Knowing and Making: Does Nudge require regulators to be "more rational" than consumers?

Dear son

This whole idea of nudge policy making relates to the idea that people would be more able to change behaviour if they are given a slight nudge rather than a shove or given black and white rules. 

It's a bit weak in its argument. In any case it takes time for nudging to take shape. For example, for long term unemployed, it's better to make work more attractive and welfare more painful so that they get off their butts and look for work. The shove idea would be to stop welfare after 2 years. 

But the underlying idea is that the regulators, the bureaucrats, the politicians are rational, completely altruistic and are driven by solely an idea of human well being and happiness. I can just see you chuckle and laugh. 

Lets assume the reserve situation, we know the top guys are anything but the above. So how would you, as a citizen, go about nudging them to be altruistic and good? See the difficulty in this?

So I'm afraid I'm not that enamoured with this nudge theory. It's a fad if you ask me. But laws of economics are iron, man is driven by incentives. Learn that and you will know how to manage people and understand why people behave the way they do. 

Love

Baba

Knowing and Making: Does Nudge require regulators to be "more rational" than consumers?
http://www.knowingandmaking.com/2011/11/does-nudge-require-regulators-to-be.html

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Knowing and Making

A blog about cognitive and behavioural economics. Building mathematical models of how psychology influences economic systems.

Tuesday, 8 November 2011

Does Nudge require regulators to be "more rational" than consumers?

A couple of times recently - notably in Bill Easterly's otherwise very positive review of Daniel Kahneman's new book - I've seen the following common critique of Nudge-style approaches: "But if people are irrational, regulators are irrational too - so how can they make rules to counter citizens' irrationality?" Easterly says:
But [the case for libertarian paternalism] is much too sweeping, because it overlooks everything the rest of the book says about how the experts are as prone to cognitive biases as the rest of us. Those at the top will be overly confident in their ability to predict the system-wide effects of paternalistic policy-making...While it's right for regulators to be humble about their degree of knowledge about the world, and to be cautious in creating new regulations, there are several reasons why this particular criticism is wrong.
First, we are not comparing like with like. There is no claim that a regulator, when placed in the same situation and making the same decision as a citizen, will come up with a better answer. Instead, we are looking at times when citizens make snap decisions without thinking them through - or, often, make no overt decision at all because they do not notice that there is a decision to be made. In these cases, the regulator's goal is either to say "what would the citizen decide if they did think about it carefully?", or even better, to encourage the citizen to make the effort of thinking it through themselves. If the answer to "what would the citizen decide?" is controversial or ambiguous, the regulator is unlikely to try to intervene.
Second, everyone specialises in something. A lawyer specialises in the law - I wouldn't expect them to be better at making business decisions than me, but where my business decisions have legal ramifications I'd like to have their input. A doctor does not know better than me what I should choose to eat for dinner, but they can give me useful information to help me pick the foods that are right for me. And similarly, somebody who spends their professional life thinking about decision-making and examining the extensive research in this field is likely to be able to help me make decisions that I'll be happier with.
Third, even if regulators are not perfect, a best-effort regulation may well be better than none at all. The absence of regulation does not mean the absence of nudging. As Thaler and Sunstein point out in Nudge, our decisions are going to be influenced by context, framing and defaults no matter what. If the government takes no part, then the influences will be random, or chosen by private companies (whose interests are sometimes opposed to mine, though not always). If a democratically accountable government can help to move from one default frame to another that is more likely to be in my interest, then why would I not prefer that one?
There are people who read public choice theory as implying that most government policies are likely to be corrupt and wrong-headed. These people may well oppose Nudge-style regulations as they oppose most other regulations. But I think that view is not a mainstream one.
Indeed, mainstream economics has a clear place for regulations - where the action of a private party imposes an unpriced cost or "externality" on others, an appropriate regulation will actually make the market function more like a genuine free market, not less. One could argue that the framing carried out by private companies acts as an externality by imposing hidden costs on the consumer - in which case a better market outcome will be achieved by reversing these frames.
Finally, Nudge policies are designed to be optional. Anyone who does not trust government to provide a default which is in her own interest is welcome to ignore the government's recommendation and make her own choice. Those who would prefer to make the tradeoff of trusting the government's (carefully researched, democratically supervised) recommendations can simply take the default and save themselves the effort of thinking it through, and reduce their risk of making a mistake.
Easterly certainly raises an interesting challenge for behavioural research: the "system-wide effects of paternalistic policy-making" are indeed not well-understood. The fact that the policies are optional for the citizen is (I suspect) likely to mean that the system exhibits stability rather than instability, with any effects of Nudge regulations being damped rather than amplified by the interactions of the system. But it's not certain yet. My own research focuses partly on this area, as I think it's important to find out how a more accurate picture of human behaviour, scaled up to the systemic level, will affect our understanding of how markets work.
I notice that I have written on this subject before, so I'll finish by quoting myself:
We don't expect aeronautical engineers to be immune from the law of gravity. Yet we still trust them to design planes that can help us transcend our own gravitational problems. at 00:44

National pay for teachers 'undermining school standards'

Now here’s something that is guaranteed to get people all excited.

Researchers warned that imposing fixed salary levels across the country led to serious staff vacancies and underperformance in more affluent areas where private sector pay was higher.

It was claimed that national pay in state schools – a system fiercely protected by teaching unions – resulted in an average drop of one GCSE grade per pupil as schools struggled to recruit and retain good teachers.

Pupils in areas such as the Home Counties and leafy suburbs surrounding major cities such as Manchester and Birmingham were most likely to be hit, researchers warned.

Prof Carol Propper, from Bristol University’s Centre for Market and Public Organisation, which published the study, said the findings presented “strong evidence” that national salary scales had a “negative impact on pupils’ learning”.

In my view, one of the reasons why the north of England or even Scotland under-performs the south east and London is because the economy is frankly overpriced over there as one reason. When the costs are so high, why would anybody move up there to setup jobs? And once you spread this reason around, you will see why things like education is challenging.

When you run out of money, you can do this

When you run out of money, your bank card is useless, no? not really, see what you can do with bank cards

Reading about the Buddha made my hair hurt

If the Buddha has become enlightened and gotten off the wheel of life as we know it, then from a metaphysical perspective, he is no longer in this Newtonian universe. I'm happy to consider, in terms of faith and metaphysics to consider the soul to be made up of an energy form which is yet to be determined.
Which begs the question, he is obviously somewhere else, in terms of the laws of preservation of mass and energy. That somewhere else is a universe which is outside our universe, operating on physical principles which we do not know or operate. the barrier or boundary between these two universes is also unclear or unknown.
But based upon faith, praying to Buddha helps in improving your lot in life in this world or even in your next life here. Which means that the Buddha is able to reach back from the other universe to this and influence people and matter in this universe.
But if he has passed off the wheel of life, why is he still coming back?

Beyond Food

I was invited to a dinner at a great restaurant near London Bridge by my alma mater to talk about the economy and stuff with other alumni and associated academic greats. The food was great and I, as usual, poked people after listening to some serious pap about how bankers ruined their lives. HA!, but that’s not what I wanted to talk about. I want to talk about the restaurant itself.

Its hosted by the Beyond Food Foundation. And it is a great and simple idea. I quote

Our mission at the Beyond Food Foundation is to inspire people who are at risk of or have experienced homelessness to gain meaningful employment.

We run two programmes to do this; Freshlife and United Kitchen Apprenticeship. Both of these programmes use food as a catalyst to build relationships, talk openly, and support and challenge individuals through their development. Our holistic approach ensures that we fully support everyone we work with and gives them the best chance at success.

To us, meaningful employment is emotionally, economically and intellectually fulfilling to the individual, as well as beneficial to the society we live in.

Here are some of the alumni







It really inspired me. What a great idea, eh?