Libertarian Paternalism: Paradox of Restricted Choice

This article is an excerpt from the Shortform summary of "Nudge" by Richard H. Thaler and Cass R. Sunstein. Shortform has the world's best summaries of books you should be reading.

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What is libertarian paternalism? How does it encourage better decisions?

Described in Nudge, libertarian paternalism is a concept that balances the freedom of choice with the likelihood of people to make bad decisions. Instead of just forcing people to do something, you set them up to make better choices.

Read on to understand how libertarian paternalism works.

What Is Libertarian Paternalism?

Given Humans’ innate propensity to make poor choices, whether through cognitive bias or social conformity or animal desire, are good decisions simply beyond us? Is there any way, other than severely restricting the number of choices available to us, that public and private entities can help us help ourselves?

Thaler and Sunstein’s answer is the embrace of a new movement described in Nudge: libertarian paternalism

Libertarian paternalism seeks to preserve liberty—that is, our freedom to do what we like, as long as it doesn’t infringe on another’s opportunity to do the same—while using techniques suggested by behavioral economics and psychology to point us in the most beneficial direction. In a libertarian paternalistic world, the public and private entities that present us with choices —“choice architects,” in Thaler and Sunstein’s terminology—use subtle strategies to push us toward the “right” choices. These “right” choices are the ones we would make for ourselves if we weren’t susceptible to cognitive bias, temptation, or social influence. 

These pushes, so subtle that the average person wouldn’t even recognize them as influencing his or her decision, are what Thaler and Sunstein call “nudges.” An effective nudge takes advantage of our decision-making weaknesses to steer us toward beneficial—or, at least, less harmful—choices.

Consider social influence, for example. As established just above, our tendency to follow the herd can get us into serious trouble. But a savvy choice architect can use that tendency to alter our behavior for the better.

An experiment conducted with the citizens of San Marcos, California, illustrates the point. Working with a sample size of 300 households, researchers informed each household of its energy consumption over the previous few weeks and included the average San Marcos household’s energy consumption. In the subsequent weeks, the higher-than-average energy consumers reduced their consumption, while the lower-than-average consumers increased their consumption. Each group wanted to be average.

But there was a further wrinkle in the experiment. Some higher-than-average consumers received a frowny-face emoticon along with their consumption statistics, while some lower-than-average consumers received a smiley face. The above-average consumers who received the frowning face showed an even larger reduction of consumption than the above-average consumers that didn’t receive one. And, whereas the below-average consumers who didn’t receive an emoticon raised their consumption to match the average, the below-average consumers who received a smiley face continued to consume at their lower rates. Simple social cues had outsize effects on behavior.

Objections and Rebuttals

Dyed-in-the-wool libertarians might bristle at the Nudge libertarian paternalism techniques, as they seem to constrain or otherwise corrupt free choice. “It’s a slippery slope from a ‘nudge’ to a ‘mandate’,” they might say.

Thaler and Sunstein offer a three-part response to this sort of objection.

1) Talking about the “slippery slope” sidesteps evaluating libertarian paternalism on its own merits. Does offering a better default retirement plan lead to better outcomes for workers? Does automatic enrollment in retirement plans result in more financially secure seniors? If so, then those suspicious of “big government” should suspend their misgivings. There will always be opportunities later to critique and, if necessary, retrench libertarian paternalistic approaches.

2) Through readily available “opt out” choices, libertarian paternalism always offers an escape hatch. Slippery slopes are steepest when options are limited and there’s no easy way to reverse course. Nudges prioritize choice—there’s always the possibility of opting out, even when the default is “opt-in”—and so the danger of creeping paternalism is limited.

3) Nudges are inevitable. Public and private entities are in the business of choice architecture, whether they want to be or not—there’s no such thing as a “natural” or “neutral” presentation of choices. Thus it makes sense for these entities to nudge people toward the most beneficial choices, as long as choice itself is jealously guarded.

(Although pure neutrality is impossible, there are relative degrees of neutrality. For example, a ballot shouldn’t be designed by a choice architect to favor one candidate over another—rather, the candidates should be randomly ordered and nudges minimized.)

A Word About Markets

The free market, through its plethora of choices and heated competition to provide the best services at the best price, can take some of the guesswork out of decision-making. But it can’t turn Humans into Econs. In other words, only Econs have all the necessary information and experience to make the rational decision 100% of the time.

Take the example of “extended warranties.” Most devices or appliances have only a minuscule chance of malfunctioning after the factory warranty expires, yet consumers are consistently convinced to pay for extended coverage (“Better safe than sorry,” we might say). An Econ knows that extended warranties are always a poor investment, but Humans don’t, and the firms providing the warranties have no incentive to nudge us away from them. Firms in a free market can benefit just as much from human frailty as human rationality—maybe more.

Libertarian Paternalism: Paradox of Restricted Choice

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Rina Shah

An avid reader for as long as she can remember, Rina’s love for books began with The Boxcar Children. Her penchant for always having a book nearby has never faded, though her reading tastes have since evolved. Rina reads around 100 books every year, with a fairly even split between fiction and non-fiction. Her favorite genres are memoirs, public health, and locked room mysteries. As an attorney, Rina can’t help analyzing and deconstructing arguments in any book she reads.

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