One-Click Paternalism

For a number of years, those interested in behavioral economics have been exploring how recent findings about human fallibility might bear on law and public policy. There has been growing interest in various forms of paternalism -- alternately described as light, soft, asymmetrical, and libertarian. For all these approaches, the unifying idea is that private and public institutions might adopt rules that steer people in directions that will make their lives go better while also maintaining freedom of choice. An example is a default rule (say, for savings or for health care) that, if unaltered, helps all or most people; another example is a cooling-off period (say, for encyclopedia sales).

Richard Thaler and I have been working on the topic of paternalism for many years, and have been defending forms of paternalism that preserve freedom of choice. Some libertarians, fearful of government bias or error, have objected that if public officials are involved, paternalism has no legitimate place.

In response to this objection, we have recently become interested in the possibility of "one-click paternalism," embodied in approaches that nudge people in good directions, but that allow essentially costless opt-outs. An example would be an automatic enrollment plan for savings, which workers could reject by a press of a button. Another example would be a default prescription drug plan for seniors, which people could replace with a plan that better suits their needs with a click (or possibly two).

If one-click paternalism provides a useful model, cooling-off periods are a bit more controversial, at least if you can't one-click your way out of them. Thaler and I think that one-click paternalism is often a useful approach for private institutions (employers, rental car companies, cell phone providers) and that the market will produce at least some protection against self-interested or venal nudging.

For government, we think that a form of public nudging is inevitable (short of anarchy), and that in many domains, one-click paternalism is preferable to both the command-and-control regulation favored by many liberals and the laissez-faire approaches favored by many conservatives. (For those interested in a detailed treatment, see our new book on these issues here.)

Comments

[Joan A. Conway]

Posting reviews of retail outlets that see cell phones gives warning of fraudulent business practices concerning the purchase of air time after the purchase of the cell phone, without customer's expectations being reached beforehand as to the manufacturer's promises that the cell phone indeed takes pictures in broad daylight, etc.

The intention is to entrap the consumer into a purchase of air time that will not be returnable after it is installed in the cell phone. If the customer's expectations of consumer experience is less than desired, they are caught into the air time entrapment.

If a push button made this fraudulent business practice faster without the after-the-fact- no-knowledge offered, or perhaps known salesman, like I recently hand, than I would nix this be faciliated with a one clip surrender into the "Like a Virgin" corporate scam.

[Walker]

I wrote a paper in law school about how "libertarian paternalism" can't work with regulation of financial innovations. At the same time my girlfriend was writing a paper called something like "Inherent failings in current subprime mortgage securities: collapse predictable". On one hand, I think that Libertarian Paternalism only creates transaction costs for financial institutions that, even if they are not rational actors, are always willful actors that choose to act, in their own eyes, in the manner that is in their best interest (financially, probably weighted to the short term in reaction to market pressures created by human psychology). At the point where the transaction costs become high enough, the "libertarian" aspect of libertarian paternalism fades. But the mortgage markets are where the world of guiding disinterested, uninterested, rushed, and/or confused consumers meets the world of self-interested and analytical financial institutions. I'd be interested to hear Cass or Richard speak to what one-click paternalism might have done to avoid the current credit crunch. Maybe there are no solutions from this governance mindset at this level of policy/economy. I am trying to envision it: maybe you have to click out of a fixed rate mortgage and in to an arm, with some disclaimers? How else could one-click paternalism be effective for the mortgage market?