happiness (Yale University Press), in which they articulate an approach to designing social and economic policies that incorporates an understanding of people's cognitive limitations.
They call this governing philosophy "libertarian paternalism." That is not an oxymoron, they insist in their book. Rather it is a corrective to the longstanding assumption of policy makers that the average person is capable of thinking like Albert Einstein, storing as much memory as IBM's Big Blue, and exercising the willpower of Mahatma Gandhi. That is simply not how people are, they say. In reality human beings are lazy, busy, impulsive, inert, and irrational creatures highly susceptible to predictable biases and errors. That's why they can be nudged in socially desirable directions.
A nudge is thus any noncoercive alteration in the context in which people make decisions. The libertarian paternalism behind it is rooted in Thaler's lifelong fascination with the power of small, seemingly innocuous details — the arrangement of food in a cafeteria, the drawing of a small fly in the bowl of a urinal, a pattern of lines on the road — to influence people's behavior. David Laibson, a professor of economics at Harvard University, says that Thaler's ideas, once a cry in the wilderness, are so influential that "about half of the profession now believes that psychology has a useful role to play in economic modeling, and that number is growing."
"Cass is always about 10 minutes late," Thaler tells me as we slide into a well-worn booth at Noodles Etc., a modestly priced Pan-Asian restaurant on the periphery of Chicago's Gothic stone campus. As we thumb through our menus, he predicts that Sunstein will order the same thing he always orders: tofu salad. Thaler should know. He and Sunstein have maintained a standing weekly lunch date at Noodles for the past few years as they sketched out the ideas in Nudge. (The restaurant is duly thanked in the book's acknowledgments.)
Ten minutes later, Sunstein appears, loping toward the table, a sheepish grin on his face. He blames his tardiness on the dearth of parking in the neighborhood, sits down, and promptly orders the tofu salad. Thaler opts for a heaping dish of chicken, noodles, and broccoli.
Sunstein explains the appeal of libertarian paternalism: "For too long, the United States has been trapped in a debate between the laissez-faire types who believe markets will solve all our problems and the command-and-control types who believe that if there is a market failure then you need a mandate." That debate has been exhausted, he says.
"The laissez-faire types are right that … government can blunder, so opt-outs are important," he says. "The mandate types are right that people are fallible, and they make mistakes, and sometimes people who are specialists know better and can steer people in directions that will make their lives better."
Sunstein argues that understanding human irrationality can improve how public and private institutions shape policy by increasing the likelihood that people will make decisions that are in their own self-interest. Most important, he and Thaler insist, such nudges can be executed while protecting freedom of choice.
Take two examples in their book. Studies show that placing fruit at eye level in school cafeterias enhances its popularity by as much as 25 percent. Or consider this stroke of creativity by an economist in Amsterdam charged with cleaning up the restrooms at the Schiphol Airport: He had a fly etched into the wells of urinals, giving male patrons something to aim at. Spillage was reduced by 80 percent. The problems of childhood obesity and foul restrooms are remedied with very little inconvenience to people — or cost. Children remain free to grab that piece of chocolate cake, and there is nothing preventing visitors to Schiphol's restrooms from ignoring the fly and aiming elsewhere. It is merely less likely that either group will do so.
"Nudges are inevitable, so they might as well be smart," Sunstein says with a grin. The inevitability — and potential — of nudges is most clear when it comes to default options. For example, 401(k) employee-savings plans generally have an opt-in design, meaning that when employees become eligible to participate, the onus is on them to join. Many will procrastinate — even though it is usually in their best interest not to. According to Sunstein and Thaler, that inertia can be harnessed. They suggest that companies adopt automatic enrollment for 401(k) programs, pointing to studies that show how doing so significantly increases levels of employee participation. And, they stress, because there is still an opt-out, people aren't forced to do anything against their will.
Thaler has spent his career thinking about how people make decisions. As a Ph.D. candidate in economics at the University of Rochester in the early 1970s, he was struck by numerous anomalies that conflicted with the traditional assumption that people act rationally in pursuit of self-interest. He found, for instance, a strong tendency to go along with the status quo, or default option, even when it makes little sense. In addition, people are predictably overoptimistic, and they care twice as much about losing money as they do about gaining it. They are more fearful of unlikely threats like a nuclear-power accident than they are of something far more probable, like a car accident. Thaler began making a list of such anomalies, which he posted on a wall in his office. Those insights became the building blocks of behavioral economics, which he was instrumental in creating.
Thaler's anomalies were a direct affront to neoclassical economics, which holds that if people are left alone, they will efficiently maximize personal gain. His apostasy was not looked upon kindly by some economists. When he arrived at Chicago in 1995, after 17 years at Cornell University, he found that the Nobel Prize-winning economist Merton Miller refused to talk to him. (I could not help but smile when I recently attended one of Thaler's lectures and noticed a giant portrait of Miller in the hallway outside the classroom.)
"The first paper I wrote on behavioral economics was rejected by five journals," Thaler recalls in his office. "Part of the problem was that I didn't have any role models, so I wasn't sure what to do." The business school is housed in a sleek new building that is all sharp angles and glass. Thaler has a corner office with dramatic floor-to-ceiling windows. It is the first day of the semester, and there are cardboard boxes strewn about the room.
Everything changed in 1976, when Thaler came across an article in Science by two psychologists, Amos Tversky and Daniel Kahneman. The article argued that rules of thumb — or mental shortcuts — lead to systematic errors or biases. "When I read this paper I could hardly contain myself," Thaler wrote in a short autobiographical essay years later. "This concept is what was necessary to make the psychology of decision making relevant for economics." He began developing his theories and, in 1987, sharing them in a widely read column — aptly called "Anomalies" — for The Journal of Economic Perspectives. In 1992 those columns were collected in The Winner's Curse: Paradoxes and Anomalies of Economic Life (Free Press).
Not everyone was cold to Thaler's arrival in Hyde Park. Within a week, Sunstein introduced himself. The two had not previously met, but Sunstein described himself as an admirer. "I have always been interested in departure from rationality," Sunstein says, adding that he found Thaler's work "phenomenal."
The two struck up a friendship that soon evolved into a collaboration. In 1998 they published a highly influential article, "A Behavioral Approach to Law and Economics," in the Stanford Law Review. (The article was written with Christine Jolls, now a Yale Law School professor.) Brian Leiter, who will leave the University of Texas School of Law for Chicago's law faculty in the fall, credits that article with stimulating a "huge industry" of new legal research.
The field's credibility was further solidified in 2002, when Kah-neman, an emeritus professor of psychology at Princeton University, won the Nobel in economic science "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision making under uncertainty." Since then, behavioral economics has made a rapid march from heresy to near-orthodoxy, especially among scholars 40 years old or younger. (Thaler gleefully cites that as proof that his notoriety stems in large part from his ability to "corrupt the youth.")
Edward L. Glaeser, a professor of economics at Harvard University, who edits The Quarterly Journal of Economics, says that there is no longer a market for just another anomaly paper demonstrating that people don't act in a hyperrational manner. "We got it," he says laughing, "which is another way of saying that Thaler has won."
Tyler Cowen, a professor of economics at George Mason University, considers Thaler's work worthy of a Nobel Prize. "While I wouldn't call him a shoo-in, I would say he is favored to win the prize someday," Cowen writes in an e-mail message.
Sunstein and thaler make for an odd couple. Thaler, 62, is exuberant, sounds a bit like the comedian Al Franken, and possesses a seemingly endless stockpile of entertaining stories and anecdotes. Befitting his casual demeanor, he wears open-necked shirts, often with rolled-up sleeves, and he exudes a general sense of comfort in his own skin. His youthful, fleshy face is topped by a pile of tousled salt-and-pepper hair. (He remains both perplexed and amused at being described as "leonine" in The New York Times a few years ago.)
Sunstein, on the other hand, is lean, with a high, narrow forehead. And though he is wearing a suit and tie, he has the slightly disheveled appearance of a man who spends a lot of time alone in a room writing. His eyes dance around frantically while he talks, contrasting with his slow, deliberate cadence. Leiter describes Sunstein, 53, as "almost embarrassingly self-effacing," adding, "He is just an unusually nice guy, and that is not necessarily the norm among successful academics."
At lunch, when I ask Sunstein and Thaler about their collaborative process, Sunstein describes it as "incredibly fun." Shooting a smile in Thaler's direction, he says, "I, of course, worked harder and produced more." Thaler chuckles and nods his head.
To be sure, few people manage to produce more than Sunstein, who publishes at a daunting rate across numerous fields — constitutional law, environmental law, behavioral law and economics, and family law. He is also an authority on gay rights, animal rights, the Internet's impact on democracy, and more. According to the Library of Congress catalog, he is the author or editor of nearly 30 books. Elena Kagan, dean of Harvard Law School, whose faculty Sunstein will join in the fall, has described him as "the pre-eminent legal scholar of our time — the most wide-ranging, the most prolific … the most influential."
Indeed, a 2007 study by Leiter found that Sunstein is, by far, the most-cited full-time legal scholar. In 2006 two law professors at Vanderbilt University used network theory to show that Sunstein is the "central legal academic." Running calculations to determine other scholars' degrees of separation from the center of the legal academy, they memorably dubbed that figure the "Sunstein number."
"Cass can write very fast," Thaler says. "It's funny, when he gets under stress, when something goes wrong in his life, he writes. There were some stressful periods during the writing of the book when he sent me like five chapters in rapid succession."
Thaler contrasts that with his own style. "I've never even written a book out of whole cloth," he says. "I've merely stapled together four" (meaning edited volumes of his essays).
When I ask Sunstein if he ever worries that he publishes too much, he acknowledges that he has heard that criticism "secondhand," but he insists that he doesn't publish everything he writes (though he says he is tempted). "Cass has certain rules," Thaler interjects, like "longer is better." Sunstein was excited that the first draft of Nudge was more than 100,000 words; Thaler was excited that it was cut to 80,000.
In 2004, Thaler and his wife were invited to a fund-raising event that a neighbor was holding for a Democratic candidate for a U.S. Senate seat: Barack Obama. The Thalers had never heard of him. At the time, Obama was running third among Democrats in the heavily contested Illinois primary. "We were blown away by the guy," Thaler recalls. "The next day I called Cass and said, 'I met this Obama guy. You know, he seems like the real deal.' And Cass, in his typical way, said, 'The first day Obama is in the Senate, he will be the most-qualified guy in the Senate.'"
While Sunstein and Thaler are both ardent supporters of Obama's presidential campaign, it is hard to precisely decipher each man's role within the Obama orbit. But by all accounts — except their own — they are major figures. The New Republic recently dubbed Thaler the "in-house intellectual guru" of Obama's policy shop. When I ask Thaler about it, he rolls his eyes and calls the characterization "a bit of an overstatement."
He describes his role as an adviser as "very informal," saying that at the start of Obama's campaign, he served on a committee counseling the candidate on Social Security. Since then, "I occasionally get calls from his policy people," he says. Thaler chalks up whatever influence he might have to his close relationship with Austan Goolsbee, a professor of economics at Chicago's business school who is now Obama's chief economic adviser. "Cass is closer to the Obama camp than I am. He and Barack are very good friends," Thaler says.
Sunstein's relationship with Obama dates back to 1992, when Obama began teaching part time at Chicago's law school, something he continued doing until his election to the Senate in 2004. (Sunstein tried to persuade Obama to join the faculty full time on numerous occasions, but Obama declined.)
When I ask Sunstein about the candidate, however, he becomes noticeably wary. In fact, when I first ask him and Thaler for permission to record my interview, they agree, but Sunstein jokes that he has nothing but nice things to say about "a certain senator from New York." The two men then begin to heap over-the-top praise on everyone, including John McCain and President Bush. They succeed in cracking each other up. The shtick is a clear reference to the trouble that the onetime Obama adviser Samantha Power, a professor of public policy at Harvard University, got herself into when she was quoted calling Hillary Rodham Clinton a "monster." (Sunstein and Power are dating.)
So has Obama read Nudge? Would a President Obama be the first nudger in chief? Thaler and Sunstein sent advance copies to several members of Obama's inner circle, including a copy for the candidate. But they assume he is more than a little too busy to read much these days. Furthermore, they are eager to portray libertarian paternalism as a bipartisan philosophy. On many issues, including environmental protection, family law, and school choice, they argue for less government coercion. "If incentives and nudges replace requirements and bans, government will be both smaller and more modest," they write. "We are not for bigger government, just for better governance."
Sunstein is "elated" that their first joint appearance to promote the book was held at the American Enterprise Institute, a conservative think tank in Washington, where they received a very warm reception. (Thaler was in peak form, delivering an extemporaneous 30-minute talk that was one part policy lecture and one part stand-up comedy routine.) As evidence of libertarian paternalism's broad appeal, they point to the 2006 Pension Protection Act, which incorporated principles of behavioral economics. Those companies that moved to automatic enrollment for pensions were rewarded with a waiver that freed them from some burdensome paperwork. The law received support from an unlikely coalition of politicians, including conservative Republicans like Sen. Robert F. Bennett of Utah and Rick Santorum, then a senator from Pennsylvania, as well as liberal Democrats like Rep. Rahm Emanuel of Illinois.
"It made me think that these ideas really could bridge the political divide," says Thaler.'"
Additional commentary by University of Chicago Professor Steven Levitt about Nudge can be found in The New York Times. Professor Sunstein will be a Visiting Professor of Law at the Law School beginning next year where he will continue to teach courses in a wide variety of areas.
